Duke upends growth plan, focuses on paying debt

In this horrendous environment, nothing is more important for a debt-laden public company than proving it can pay its bills.

Which explains why locally based Duke Realty Corp. has set aside talk of growth and expansion and has instead made managing
its $4.3 billion debt load the overriding priority.

From an operations standpoint, so far so good. The office-and-industrial developer’s occupancy rate actually rose nearly 2
percentage points over the past year. It also was able to bump up rents on lease renewals 1.8 percent.

But many analysts fear the other shoe is about to drop.

"We don’t think these results are sustainable," Morningstar Inc. wrote in a recent report.

"The recession is likely to force tenants to reduce head count and space requirements, and Duke’s office and industrial
buildings
will be particularly hurt by the economic downturn because most of them are located in suburbs as opposed to space-constrained
central business districts."

Duke CEO Denny Oklak isn’t sitting back nostalgically recalling the boom times.

Since January 2008, the company has reduced its work force 20 percent, to 1,130 employees (more than one-third are based in
Indianapolis).

Duke also closed offices in Austin and San Antonio, Texas; Seattle; and southern California — markets it had targeted
for expansion.

And early this year, the company jolted investors by cutting its dividend by nearly half, to $1 per share annually.

The move will free up $150 million in 2009. In a conference call with investors, Oklak called the move warranted "in
light
of the unprecedented lack of available capital to refinance our future debt." This is the first time since Duke went
public
in 1993 that it hasn’t announced a dividend increase.

It’s all about making sure the company has the cash it needs to make debt payments at a time the unsecured credit market —
long
a source of funds for Duke and other real estate companies — remains shut down.

"Right now, we are not even trying to factor in a recovery," Oklak, 55, told IBJ.

"We are kind of in a mode of getting through — however long this downturn takes — and positioning our company
to be in good shape."

Executives aren’t leaving anything to chance. By the end of this year, they plan to have lined up the $1.2 billion needed
to pay off debt maturities in 2011, its biggest year for repayments. One option is to borrow against the $6 billion in real
estate the company owns that’s debt-free — a form of credit that remains available.

While Oklak said he understands investors’ concern about the company’s debt, "we have a solid balance sheet and a lot
of opportunities
to raise capital."

Fitch Ratings, which analyzes the financial strength of companies, last month praised "the prudent steps that management
has
taken in response to extraordinary market conditions."

Nonetheless, it revised its outlook to "negative" because of the company’s high leverage and the likelihood that
profitability
will erode in 2009.

Duke already has drastically scaled back development and is operating under the mantra "blend, extend, don’t spend."

It wants tenants with impending lease expirations to lock in renewals, giving them a break on current rent as an incentive.

The deals reduce Duke’s risks, wiping out the potential of losing a long-term tenant.

And the rent increases in later years offset the initial concessions, allowing Duke to pocket a higher "blended"
rate.

Good management, to be sure. But not enough to stoke investor enthusiasm in the company’s shares, even at their severely depressed
levels.

Duke stock now trades for just $5, down nearly 80 percent over the past 12 months.

But that’s the least of the issues facing Duke these days.

While a higher stock price would be nice, management’s focus is on something more fundamental — ensuring the company
has the
financial muscle to be a survivor.

Dell fund bids adieu

Michael S. Dell, the computer entrepreneur, isn’t waiting for a turnaround at Steak n Shake.

New York-based MSD Capital LP, his family investment vehicle, recently sold its 9 percent stake in the Indianapolis diner
chain, collecting around $20 million.

MSD amassed most of its 2.8 million shares in the fall of 2003, when the company’s shares were fetching more than $14 apiece.

The stock now fetches less than $7 a share.