Real Estate Duke Realty Corp. - Tippie College of …...Important disclosures appear on the last page of this report. Krause Fund Research Fall 2017 Real Estate Recommendation: BUY

Important disclosures appear on the last page of this report.

Krause Fund Research Fall 2017 Real Estate Recommendation: BUY Analysts Vignesh Das [email protected]

Qiqi Shi [email protected]

Josh Marquez [email protected]

Zo-Ean Lee [email protected]

Investment Thesis We are recommending a Buy rating for Duke Realty Corp. Industrial REITs are benefitting greatly from industry trends and Duke is adapting its capital and asset strategy to position itself to perform even better. Furthermore, Duke maintains a strong credit rating with agencies and remains to be one of only 31 REITs in the S&P 500. Duke’s management actively adapts their strategy to position itself for future growth, and we believe that the company is going to see impressive growth in the coming years. Drivers of Thesis • E-commerce is steadily claiming larger portions of

retail market share as retail continues to get clobbered by debt originations and a shifting shopping culture

• Duke sharply pivoted from 2016 asset strategy by disposing of nearly all non-industrial assets to accommodate the growing e-commerce sector

• A strong rebound for retail looks grim as the pressure of debt originations is to exponentially increase in the next few years

• Duke significantly cut down on their debt levels shielding them from potential rising interest rates

Risks of Thesis • Heightened competition in the market can bring

occupancy and rent decreases • Duke does not operate globally and does not plan to,

which is an opportunity that they could miss • The cyclical nature of commercial real estate means

that the company may face naturally stunted growth

Duke Realty Corp. (NYSE: DRE)

November 14, 2017 Target Price Range: $31 - $36

Krause Fund DCF Krause Fund DDM Relative Multiple P/E

$35.31 $32.82 $32.71

Price Data Current Price 52-Week Range Consensus 1yr Target

$29.11

$23.58-30.14 $30.00

Key Statistics Market Cap (B) Shares Outstanding (M) Beta Dividend Yield Est. 5yr Growth Price/Earnings Price/Earning (FY1) Price/FFO Price/AFFO Price/Book

$10.463 356.08

0.80 2.51% 6.00%

30.2 8.0

22.1 25.0

2.7 Profitability/Financial Ratios Operating Margin Profit Margin Return on Assets (ROA) Return on Equity (ROE) Debt to Equity

39.27%

163.70% 19.08% 38.36%

0.54

Figure 1 – DRE 1yr performance against S&P 500 Source – Google Finance

Company Overview Duke Realty Corp. (DRE) is a U.S. industrial REIT, specializing in services to ecommerce and supply chain companies. Duke has 21 major industrial markets that have teams and properties mainly located in proximity to coastal ports and thriving inland hubs across the U.S. More than half the markets Duke serves are labelled as Tier 1. Duke Realty had a vertically integrated structure enabling them to provide clients with expertise in four main areas: development, leasing, property management, and construction.


Krause Fund Research Fall 2017

Executive Summary We are issuing a BUY rating for DRE primarily due to the positive underlying fundamentals of both the industrial sector and Duke in itself. Despite recent dips in revenue due to Duke’s disposition of different property types, their specialization in the industrial sector has them poised to see sustainable and organic growth. In the commercial real estate world, e-commerce has taken a commanding position in terms of market share with no signs of slowing down. As a result, the need for industrial distribution and warehouse spacing is also set to grow. As Duke Realty has made it their strategic objective to specialize as an industrial REIT, they are expected to benefit as e-commerce continues to grow in the commercial real estate landscape. Since the global financial crisis, e-commerce has more than doubled its share of total retail sales to 8.9%.1 Becoming a pure-play REIT will prove to be a strong move on management’s part to support future growth. All of our valuation models also indicate an underpriced stock. This is also without taking into account the external factors that can stimulate further growth for an industrial REIT. Macroeconomic Outlook U.S GDP Since the global financial crisis the U.S. has been in a long and stable period of economic growth which we expect to see continue for the next few years. The second and third quarters of 2017 provided the first back-to-back 3% GDP quarters since 2014. Although we’ve seen strong quarters as of late we expect GDP to normalize around 2.0%-2.5% over the next 1-3. Rising GDP tends to mean increased corporate profits and consumer spending, which are both beneficial to commercial real estate.2 That being said, increasing GDP also correlates to increased interest rates which have an adverse effect on REITs, which are heavily dependent on low borrowing costs for their large debt.

Figure 2--Source: St. Louis Fed (FRED)

Inflation Inflation has remained stagnant which has led to debate about whether or not the Fed should continue to raise rates. Although inflation hasn’t been able to find steam, we expect it to meet the Fed’s 2% target rate within the next 1 or 2 years. As the labor market continues to stay very tight and unemployment rate staying at a historic low of 4.2%, wage growth should begin to accelerate. Combined with a strengthening U.S. and global economy, inflation should begin to rise again, encouraging the Fed to continue interest rate hikes. The risks of inflation is not of much concern right now as growth and interest rates or rising and employment fundamentals are good. Furthermore, a low-liquid-low-volatility REIT doesn’t face the inherent inflation concerns that a more volatile industry might. Interest Rates Observing interest rates are important due to the nature of how REITs operate. REITs require lots of debt to fund their operations and interest rates are important metric when measuring borrowing costs. Interest rates have largely had a question mark surrounding them as the Fed looks towards 2018. The target rate currently sits at 1.00% - 1.25%, with the Fed planning on another rate hike in December. It looks as though the Fed also intends on multiple hikes in 2018 as the interest rates look to normalize around 2.5% in the next 1-3 years.3

Figure 3 -- Source: St. Louis Fed (FRED)

Figure 4 -- Source: IBISWorld – yield on 10-year treasury



Industry Trends – The Retail Apocalypse The Commercial Real Estate industry is composed of four primary property types: Multifamily, Retail, Industrial, and Office as well as several other niche properties. While there’s stability in the office and apartment sectors, a leading storyline in real estate is the apocalypse facing the retail sector. We are especially optimistic about Duke because we believe that this storyline can provide a much greater impact on the growth of industrial REITs beyond the positivity shown in our valuation models. Store closing around the nation have sent a dooming message about the sector. On top of that, only $100 million in high-yield retail borrowings were to mature this year increasing to $1.9 billion in 2018, and averaging $5 billion from 2019-2025.4

Figure 5 -- Source: Bloomberg.com Retail stores have been closing at record rates even with high consumer confidence, a tight labor market, and a growing economy, which only spells trouble when all the retail debt finally matures.

Figure 6 -- Source: Bloomberg.com

While retail faces an extremely uncertain future, e-commerce giants like Amazon continue to expand their market share and thrive in today’s culture.

Figure 7 -- Source: Bank of America Merrill Lynch Global Real Estate Conference Duke outlined their key macroeconomic drivers of demand at a Bank of America Merrill Lynch conference. As shown in Figure 7, among the most correlated factors to DRE’s demand were e-commerce and GDP, both of which are trending upward. Massive debt obligations combined with an increased market share attributable to e-commerce is set to put immense pressure upon the retail sector. With these trends becoming more evident, Duke took advantage by hastily conforming into a pure-play industrial REIT and investing heavily in the acquisitions of state-of-the-art industrial distribution and warehouse facilities. The way Duke has adapted so keenly to industry trends has us optimistic about their future prospects.



Figure 8 - Source: St. Louis Fed (FRED) E-commerce % of sales Porter’s Five Forces for Real Estate Threat of New Entrants: Medium With the trends in real estate pointing in a favorable direction for industrial REITs, the sector looks a lot more inviting. Duke has to be weary of competition that may look to seek a competitive edge in pricing or value proposition. For Duke to mitigate the threat of new entrants, it is important for management to be consistently seeking innovation and adapt their capital or asset strategy when needed, as they’ve proven they will do. Bargaining Power of Suppliers: Low Seeing as industrial REIT’s are not supply intensive the bargaining power of suppliers is low. A threat here could be in the form of poor terms of acquisition by a seller. Duke often acquires and sells properties and there could be potential bargaining power in the hands of a seller whose property Duke may be looking to acquire. Bargaining Power of Buyers: Medium Bargaining power of buyers exists in different ways for industrial REITs like Duke. Similar to the instance for suppliers, Duke often looks to dispose of land or properties that no longer fit their asset strategy. It is important for management to stay weary of not taking bad losses on asset dispositions. Furthermore, if Duke continues to invest in quality industrial developments to boost their portfolio, buyers lose their bargaining power because it is likely that the property will be in high demand.

Threat of Substitutes: Low The threat of substitute products or services is rather low for duke because of their intense specialization. By solely focusing on industrial warehouse and distribution facilities Duke mitigates the threat of another product or service being detrimental to their business. Furthermore, Duke actively partakes in development, leasing, property management, and construction services so they already cover a wide enough range to feel comfortable. Industry Rivalry: High Industrial REIT rivalry is very high due to the trends in the industry. It’s no secret that industrial REITs have a favorable road ahead with underlying real estate fundamentals, and this makes it difficult to differentiate because of the number of competitors adapting to the changes. Long-term competition like this can no doubt hurt profitability so proving a competitive advantage is important. Duke has an advantage in the broad services they provide as well as the quality of their portfolio. These are the factors they find important to staying ahead of the competition, and we believe that they do create a sustainable competitive advantage. SWOT Analysis Strengths Duke has Comprehensive real estate service and complementary business segments. It has rental service and real estate investments two product lines. The rental service includes the leasing of industrial properties like warehouse, industry buildings, medical office building and suburban office building. Apart from rental service, the company also provide service in land acquisition, development, construction, management, leasing, maintenance and disposition. Having control in different business segments allow the company response more flexible and quick to the changes on the demand and preferences of market.

Duke has a strong presence on its asset management strategy and client relationship building. The company react quickly to the change of REITs market. It has been shifting its investment focus from office properties to industrial properties due to the development trend of retail market. Up to present, the company has owned 501 industrial properties that 480 properties are in-service and 21 properties are under development with maintaining a strong occupancy rate 90%+.

Weaknesses Duke mainly presences in 21 industrial logistic markets that are highly concentrated in east coast of US. Its portfolio did not have thriving development in the Central and west coast



region. This would potential because Duke to become less competitive and reduce its barging power in the REITs industry. Opportunities The recessions of retail industry creates opportunities for industrial realty to grow. Duke is transforming its focus to industry properties development is a good start for its future development. Continuing raising industrial investment activities, services and acquisitions would be considered as a most reasonable development strategy for Duke. Meanwhile, having a business expansion plan on the weak geography presence would bring Duke to become more competitive in real estate industry. Threats Intensive completion and challenges from finance outsourcing are pressuring Duke. There are 6 main competitors in US industrial based on the ownership of Square feet of properties. Duke places as second among the competitors. The differences of ownership on properties between industrial followers are small. Acquiring more properties to maintain market positon and increase market share is part of current development plan for most of the companies in the industry. Amplifying acquisition would push companies to refinance and outsourcing, which could lead the bank to reducing the lending. Without maintain profit and dividend payout, Duke could lost its REITs classification. Industry Leaders & Followers Industrial REITs have performed very strongly in relation to other REIT sectors. Figure 9 below shows a comparison of the gains from some of the industry’s top REITs. Duke Realty led gains for the one-year and three-year period ended August 30, 2016.

Figure 9 – Source: seekingalpha.com The reason Duke has had noticeable success is because it offers a true competitive advantage. They have been executing on their strategy to develop class-A distribution

centers in key locations. Duke CEO, James Connor, made sure that Duke responded to the trend of faster customer delivery times by developing buildings in highly urban locations. With tenants such as Amazon, Home Depot, FedEx, and UPS Duke has positioned itself strongly, understanding that retailers will pay more for urban real estate to cut long-term costs stemming from remote distribution locations. Figure 10 below shows Duke’s primary facility locations and Figure 11 shows some of Duke’s high-profile tenants.7

Figure 10 – Source: dukerealty.com – Duke Realty’s Markets

Duke’s clients come from diverse industries: manufacturing, e-commerce, transportation, retail, etc. This is proof that Duke’s industry expertise reaches across a broad horizon.

Figure 11 – Source: dukerealty.com – Duke’s Client Base



Industry Metrics The table bellows compares some metrics from some of the big names in industrial REITS. Company Mkt. Cap

(B) P/E 17 P/AFFO P/BV

Duke Realty

10.41 8.0 25.0 2.7

DCT Industrial

5.67 62.6 32.4 2.4

Prologis Inc.

35.7 27.4 26.1 1.9

First Industrial

3.87 35.0 24.3 2.7

Source: FactSet We will be discussing the industry metrics in further depth in the relative multiple valuation discussion below.

Figure 12– Source: dukerealty.com – Peer Comparison Investment Positives • Duke Realty Corp is a company that is positioned to

benefit significantly as their business model is focused on the industrial sector which has the most positive impact of the retail boom with more to come

• They service high-profile tenants such as: Amazon, FedEx, Home Depot, Walmart etc.

• Figure 12 shows superior numbers in building age & average building size compared to peers

• Possess a competitive advantage with multitude of service and urban location

Investment Negatives • Lack of global presence limits scope of business • Changed asset strategy in 2017 to pure-play industrial so

they lack historical performance with new strategy • Stock price growth present but modest; large portion of

recommendation falling into industry trends Valuation Analysis After valuing Duke Realty Corp with the Discounted Cash Flow (DCF), Economic Profit model (EP), Relative price to Fund from Operations (P/ FFO) and Relative price to Adjust Fund from Operation (P/ FFO) model analyses, we came to the conclusion that Duke should have a BUY rating. The DCF and DDM model provided an intrinsic stock price of $35.31 and $32.82, higher than the current trading price of $29.11. We forecasted future cash flows to 2021, where we felt the company would reach steady-state growth 4.25%. We selected a five-year horizon because we felt that Duke’s capital and asset strategies would be consistent and solidified by then. Key Assumptions Revenue Decomposition DRE’s revenue consists two segments: Rental Revenue and General contractor & Service Fee. To acquire the accurate forecast of Rental Revenue, we decomposed DRE’s Rental Revenue by the number of properties, gross leasable area, occupancy rate, and price per building per Sq. Ft. We forecast the each type of property revenue in the next coming 5 years via averaging the historical 10 years’ growth rate (see Table 1), excluding outliers, in each decomposed category mentioned above. Due to the acquisition and disposition of property activity, the number of properties projection for 2018 beyond are based on the top of most recent properties duke owned. In projection of General Contractor & Service Fee Revenue, we used the same method to project the growth rate (see Table 2). Table 1



Table 2

Weighted Average Cost of Capital The WACC is implemented to the calculation of DCF and DDM model. We used the Capital Asset Pricing Model to calculate the cost of equity with the assumptions for risk-free rate, market risk premium, and beta. The risk-free rate is 2.93% that is using the yield on the 30-year Treasury bond. The market risk premium is determined using geometric average premium of U.S. Historical Average Risk Premiums from 1928-2016 since we believe that is what investors would expect recently. We decided to use the adjusted beta 0.802 of DRE that appeared on Bloomberg to get the most reasonable cost of equity of 6.66%. Cost of debt should be determined to use 10-year corporate bond that is issued in mid-2016 and mature in 2026 with yield 3.31 plus spread 98.37 base point, which is 4.29%. We believed that the most recent issued bond would give us a reasonable estimation of WACC 5.56%. Discounted Cash Flow/ Economic Profit The DCF/ EP model gives an adjusted intrinsic price of $35.31 at 11/13/2017 that is 21.3% higher than the current market price $29.11. To get the most accurate Enterprise value, we chose the NOPLAT in 2021 as our FCF instead of the projected FCF for our continuing value calculation. The model assumes the continuing growth rate will stabilize at 4.25% with long term ROIC of 6.63% at year 2021. The price indicates that the company is slightly undervalued by the market. Dividend Discount Model The DDM projects the adjusted intrinsic price as $32.82 per share on 11/13/2017. The price is calculated based on the assumption of continuing growth rate of 4.25% with long-term ROE of 8.25% at year 2021. The dividend per share is growing with the assumption of the growing Net Income and Weighted average common shares outstanding ratio. The price is 12.7% higher than the current price $29.11. Duke is currently considered undervalued by the market. Relative Valuation Models (P/FFO, P/AFFO) We built up a relative valuation model based on taking the average P/E, P/FFO, P/AFFO, and P/BV ratios of our peer competitors. Duke have favorable ratios in comparison to several of its peers. We chose to use FFO ratios because it is a far more accurate measure of REIT performance than

earnings, due to income volatility. FFO is commonly used as an operating performance benchmark. AFFO is an even more accurate measure of residual cash flow. These numbers are the best indicators for a REIT’s ability to pay future dividends.5 Duke’s P/AFFO is extremely favorable compared to its peers which bodes well for Duke. Duke measured right at its peer average when analyzing P/BV values. Sensitivity Analysis For our sensitivity analysis, we were able to measure two metrics that went towards the company’s valuation. We chose to look at CV Growth compared to both CV ROIC as well as WACC because those are both figures that can heavily affect the valuation of a model. We also chose to look at Cost of Equity and ROIC in terms of how they affected FFO growth. We felt this was important because of how important of a metric FFO is when analyzing REITS, so we chose to see how sensitive factors such as cost of equity and ROIC affected it. References 1. “E-Commerce Retail Sales as a Percent of Total

Sales.” FRED, St. Louis Federal Reserve, 17 Aug. 2017, fred.stlouisfed.org/series/ECOMPCTSA

2. “IBISWorld Industry Report NN007: Commercial Real Estate in the US. ”Http://clients1.Ibisworld.com/Reports/Us/Industry/Default.aspx?Entid=2009, IBISWorld, clients1.ibisworld.com/reports/us/industry/default.aspx?entid=2009

3. “Federal Reserve Press Release.” Board of Governors of the Federal Reserve System, Federal Reserve, www.federalreserve.gov/monetarypolicy/fomccalendars.htm.

4. Townsend, Matt, et al. “America's 'Retail Apocalypse' Is Really Just Beginning.”Bloomberg.com, Bloomberg, 8 Nov. 2017, www.bloomberg.com/graphics/2017-retail-debt/.

5. Staff, Investopedia. “Adjusted Funds from Operations - AFFO.” Investopedia, Investopedia, 17 May 2016, www.investopedia.com/terms/a/affo.asp.

6. DUKE REALTY CORPORATION, FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION. Retrieved from https://www.sec.gov/Archives/edgar/data/783280/000078328017000012/a10k2016.htm

http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

http://www.bloomberg.com/graphics/2017-retail-debt/

http://www.bloomberg.com/graphics/2017-retail-debt/

http://www.investopedia.com/terms/a/affo.asp

https://www.sec.gov/Archives/edgar/data/783280/000078328017000012/a10k2016.htm

https://www.sec.gov/Archives/edgar/data/783280/000078328017000012/a10k2016.htm


7. Admin. “Duke Realty Likely to Bolster Acquisitions

with Medical Sale Proceeds.” Minnesota Real Estate Journal, Minnesota Real Estate Journal, 19 June 2017, mrej.com/2017/06/duke-realty-likely-to-bolster-acquisitions-with-medical-sale-proceeds/

8. “Duke Realty 10-K.” SEC Filings, EDGAR, www.sec.gov/Archives/edgar/data/783280/000078328017000012/a10k2016.htm#s8E67B705F3B050AB9A9F0F2240188EDB.

Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

Duke Realty CorporationRevenue Decomposition

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021CVRental and related revenueRental Revenue by Property Types REIT-Industrial 529.10 556.90 583.00 741.98 815.34 895.95 984.53 1081.87Growth Rate 9.79% 5.25% 4.69% 27.27% 9.89% 9.89% 9.89% 9.89%Medical Office 146.5 161 175.4 0.79 0.84 0.88 0.91 0.94Growth Rate 14.90% 9.90% 8.94%REIT-Office 131.7 90.7 0 0.00 0.00 0.00 0.00 0.00Growth Rate -47.59% -31.13% -100.00%

Related Revenue from Rental 26.80%Non-Reportable Rental Operations Segments 8.8 0 47 0.21 0.23 0.24 0.24 0.25Growth Rate 22.22% -100.00% 0.00%Other Revenue 6.1 7.5 8 7.01 6.14 5.38 4.72 4.13Growth Rate 8.93% 22.95% 6.67%Non-Segment 0 0 0 0 0 0 0 0Growth Rate 0.00% 0.00% 0.00%Discontinued Operations 0 0 0 0 0 0 0 0Growth Rate 0.00% 0.00% 0.00%Total Rental Reveune 822.20 816.10 813.40 750.00 822.56 902.45 990.41 1087.20Growth Rate -5.87% -0.74% -0.33%

General contractor and service fee RevenueService Operations 224.5 133.4 88.8 68.63 53.04 40.99 31.68 24.49Growth Rate 8.66% -40.58% -33.43%Total Revenue 1,046.90 949.4 902.2 818.63 875.60 943.45 1022.09 1111.69Growth Rate -3.06% -9.31% -4.97%

Number of Properties REIT-Industrial 500 459 455 501 507 514 520 526

Growth Rate ‐1.38% ‐8.20% ‐0.87%Medical Office 81 83 86 2 2 2 2 2

Growth Rate 2.53% 2.47% 3.61%REIT-Office 148 45 20 0 0 0 0 0

Growth Rate ‐11.90% ‐69.59% ‐55.56%

Gross Leasable Area (Sq Ft)REIT-Industrial 130.4 130.5 130.9 146.4 153.7 161.5 169.6 178.1

Growth Rate 3.49% 0.08% 0.31%Medical Office 6.548 6.6 6.8 1.2 1.2 1.2 1.2 1.2

Growth Rate ‐4.21% 0.79% 3.03%REIT-Office 16.2 5.5 2 0.00 0.00 0.00 0.00 0.00

Growth Rate ‐17.77% ‐66.05% ‐63.64%

Occupancy RateIndustrial Office 97.50% 98.10% 96.70% 97.05% 97.40% 97.76% 98.11% 98.47%Growth Rate 2.63% 0.62% ‐1.43%Medical Office 93.10% 94.80% 94.30% 96.77% 99.31% 100% 100% 100%Growth Rate ‐0.11% 1.83% ‐0.53%Office 85.40% 92.40% 63.80% 90.00% 0 0 0 0Growth Rate ‐2.73% 8.20% ‐30.95%

Industrial Rental price per building per Sq Ft 0.00832 0.00948 0.01012 0.01042 0.01073 0.01105 0.01138 0.01172Growth Rate 4.82% 13.87% 6.81%Medical office Rental price per building per Sq Ft 0.29668 0.31002 0.31806 0.32933 0.34101 0.35309 0.36561 0.37857Growth Rate 17.12% 4.50% 2.59%Office Rental price per building per Sq Ft 0.06432 0.39661 0.00000 0.43196 0.47047 0.51241 0.55809 0.60785Growth Rate ‐25.62% 516.61% ‐100.00%

Income Statement

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021CVRevenues:

Rental and related revenue 822.4 816.1 813.4 750.0 822.6 902.5 990.4 1087.2General contractor and service fee revenue 224.5 133.4 88.8 68.6 53.0 41.0 31.7 24.5

Total revenues 1046.9 949.4 902.2 818.6 875.6 943.4 1022.1 1111.7Operating Expenses:

Rental expenses -136.3 -125.7 -107.4 -99.0 -108.6 -119.2 -130.8 -143.6General contractor and other services expenses -200.0 -119.2 -80.5 -63.2 -48.9 -37.8 -29.2 -22.6

General and administrative expenses -49.4 -58.6 -55.4 -29.4 -22.7 -17.5 -13.6 -10.5Depreciation and amortization -346.3 -317.3 -317.8 -315.8 -331.6 -348.2 -365.6 -383.9

Total Operating Expenses -845.6 -732.1 -678.0 -586.2 -596.0 -613.4 -637.5 -667.4Other Operating Activities:

Gains on land and property sales 267.4 261.5 276.4 0.0 0.0 0.0 0.0 0.0Impairment charges -49.1 -22.9 -18.0 0.0 0.0 0.0 0.0 0.0

Other Operating Expenses/income -7.2 -6.0 -3.9 0.0 0.0 0.0 0.0 0.0Total Other Operating Activities 211.1 232.6 254.5 0.0 0.0 0.0 0.0 0.0

Operating income / loss 411.1 448.4 477.0 232.4 279.6 330.0 384.6 444.3Interest and other income / expense, net 1.2 4.7 4.0 4.0 4.0 4.0 4.0 4.0

Interest expense -196.2 -173.6 -141.6 -124.8 -91.5 -91.9 -92.3 -92.8Gain / loss on debt extinguishment -0.3 -85.7 -33.9 0.0 0.0 0.0 0.0 0.0

Acquisition-related activity -1.1 -8.5 7.2 0.0 0.0 0.0 0.0 0.0Other income / expenses -196.3 -263.1 -164.3 -120.8 -87.5 -87.9 -88.3 -88.8

0.37% 2.10% 0.19% 7.07%Pretax Income / loss from continuing operations 214.7 185.3 312.7 111.7 192.1 242.2 296.3 355.5

Income tax benefit / expense 0.8 3.9 0.6 -7.9 0.0 0.0 0.0 0.0Income / loss from continuing operations 215.6 189.2 313.3 103.8 192.1 242.2 296.3 355.5

Income / loss before gain on sales 11.1 10.9 1.0 17.7 0.0 0.0 0.0 0.0Gain / loss on sale of depreciable properties, net of tax 19.8 421.7 1.0 1218.6 0.0 0.0 0.0 0.0

Income / loss from discontinued operations 30.9 432.7 2.0 1236.3 0.0 0.0 0.0 0.0

Net income / loss 246.5 621.9 315.3 1340.1 192.1 242.2 296.3 355.5

Funds from Operations (FFO)Net Income 246.5 621.9 315.3 1340.1 192.1 242.2 296.3 355.5Depreciation & Amortization 346.3 317.3 317.8 315.8 331.6 348.2 365.6 383.9Gain on sales of properties/land -287.2 -683.2 -277.4 -1218.6 0.0 0.0 0.0 0.0

Funds from Operations (FFO) 305.6 256.0 355.7 437.3 523.7 590.4 662.0 739.4Capital Expenditures -571.0 -266.0 349.0 324.1 340.3 357.3 376.9 394.0

Adjusted Funds from Operations (AFFO) 876.6 522.0 6.7 113.2 183.4 233.0 285.0 345.33.16% 3.16%

Weighted average common shares outstanding (diluted) 340.4 352.2 357.1 368.4 380.0 392.0 404.4 417.2Basic Earnings per Share (diluted) 0.60 1.77 0.88 3.64 0.51 0.62 0.73 0.85Common stock dividend declared 0.68 0.89 0.73 0.76 0.79 0.83 0.86 0.90Dividends on preferred shares -24.9 0.0 0.0 0.0 0 0 0 0

Duke Realty CorporationCash Flow Statement

Fiscal Years Ending Dec. 31 2014 2015 2016Operating Activities:Net income / loss 246.5 621.9 315.3

Adjustments to reconcile net income / loss to net cash provided by operating activities 198 -242.5 134.9Depreciation of buildings and tenant improvements 290.3 253.7 255.4Amortization of deferred leasing and other costs 94.3 67.2 62.4Amortization of deferred financing costs 9.8 7 5.3

Straight-line rental income and expense, net -20 -22.4 -13.7Impairment charges 49.1 22.9 18Other accrued revenues and expenses, net 47.7 3.8 9.8Gain / loss on debt extinguishment 0.3 85.7 33.9Gain on dissolution of unconsolidated company 0 0 -30.7Gain / loss on acquisitions 0 0 -7.3Gains on land and depreciated property sales -195.9 -689.6 -173Third-party construction contracts, net -17.2 4 5.3Operating distributions received in excess of / less than equity in earnings from unconsolidated companies -60.4 25.3 -30.6Net cash provided by operating activities 444.5 379.4 450.1

Investing Activities: -207 1,121.30 24.9Development of real estate investments -446.7 -370.5 -401.4Acquisition of real estate investments and related intangible assets -125.2 -28.8 -170.6Acquisition of undeveloped land -68.2 -39.9 -99.2Second generation tenant improvements, leasing costs and building improvements -98.8 -61.9 -59.3Other deferred leasing costs -31.5 -30.8 -38.4Other assets -10 -19.1 187.1Proceeds from land and depreciated property sales, net 493.2 1,675.70 538.6Capital distributions from unconsolidated companies 91.8 69 126.1Capital contributions and advances to unconsolidated companies -11.6 -72.4 -57.9Net cash provided by / used for investing activities -207 1,121.30 24.9

Net cash provided by / used for financing activities -238.8 -1,496.10 -484.9Proceeds from issuance of common shares, net 289.1 4.5 220.3Payments for redemption / repurchase of preferred shares -446.6 0 0Proceeds from unsecured debt 300 0 375Payments on unsecured debt -2.1 -913.1 -440Proceeds from secured debt financings -- -- --Payments on secured indebtedness including principal amortization -112.9 -245.7 -354.8Borrowings / payments on line of credit, net 18 -35 -23Distributions to common shareholders -228.2 -238.1 -255.3Distributions to common shareholders - special dividends 0 -69.1 0Distributions to preferred shareholders -27.4 0 0Distributions to / contributions from noncontrolling interests, net -2.8 -2.8 -2.6Buyout of noncontrolling interests -7.8 0 0Change in book overdrafts -4.7 3.4 2.3Deferred financing costs -13.5 -0.3 -6.7Net cash provided by / used for financing activities -238.8 -1,496.10 -484.9

Net increase / decrease in cash and cash equivalents -1.4 4.6 -9.9Cash and cash equivalents at beginning of period 19.3 17.9 22.5Cash and cash equivalents at end of period 17.9 22.5 12.6

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021CVCash Flows from Operating Activities Net income / loss 1340.1 192.1 242.2 296.3 355.5

Adjustment to reconcile Net income to Net cashDepreciation & Amortization 315.8 331.6 348.2 365.6 383.9

Changes in:Accounts receivable 2.0 -1.3 -1.5 -1.7 -2.0

Straight-line rents receivable, net 6.44 -10.60 -11.7 -12.8 -14.1Receivables on construction contracts, including retentions -7.02 -1.18 -1.41 -1.64 -1.86

Construction payables and amounts due subcontractors, including retentions 1 4 5 5 6Other accrued expenses and liabilities -22 11 13 15 17

Construction in progress -17 -18 -19 -20 -21Accrued real estate taxes -20 4 4 5 6

Tenant security deposits and prepaid rents 0 4 4 5 5Net Cash provided by Operating Activities 1598.9 510.9 578.6 651.1 729.3

Cash Flows from Investment Activities Land and improvements -75.6 -79.3 -83.3 -89.2 -91.9

Buildings and tenant improvements -248.6 -261.0 -274.0 -287.7 -302.1Deferred leasing and other costs 31.7 -21.6 -25.7 -29.8 -34.0

Investments in and advances to unconsolidated companies 0.0 0.0 0.0 0.0 0.0Undeveloped land 0.0 0.0 0.0 0.0 0.0

Real estate investments and other assets held-for-sale 0.0 0.0 0.0 0.0 0.0Liabilities related to real estate investments held-for-sale 0.0 0.0 0.0 0.0 0.0

Net Cash provided by Investment Activities -292.4 -361.9 -383.0 -406.7 -428.0

Cash Flows from Financing Activities Secured debt, net of deferred financing costs -71.2 1.4 1.5 1.6 1.6

Unsecured debt, net of deferred financing costs -662.9 8.1 8.5 9.5 9.4Unsecured line of credit -43.0 0.0 0.0 0.0 0.0

Distributions to Commons Shareholders -280.3 -301.5 -324.2 -348.7 -375.0Change in common stock 10.0 10.0 10.0 10.0 10.0

Net Cash provided by Financing Activities -1047.5 -281.9 -304.2 -327.6 -353.9

Net increase / decrease in cash and cash equivalents 259.0 -132.9 -108.7 -83.2 -52.6Cash and cash equivalents at beginning of period 12.6 271.6 138.7 30.1 -53.2Cash and cash equivalents at end of period 271.6 138.7 30.1 -53.2 -105.8

Duke Realty CorporationBalance Sheet

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021CVAssets:Real Estate Investments:

Land and improvements 1,413 1,392 1,511 1587 1666 1749 1838 1930Buildings and tenant improvements 4,986 4,741 4,971 5220 5481 5755 6042 6344

Construction in progress 246 321 347 364 383 402 422 443Investments in and advances to unconsolidated companies 294 268 198 198 198 198 198 198

Undeveloped land 500 383 237 237 237 237 237 237Total real estate investments 7,439 7,105 7,264 7,605 7,964 8,340 8,737 9,153

Accumulated depreciation -1,235 -1,192 -1,284 -1600 -1931 -2280 -2645 -3029Net real estate investments 6,204 5,913 5,981 6006 6033 6061 6092 6123

Real estate investments and other assets held-for-sale 725 46 52 52 52 52 52 522.20% 14.61% 2.08%

Cash and cash equivalents 18 23 13 272 139 30 -53 -106Accounts receivable, net 26 19 20 18 19 21 23 24

Straight-line rents receivable, net 110 117 116 110 120 132 145 159Receivables on construction contracts, including retentions 36 16 10 17 18 20 21 23Deferred financing costs, net of accumulated amortization 39 0 0 0 0 0 0 0

Deferred leasing and other costs, net 388 346 342 310 332 358 387 421Escrow deposits and other assets 210 416 238 238 238 238 238 239

Total assets 7,755 6,896 6,772 7022 6951 6911 6905 6936

Liabilities:Debt 48.62% 30.21% 5.21% 0.08%

Secured debt, net of deferred financing costs 942 738 384 313 314 316 317 319Unsecured debt, net of deferred financing costs 3,364 2,511 2,477 1814 1822 1831 1840 1850

Unsecured line of credit 106 71 48 5 5 5 5 5Total indebtedness 4,413 3,320 2,908 2132 2141 2151 2163 2174

Liabilities related to real estate investments held-for-sale 59 1 2 2 2 2 2 26.72% -66.72% 19.20% 5.36%

Construction payables and amounts due subcontractors, including retentions 69 55 54 55 59 63 69 75Accrued real estate taxes 76 72 73 53 56 61 66 71

Accrued interest 55 34 24 24 24 24 24 24Other accrued expenses and liabilities 159 168 179 157 168 181 196 213

Tenant security deposits and prepaid rents 44 41 40 40 44 48 53 58Total liabilities 4,875 3,691 3,279 2463 2495 2531 2572 2618

Equity:Common Stock & Additional Paid in Capital 4,948 4,965 5,196 5206 5216 5226 5236 5246

Accumulated other comprehensive income / loss 3 2 1 0 0 0 0 0Distributions in excess of net income -2,091 -1,785 -1,730 -670 -780 -862 -914 -934

Total shareholders equity 2,860 3,182 3,466 4536 4436 4364 4322 4312Noncontrolling interest 20 23 27 23 20 16 11 6

Total equity 2,880 3,205 3,493 4559 4456 4380 4333 4318

Total liabilities and equity 7,755 6,896 6,772 7022 6951 6911 6905 6936

checkassets 7022 6951 6911 6905 6936L&E 7022 6951 6911 6905 6936Diff 0.600000 -0.286011 -0.565296 -0.276153 0.539435Change in diff 0.600000 -0.886011 -0.279285 0.289143 0.815588

Duke Realty CorporationCommon Size Income Statement

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021CVRevenues

Rental and related revenue 78.55% 85.95% 90.16% 91.62% 93.94% 95.65% 96.90% 97.80%General contractor and service fee revenue 21.45% 14.05% 9.84% 8.38% 6.06% 4.35% 3.10% 2.20%

Total revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Operating Expenses Rental expenses 13.02% 13.24% 11.90% 12.10% 12.40% 12.63% 12.79% 12.91%

Real estate taxes 10.98% 11.89% 13.16% 12.10% 9.62% 9.62% 9.62% 9.62%General and administrative expenses 4.72% 6.17% 6.14% 3.59% 2.59% 1.86% 1.33% 0.94%

General contractor and other services expenses 19.10% 12.56% 8.92% 7.72% 5.58% 4.00% 2.86% 2.03%Depreciation and amortization 33.08% 33.42% 35.23% 38.58% 37.87% 36.91% 35.77% 34.53%

Total Operating Expense 80.77% 77.11% 75.15% 71.61% 68.07% 65.02% 62.37% 60.04%Other Operating Activities:

Gains on land and property sales 25.54% 27.54% 30.64% 0.00% 0.00% 0.00% 0.00% 0.00%Impairment charges and other expenses 4.69% 2.41% 2.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total Other Operating Activities 20.16% 24.50% 28.21% 0.00% 0.00% 0.00% 0.00% 0.00%Operating income / loss 39.27% 47.23% 52.87% 28.39% 31.93% 34.98% 37.63% 39.96%

Interest and other income / expense, net 0.11% 0.50% 0.44% 0.49% 0.46% 0.42% 0.39% 0.36%Interest expense 18.74% 18.29% 15.69% 15.24% 10.45% 9.74% 9.03% 8.35%

Gain / loss on debt extinguishment -0.03% -9.03% -3.76% 0.00% 0.00% 0.00% 0.00% 0.00%Acquisition-related activity -0.11% -0.90% 0.80% 0.00% 0.00% 0.00% 0.00% 0.00%

Other income / expenses 18.75% 27.71% 18.21% 14.75% 9.99% 9.31% 8.64% 7.99%

Pretax Income / loss from continuing operations 20.51% 19.52% 34.66% 13.64% 21.94% 25.67% 28.99% 31.98%Income tax benefit / expense -0.08% -0.41% -0.07% 0.97% 0.00% 0.00% 0.00% 0.00%

Income / loss from continuing operations 20.59% 19.93% 34.73% 12.68% 21.94% 25.67% 28.99% 31.98%

Income / loss before gain on sales 1.06% 1.15% 0.11% 2.16% 0.00% 0.00% 0.00% 0.00%Gain / loss on sale of depreciable properties, net of tax 1.89% 44.42% 0.11% 148.86% 0.00% 0.00% 0.00% 0.00%

Income / loss from discontinued operations 2.95% 45.58% 0.22% 151.02% 0.00% 0.00% 0.00% 0.00%Net income / loss 23.55% 65.50% 34.95% 163.70% 21.94% 25.67% 28.99% 31.98%

Funds from Operations (FFO)Net Income 23.55% 65.50% 34.95% 163.70% 21.94% 25.67% 28.99% 31.98%Depreciation & Amortization 33.08% 33.42% 35.23% 38.58% 37.87% 36.91% 35.77% 34.53%

Gain on sales of properties/land -27.43% -71.96% -30.75% -148.86% 0.00% 0.00% 0.00% 0.00%Funds from Operations (FFO) 29.19% 26.96% 39.43% 53.42% 59.82% 62.57% 64.76% 66.51%

Capital Expenditures -54.54% -28.02% 38.68% 39.59% 38.87% 37.87% 36.88% 35.44%Adjusted Funds from Operations (AFFO) 83.73% 54.98% 0.74% 13.83% 20.95% 24.70% 27.89% 31.07%

Weighted average common shares outstanding (diluted) 32.52% 37.10% 39.58% 45.00% 43.40% 41.55% 39.57% 37.53%Basic Earnings per Share (diluted) 0.06% 0.19% 0.10% 0.44% 0.06% 0.07% 0.07% 0.08%Common stock dividend declared 0.06% 0.09% 0.08% 0.09% 0.09% 0.09% 0.08% 0.08%Dividends on preferred shares 2.38% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Duke Realty Corporation

Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021CV

Assets:Real Estate Investments:

Land and improvements 134.97% 146.62% 167.48% 193.81% 190.26% 185.40% 179.86% 173.64%

Buildings and tenant improvements 476.26% 499.37% 550.99% 637.59% 625.92% 609.95% 591.17% 570.70%

Construction in progress 23.50% 33.81% 38.46% 44.51% 43.69% 42.58% 41.27% 39.84%

Investments in and advances to unconsolidated companies 28.08% 28.23% 21.95% 24.19% 22.61% 20.99% 19.37% 17.81%

Undeveloped land 47.76% 40.34% 26.27% 28.95% 27.07% 25.12% 23.19% 21.32%

Total real estate investments 710.57% 748.37% 805.14% 929.04% 909.55% 884.04% 854.86% 823.30%

Accumulated depreciation -117.97% -125.55% -142.32% -195.43% -220.59% -241.63% -258.81% -272.48%

Net real estate investments 592.61% 622.81% 662.94% 733.62% 688.96% 642.41% 596.05% 550.82%

Real estate investments and other assets held-for-sale 69.25% 4.85% 5.76% 6.35% 5.94% 5.51% 5.09% 4.68%

Cash and cash equivalents 1.71% 2.37% 1.40% 33.18% 15.84% 3.19% -5.20% -9.51%

Accounts receivable, net 2.50% 1.98% 2.26% 2.20% 2.20% 2.20% 2.20% 2.20%

Straight-line rents receivable, net 10.51% 12.32% 12.86% 13.38% 13.72% 13.97% 14.16% 14.29%

Receivables on construction contracts, including retentions 3.44% 1.69% 1.11% 2.08% 2.08% 2.08% 2.08% 2.08%

Deferred financing costs, net of accumulated amortization 3.73% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Deferred leasing and other costs, net 37.06% 36.44% 37.91% 37.91% 37.91% 37.91% 37.91% 37.91%

Escrow deposits and other assets 20.06% 43.82% 26.38% 29.07% 27.18% 25.23% 23.29% 21.50%

Total assets 740.76% 726.35% 750.61% 857.80% 793.84% 732.50% 675.57% 623.96%

Liabilities:Debt

Secured debt, net of deferred financing costs 89.98% 77.73% 42.56% 38.21% 35.88% 33.46% 31.04% 28.69%

Unsecured debt, net of deferred financing costs 321.33% 264.48% 274.55% 221.60% 208.11% 194.05% 180.05% 166.39%

Unsecured line of credit 10.13% 7.48% 5.32% 0.61% 0.57% 0.53% 0.50% 0.46%

Total indebtedness 421.53% 349.69% 322.32% 260.42% 244.57% 228.04% 211.59% 195.53%

Liabilities related to real estate investments held-for-sale 5.64% 0.11% 0.22% 0.24% 0.23% 0.21% 0.20% 0.18%

Construction payables and amounts due subcontractors, including retentions 6.59% 5.79% 5.99% 6.72% 6.72% 6.72% 6.72% 6.72%

Accrued real estate taxes 7.26% 7.58% 8.09% 6.42% 6.42% 6.42% 6.42% 6.42%

Accrued interest 5.25% 3.58% 2.66% 2.93% 2.74% 2.54% 2.35% 2.16%

Other accrued expenses and liabilities 15.19% 17.70% 19.84% 19.20% 19.20% 19.20% 19.20% 19.20%

Tenant security deposits and prepaid rents 4.20% 4.32% 4.43% 4.91% 5.03% 5.12% 5.19% 5.24%Total liabilities 465.66% 388.77% 363.44% 300.85% 284.92% 268.27% 251.67% 235.46%

Equity:Common Stock & Additional Paid in Capital 472.63% 522.96% 575.93% 635.94% 595.71% 553.93% 512.28% 471.89%

Accumulated other comprehensive income / loss 0.29% 0.21% 0.11% 0.00% 0.00% 0.00% 0.00% 0.00%Distributions in excess of net income -199.73% -188.01% -191.75% -81.88% -89.04% -91.34% -89.43% -83.98%

Total shareholders equity 273.19% 335.16% 384.17% 554.06% 506.67% 462.59% 422.85% 387.91%Noncontrolling interest 1.91% 2.42% 2.99% 2.81% 2.28% 1.70% 1.08% 0.54%

Total equity 275.10% 337.58% 387.16% 556.87% 508.95% 464.29% 423.93% 388.45%Total liabilities and equity 740.76% 726.35% 750.61% 857.72% 793.87% 732.56% 675.60% 623.91%


Value Driver Estimation


Operating Revenues 1046.9 949.4 902.2 818.6 875.6 943.4 1022.1 1111.7Rental Cost -136.3 -125.7 -107.4 -99.0 -108.6 -119.2 -130.8 -143.6

General and Administrative Cost -200.0 -119.2 -80.5 -29.4 -22.7 -17.5 -13.6 -10.5

Depreciation -346.3 -317.3 -317.8 -315.8 -331.6 -348.2 -365.6 -383.9

Real Estate Taxes -115.0 -112.9 -118.7 -99.0 -84.2 -90.8 -98.3 -107.0

Other Operating Expenses -7.2 -6.0 -3.9 0.0 0.0 0.0 0.0 0.0

Implied Interest on Operating Leases 174.5 217.8 152.1 161.2 161.5 161.8 162.0 162.4

EBITA 416.6 486.2 426.0 436.6 489.9 529.5 575.9 629.2Adjusted Taxes

Tax on interest expense 0.7 3.7 0.3 8.8 0.0 0.0 0.0 0.0

Tax on interest income 0.0 -0.1 0.0 -0.3 0.0 0.0 0.0 0.0

Tax on implied lease interest 0.7 4.6 0.3 11.4 0.0 0.0 0.0 0.0

Change in Deferred Taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

NOPLAT 418.0 494.4 426.6 456.6 489.9 529.5 575.9 629.2

NOWC Calculation

Operating Current Assets

Cash and cash equivalents 17.9 22.5 12.6 271.6 138.7 30.1 -53.2 -105.8

Accounts Receivable 26.2 18.9 20.4 18.0 19.3 20.8 22.5 24.5

Receivables on construction contracts, including retentions 36.0 16.0 10.0 17.0 18.2 19.6 21.3 23.1

Straight line rent receivable 109.7 116.8 115.9 109.6 120.2 131.8 144.7 158.8

Total Operating Assets 189.7 174.1 158.9 416.3 296.4 202.3 135.3 100.7

Operating Liabilities

Accrued Expenses 235.0 240.0 252.0 209.8 224.4 241.7 261.9 284.9

Construction Payables 69.0 55.0 54.0 55.1 58.9 63.4 68.7 74.8

Total Operating Liabilities 304.0 295.0 306.0 264.8 283.2 305.2 330.6 359.6

Net Operating Working Capital -114.3 -120.9 -147.1 151.4 13.1 -102.9 -195.3 -259.0

Property, Plant and Equipment 5164.0 4941.0 5198.0 5206.3 5215.0 5224.1 5235.4 5245.5

Receivables on Construction contracts 388.0 346.0 342.0 310.3 331.9 357.6 387.4 421.4Escrow deposits and other assets 209.9 416.1 237.8 238.0 238.0 238.0 238.0 239.0Total Other Operating Assets 597.9 762.1 579.8 548.3 569.9 595.6 625.4 660.4

Tenant security deposits and prepaid rents -44.0 -41.0 -40.0 -40.2 -44.1 -48.3 -53.0 -58.2Total Other Operating Liabilities -44.0 -41.0 -40.0 -40.2 -44.1 -48.3 -53.0 -58.2

Present Value of Operating Leases 5077.4 3544.4 3758.2 3764.2 3770.5 3777.0 3785.2 3792.6

Invested Capital 10681.0 9085.6 9348.9 9630.0 9524.4 9445.5 9397.7 9381.3

ROIC 4.12% 4.63% 4.70% 4.88% 5.09% 5.56% 6.10% 6.70%

EP -145.3 -99.0 -78.2 -62.8 -45.1 0.4 51.1 107.1

FCF -124.6 2089.8 163.3 175.4 595.6 608.4 623.7 645.6


Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity 6.66%

Risk-free rate 2.93%

Market Risk premium 4.65%

Beta 0.802

Cost of Debt 4.29%

PV of operating leases $3,758,191.70

Debt Outstanding $2,930,000.00

Total Debt $6,688,191.70

Shares O/S 357,076

Stock Price 28.48

MV Equity $10,169,524.48

Market Value $16,857,716.18

Tax Rate 9.62%

WACC 5.56%


Key Inputs:

CV Growth 4.25%

CV ROIC 6.70%

WACC 5.56%


FFO Growth 11.70%

Fiscal Years Ending Dec. 31 2016 2017E 2018E 2019E 2020E 2021CV

NOPLAT 426.59 456.56 489.93 529.54 575.86 629.21

DCF Model

FCF 163.3 175.4 595.6 608.4 623.7

CV 17602.1

PV of FCF Discounted 166.15 534.53 517.31 502.39 14178.86

Enterprise Value 15899.25

Cash 12.60

Debt -0.49

PV of Operating Leases -3758.19

ESOP -18.74

Equity Value 12134.43

Shares O/S 357.08

Price Per Share $33.98

Adjusted Price Per Share $35.31

EP Model 2016 2017E 2018E 2019E 2020E 2021CV

NOPLAT 426.59 456.56 489.93 529.54 575.86 629.21

FCF 163.34 175.4 595.6 608.4 623.7 0

ROIC 4.70% 4.88% 5.09% 5.56% 6.10% 6.70%

Invested Capital 9348.9 9630.0 9524.4 9445.5 9397.7 9381.3

Economic Profit -62.82 -45.08 0.41 51.11 107.11

CV 8204.45

PV of FCF Discounted -59.51 -40.46 0.35 41.17 6608.84

Total FCF 6550.38

Enterprise Value 15899.25

Cash 12.60Debt -0.49PV of Operating Leases -3758.19ESOP -18.74Equity Value 12134.43Share O/S 357.08Price Per Share $33.98Adjusted Price Per Share $35.31

Model Date 11/13/2017Next FYE 12/31/2017Last FY 12/31/2016Days in FY 365Days from FY 2016 317Elapsed Fraction 0.8685

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models


Fiscal Years Ending Dec. 31 2016 2017E 2018E 2019E 2020E 2021CV

EPS 0.88 3.64 0.51 0.62 0.73 0.85

Key AssumptionsCV growth 4.25%

CV ROE 8.23%


CV P/E Multiple 20.08

CV EPS 0.85

Dividend DiscountingFuture Stock Price 21.40

Dividends Per Share 0.73 0.76 0.79 0.83 0.86 0.90

CV Stock Price 37.31

1 2 3 4 4

1.0666 1.1376 1.2134 1.2942 1.2942

0.71 0.70 0.68 0.67 28.83

Intrinsic Value 31.59Adjusted Price Per Share 32.82

Model Date 11/13/2017

Next FYE 12/31/2017

Last FYE 12/31/2016

Days in FY 365

Days from last FY 317

Elapsed Fraction 0.8685

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

EPS EPS

Ticker Company Price 2017E 2018E P/E 17 P/E 18 P/FFO P/AFFO P/BV

PLD Prologis Inc $67.07 $2.45 $1.45 27.4 46.3 20.5 26.1 1.9

DCT DCT Industrial Trust $60.72 $0.97 $0.75 62.6 81.0 21.1 32.4 2.4

PSB PS Business Parks $134.99 -- -- -- -- 22.5 74.6 2.5

FR First Industrial Realty Trust Inc. $32.23 $0.92 $0.66 35.0 48.8 19.3 24.3 2.7

EGP EastGroup Property Trust $92.91 $2.28 $2.31 40.8 40.2 18.4 24.9 3.9

Average 41.4 54.1 20.4 36.4 2.7

DRE Duke Realty Corporation $29.11 $3.64 $0.51 8.0 57.6 22.1 25.0 2.7

$150.74$27.33$26.82$42.41$28.89

Relative FFO/AFFO Value $34.61Relative Value $32.71**FactSet


Relative Valuation Models

1. Not all ratios will be relevant to each company. Relative valuation metrics tend to be industry specific.

2. Choose those ratios which make the most sense for the target company.

3. Hide or delete the ratios and metrics which do not apply.

4. Remove cells that are outliers from the "Average"

5. Add or delte rows as necessary to fit the number of comparable firms.

Notes for using this worksheet:

Implied Relative Value:

Relative P/E (EPS18)Relative P/FFO

Relative P/AFFO

Relative P/E (EPS17)

Relative P/BV


Key Management Ratios


Liquidity RatiosCurrent Ratio 0.812 1.374 1.525 6.708 4.497 2.870 1.785 1.230

Quick Ratio 0.049 0.097 0.063 1.960 0.949 0.194 -0.321 -0.597

Cash Ratio 1.71% 2.78% 2.92% 85.48% 43.46% 9.37% -16.49% -32.65%

Total Asset Turnover 0.135 0.138 0.133 0.117 0.126 0.137 0.148 0.160

Total A/R Turnover 7.70 6.98 6.63 6.42 6.28 6.18 6.11 6.06

Financial Leverage RatiosDebt to Asset Ratio 62.86% 53.52% 48.42% 35.07% 35.89% 36.62% 37.25% 37.74%

Equity to Asset Ratio 37.58% 37.71% 40.64% 39.12% 39.69% 34.74% 39.28% 37.14%

Debt to Equity Ratio 1.69 1.15 0.94 0.54 0.56 0.58 0.59 0.61

Profitability RatiosOperating Margin 39.27% 47.23% 52.87% 28.39% 31.93% 34.98% 37.63% 39.96%

Profit Margin 23.55% 65.50% 34.95% 163.70% 21.94% 25.67% 28.99% 31.98%

Return on Assets 3.18% 9.02% 4.66% 19.08% 2.76% 3.50% 4.29% 5.12%

Return on Equity 8.10% 21.59% 9.84% 38.36% 4.21% 5.43% 6.77% 8.20%

Payout Policy RatiosDividend Payout Ratio 10.10% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Dupont Analysis Profit Margin 23.55% 65.50% 34.95% 163.70% 21.94% 25.67% 28.99% 31.98%

Equity Multipier 2.5 2.4 2.1 2.0 1.5 1.6 1.6 1.6

Total Asset Turnover 0.135 0.138 0.133 0.117 0.126 0.137 0.148 0.160

Return on Equity 8.10% 21.59% 9.84% 38.36% 4.21% 5.43% 6.77% 8.20%

Funds From OperationsFFO 305.6 256.0 355.7 437.3 523.7 590.4 662.0 739.4

FFO Growth -16.23% 38.95% 22.95% 19.76% 12.72% 12.13% 11.70%

AFFO 876.6 522.0 6.7 113.2 183.4 233.0 285.0 345.3AFFO Growth -40.45% -98.72% 1589.79% 62.03% 27.04% 22.30% 21.17%

Activity or Asset-Management Ratios

Operating Operating Operating Operating Operating

Leases Leases Leases Leases Leases

2017 618 2016 598 2015 870 2014 704 2013 668

2018 603 2017 585 2016 824 2015 689 2014 628

2019 549 2018 526 2017 752 2016 621 2015 565

2020 488 2019 464 2018 657 2017 546 2016 499

2021 422 2020 405 2019 559 2018 463 2017 427

Thereafter 1898 Thereafter 1718 Thereafter 2508 Thereafter 1885 Thereafter 1631

4578 4296 6170 4908 4418

Less: Interest 819.8 Less: Interest 751.6 Less: Interest 1092.6 Less: Interest 840.0 Less: Interest 738.1

3758.2 3544.4 5077.4 4068.0 3679.9

4.29% 4.29% 4.29% 4.29% 4.29%

4.50 4.24 4.49 4.07 3.82

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 618 592.6 1 598 573.4 1 870 834.2 1 704 675.0 1 668 640.5

2 603 554.4 2 585 537.9 2 824 757.6 2 689 633.5 2 628 577.4

3 549 484.0 3 526 463.7 3 752 663.0 3 621 547.5 3 565 498.1

4 488 412.5 4 464 392.2 4 657 555.4 4 546 461.6 4 499 421.8

5 422 342.1 5 405 328.3 5 559 453.1 5 463 375.3 5 427 346.1

6 & beyond 422 1372.6 6 & beyond 405 1248.9 6 & beyond 559 1814.2 6 & beyond 463 1375.1 6 & beyond 427 1195.9

3758.2 3544.4 5077.4 4068.0 3679.9

Number Years Implied by Year 6 Payment

PV of Minimum Payments PV of Minimum Payments

PV of Minimum Payments

Fiscal Years Ending Fiscal Years Ending

Total Minimum Payments

Capitalization of Operating Leases

Pre-Tax Cost of Debt



Capitalization of Operating LeasesCapitalization of Operating Leases


Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)

Fiscal Years EndingFiscal Years Ending Dec. 31


Fiscal Years Ending

Total Minimum Payments


Present Value of Operating Lease Obligations (2012)Present Value of Operating Lease Obligations (2013)Present Value of Operating Lease Obligations (2014)

Total Minimum Payments Total Minimum PaymentsTotal Minimum Payments





PV of Minimum PaymentsPV of Minimum Payments PV of Minimum Payments


Number Years Implied by Year 6 PaymentNumber Years Implied by Year 6 Payment



Sensitivity Testing

CV ROIC$35.31 6.55% 6.60% 6.65% 6.70% 6.75% 6.80% 6.85%4.10% $31.88 $32.37 $32.85 $33.33 $33.79 $34.25 $34.714.15% $32.44 $32.95 $33.46 $33.96 $34.45 $34.93 $35.404.20% $33.04 $33.58 $34.11 $34.63 $35.15 $35.65 $36.154.25% $33.69 $34.26 $34.81 $35.36 $35.90 $36.43 $36.964.30% $34.39 $34.98 $35.57 $36.15 $36.72 $37.28 $37.834.35% $35.15 $35.77 $36.39 $37.00 $37.60 $38.19 $38.774.40% $35.97 $36.63 $37.28 $37.92 $38.55 $39.18 $39.79

WACC$35.31 5.41% 5.46% 5.51% 5.56% 5.61% 5.66% 5.71%4.10% $37.95 $36.22 $34.62 $33.12 $31.72 $30.41 $29.194.15% $38.85 $37.02 $35.33 $33.75 $32.29 $30.92 $29.644.20% $39.81 $37.88 $36.09 $34.43 $32.89 $31.46 $30.124.25% $40.86 $38.80 $36.91 $35.16 $33.54 $32.03 $30.634.30% $42.00 $39.81 $37.80 $35.95 $34.24 $32.65 $31.184.35% $43.26 $40.91 $38.77 $36.80 $34.99 $33.32 $31.774.40% $44.63 $42.11 $39.82 $37.73 $35.80 $34.03 $32.40

FFO Growth$35.31 11.40% 11.50% 11.60% 11.70% 11.80% 11.90% 12.00%6.48% $35.26 $35.26 $35.26 $35.26 $35.26 $35.26 $35.266.54% $35.28 $35.28 $35.28 $35.28 $35.28 $35.28 $35.286.60% $35.29 $35.29 $35.29 $35.29 $35.29 $35.29 $35.296.66% $35.31 $35.31 $35.31 $35.31 $35.31 $35.31 $35.316.72% $35.33 $35.33 $35.33 $35.33 $35.33 $35.33 $35.336.78% $35.35 $35.35 $35.35 $35.35 $35.35 $35.35 $35.356.84% $35.36 $35.36 $35.36 $35.36 $35.36 $35.36 $35.36

FFO Growth$35.31 11.40% 11.50% 11.60% 11.70% 11.80% 11.90% 12.00%6.55% $33.69 $33.69 $33.69 $33.69 $33.69 $33.69 $33.696.60% $34.26 $34.26 $34.26 $34.26 $34.26 $34.26 $34.266.65% $34.81 $34.81 $34.81 $34.81 $34.81 $34.81 $34.816.70% $35.36 $35.36 $35.36 $35.36 $35.36 $35.36 $35.366.75% $35.90 $35.90 $35.90 $35.90 $35.90 $35.90 $35.906.80% $36.43 $36.43 $36.43 $36.43 $36.43 $36.43 $36.436.85% $36.96 $36.96 $36.96 $36.96 $36.96 $36.96 $36.96

CV

Gro

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CV

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Cos

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RO

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NOTES:

Ticker Symbol DRE

Current Stock Price $29.11Risk Free Rate 2.93%

2.61%

38.80%

Average Average B-S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 1.63 18.16 1.6 $11.52 $18.74 Enter the number Total 1.63 18.16 1.60 11.52 18.74 The value of all op

You may need to s

Subtract this amou

VALUATION OF OPTIONS GRANTED IN ESOP

Current risk-free ra

Current Dividend Yield

Annualized St. Dev. of Stock Returns

Enter the ticker sy

The stock price is

Current annualize

Current annualize

1.631.601.02

$18.166.66%$29.11

2017E 2018E 2019E 2020E1.02 0.61

$18.16 $18.1618.46 11.08

0 0$29.11 $31.73

0 0

238.90 259.601.02 0.61 0.00 0.00

0 0 0 0239.92 260.21

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Average Strike Price:Increase in Common Stock Account:

Change in Treasury StockExpected Price of Repurchased Shares:

Cost of Equity:Current Stock Price:

Number of Options Outstanding (shares):Average Time to Maturity (years):Expected Annual Number of Options Exercised:

Current Average Strike Price:

Less: Shares Repurchased in TreasuryShares Outstanding (end of the year)

Plus: Shares Issued Through ESOPShares Outstanding (beginning of the year)

Increase in Shares Outstanding:

Number of Shares Repurchased:

Documents

Real Estate Duke Realty Corp. - Tippie College of …...Important disclosures appear on the last page of this report. Krause Fund Research Fall 2017 Real Estate Recommendation: BUY