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BEHIND THE NEWS: Duke Realty hits groove; stock rings up big returns

February 26, 2007

T h e m a n a g e - ment team at Duke Realty Corp. is proving itself adept at juggling these days.

The Indianapolis-based industrial, office and retail developer wowed Wall Street with a 25-percent increase in fourth-quarter funds from operations, a key measure of performance for Duke and other real estate investment trusts. The company received a lift, in part, from a spate of property sales.

But the solid results weren't an aberration for the relatively low-profile Duke-which often finds itself in the shadow of a larger local REIT, mall owner Simon Property Group Inc.

Duke's not in a slamdunk business. Quarter after quarter, it must buy enough land to keep its development pipeline flush, but not so much that non-revenue-producing property drags down financial results. Meantime, it's continually launching development projects while divesting other holdings. All the while, it must not lose sight of the nuts and bolts of its business, the leasing and property management of its 121-millionsquare-foot portfolio.

Denny Oklak, a 20-year Duke veteran who became CEO in 2004, doesn't sound the least bit fazed.

"We feel good about the direction we're headed," the 53-year-old said matter-of-factly.

His upbeat outlook is understandable. Duke, like many real estate investment trusts, has been producing big returns for shareholders. Including reinvested dividends, Duke shares have climbed 14 percent so far this year. They've returned 36 percent over the last 12 months and 291 percent since the start of 2000. By comparison, since 2000 the S&P 500 has returned a mere 11 percent.

Solid company performance helped drive the stock. Excluding Duke's newest properties, for instance, occupancy was 95.4 percent at the end of 2006, up from 93.8 percent a year earlier. Same-property profit climbed 7 percent. And the company started $1.04 billion in development projects in 2006, the first time it crossed the billion-dollar barrier.

Funds from operations for the year totaled $371.1 million, or $2.48 a share-up 3.3 percent from a year earlier. This year might be better. If the company hits the midpoint of its guidance for 2007 FFO, it would increase 8.5 percent.

"We are happy with Duke's progress on its development pipeline and its resuscitated earnings growth," David Fick, an analyst with Stifel Nicolaus & Co. in Baltimore, wrote in a report this month.

Indeed, Duke has come a long way. It had only three major markets-Indianapolis, Cincinnati and Columbus, Ohio-when it went public in 1993. The next few years, the company expanded throughout the Midwest. Then, in 1999, it made an acquisition that gave it a big presence in Atlanta and the Southeast.

But then the dot-com bubble burst, and the economy soured. Duke retrenched, putting expansion into new territories on hold until 2005. It has since made major moves in Houston, Phoenix, Baltimore and Washington, D.C.

"It is really our goal to operate on a national basis, to be in most of the major cities across the country," Oklak said.

Analysts like the diversification, as long as Duke's careful. The company's Midwestern markets don't post the torrid growth some other parts of the United States are seeing. And spreading projects across the country helps protect Duke from the economic ups and downs of particular regions.

That doesn't mean Duke has lost interest in its hometown. It has several major projects in the works here-including the Parkwood West office park at 96th Street and North Meridian Street; Anson, a 1,700-acre retail and commercial development in Boone County; and a joint venture with locally based Browning Investments that's developing industrial buildings.

But Duke's aggressive expansion doesn't come without risk.

"We are somewhat concerned about lease-up at several planned speculative projects in new markets where there is significant new construction," Fick said in his report.

Duke, though, has proved skeptics wrong before. Not everyone on Wall Street cheered when the company two years ago agreed to buy five office buildings near O'Hare International Airport in Chicago from Simon Property Group for $257 million.

At the time, Fick called the purchase a strategic error. He said Duke had no competitive advantage in Chicago and that the office market in the suburbs was "in terrible shape, both now and prospectively."

But Duke's own analysis proved prescient. Since the deal closed, occupancy in the buildings has climbed from 82 percent to 93 percent, and the company thinks it will go higher. The increase stems, in part, from landing the corporate headquarters of Culligan International Co.
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