Will Duke Realty's Transition to Industrial Real Estate Pay Off?

Duke Realty's focus on industrial real estate could provide substantial boosts to its cash flow and dividends.

Jul 7, 2014 at 11:41AM
G

Source: Company

Duke Realty (NYSE:DRE) has transformed itself into a promising commercial REIT with significant exposure to the industrial segment over the last five years.

While in 2009 the share of net operating income (NOI) attributable to the industrial segment only accounted for 36%, a series of transactions caused Duke Realty to gravitate toward higher industrial real estate exposure. The segment accounted for 60% of the company's total NOI at the end of 2013.

This focus on industrial real estate should serve Duke Realty well over the next couple of years and materially boosts its cash flow.

In addition to industrial real estate, Duke Realty invests in office and medical office properties. These accounted for 25% and 15% of company NOI at the end of 2013 respectively.

Background
Prologis, Inc., a leader in the industrial REIT space, has a grip on 241 million square feet of industrial real estate, whereas Duke Realty's industrial real estate portfolio consists of approximately 116 million square feet. 

Though Prologis is about twice the size of Duke Realty in terms of industrial exposure, Duke Realty is not necessarily a second class player. Its industrial real estate portfolio has a relatively young average building age of only 12 years as compared to 20 years for Prologis. It has occupancy rates above 90% across all building sizes.

Focus on growth regions
A key value determinant for REITs is their geographic diversification in order to mitigate concentration risk.

Over the last four years, Duke Realty has consistently worked at establishing a presence in previously underserved key growth markets such as California, Pennsylvania, New Jersey, and South Florida. It also increased its industrial real estate footprint in Houston, Chicago, and Seattle, among others.

G

Source: Duke Realty NAREIT REITWeek Conference Presentation

Going forward, Duke Realty's shift toward high-growth markets and industrial hubs with strong economic growth prospect should serve the REIT's cash flow and distribution development well.

Industrial exposure driving rent growth
The industrial real estate asset class should be doing relatively well when the economy does well. With a focus on the industrial segment, Duke Realty should be able to capitalize on strong, cyclical demand for commercial properties.

G

Source: Duke Realty NAREIT REITWeek Conference Presentation

This cyclical demand should be reflected in improved occupancy rates and strong rent growth going forward.

The chart on the left indicates that rent growth has already bounced back materially from the disaster rates in 2010 and 2011.

In 2013, portfolio rent growth based on renewal leases stood at 3.1%, with the industrial segment outperforming at 4.3%. Duke Realty expects 2014 to see even stronger rent growth.

With industrial rent growth to hit 8.3% in the current fiscal year, it becomes evident that Duke Realty's strategic shift toward industrial properties was the right move. It should pay off handsomely for investors in 2014 and beyond.

Cash flow growth driven by industrial exposure
High expected growth rates for the industrial segment should also leave their mark on Duke Realty's prospective cash flows.

G

Source: Duke Realty NAREIT REITWeek Conference Presentation

The company's cash flows have already received a boost since 2010.

Its adjusted funds from operations, or AFFO, stood at just $0.76 per share in 2010 and increased by more than 18% until 2013. This is a respectable achievement considering that U.S. real estate has not necessarily been a preferred asset class lately.

With an estimated 2014 AFFO of $0.94, Duke Realty currently trades at approximately 19 times adjusted funds from operations. This isn't cheap, but it appears to be a reasonable multiple given Duke Realty's cyclically positioned real estate portfolio.

The Foolish Bottom Line
With further projected AFFO growth ahead, Duke Realty makes a compelling value proposition that is largely driven by two themes: a recovery in the U.S. economy, and a strategic portfolio repositioning with a higher reliance on business-cycle-sensitive industrial real estate.

Meanwhile, investors get to enjoy a 3.8% dividend yield and regular cash distributions on a quarterly basis.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Kingkarn Amjaroen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers