Duke Realty Sails

Bulldozers raze a shuttered General Motors plant to make way for warehouses that will hold a growing flow of goods from Baltimore's docks. Duke Realty, a real estate investment trust, bought the 184-acre GM property in February and plans to put up a 16-building complex. With Asian shipping lines bringing more traffic to East Coast ports, the timing couldn't be better. And the Baltimore deal is only one part of a plan to build warehouses near Atlantic shipping hubs.

REITs rock

A housing slowdown and interest-rate hikes be damned -- REITs are still going strong. Standard Poor's 500-stock index returned 4% in 2006 to April 3, but SP's REIT index did more than three times as well. REITs, which must pay out at least 90% of their earnings in dividends to shareholders, have outperformed the SP 500 every year since 2000.

REITs that specialize in office and industrial properties have done particularly well recently because businesses are growing and space for them is in short supply. What separates Duke Realty from the pack is its willingness to be more than a landlord; it develops properties from groundbreaking to ribbon cutting. The trust controls nearly 4,400 acres of undeveloped land and runs an in-house construction company.

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Duke is willing to pay for its sea legs. The Indianapolis company sold many of its older, landlocked warehouses last year for $955 million, and it is using the proceeds to fund its port strategy and other projects. Duke bought 5.1 million square feet of warehouse space near the Savannah docks in January, and it's eyeing land near the Houston Ship Channel.

Duke stays out of downtowns in favor of suburban office parks and massive distribution centers. Most Duke holdings are concentrated in five midwestern cities. That geographic focus has hurt the stock at times because of the Midwest's sluggish office markets. "Our Midwest markets don't get enough credit," says Denny Oklak, Duke's chairman.

Rather than stand on the merits of the country's midsection, Duke Realty bought office and industrial properties in tony northern Virginia for $855 million in March. The deal gives the company 166 acres of land to develop in a fast-growing swath of suburbia and diversifies its property portfolio. Duke Realty wants to persuade other real estate investors to buy stakes in its office properties so it can use money from the partnerships to fund new projects.

Earnings growth from new projects will not affect Duke Realty's bottom line until at least next year. "Everybody needs to know it's going to take a little bit of time," says chief financial officer Matt Cohoat.

Duke shares yield an above-average 5.2%. But REIT stocks aren't judged by earnings -- funds from operations is the key measure. The stock, recently $35, sold for 15 times the $2.41 in FFO that analysts expect Duke to generate in 2006. That is above the average price-to-FFO ratio of 14 for all property-owning REITs. Prudential Equity analyst James Feldman thinks Duke could generate FFO of $2.64 per share in 2007 because of profits from new development. But Duke's port adventure remains shrouded in the fog of possibility. You might be better off waiting for the mist to lift.