Duke-Weeks: Nine months after the merger

Duke-Weeks Realty Corp., formed last July after a merger between Indianapolis-based Duke Realty Investments and Atlanta-based Weeks Corp., is led by chairman and CEO Thomas L. Hefner. Created by two of the country's leading industrial and office REITs, Duke-Weeks (NYSE: DRE) has posted 17 consecutive quarters of double-digit growth in funds from operations (FFO) per share on the New York Stock Exchange.

Yet, like many REITs, its stock price has remained flat on Wall Street. As of press time, Duke-Weeks' stock was selling for $19 a share, down from its 52-week high of $24.25. Under Hefner's direction, Duke-Weeks reorganized as a publicly traded company in October 1993, and the company's portfolio has grown from less than 3 million sq. ft. in the early 1980s to more than 106 million sq. ft. in 17 U.S. cities today. Duke-Weeks now has more than $5.5 billion in market capitalization.

Hefner joined Duke as managing general partner in 1981 and served as the company's president and CEO for six years prior to the merger with Weeks. He is a member of the board of governors of the National Association of Real Estate Investment Trusts (NAREIT), and earned his bachelor's degree from Purdue University.

Hefner talked with NREI about the future of Duke-Weeks and the REIT industry overall.

NREI: It's been about a year since the merger with Weeks took place. Has it been difficult to integrate the two companies? What made the merger attractive?

HEFNER: Actually, it's been pretty easy to integrate, but it's been very hard to accept the market's response. The results of the merger have been outstanding. We were at a point where there were no other cities in the Midwest we really wanted to enter. As we looked through the alternatives in the Southeast, we talked to all the logical players, and the player that became obvious to us as the best fit was Weeks. They started out, as we did, as an industrial developer. Weeks was only about $1.7 billion in total market-cap, so they were a manageable acquisition as opposed to some of the other [companies] that were too big and not as efficient operationally. Also, they operate a lot like we do.

NREI: Have you recently moved more aggressively in the office arena?

HEFNER: Historically, we have been in the office and the industrial business. On an income basis, we've been very close to 50-50. On a square foot basis, we're always substantially higher on the industrial side. So that mix, instead of being 50-50 today, is probably 60-40, industrial to office. I see that falling back to 50-50. In other words, in the Southeast you'll see us using our office expertise to expand business in Atlanta and Orlando as well as Tampa, Fla., and Raleigh, N.C.

NREI: Are there any markets that you're looking at that you haven't previously?

HEFNER: We want to strengthen the Dallas, Raleigh, Orlando and Tampa platforms. The Midwest platforms are already in pretty good shape. We think that is a more profitable goal for the next couple of years rather than looking for new markets. What we want to do is put a little meat on the company's bones in each of these cities, and that's where our higher margin will be.

NREI: How big does Duke want to grow its portfolio?

HEFNER: I think you'll continue to see us growing, but we'll be growing at a slower pace than we have in the past. We'll probably get to $6 billion. We don't need to get a lot bigger. We think the best operating spot for us is to be in the first tier of REITs.

NREI: Does the general state of REITs right now affect your ability to acquire or develop properties?

HEFNER: In the early years, we bought a lot of property. We entered St. Louis and Minneapolis through acquisitions, and we used our stock to trade for properties. We aren't doing any of that today, because we don't want to trade our stock - we'd rather pay cash. Second, we've kept our balance sheet pretty pristine. So we're under no pressure to slow down. We've always understood what our cost-to-capital is, so we have never done poor deals that we've had to end up selling. While the stock price depresses us, it really doesn't affect our ability to do business. That's one of the advantages of having a conservative balance sheet. Our focus now is on recycling as much capital as we put out new.

NREI: What do you think it will take to boost your stock price?

HEFNER: The momentum play today is the tech sector. And until there's some kind of pullback in technology, that momentum will continue. I liken it to someone driving into the Eisenhower tunnel at 150 mph. They aren't sure exactly why they're doing it, but everybody else is doing it.

What we try to do is stay focused on our primary business. I think there's a tendency in a market like this to take an inordinate amount of risk, to change your business model, to try to become a high-tech company or to do something out of frustration. I think that's the worst thing you can do. I think if you perform in an exemplary fashion, sooner or later people will understand your company's value.

We're off to a great start this year. When supply and demand is in equilibrium and when interest rates are in flux, that is the sweet spot in our business. With a portfolio worth $5.5 billion, we don't have to issue a lot of new stock. What we're going to do is self-fund our business. While we'll do about $800 million in new development a year, we'll do $400 million or $500 million in sales. We will do very little in terms of raising new equity, which should make our stock a little scarcer. We've been growing our dividend in double-digits each year for the past two to four years, and that's a pretty powerful growth statement.

NREI: Will you remain in the public markets?

HEFNER: Sure. Just because we're not happy with our stock price - nothing is linear in this world. Everybody wants it to be linear; it just doesn't work that way. I think the REIT industry is here to stay, and it's going to get bigger, not smaller. The public arena has allowed us to grow to a $5 billion to $6 billion company, and it's the only way we probably could have done it.

NREI: How is technology changing the way you do business?

HEFNER: I think the sector in the REIT industry that is most affected right now is retail. The sectors that are least affected are office and industrial. I'm not saying they won't be affected. What e-commerce will do to warehousing and how computerization will affect the need for office space is yet to be determined. Clearly, in the warehousing area, e-commerce is having an effect on distribution, and we're watching that carefully. But, I don't think it's going to have the effect that some people think it's going to have on business.

NREI: What are your targets for 2000?

HEFNER: Analysts' estimates are right at 10% growth in FFO per share, and we're comfortable with those estimates. That will translate to close to a 10% dividend growth. My experience is if you can consistently grow your earnings in double-digits, people will pay you a premium for your stock.

NREI: Where do you envision Duke being in the next few years?

HEFNER: I see us growing, but we're not going to grow as fast. We have staked out the Midwest and the Southeast markets. I think it's going to be a long time before we think about going beyond those boundaries because we still believe real estate is a regional business. You still need to have local knowledge, and you still have to manage that process. Taking on Atlanta; Raleigh, N.C.; Florida; and Dallas is a big task. We don't want to underestimate the work required. People keep thinking we're going to slow our growth rate because of the merger. We merged the two most consistent growers in the industry, so it would take pretty poor management not to grow.

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