Shares of Duke Realty (DRE) skyrocketed last year. The industrial-focused real estate investment trust (REIT) gained 64%, pushing its share price above $65 by the end of 2021. If the company had another year like that, the stock could top $100 in 2022.
Here's a look at whether the industrial REIT could achieve that price point in 2022.
Image source: Getty Images.
What drove last year's big move?
Duke Realty had an extremely successful 2021. The industrial REIT grew its core funds from operations (FFO) by 13.8%, driven by robust demand for warehouse space in the U.S. The company signed 33.5 million square feet of leases last year, the highest annual leasing volume in its history. That helped drive occupancy of its in-service portfolio to a record 98.1%. The company also completed 7.7 million square feet of development projects, with 89% of that space leased.
Rental rates on second-generation leases grew a stunning 35.3% for the year, the highest in its history. The company was able to push through such high rate increases because of blistering demand for warehouse space, driven by the accelerating adoption of e-commerce and supply chain disruption-related changes in inventory management practices.
Can Duke Realty maintain its momentum in 2022?
Duke Realty expects 2022 to be another strong year. The REIT sees its FFO growing by about 10% at the midpoint of its guidance range. Driving that view is continued strong demand for industrial real estate at a time when occupancy levels are at historic lows. That should keep pushing rental rates higher.
In addition to the rental growth across its in-service portfolio, Duke Realty expects to continue expanding its size. The company has more than $1.4 billion of projects under development, the bulk of which it anticipates placing into service during 2022. In addition, it expects to make $300 million to $500 million of acquisitions and start $1.2 billion to $1.4 billion of new developments. Partially offsetting this growth is a plan to sell $600 million to $800 million of assets with limited near-term rental growth potential due to long-term in-place leases.
That growing income could help push the REIT's stock even higher in 2022.
Is $100 a share realistic for Duke in 2022?
While Duke Realty ended 2021 above $65 a share, the stock has cooled off in early 2022. Real estate stocks got slammed in January due to concerns about higher interest rates. That has weighed on Duke Realty's stock. It's down more than 10% already this year and recently is trading for around $58 a share.
With Duke Realty expecting its core FFO per share to rise by about 10% this year, the current share price has it trading at 30.5 times its 2022 FFO. That's cheaper than it was to start the year and less expensive than some of its rivals, which recently traded closer to 40 times their FFO.
This price point suggests some upside potential for Duke Realty. However, $100 a share seems unrealistic for 2022. The stock would have to gain more than 50% from last year's peak and over 70% from the current share price. Further, that price point implies Duke Realty would trade at more than 50 times its 2022 FFO. That seems way too expensive for a company growing at a 10% annual rate.
However, $100 a share is a possibility in the coming years. Duke should continue benefiting from strong rental growth rates in the near term as existing leases expire and it captures higher market rates. In addition, it should be able to continue making value-enhancing investments to grow its portfolio. That should support upwards of 10% annual FFO per share growth for the next few years, which should steadily push Duke Realty's stock price higher.
The verdict: $100 a share is too optimistic
Last year was one for the record books at Duke Realty as insatiable demand for warehouse space drove up occupancy and rental rates. That momentum should continue in 2022 because demand isn't going to cool off anytime soon. That bodes well for the stock price.
While $100 a share seems a bit of a stretch for 2022, Duke Realty appears poised to continue its ascent.
