Technology and Real Estate & Retail

BEHIND THE NEWS: Duke at a crossroads after impressive run

June 13, 2005

Duke Realty Corp. has quietly made bundles for investors the past five years. But you wouldn't know it from the tone of recent analyst reports on the Indianapolis-based company, one of the nation's largest industrial and office developers.

"We [compare] Duke's investment case to that of a large ship, since we believe that it would take the company time to gradually turn its performance around on a course to improved results," wrote Prudential Equity Group's James Sullivan.

"There is virtually no traction in market rents for Duke's core markets, especially in Atlanta, Cincinnati, Indianapolis, Chicago and Minneapolis," added Legg Mason's David Fick.

Indeed, investors are angst-ridden over the future for Duke, even though the company long term has been a star performer. An investor who put $100 into Duke shares in January 2000, and reinvested all dividends, was sitting on $245 five years later. In the same span, $100 invested in the Standard & Poor's 500-stock index shrank to $89.

Thomas Peck, Duke's senior vice president for investor relations and capital markets, said the company is positioning itself to accelerate growth, which slowed after the technology bubble burst in 2000 and after 9/11.

Even amid those setbacks, investors began flocking to Duke and other real estate investment trusts, in part because of a seismic shift in how they viewed the once-staid and little-understood sector.

REITs are like most other public companies except that they're exempt from federal income taxes. In return, they must distribute most of their earnings as dividends, which historically made them attractive for retirees and other income-oriented investors.

Burned by the mania for all things Internet, investors began scarfing up shares of real estate firms and other old-line businesses. Also stoking investor enthusiasm for REITs were low interest rates, which reduced developers' borrowing costs.

Yet now analysts say sluggish demand for commercial property, especially office space, in Duke's key markets will make it difficult for the company to propel its shares higher. Duke shares were trading June 9 at $31.12, down 3 percent for the year.

As Friedman Billings analyst Paul Morgan said in a report, "Lack of pricing power could limit internal growth momentum."

Rekindling growth has emerged as the first big challenge for Duke's new management team, led by Dennis Oklak, a 19-year veteran who succeeded the legendary Tom Hefner as CEO last year. Two months ago, Hefner, now 58, stepped down as chairman.

Adding to the uncertainty: Duke has put on the sale block 14.4 million square feet of industrial real estate, mostly smaller properties in areas where the company lacks a dominant presence.

Analysts say the property sale may fetch more than $1 billion. They generally favor the strategy, saying it makes sense for Duke to take advantage of the frothy prices investors are paying for real estate and to reinvest proceeds.

But the downside is that Duke's quarterly results might suffer short term, since the company will no longer be pocketing operating profits from the properties it sells. And a purchase Duke announced this month has some analysts

fretting Duke may not reinvest in the wisest ways.

Duke said it paid $257 million to buy five office buildings near O'Hare International Airport in Chicago from Indianapolis-based Simon Property Group Inc. Duke officials say the buildings' proximity to the airport and a lack of undeveloped land for competing projects will help the investment pay off.

But Legg Mason's Fick called the purchase a strategic error. He said Duke has no competitive advantage in Chicago and that the office market in its suburbs "are in terrible shape, both now and prospectively."

For those uneasy over all the uncertainties, here's a nugget of good news: The stock's 13-percent slide since November has left investors who buy at current prices with a hefty annual dividend yield of nearly 6 percent.

Even if Duke stumbles, analysts say, the dividend is unlikely to be in jeopardy, since the company has a healthy balance sheet and manageable debt load.

Giving back bonuses

Plainfield-based Brightpoint Inc. didn't make as much money last year as it first reported, and as a result the five highestpaid executives have volunteered to return a total of $1 million in previously paid bonuses, a filing with the Securities and Exchange Commission shows.

That $1 million represents 70 percent of the bonuses the five received. Taking the biggest hit was CEO Bob Laikin, whose bonus fell from $672,500 to $201,0000.

The give-backs follow Brightpoint's announcement last month that, as a result of accounting errors the company discovered in France and Australia, it was restating its 2004 results, cutting profit from $16.3 million to $13.8 million.
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