INDIANAPOLIS—All three main sectors in the portfolio of Duke Realty, one of the major REITs in the Midwest and Southeast, exhibited a great deal of strength in the first quarter, leading Cowen and Company, an international equity research firm, to reiterate its Outperform rating on the company’s shares.
The rising US industrial economy, especially the continuing expansion of e-commerce, for example, should drive up rents and push SSNOI growth within the Indianapolis-based DRE’s industrial portfolio, the researchers wrote in a just-published analysis. Industrials comprise 59% of its NOI. Occupancy in DRE’s industrial properties was 95.2% at the end of the quarter, and tenants occupy 97.2% of the buildings with more than 500,000-square-feet, which comprise 41% of its industrial portfolio. “At this level, DRE can prioritize rents over occupancy, and 1Q14 leasing spreads of 8.3% were the highest since the financial crisis,” the researchers note.
In the past few years, suburban office buildings have performed worse than all other real estate sectors, and provide 26% of DRE’s NOI. But during that time, the company shed its older office buildings located in low-growth markets, the researchers wrote. And of its current top five office markets, four saw increased occupancy in the past year and three had positive rent growth. Furthermore, “DRE is well positioned to benefit from growing demand for class A office product in sunbelt markets like Raleigh, South Florida and Nashville.
Cowen and Company add that Ventas’ recent acquisition of American Realty Capital Healthcare Trust for about $2.6 billion should make investors take a closer look at DRE’s MOB portfolio. “DRE derives 14% of its NOI from medical office buildings, and has the youngest and most productive MOB portfolio of its peer group,” and the MOBs included in the Ventas deal had a 6.0% cap rate. “If we believe the VTR/HCT transaction is a true reflection of market value, DRE’s MOB assets should trade below a 6.0% cap rate.”
However, the Cowen researchers say “we believe the VTR transaction is a highwater mark for MOB valuations, and maintain our 6.25% cap rate for DRE’s MOB assets.”