Real profits Featured

10:57am EDT December 17, 2003
It's only been a decade since Duke Realty Corp. went public, but in that time, the real estate investment trust (REIT) has grown more than tenfold.

"When we went public, our market capitalization was $600 million," says president and COO Dennis Oklak. "Today, it's $7.3 billion."

That growth is due in large part to the company's 1999 merger with Atlanta-based Weeks Realty, which essentially doubled Duke's city base. Before the merger, it served its home market of Indianapolis, as well as Cincinnati, Columbus, Cleveland, Chicago, Minneapolis, St. Louis and Nashville.

With the merger, it added Atlanta, Dallas, Raleigh, Jacksonville, Tampa/Orlando and South Florida. That gives Duke interest in more than 108 million square feet of property, and it owns or controls more than 3,800 acres of undeveloped land.

For two years after the merger, the company did business as Duke-Weeks Realty Corp., wanting to capitalize on the brand recognition each company had in its home market. But in July 2001, Duke Chairman and CEO Thomas Hefner decided it was time to drop "Weeks" from the name and return to the company's core identity.

At the time, Hefner said he believed the Duke Realty name would "strengthen the company's brand awareness" in all of its markets and more closely position it as a "dynamic operating company that transcended any particular person or family."

Since then, he's been proven correct.

Duke has successfully weathered the downtrodden economy, and in November, Hefner announced he would be stepping down from his position, leaving the company in solid financial shape and with a bright future.

In April, Oklak will assume the role of CEO.

A real estate veteran with a strong financial background and a penchant for deal structuring, Oklak joined Duke in 1986 as tax manager and later served as vice president, treasurer and chief administrative officer. In 2002, he was named co-COO.

With his expertise, Oklak was a logical choice to succeed Hefner and build upon the company's successes. To do that, he will focus on maintaining the company's business model, which has proven effective. He's also committed to ensuring that Duke continues to recruit, hire and retain top employees.

 

Slow and steady growth

Now that the company has worked through its growing pains, Duke's business model is simple but effective -- make the most of its current markets and minimize risk.

As a specialist in office, industrial and retail spaces, Oklak calls Duke a vertically-integrated enterprise and says much of what the company accomplishes is handled internally.

"All aspects of the business are in-house," he says. "For the most part, we do it all. We build and own the property. And we manage it."

Duke's portfolio consists of roughly 75 percent industrial properties, 24 percent office space and 1 percent retail. In general, the REITs nationwide that are attracting investors are those that own residential buildings and retail centers, according to the 2003 Real Estate Investment Survey, conducted by National Real Estate Investor and Marcus & Millichap Real Estate Investment Brokerage Co. Office and industrial specialists are at the bottom of the list, primarily because of the sluggish economy and job losses.

But despite the nationwide trend and Duke's weighted holdings, it has bucked industry trends and maintained a profitable portfolio, even with lower occupancy rates industrywide.

"All of our cities are profitable," Oklak says. "Occupancy rates are down from normal, though. Right now, about 87 percent of our portfolio is leased. Back when the economy was strong, we had rates in the mid-90s. But we are still profitable at this level.

"We're doing great for this level of economic activity. We're holding up fine. But it's tougher to get growth when the real estate side isn't there."

While he can't point to any one city within Duke's portfolio that consistently outperforms the others, Oklak does say the industrial market is doing better than the office market, and that the Indianapolis industrial market is one of the company's star performers.

Because of this, Oklak says he has no plans to expand Duke's territory. There are three main reasons.

First, Duke is continuing to pull together the Duke-Weeks companies into one cohesive unit.

"It takes time to absorb everything and operate efficiently," Oklak says.

Second, the slow real estate market makes growth a challenge.

"No cities look good to us today," Oklak says. "We're always monitoring the markets, but we'll stay in the Midwest and Southeast and adjoining markets as we continue to grow over the next few years."

And finally, it takes a sizable city to sustain a Duke office.

"Every office has property managers, a construction team, a pre-development team," Oklak says. "It's a full-service office. It takes a larger city with a lot of volume to support that."

Beyond those factors, Oklak says that Duke faces other challenges to growth that come from the real estate industry in general.

"Every industry is constantly changing," Oklak says. "Ours changes at a slower pace."

Changes that have crept in include building requirements for industrial and office facilities.

Says Oklak, "The industrial structures we build today are larger, have thicker floors and require different racking systems for inventory. When it comes to office space, businesses expect offices to have the latest, most efficient technology."

 

Risk averse

To minimize risk, Duke practices management by committee.

"We have a lot of internal committees throughout the company that monitor all of the company's functions," he says. "For example, our weekly business committee meets to review significant transactions."

During those meetings, all significant property transactions are reviewed and approved by senior managers, as is the company's balance sheet, says Oklak, a former public accountant.

"We have solid internal accounting controls," he says. "Most of the committees have their own separate area of responsibility, so there is not a great need to interact. When interaction is required, issues are discussed by both committees whose input is required. Generally, there is a consensus built among members of the committees.

"But in the unusual case that a consensus cannot be reached, issues are resolved by the CEO or president," Oklak says.

Another aspect of minimizing risk is to develop an employee strategy.

Says Oklak, "It's always about people. You can never have enough great people in the right places."

And to ensure the hires are there, Duke relies on multiple channels for recruiting.

"We use a combination of industry networking and placement agencies to identify the brightest talent in the real estate industry," says Oklak. "We then give the individuals authority to use their skills and work hard on making sure our compensation rewards them properly for their contributions to the company."

Retention is always a challenge, and to keep key employees in place, Hefner, Oklak and the other senior managers have been developing a pipeline, identifying key positions and grooming successors.

"For the last two years, we have been focusing on developing a formal succession plan so we can have back-ups of all key positions," Oklak says.

The plan affected 100 employees and included Oklak's own transition to CEO.

"We basically went down three levels of reporting from the CEO to determine our key positions, which amounted to about 100 associates," says Oklak. "We then used some outside professionals to perform a formal evaluation process of each individual's strengths and development needs. We then designed development plans to improve each associate's performance so that they will be ready for additional opportunities as they arise."

As far as opportunities go, Oklak's arrives in April. How to reach: Duke Realty, (800) 875-3366 or www.dukerealty.com