600 E. 96th Street, Suite 100
With an emphasis on using real estate to support our clients' businesses, Duke Realty Corporation has grown to become one of the most successful commercial real estate companies in the United States, serving more than 4,500 tenants.
Duke Realty Corporation is an Indianapolis-based real estate investment trust (REIT) that specializes in the development and management of suburban office and industrial properties located in 13 major midwestern and southern cities. The company owns interests in approximately 110 million square feet of property and also owns or controls more than 4,000 acres of undeveloped land, capable of containing an additional 62 million square feet of rentable space. Duke serves more than 4,500 tenants.
Launch of Predecessor Company in 1972
The man behind the Duke name was Phillip R. Duke, a 1959 graduate of Butler University who started out his business career as a certified public accountant. He switched to real estate development when he became a partner at C.W. Jackson Construction Co. He then struck out on his own, teaming up with attorney John Wynne to form a construction and development company. They brought in someone with a sales background, John Rosebrough, and in 1972 P.R. Duke & Associates was born. The three men pooled their money, a modest $30,000 in operating funds and another $10,000 in development funds. Despite limited capital and no reputation in development, they bought a struggling 324-acre industrial park, Park 100, from Indianapolis businessman Howard Sams. What they may have lacked in experience they compensated for with vision. They were pioneers in the development of flex space--combining office, showroom, and warehouse space in one location. Duke transformed Park 100 into one of the country's largest industrial parks, eventually encompassing some 1,500 acres.
Phillip Duke and his partners adopted a vertically integrated approach to the real estate business, establishing five operating companies to support their development activities: P.R. Duke Co. Construction, Duke Construction Management Inc., Duke Management Inc., Duke Realty Inc., and P.R. Duke Securities. These entities were essentially designed to produce savings for development projects rather than to generate significant levels of profit. The arrangement was summarized in a 1986 Indianapolis Business Journal article: "The relationship between the two P.R. Duke & Associates arms allows the company to retain control of all aspects of the development of its projects from the idea to collecting rents. 'The real business we're in is creating net income streams--rents,' Duke said."
Once the business was well established in its hometown, Duke expanded into its second market, Cincinnati, in 1978. It began testing a third market in 1985 when it built an office building in Nashville, Tennessee. The timing, however, was less than fortuitous due to a number of Texas developers entering the area simultaneously, a situation that led to the area becoming overbuilt. While Duke aggressively added to its holdings in Indianapolis and Cincinnati in a bid to become the dominant developer in those cities, it was content to adopt a wait-and-see approach in Nashville. Ultimately the Texas firms abandoned the market and Duke remained to further develop the area when conditions improved.
Formation of a REIT in 1985
In 1985 Duke decided to package a number of its properties in a real estate investment trust. The REIT had been created by Congress in 1960 as a way for small investors to become involved in real estate in a manner similar to mutual funds. REITs could be taken public and their shares traded just like stock companies and they were also subject to regulation by the Securities and Exchange Commission. Unlike stocks, however, REITs were required by law to pay out at least 95 percent of their taxable income to shareholders each year, a provision that severely limited the ability of REITs to raise funds internally. During the first 25 years of existence, REITs were allowed only to own real estate, a situation that hindered their growth. Third parties had to be contracted to manage the properties. REITs also fell out of favor with investors in the 1970s because of a number of heavily leveraged, poor-performing trusts. Not until the Tax Reform Act of 1986 changed the nature of real estate investment did the REIT gain widespread usage. Tax shelter schemes that had drained potential investments were shut down by the act. Interest and depreciation deductions were greatly reduced so that taxpayers could not generate paper losses in order to lower their tax liabilities. REITs also were permitted now to provide customary services for property, in effect allowing the trusts to operate and manage the properties they owned.
While the tax legislation was being passed in 1985, Duke established a REIT, Duke Realty Investments, in November of that year in preparation for the act taking effect a few months later. The trust was created to have a finite life, 10 to 12 years, which by law meant that it could not add properties to its portfolio, nor could it sell any properties for four years. The REIT completed its initial public offering of two types of shares (income and capital), netting $69 million. By buying the capital shares investors received a share of capital gains as the properties were sold off in the course of Duke Realty's existence. It proved to be an awkward structure, making the company difficult to analyze, and after two years the trust adopted a single class of stock. Regardless, the original incarnation of Duke Realty Corporation was never very popular with investors.
In 1986 Phillip Duke and Rosebrough sold their interests in the five operating companies of P.R. Duke & Associates to a partnership headed by one of the original founders, John Wynne, along with four second-level managers. The three founders, however, retained their share of ownership in the more important development arm of the organization. Duke told the press, "The truth is the younger team has been pretty much getting the job done on their own for some time now." A more dramatic change in the real estate operation would occur three months later when Duke died of a heart attack in Florida.
The Duke development arm expanded in the late 1980s, moving into new territories such as suburban Detroit and a number of markets in Ohio, Illinois, and Kentucky. Like many real estate firms it became dependent on a continually growing economy, steady rent increases, and liberal lending practices. As economic growth slowed and markets became saturated with space, many companies became trapped in a downward spiral of decreasing values. With real estate available at distressed prices in the early 1990s REITs finally became an attractive mainstream investment option. In order to shed massive levels of debt dozens of real estate firms went public as REITs in 1993. The Duke REIT, which had been a sluggish performer, now became a means of revitalizing the fortunes of the Duke enterprises.
In October 1993 Duke Realty Investments acquired Duke Associates, then completed a public offering of stock that raised $312.7 million, of which $290 million was used to pay down debt. The reorganized company was left with approximately $243 million in debt. Duke was now in a position to raise capital to add properties to its portfolio, but management made it clear to investors that it would be circumspect. Chief Financial Officer Gene Zink told the press, "It is not our plan to gobble up properties." Serving as Duke's president and CEO was Thomas L. Hefner, who had been a managing general partner at Duke Associates since 1978 and had recently served as the firm's chief operating officer. Wynne assumed the chairmanship of the REIT.
Duke pursued a strategy of developing a regional REIT that sought to dominate the markets it entered but not become overextended. Isolated projects outside the Midwest, such as one in Florida, were the exception. In 1995 the company established a regional office in St. Louis and acquired 463,000 square feet of office properties as well as 153 acres of suburban land for the future development of industrial properties. In February 1996 Duke established a beachhead in Cleveland, acquiring Farro Enterprises Inc. Over the course of the year Duke acquired additional assets in the region so that by the end of 1996 it had nearly two million square feet of space under management. Altogether, Duke owned interests in 266 rental properties with a total of 31.2 million square feet, the vast majority located in the company's primary markets: Indianapolis, Cincinnati, Cleveland, Columbus, Detroit, St. Louis, and Nashville.
Duke continued to expand into new markets in 1997. It opened a regional office in Chicago and acquired nearly one million square feet of suburban office space and 160 acres of land for future development. In October 1997 Duke acquired Minneapolis-based R.L. Johnson Company, picking up 3.2 million square feet of industrial and office space. Moreover, in 1997 Duke added to its core markets. The company acquired 982,000 square feet of suburban office space in St. Louis, and also bought significant amounts of land and properties in Cleveland and Indianapolis. Duke began to explore the possibility of expanding further, considering such markets as Kansas City, Missouri; Memphis, Tennessee; and Pittsburgh, Pennsylvania. While it grew at a steady and cautious pace, other REITs were engaged in an acquisition binge and as a consequence took on large levels of debt. The industry average of debt-to-market capitalization was close to 50 percent; Duke maintained a level around 26 percent. Many investors believed that the industry was overbuilding again, resulting in a drop in the price of REIT shares. Reluctant to tap into the capital market at these levels, REITs were unable to complete major acquisitions.
Acquiring Weeks Corp. in 1999
Unencumbered by debt, Duke was positioned to make a major deal. Management also was convinced that its business model was manageable on a larger scale and that the time had come to expand beyond its voluntary confines. In addition, in the rapidly consolidating world of real estate, the company was virtually obligated to grow larger. Duke looked at markets to the southeast of its area of operation and discovered that Atlanta-based Weeks Corp. was a perfect complement. Only in the Nashville market was there any overlap. Weeks was formed in 1965 and went public in 1994. It owned interests in some 300 industrial properties, 34 suburban office properties, and five retail properties in ten Sunbelt cities, including Atlanta, Georgia; Miami, Florida; Raleigh-Durham-Chapel Hill, North Carolina; Dallas/Ft. Worth, Texas; Orlando, Florida; and Spartanburg, South Carolina. In March 1999 Duke and Weeks agreed to a $1.1 billion stock swap, creating a company with a market value of close to $5.4 billion. Each share of Weeks common stock was exchanged for 1.38 shares of Duke common stock. The new entity became known as Duke-Weeks Realty Corp., a name it would retain for two years before becoming Duke Realty Corporation. The company's headquarters was located in Indianapolis, and Hefner became CEO and chair. All tallied, postmerger, the company owned 846 office and industrial buildings totaling 90 million square feet.
Management was pleased with the integration of Weeks, which operated in a manner similar to Duke, but found it hard to accept the response from the investment community. In the spring of 2000 shares of its stock were selling in the $19 range, down from a 52-week high of $24.25, a situation all too common for REITs at the time. Although it was eager to strengthen its holdings in such markets as Dallas, Raleigh, Orlando, and Tampa, Duke elected in 2000 to pursue what it called a "capital recycling" program, with the intent of selling around $400 million in assets that year. In reality Duke disposed of $765 million in 2000 and another $541 million in 2001, followed by nearly $230 million in the first several months of 2002. None of the assets were considered to hold strategic value to the company. As a result of the selloff, at a time of economic difficulties for the country, Duke was sitting on some $2 billion in cash and boasted a 25 percent debt-to-capital ratio, down from 38 percent when the program was launched. With such a low debt load the company held a tremendous advantage over competitors in its ability to borrow capital. Management was comfortable returning to the 38 percent level, and investors would tolerate a level as high as 45 percent. Despite its cash and ability to raise additional funds, the company simply did not see strong enough demand in the market to warrant major development projects, nor did it spot any appealing acquisition targets. Instead Duke was willing to maintain what most regarded as the cleanest balance sheet in the real estate industry and wait for economic conditions to improve.
Early in 2003 Duke began a transition in the ranks of upper management when Hefner announced his intention to retire as CEO in April 2004, and then give up the chairmanship a year later. Although his successor was not yet named, speculations in the press centered on the company's president and chief operating officer, Denny Oklak.
Principal Subsidiaries: Duke Realty Limited Partnership; Weeks Development Partnership.
Principal Competitors: Highwoods Properties, Inc.; Liberty Property Trust; Prime Group Realty Trust.