UBS: Buy Duke Realty, The 'Purer Play On Industrial'

In a report published Wednesday, UBS analyst Jeremy Metz upgraded the rating on Duke Realty Corp DRE from Neutral to Buy, while raising the price target from $21 to $23. As the company completes the disposal of its non-core assets, the analyst believes that it will become a "purer play on industrial."

According to the UBS report, "With over $3B of asset sales since the start of 2013 including ~$1.4B in 2Q15, DRE continues to actively reposition the portfolio away from non-core suburban office/light industrial and into bulk industrial."

The analyst expects Duke Realty to continue to reduce its office exposure, from the current 11 percent of NOI to less than 5 percent by year-end 2016. Although some assets still remain to be disposed off, the analyst believes that the bulk of the disposal of non-core assets is already complete, with the company having reduced office exposure from more that 50 percent of NOI in 2009.

"In turn, this should provide a better runway for earnings, NAV, and eventually dividend growth. Furthermore, we think recent/pending sales have positioned DRE to fund its $550m development pipeline and upcoming maturities without needing any additional external capital," Metz stated.

Duke Realty has not increased its dividend ever since it came out of the crash in 2009, due to its deleveraging activities, funding needs and uncertainties surrounding the timing and size of asset sales.

However, given that the bulk of the asset sales are completed, the balance sheet has improved and there appears to be a "cleaner runway" for AFFO growth, the analyst believes that the company is now in positioned to hike its dividend, starting 2016.