UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2002
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                    to
	Commission File Number: 1-9044

 

DUKE REALTY LIMITED PARTNERSHIP

 

State of Incorporation:		IRS Employer Identification Number:
Indiana		35-1740409
600 East 96th Street, Suite 100 Indianapolis, Indiana  46240
Telephone:  (317) 808-6000
(Address, including zip code and telephone number, including area code, of principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes    ý      No    o

 

The number of Common Units outstanding as of August 8, 2002 was 14,993,355 ($.01 par value).

 

 

DUKE REALTY LIMITED PARTNERSHIP

 

INDEX

 

Part I - Financial Information
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and December 31, 2001
		Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2002 and 2001
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2002 and 2001
		Condensed Consolidated Statement of Partners’ Equity (Unaudited) for the six months ended June 30, 2002
		Notes to Condensed Consolidated Financial Statements (Unaudited)
		Independent Accountants’ Review Report
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part II - Other Information
	Item 1.		Legal Proceedings
	Item 2.		Changes in Securities
	Item 3.		Defaults Upon Senior Securities
	Item 4.		Submission of Matters to a Vote of Security Holders
	Item 5.		Other Information
	Item 6.		Exhibits and Reports on Form 8-K

 

 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except per unit amounts)

 

		June 30, 2002			December 31, 2001
		(Unaudited)
ASSETS
Real estate investments:
Land and improvements		$	588,138		$	583,909
Buildings and tenant improvements		4,108,407			4,068,944
Construction in progress		65,383			154,086
Investments in unconsolidated companies		322,097			323,682
Land held for development		324,327			322,528
		5,408,352			5,453,149
Accumulated depreciation		(488,871		)	(425,721		)
Net real estate investments		4,919,481			5,027,428
Cash and cash equivalents		1,435			10,453
Accounts receivable, net of allowance of $3,690 and $2,820		17,535			23,142
Straight-line rent receivable, net of allowance of $3,266 and $841		46,621			42,751
Receivables on construction contracts		25,876			30,077
Deferred financing costs, net of accumulated amortization of $14,268 and $17,459		10,579			12,489
Deferred leasing and other costs, net of accumulated amortization of $46,396 and $41,284		98,695			97,117
Escrow deposits and other assets		116,456			86,789
		$	5,236,678		$	5,330,246
LIABILITIES AND SHAREHOLDERS’ EQUITY
Indebtedness:
Secured debt		$	318,960		$	318,484
Unsecured notes		1,376,257			1,376,372
Unsecured lines of credit		40,000			120,000
		1,735,217			1,814,856
Construction payables and amounts due subcontractors		37,585			54,735
Accounts payable		2,133			2,274
Accrued expenses:
Real estate taxes		57,279			51,462
Interest		30,996			24,313
Other		44,820			48,678
Other liabilities		111,272			117,577
Tenant security deposits and prepaid rents		28,513			34,644
Total liabilities		2,047,815			2,148,539
Minority interest		5,524			5,475
Partners’ equity:
General Partner
Common equity		2,253,576			2,203,291
Preferred equity (liquidation preference of $608,664)		583,419			583,419
		2,836,995			2,786,710
Limited partners’ common equity		243,485			286,759
Limited partners’ preferred equity		102,955			102,955
Accumulated other comprehensive income (loss)		(96		)	(192		)
		3,183,339			3,176,232
		$	5,236,678		$	5,330,246

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

2

 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

For the three and six months ended June 30,

 (in thousands, except per unit amounts)

(Unaudited)

 

		Three Months Ended						Six Months Ended
		2002			2001			2002			2001
RENTAL OPERATIONS:
Revenues:
Rental income		$	173,895		$	172,906		$	342,768		$	345,357
Equity in earnings of unconsolidated companies		6,278			7,315			12,574			17,285
		180,173			180,221			355,342			362,642
Operating expenses:
Rental expenses		30,226			29,649			61,513			60,324
Real estate taxes		18,959			18,030			38,123			35,850
Interest expense		27,918			28,340			55,327			57,627
Depreciation and amortization		42,991			37,900			85,490			78,034
		120,094			113,919			240,453			231,835
Earnings from rental operations		60,079			66,302			114,889			130,807
SERVICE OPERATIONS
Revenues:
General contractor gross revenue		40,980			64,035			86,913			125,203
General contractor costs		(36,658		)	(56,482		)	(76,877		)	(106,360		)
Net general contractor revenue		4,322			7,553			10,036			18,843
Construction management and development activity income		7,536			7,763			27,929			11,925
Property management, maintenance and leasing fees		3,429			7,896			6,628			14,494
Other income		77			415			52			687
Total revenue		15,364			23,627			44,645			45,949
Operating expenses		8,195			14,400			21,944			27,434
Total earnings from service operations		7,169			9,227			22,701			18,515
General and administrative expense		(6,798		)	(4,688		)	(14,036		)	(8,715		)
Operating income		60,450			70,841			123,554			140,607
OTHER INCOME (EXPENSE)
Interest income		1,333			1,566			1,760			3,000
Earnings from land and depreciable property dispositions		2,976			530			4,087			13,316
Other revenue (expense)		25			(428		)	237			(1,367		)
Other minority interest in earnings of subsidiaries		(251		)	(330		)	(636		)	(1,241		)
Income from continuing operations		64,533			72,179			129,002			154,315
Discontinued operations:
Net income from discontinued operations		968			615			1,752			1,258
Gain on sale of discontinued operations		2,723			—			2,723			—
Net income from discontinued operations		3,691			615			4,475			1,258
Net income		68,224			72,794			133,477			155,573
Dividends on preferred units		(14,209		)	(15,917		)	(28,419		)	(31,291		)
Net income available for common unitholders		$	54,015		$	56,877		$	105,058		$	124,282
Basic net income per common unit:
Continuing operations		$	.34		$	.39		$	.67		$	.83
Discontinued operations		.02			—			.03			.01
Total		$	.36		$	.39		$	.70		$	.84
Diluted net income per common unit:
Continuing operations		$	.34		$	.38		$	.67		$	.82
Discontinued operations		.02			—			.03			.01
Total		$	.36		$	.38		$	.70		$	.83
Weighted average number of common units outstanding		149,310			147,899			148,992			147,569
Weighted average number of common and dilutive potential common units		151,092			149,572			150,682			151,369

 

See accompanying Notes to Consolidated Financial Statements.

 

3

 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30

(in thousands)

(Unaudited)

 

		2002			2001
Cash flows from operating activities:
Net income		$	133,477		$	155,573
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of buildings and tenant improvements		75,584			69,556
Amortization of deferred leasing and other costs		10,228			9,406
Amortization of deferred financing costs		1,923			2,609
Minority interest in earnings		636			1,241
Straight-line rent adjustment		(4,099		)	(6,320		)
Earnings from land and depreciated property dispositions		(5,545		)	(13,316		)
Build-to-suit operations, net		163,639			(123,466		)
Construction contracts, net		(13,537		)	235
Other accrued revenues and expenses, net		7,474			(3,040		)
Equity in earnings in shortfall of operating distributions received from unconsolidated companies		5,308			6,692
Net cash provided by operating activities		375,088			99,170
Cash flows from investing activities:
Development of real estate investments		(63,914		)	(98,007		)
Acquisition of real estate investments		(32,941		)	(13,927		)
Acquisition of land held for development and infrastructure costs		(16,388		)	(22,953		)
Recurring tenant improvements		(13,959		)	(7,819		)
Recurring leasing costs		(8,556		)	(6,394		)
Recurring building improvements		(5,849		)	(3,811		)
Other deferred leasing costs		(8,603		)	(7,704		)
Other deferred costs and other assets		(19,076		)	(11,916		)
Tax deferred exchange escrow, net		—			25,202
Proceeds from land and depreciated property sales, net		35,023			187,605
Capital distributions from unconsolidated companies		—			59,899
Advances to unconsolidated companies		(18,224		)	(2,544		)
Net cash (used) provided by investing activities		(152,487		)	97,631
Cash flows from financing activities:
Contribution from General Partner		18,201			102,913
Proceeds from indebtedness		—			175,000
Payments on indebtedness including principal amortization		(7,738		)	(46,019		)
Repayments on lines of credit, net		(78,488		)	(204,247		)
Distributions to partners		(134,433		)	(126,793		)
Distributions to preferred unitholders		(28,419		)	(31,291		)
Distributions to minority interest		(565		)	(1,147		)
Deferred financing costs		(177		)	(4,548		)
Net cash used for financing activities		(231,619		)	(136,132		)
Net increase (decrease) in cash and cash equivalents		(9,018		)	60,669
Cash and cash equivalents at beginning of period		10,453			39,200
Cash and cash equivalents at end of period		$	1,435		$	99,869
Other non-cash items:
Assumption of debt for real estate acquisitions		$	9,566		$	6,379
Contributions of land and depreciable property to unconsolidated companies		$	—		$	15,812
Conversion of Limited Partner Units to common shares of General Partner		$	12,480		$	7,847
Transfer of debt in sale of depreciated property		$	2,432		$	—
Issuance of Limited Partner Units for real estate acquisitions		$	5,440		$	2,487

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

4

 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Condensed Consolidated Statement of Partners’ Equity

For the six months ended June 30, 2002

(in thousands,  except per unit data)

(Unaudited)

 

		General Partner						Limited Partners’ Common Equity			Limited Partners’ Preferred Equity			Accumulated Other Comprehensive Income (Loss)			Total
		Common Equity			Preferred Equity
Balance at December 31, 2001		$	2,203,291		$	583,419		$	286,759		$	102,955		$	(192	)	$	3,176,232
Comprehensive income:
Net income		93,830			24,215			11,228			4,204			—			133,477
Distributions to preferred unitholders		—			(24,215		)	—			(4,204		)	—			(28,419		)
Gains (losses) on derivative instruments														96			96
Comprehensive income available for common unitholders		—			—			—			—			—			105,156
Capital contribution from General Partner		18,466			—			—			—			—			18,466
Acquisition  of Partnership interest for common  stock of General Partner		58,051			—			(45,571		)	—			—			12,480
Acquisition of property in exchange for Limited Partner Units		—			—			5,440			—			—			5,440
Distributions to General Partner		(323		)	—			—			—			—			(323		)
Distributions to partners ($.90 er Common Unit)		(119,739		)	—			(14,371		)	—			—			(134,110		)
Balance at June  30, 2002		$	2,253,576		$	583,419		$	243,485		$	102,955		$	(96	)	$	3,183,339

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

5

 

DUKE REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.     Financial Statements

 

The interim condensed consolidated financial statements included herein have been prepared by Duke Realty Limited Partnership (the “Partnership”) without audit (except for the Balance Sheet as of December 31, 2001). The statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K.

 

The Partnership

 

Duke Realty Limited Partnership (the “Partnership”) was formed on October 4, 1993, when Duke Realty Corporation (the “General Partner”) contributed all of its properties and related assets and liabilities along with the net proceeds of $309.2 million from the issuance of an additional 14,000,833 units through an offering (the “1993 Offering”) to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest. The General Partner was formed in 1985 and qualifies as a Real Estate Investment Trust (“REIT”) under provisions of the Internal Revenue Code.  In connection with the 1993 Offering, the formation of the Partnership and the acquisition of Duke Associates, the General Partner effected a 1 for 4.2 reverse stock split of its existing common units. The General Partner is the sole general partner of the Partnership and received 16,046,144 units of partnership interest (“General Partner Units”) in exchange for its original contribution which represented a 78.36% interest in the Partnership. As part of the acquisition, Duke Associates received 4,432,109 units of limited partnership interest (“Limited Partner Units”) (together with the General Partner Units, the (“Common Units”)) which represented a 21.64% interest in the Partnership. The Limited Partner Units are exchangeable for units of the General Partner’s common stock on a one-for-one basis subject generally to a one-year holding period.

 

The Partnership owns and operates a portfolio of industrial, office and retail properties in the midwestern and southeastern United States and provides real estate services to third-party owners. The Partnership conducts Service Operations through Duke Realty Services Limited Partnership (“DRSLP”) and Duke Construction Limited Partnership (“DCLP”). The consolidated financial statements include the accounts of the Partnership and its majority-owned or controlled subsidiaries.

 

2.     Lines of Credit

 

The Partnership has the following lines of credit available (in thousands):

 

Description		Borrowing Capacity (in 000’s)			Maturity Date		Interest Rate				Outstanding at June 30, 2002 (in 000’s)
Unsecured Line of Credit		$	500,000		February 2004		LIBOR	+	.65	%	$	40,000
Secured Line of Credit		100,000			January 2003		LIBOR	+	1.05	%	29,102

 

6

 

The lines of credit are used to fund development and acquisition of additional rental properties and to provide working capital.

 

The $500 million line of credit allows the Partnership an option to obtain borrowings from the financial institutions that participate in the line of credit at rates lower than the stated interest rate, subject to certain restrictions. Amounts outstanding on the line of credit at June 30, 2002, are at LIBOR + .65% (2.49% at June 30, 2002).

 

3.     Related Party Transactions

 

The Partnership provides management, maintenance, leasing, construction, and other tenant-related services to properties in which certain of its executive officers have ownership interests. The Partnership has an option to acquire these executive officers’ interest in these properties (the “Option Properties”). The Partnership received fees totaling approximately $650,000 and $943,000 for services provided to the Option Properties for the six months ended June 30, 2002 and 2001, respectively. The Partnership believes that the fees charged by the Partnership for such services are equivalent to those charged to third-party owners for similar services.

 

The Partnership has other related party transactions that are insignificant and that include terms that are considered by the Partnership to be at arm’s-length and equal to those negotiated with unaffiliated parties.

 

4.     Net Income Per Common Unit

 

Basic net income per common unit is computed by dividing net income available for common unitholders by the weighted average number of common units outstanding for the period. Diluted net income per common unit is computed by dividing net income available for common units by the sum of the weighted average number of common units outstanding and dilutive potential common units for the period.

 

The following table reconciles the components of basic and diluted net income per common unit for the three and six months ended June 30 (in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Basic net income available for  common unitholders		$	54,015		$	56,877		$	105,058		$	124,282
Joint venture partner convertible ownership net income		—			—			—			1,666
Diluted net income available for common units and dilutive potential common units		$	54,015		$	56,877		$	105,058		$	125,948
Weighted average number of common units outstanding		149,310			147,899			148,992			147,569
Joint venture partner convertible ownership common unit equivalents		—			—			—			2,118
Dilutive units for long-term compensation plans		1,782			1,673			1,690			1,682
Weighted average number of common units and dilutive potential common units		151,092			149,572			150,682			151,369

 

The Preferred D Series Convertible equity and the Series G preferred limited partner units were anti-dilutive for the three months and six months ended June 30, 2002 and 2001; therefore, no conversion to common units is included in weighted dilutive potential common units.

 

A joint venture partner in one of the Partnership’s unconsolidated ventures has the option to convert a portion of its ownership to General Partner common shares. The effects of the option on earnings per

 

7

 

unit was anti-dilutive for the three and six months ended June 30, 2002; therefore no conversion to common units is included in weighted dilutive potential common units. During the six months ended June 30, 2001, the effect of the option on earnings per unit was dilutive. Therefore, additional equity in earnings was included in diluted net income available for common unitholders and conversion to common units was included in weighted dilutive potential common units. The effect of this same option was anti-dilutive for the three months ended June 30, 2002; therefore, no conversion to common units is included in dilutive potential common units.

 

5.     Segment Reporting

 

The Partnership is engaged in four operating segments; the ownership and rental of office, industrial and retail real estate investments and the providing of various real estate services such as property management, maintenance, leasing, development and construction management to third-party property owners (“Service Operations”). The Partnership’s reportable segments offer different products or services and are managed separately because each requires different operating strategies and management expertise. There are no material intersegment sales or transfers.

 

Non-segment revenue to reconcile to total revenue consists mainly of equity in earnings of unconsolidated companies. Non-segment assets to reconcile to total assets consist of corporate assets including cash, deferred financing costs and investments in unconsolidated companies.

 

The Partnership assesses and measures segment operating results based on industry performance measures referred to as Funds From Operations (“FFO”). The National Association of Real Estate Investment Trusts defines FFO as net income or loss, excluding gains or losses from debt restructuring and sales of depreciated operating property, plus operating property depreciation and amortization and adjustments for minority interest and unconsolidated companies on the same basis. FFO is not a measure of operating results or cash flows from operating activities as measured by generally accepted accounting principles, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. Interest expense and other non-property specific revenues and expenses are not allocated to individual segments in determining the Partnership’s performance measure.

 

The revenues and FFO for each of the reportable segments for the three and six months ended June 30, 2002 and 2001, and the assets for each of the reportable segments as of June 30, 2002 and December 31, 2001, are summarized as follows (in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Revenues
Rental Operations:
Office		$	103,051		$	94,019		$	200,116		$	185,737
Industrial		68,817			72,428			138,332			146,152
Retail		1,755			6,569			3,474			13,564
Service Operations		15,364			23,627			44,645			45,949
Total Segment Revenues		188,987			196,643			386,567			391,402
Non-Segment Revenue		6,550			7,205			13,420			17,189
Consolidated Revenue from continuing operations		195,537			$	203,848		$	399,987		$	408,591
Discontinued Operations		1,404			1,547			2,953			3,094
Consolidated Revenue		$	196,941		$	205,395		$	402,940		$	411,685
Funds From Operations
Rental Operations:
Office		$	70,864		$	63,892		$	135,370		$	125,029
Industrial		52,895			56,347			105,844			112,959
Retail		1,481			5,476			2,949			11,190
Services Operations		7,169			9,227			22,701			18,515
Total Segment FFO		132,409			134,942			266,864			267,693
Non-Segment FFO:
Interest expense		(27,918		)	(28,340		)	(55,327		)	(57,627		)
Interest income		1,333			1,566			1,760			3,000
General and administrative expense		(6,798		)	(4,688		)	(14,036		)	(8,715		)
Gain on land sales		1,883			2,643			3,091			3,320
Other expenses		(601		)	(890		)	(957		)	(1,416		)
Minority interest in earnings of subsidiaries		(251		)	(330		)	(636		)	(1,241		)
Joint venture FFO		10,758			11,564			21,534			22,752
Dividends on preferred units		(14,209		)	(15,917		)	(28,419		)	(31,291		)
Discontinued operations		2,235			1,095			3,340			2,186
Consolidated FFO		98,841			101,645			197,214			198,661
Depreciation and amortization on continuing operations		(42,991		)	(37,900		)	(85,490		)	(78,034		)
Depreciation and amortization on discontinued operations		(2		)	(479		)	(322		)	(928		)
Share of joint venture adjustments		(4,383		)	(4,277		)	(8,798		)	(5,414		)
Earnings (loss) from depreciated property sales		2,550			(2,112		)	2,454			9,997
Net Income Available for Common Unitholders		$	54,015		$	56,877		$	105,058		$	124,282

 

8

 

		June 30, 2002			December 31, 2001
Assets
Rental Operations:
Office		$	2,570,695		$	2,625,015
Industrial		2,112,803			2,184,234
Retail		66,199			64,946
Service Operations		84,824			99,554
Total Segment Assets		4,834,521			4,973,749
Non-Segment Assets		402,157			356,497
Consolidated Assets		$	5,236,678		$	5,330,246

 

 

6.     Real Estate Assets Held for Sale

 

The Partnership adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” (“SFAS 144”), on January 1, 2002. SFAS 144 requires the Partnership to report in discontinued operations the results of operations of a  property  that has either been disposed of or is classified as held for sale, unless certain conditions are met.

 

At June 30, 2002, the Partnership had one industrial property, five office properties and one retail property comprising a total of approximately 688,000 square feet classified as held for sale. Of these properties, two build-to-suit office properties were under development at June 30, 2002. Net operating income (defined as total property revenues, less property expenses, which include real estate taxes, repairs and maintenance, property management, utilities, insurance and other expenses) of the properties held for sale for the six months ended June 30, 2002 and 2001, respectively, was $1.6 million and $2.6 million. Net book value of the properties was $49.7 million at June 30, 2002. There can be no assurances that such properties will be sold.

 

The Partnership classified the results of operations of one building in its June 30, 2002, held for sale portfolio as discontinued operations in accordance with SFAS 144. The results of operations for the remaining held for sale properties are included in continuing operations as these properties were

 

9

 

identified for sale prior to the adoption of SFAS 144. In addition, two properties were sold during the six months ended June 30, 2002, that were identified as held for sale post adoption of SFAS 144; therefore, their results of operations and gains on disposal for these two properties are reported in discontinued operations. The results of operations and gains from disposal for all other properties sold during the six months ended June 30, 2002, are classified in continuing operations as these properties were identified as held for sale prior to the adoption of SFAS 144. The effect of the adoption of SFAS 144 resulted in net income of $4.5 million and $1.3 million being classified as discontinued operations for the six months ended June 30, 2002 and 2001, respectively.

 

7.     Partners’ Equity

 

The General Partner periodically accesses the public equity markets and contributes the net proceeds to the Partnership to fund the development and acquisition of additional properties. The following series of preferred equity are outstanding as of June 30, 2002 (in thousands, except percentages):

 

Description		Units Outstanding		Dividend Rate		Initial Optional Redemption Date		Liquidation Preference		Convertible
Series B Preferred		300		7.990	%	September 30, 2007		150,000		No
Series D Preferred		535		7.375	%	December 31, 2003		133,750		Yes
Series E Preferred		400		8.250	%	January 20, 2004		100,000		No
Series F Preferred		600		8.000	%	October 10, 2002		150,000		No
Series I Preferred		300		8.450	%	February 6, 2006		75,000		No

 

All series of preferred equity require cumulative distributions, have no stated maturity date, and the redemption price of each series may only be paid from the proceeds of other capital shares of the General Partner, which may include other classes or series of preferred shares.

 

The Series D Preferred equity is convertible at a conversion rate of 9.3677 common units for each preferred unit outstanding.

 

The dividend rate on the Series B Preferred equity increases to 9.99% after September 12, 2012.

 

8.     Other Matters

 

Reclassifications

 

Certain 2001 balances have been reclassified to conform to 2002 presentation.

 

9.     Derivative Instruments

 

The Partnership has one interest rate swap contract that does not meet the criteria of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) to qualify for hedge accounting. SFAS 133 requires that unrealized gains and losses on derivatives not qualifying as hedge accounting be recognized currently in earnings. During the six months ended June 30, 2002, the Partnership recognized income of $549,000 from this interest rate swap contract compared to an expense of $721,000 for the six months ended June 30, 2001.

 

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10.  Stock Based Compensation

 

The Partnership elected to adopt Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” effective January 1, 2002. As a result, the Partnership will expense stock options based upon estimated fair value of the options at the date of grant. Additionally, the Partnership will expense the discount given to employees under the employee stock purchase plan. The Partnership recorded expense of $200,000 for the first six months of 2002 related to stock compensation from this accounting change.

 

11.  Subsequent Events

 

The Board of Directors of the General Partner declared the following distributions at its July 31, 2002 regularly scheduled Board meeting:

 

Class		Quarterly Amount/Unit			Record Date		Payment Date
Common		$	0.455		August 14, 2002		August 30, 2002
Preferred (per depositary unit):
Series B		$	0.99875		September 16, 2002		September 30, 2002
Series D		$	0.46094		September 16, 2002		September 30, 2002
Series E		$	0.51563		September 16, 2002		September 30, 2002
Series F		$	0.50000		October 17, 2002		October 31, 2002
Series I		$	0.52813		September 16, 2002		September 30, 2002

 

At the same meeting, the Board authorized the following:

 

•      A resolution to amend the General Partner’s Shareholder Rights Plan by changing the termination date for the Plan to August 31, 2002;

 

•      The redemption of all the $150 million of the outstanding Series F Preferred equity, with the redemption date fixed for October 10, 2002.

 

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The Partners

Duke Realty Limited Partnership:

 

We have reviewed the condensed consolidated balance sheet of Duke Realty Limited Partnership and subsidiaries as of June 30, 2002, the related condensed consolidated statements of operations for the three months and the six months ended June 30, 2002 and 2001, the related condensed consolidated statements of cash flows for the six months ended June 30, 2002 and 2001, and the related condensed consolidated statement of partners’ equity for the six months ended June 30, 2002. These condensed consolidated financial statements are the responsibility of the Partnership’s management.

 

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Duke Realty Limited Partnership and subsidiaries as of December 31, 2001, and the related consolidated statements of operations, partners’ equity and cash flows for the year then ended (not presented herein); and in our report dated January 30, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001 is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

KPMG LLP

Indianapolis, Indiana

July 31, 2002

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Business Overview

 

Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including those related to the Partnership’s future operations, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Partnership, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: general economic and business conditions; continued qualification as a real estate investment trust; competition for tenants; increases in real estate construction costs; interest rates, accessibility of debt and equity capital markets and other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters and liquidity of real estate investments. The words “believe,” “estimate,” “expect” and similar expressions or statements regarding future periods are intended to identify forward-looking statements. All forward-looking statements are inherently uncertain as they involve substantial risks and uncertainties beyond the Partnership’s control. The Partnership undertakes no obligation to update or revise any forward-looking statements for events or circumstance after the date on which such statement is made. New factors emerge from time to time, and it is not possible for the Partnership to predict all such factors. Further, the Partnership cannot assess the impact of each such factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

The Partnership’s operating results depend primarily upon income from the Rental Operations of its industrial, office and retail properties located in its primary markets. This rental income is substantially influenced by the supply and demand for the Partnership’s rental space in its primary markets. In addition, the Partnership’s growth is dependent upon its ability to increase and maintain occupancy rates and increase rental rates of its in-service portfolio. The Partnership’s strategy for growth also includes developing and acquiring additional rental properties in its primary markets.

 

For the six months ended June 30, 2002, the Partnership’s rental income from continuing operations decreased by approximately 1% from the same period in 2001. This reduction resulted from a combination of a slower economy reducing overall portfolio occupancy by 1.7% since June 30, 2001, and the sale of over $500 million of assets in 2001. While these events have affected growth and related rental income, the Partnership has a debt to market capitalization ratio of 25.5% at June 30, 2002, and only $40 million drawn on its $500 million unsecured line of credit as of June 30, 2002.

 

As noted above, the Partnership’s operating results depend primarily upon income from the Rental Operations of its industrial, office and retail properties. The following highlights the areas of Rental Operations that the Partnership considers critical for future revenue growth (all square footage totals and occupancy percentages reflect 100% of both wholly-owned properties and properties in joint ventures that the Partnership has ownership interests):

 

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Same Property Performance: The Partnership tracks Same Property performance, which compares those properties that were in-service for all reported portions of a two-year period. The net operating income from the same property portfolio increased 1.0% for the six months ended June 30, 2002, compared to the six months ended June 30, 2001.

 

Occupancy Analysis: The following table sets forth information regarding the Partnership’s in-service portfolio of rental properties as of June 30, 2002 and 2001 (square feet, in thousands):

 

 

Lease Expiration: The following table reflects the Partnership’s in-service portfolio lease expiration schedule as of June 30, 2002, by product type indicating square footage and annualized net effective rents under expiring leases (in thousands, except per square foot amounts):

 

		Total Portfolio							Industrial					Office					Retail
Year of Expiration		Square Feet		Ann. Rent Revenue			Percent		Square Feet		Ann. Rent Revenue			Square Feet		Ann. Rent Revenue			Square Feet		Ann. Rent Revenue
2002		5,347		$	31,475		5	%	4,647		$	23,132		700		$	8,343		–		$	–
2003		9,882		65,572			10	%	7,723		38,335			2,159		27,237			–		–
2004		11,352		76,751			12	%	8,789		41,831			2,540		34,513			23		407
2005		13,707		95,957			15	%	10,776		53,590			2,893		41,865			38		502
2006		11,441		81,234			13	%	8,925		45,423			2,509		35,702			7		109
2007		10,034		68,780			11	%	7,760		37,845			2,231		30,353			43		582
2008		6,541		42,796			7	%	5,109		23,149			1,408		19,277			24		370
2009		5,912		36,739			6	%	4,818		21,024			1,075		15,346			19		369
2010		5,587		44,460			7	%	3,925		18,437			1,643		25,709			19		314
2011		3,607		31,610			5	%	2,325		11,225			1,266		20,140			16		245
2012 and Thereafter		7,271		57,940			9	%	4,510		20,349			2,134		32,345			627		5,246
Total Leased		90,681		$	633,314		100	%	69,307		$	334,340		20,558		$	290,830		816		$	8,144
Total Portfolio Square Feet		103,089							78,173					24,079					837
Percent Occupied		87.96	%						88.66	%				85.38	%				97.43	%

 

 

Future Development: The Partnership also expects to realize growth in earnings from Rental Operations through the development and acquisition of additional rental properties in its primary markets. Specifically, the Partnership has 3.3 million square feet of properties under development at June 30, 2002. These properties under development should provide future earnings through Service Operations income upon sale or from Rental Operations growth as they are placed in service as follows (in thousands, except percent leased and stabilized returns):

 

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Anticipated In-Service Date		Square Feet		Percent Leased		Project Costs			Estimated Stabilized Return
Held For Rental:
3rd Quarter 2002		1,039		9	%	$	30,580		11.0	%
4th Quarter 2002		434		49	%	19,289			11.1	%
1st  Quarter 2003		843		78	%	33,598			10.7	%
Thereafter		324		48	%	35,550			11.5	%
		2,640		42	%	$	119,017		11.1	%
Build-to-Suit for Sale:
3rd Quarter 2002		642		98	%	$	12,288		10.6	%
4th Quarter 2002		–		–		–			–
1st  Quarter 2003		17		25	%	2,335			12.2	%
Thereafter		43		100	%	4,483			10.4	%
		702		96	%	$	19,106		10.8	%
Total		3,342		53	%	$	138,123		11.0	%

 

Lease Renewals: The Partnership renewed 72.4% of leases up for renewal in the three months ended June 30, 2002, totaling 2.1 million square feet on which it attained a 8.2% growth in net effective rent. This compares to renewals of 70.1% for the three months ended June 30, 2001, totaling 2.6 million square feet and 13.3% growth in net effective rent.

 

Results of Operations

 

A summary of the Partnership’s operating results and property statistics for the three and six months ended June 30, 2002 and 2001, is as follows (in thousands, except number of properties and per unit amounts):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Rental Operations revenue		$	180,173		$	180,221		$	355,342		$	362,642
Service Operations revenue		15,364			23,627			44,645			45,949
Earnings from Rental Operations		60,079			66,302			114,889			130,807
Earnings from Service Operations		7,169			9,227			22,701			18,515
Operating income		60,450			70,841			123,554			140,607
Net income available for common unitholders		$	54,015		$	56,877		$	105,058		$	124,282
Weighted average common units outstanding		149,310			147,899			148,992			147,569
Weighted average common and dilutive potential common units		151,092			149,572			150,682			151,369
Basic income per common unit:
Continuing operations		$	.34		$	.39		$	.67		$	.83
Discontinued operations		$	.02		$	.00		$	.03		$	.01
Diluted income per common unit:
Continuing operations		$	.34		$	.38		$	.67		$	.82
Discontinued operations		$	.02		$	.00		$	.03		$	.01
Number of in-service properties at end of period		899			905			899			905
In-service square footage at end of period		103,089			101,287			103,089			101,287
Under development square footage at end of period		3,342			7,585			3,342			7,585

 

Comparison of Three Months Ended June 30, 2002 to Three Months Ended June 30, 2001

 

Rental Operations

 

Rental Operations revenue remained consistent at $180.2 million for the three months ended June 30, 2002, compared to the three months ended June 30, 2001. Rental Operations revenue is primarily comprised of rental income from held for rental properties (“Rental Income”) and equity in earnings from unconsolidated companies (“Equity in earnings”). Rental Income increased from $172.9 million

 

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in 2001 to $173.9 million in 2002. This increase is the result of the Partnership recognizing $10.5 million of lease termination fees for the three months ended June 30, 2002, compared to $4.2 million for the three months ended June 30, 2001. The increase in lease termination fees was offset by an overall decrease in occupancy of in-service properties from 91.6% at June 30, 2001, to 88.0% at June 30, 2002. Also contributing to the decline in Rental Income is the effect of the Partnership’s property dispositions. Throughout 2001 and the first quarter 2002, the Partnership sold nearly $440 million of held for investment rental properties from its in-service portfolio. A majority of these properties were over 90% leased and the new developments placed in-service over the same time period are currently leased at lower percentages and, therefore, the Partnership has realized less rental income. The following is a summary of the Partnership’s in-service portfolio since January 1, 2001:

 

 

Equity in earnings decreased to $6.3 million from $7.3 million for the three months ended June 30, 2002, compared to the same period in 2001. In the second quarter of 2001, the Partnership recognized approximately $500,000 of lease termination fees compared to only $134,000 for the second quarter of 2002. In addition, two of the Partnership’s 50% joint ventures borrowed additional debt during 2001, resulting in increased interest expense in the second quarter of 2002.

 

Depreciation and amortization expense for the period ended June 30, 2002, increased over the prior year as a result of additional investments in tenant improvements and write-offs associated with early terminations of tenants.

 

As a result of the above-mentioned items, earnings from Rental Operations decreased $6.2 million from $66.3 million for the three months ended June 30, 2001, to $60.1 million for the three months ended June 30, 2002.

 

Service Operations

 

Service Operations revenues decreased from $23.6 million for the three months ended June 30, 2001, to $15.4 million for the three months ended June 30, 2002. Overall, Service Operations has experienced decreased levels of construction volume as the effects of a slowed economy have continued to delay customer decisions to expand operations into new office or industrial buildings. As a result, the Partnership experienced a $3.4 million decrease in net general contractor revenues from third party jobs construction projects.

 

Property management, maintenance and leasing fee revenues decreased to $3.4 million from $7.9 million for the three months ended June 30, 2002, compared to the same period in 2001. The $4.5 million decrease is due mainly to a decrease in landscaping maintenance revenue associated with the sale of the landscape business in the third quarter of 2001.

 

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As a result, earnings from Service Operations decreased from $9.2 million for the three months ended June 30, 2001, to $7.2 million for the three months ended June 30, 2002.

 

General and Administrative Expense

 

General and administrative expense increased from $4.7 million for the three months ended June 30, 2001 to $6.8 million for the three months ended June 30, 2002. While the Partnership continues to implement several initiatives that are reducing total operating and administration costs, reduced construction and development activity resulted in a greater amount of overhead being charged to general and administrative expense during the second quarter 2002 instead of being capitalized into development projects.

 

Discontinued Operations

 

The Partnership adopted Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) on January 1, 2002. In conjunction with the adoption of SFAS 144, the Partnership is required to classify operations of properties identified as held for sale as discontinued operations when certain conditions are met. The Partnership classified net income and gains as sales of properties of $3.7 million and $615,000, respectively,  as discontinued operations for the three months ended June 30, 2002 and 2001, respectively. These operations pertain to one property added to the held for sale portfolio post adoption of SFAS 144 and two properties which were sold during the three months ended June 30, 2002, that were identified as held for sale after the adoption of SFAS 144.

 

Net Income Available for Common Units

 

Net income available for common units for the three months ended June 30, 2002, was $54.0 million compared to $56.9 million for the same period in 2001. This decrease results primarily from the operating fluctuations in Rental Operations, Service Operations and general and administrative expenses as discussed above.

 

Comparison of Six Months Ended June 30, 2002 to Six Months Ended June 30, 2001

 

Rental Operations

 

Rental Operations revenue decreased to $355.3 million for the six months ended June 30, 2002, from $362.6 million for the six months ended June 30, 2002. Rental Operations revenue is primarily comprised of rental income from held for rental properties (“Rental Income”) and equity in earnings from unconsolidated companies (“Equity in earnings”). Rental Income decreased from $345.4 million in 2001 to $342.8 million in 2002. The Partnership continues to feel the impact of a slowed economy as businesses are delaying decisions to expand operations and, in some cases, are downsizing occupied space currently rented from the Partnership. Also contributing to the decline in occupancy is the effect of the Partnership’s property dispositions. Throughout 2001 and the first six months of 2002, the Partnership has sold over $440 million of held for investment rental properties from its in-service portfolio. A majority of these properties were over 90% leased and the new developments placed in-service over the same time period have leased at lower percentages and, therefore, the Partnership has realized less rental income. The effect of these trends is a decrease of the occupancy of the in-service portfolio from 91.6% at June 30, 2001, to 88.0% at June 30, 2002. The Partnership has mitigated the decreased occupancy effects to Rental Income through the recognition of $15.8

 

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million of lease termination fees for the six months ended June 30, 2002. These fees are the result of negotiated terms for tenants vacating or downsizing previously leased space from the Partnership. During the six months ended June 30, 2001, the Partnership recognized $5.1 million in lease termination fees.

 

Equity in earnings decreased to $12.6 million from $17.3 million for the six months ended June 30, 2002, compared to the same period in 2001. In the first quarter of 2001, the Partnership recognized a $2.9 million gain resulting from the sale of a property in a joint venture that the Partnership had a 50% ownership interest.  In addition, two of the Partnership’s 50% joint ventures acquired additional debt during 2001, resulting in increased interest expense for the six months ended June 30, 2002, compared to six months ended June 30, 2001.

 

Rental and real estate tax expenses increased for the six months ended June 30, 2002, compared to the same period in 2001. Generally, these increases resulted from increasing operating costs of the Partnership’s properties with no individually significant fluctuations or variances. The majority of the operating expenses are recovered from the tenants through increased renewal billings. Depreciation and amortization expense for the six months ended June 30, 2002, increased over the prior year, due to an increase in the Partnership’s investments in tenant improvements and write-offs associated with early terminations of tenants.

 

Interest expense decreased by $2.3 million for the six months ended June 30, 2002, compared to the same period in 2001. This decrease is attributable to the repayment of secured debt by the Partnership throughout 2001. In the third and fourth quarters of 2001 the Partnership paid off $116.6 million of secured debt, resulting in lower interest expense for the period ended June 30, 2002 compared to June 30, 2001. This decrease was offset by a decrease in the amount of interest capitalized by the Partnership for the six months ended June 30, 2002, compared to the same period in 2001, which was attributed to the decreased development volume in 2002.

 

As a result of the above-mentioned items, earnings from Rental Operations decreased $15.9 million from $130.8 million for the six months ended June 30, 2001, to $114.9 million for the six months ended June 30, 2002.

 

Service Operations

 

Service Operations revenues decreased slightly from $45.9 million for the six months ended June 30, 2001, to $44.6 million for the six months ended June 30, 2002. Overall, Service Operations has experienced decreased levels of construction volume during the six months ended June 30, 2002, compared to the same period in 2001, as the effects of a slowed economy have continued to affect customer decisions to expand operations into new office or industrial buildings. However, the timing of completion of projects in the Partnership’s held for sale pipeline (see below) helped to offset the decrease in the Partnership’s construction volume.

 

The Partnership experienced an $8.8 million decrease in net general contractor revenues from third party projects due to continued decreases in volume as the economy continues to be slower than in previous  years.

 

Construction management and development activity income represents construction and development fees earned on projects where the Partnership acts as the construction manager, and profits from the Partnership’s held for sale program whereby a property is developed and sold upon completion to a

 

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third party. The significant increase for the six months ended June 30, 2002 is attributable to the Partnership selling eight properties from this portfolio compared to five for the same period in 2001.

 

Property management, maintenance and leasing fee revenues decreased to $6.6 million from $14.5 million for the six months ended June 30, 2002, compared to the same period in 2001. The $7.9 million decrease is due mainly to a decrease in landscaping maintenance revenue associated with the sale of the landscape business in the third quarter of 2001.

 

Service Operations expenses decreased by $5.5 million from $27.4 million for the six months ended June 30, 2001, to $21.9 million for the six months ended June 30, 2002. This decrease is attributable to the decrease in construction and development activity associated with the slowdown in the economy and the reduced overhead costs from the sale of the landscaping business in the third quarter of 2001.

 

As a result of the above, earnings from Service Operations increased from $18.5 million for the six months ended June 30, 2001, to $22.7 million for the six months ended June 30, 2002.

 

General and Administrative Expense

 

General and administrative expense increased from $8.7 million for the six months ended June 30, 2001 to $14.0 million for the six months ended June 30, 2002. While the Partnership continues to implement several initiatives that are reducing total operating and administration costs, reduced construction and development activity resulted in a greater amount of overhead being charged to general and administrative expense instead of being capitalized into development projects.

 

Other Income and Expenses

 

Gain on sale of land and depreciable property dispositions is primarily driven by the sale of held for investment rental properties. Throughout 2000 and 2001, the Partnership actively pursued favorable opportunities to dispose of real estate assets that no longer met long-term investment objectives. This disposition strategy generated approximately $10 million of gain on sales of depreciable property during the fist six months of 2001, compared to only $2.5 million in the same six month period of 2002, in conjunction with the Partnership’s decision to slow dispositions in 2002 in light of the economy and current business climate.

 

Other revenue for the six months ended June 30, 2002, includes $549,000 of gain related to an interest rate swap that does not qualify for hedge accounting. During the six months ended June 30, 2001, the Partnership recognized a $721,000 loss on the same interest rate swap.

 

Discontinued Operations

 

The Partnership adopted Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) on January 1, 2002.  In conjunction with the adoption of SFAS 144, the Partnership is required to classify operations of properties identified as held for sale as discontinued operations when certain conditions are met. The Partnership classified net income of $4.5 million and $1.3 as discontinued operations for the six months ended June 30, 2002 and 2001, respectively.  These operations pertain to one property added to the held for sale portfolio post adoption of SFAS 144 and two properties which were sold during the six months ended June 30, 2002, that were identified as held for sale after adoption of SFAS 144.

 

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Net Income Available for Common Units

 

Net income available for common units for the six months ended June 30, 2002, was $105.1 million compared to $124.3 million for the same period in 2001. This decrease results primarily from the operating fluctuations in Rental Operations, Service Operations, general and administrative expenses and earnings from sales of real estate investments explained above.

 

Liquidity and Capital Resources

 

Operating Activities

 

Net cash flow provided by operating activities totaled $375.1 million and $99.2 million for the six months ended June 30, 2002 and 2001, respectively. Operating activity cash flows represents the primary source of liquidity to fund distributions to unitholders and the other minority interests. The significant increase in 2002 is due to the Partnership receiving approximately $200.0 million of proceeds from the sale of eight buildings in its build-to-suit portfolio.

 

Investing Activities

 

Net cash used by investing activities totaled $152.5 million for the six months ended June 30, 2002, compared to net cash provided by investing activities of $97.6 million for the six months ended June 30, 2001.  Investing activities represent the investment of funds by the Partnership to lease, improve and expand its portfolio of held for rental properties through the development and acquisition of additional rental properties, net of proceeds received from property sales. As noted in the comparison of 2002 to 2001, the Partnership sold a significant amount of held for rental property in 2001. During the six months ended June 30, 2002, the Partnership generated proceeds of $35.0 million from property sales compared to $187.6 million for the same period in 2001.

 

Financing Activities

 

Net cash used for financing activities totaled $231.6 million for the six months ended June 30, 2002 compared to $136.1 million for the same period in 2001. During the first six months of 2002, the Partnership utilized proceeds from property sales and cash flows from operations to reduce the amounts outstanding on its unsecured lines of credit. During the six months of 2001, the General Partner and the Partnership issued $75.0 million of preferred equity and $175.0 million of unsecured debt that was used to pay off outstanding balances on its unsecured lines of credit. The Partnership made a $.90 per unit distribution to common unitholders during the six months ended June 30, 2002, compared to a $.88 per unit distribution for the same period in 2001.

 

Debt and Equity

 

The General Partner and the Partnership currently have on file with the Securities and Exchange Commission (the “SEC”) one Form S-3 Registration Statement (the “Shelf Registration”), which, as of June 30, 2002, has remaining availability of $542.8 million to issue additional common shares, preferred equity and unsecured debt securities. The General Partner and the Partnership may from time to time issue additional securities under this Shelf Registration to fund the development and acquisition of additional rental properties. The General Partner and the Partnership also has a Shelf Registration Statement on file for at-the-market offerings of 1.5 million common shares of the General Partner.

 

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The Partnership has the following lines of credit available (in thousands):

 

Description		Borrowing Capacity			Maturity Date		Interest Rate		Outstanding at June 30, 2002
Unsecured Line of Credit		$	500,000		February 2004		LIBOR + .65	%	$	40,000
Secured Line of Credit		100,000			January 2003		LIBOR + 1.05	%	29,102

 

The lines of credit are used to fund development and acquisition of additional rental properties and to provide working capital.

 

The $500 million line of credit allows the Partnership an option to obtain borrowings from the financial institutions that participate in the line of credit at rates lower than the stated interest rate, subject to certain restrictions. Amounts outstanding on the line of credit at June 30, 2002 are at LIBOR + .65% (2.49% at June 30, 2002).

 

The total debt outstanding at June 30, 2002, totals $1.7 billion with a weighted average interest rate of 7.00% maturing at various dates through 2028. The Partnership has $1.4 billion of unsecured debt and $319.0 million of secured debt outstanding at June 30, 2002. Scheduled principal amortization of such debt totaled $5.0 million for the six months ended June 30, 2002.

 

Following is a summary of the scheduled future amortization and maturities of the Partnership’s indebtedness at June 30, 2002 (in thousands):

 

 

Accounting Changes

 

The Partnership elected to adopt Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation,” effective January 1, 2002. As a result, the Partnership will expense stock options based upon estimated fair value of the options at the date of grant. Additionally, the Partnership will expense the discount given to employees under the employee stock purchase plan. The Partnership recorded expense of $200,000 for the first six months of 2002 related to stock compensation from this accounting change.

 

Funds From Operations

 

Management believes that Funds From Operations (“FFO”), which is defined by the National Association of Real Estate Investment Trusts as GAAP net income or loss, excluding gains or losses from sales of depreciated operating property, plus operating property depreciation and amortization and adjustments for minority interest and unconsolidated companies on the same basis, is the industry standard for reporting the operations of real estate investment trusts.

 

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The following table reflects the calculation of the Partnership’s FFO for the three and six months ended June 30 as follows (in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Net income available for common unitholders		$	54,015		$	56,877		$	105,058		$	124,282
Add back (deduct):
Depreciation and amortization		42,993			38,379			85,812			78,962
Share of joint venture adjustments		4,383			4,277			8,798			5,414
(Earnings) Loss from depreciable property dispositions		(2,550		)	2,112			(2,454		)	(9,997		)
Funds From Operations		$	98,841		$	101,645		$	197,214		$	198,661
Cash flow provided by (used by):
Operating activities		$	163,822		$	21,545		$	375,088		$	99,170
Investing activities		(103,058		)	125,192			(152,487		)	97,631
Financing activities		(72,583		)	(85,940		)	(231,619		)	(136,132		)

 

While management believes that FFO is the most relevant and widely used measure of the Partnership’s operating performance, such amount does not represent cash flow from operations as defined by generally accepted accounting principles, should not be considered as an alternative to net income as an indicator of the Partnership’s operating performance, and is not indicative of cash available to fund all cash flow needs.

 

Part II – Other Information

 

Item 1.  Legal Proceedings

 

None

 

Item 2.  Changes in Securities

 

None

 

Item 3.  Defaults upon Senior Securities

 

None

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

1.     On April 24, 2002, the General Partner held its annual meeting of shareholders. At that meeting, the General Partner’s shareholders elected Barrington H. Branch, Thomas L. Hefner, L. Ben Lytle and John W. Nelley, Jr. to serve a three year term. The number of votes cast for and against each of the director nominees was as follows:

 

NOMINEE		FOR		AGAINST
Barrington H. Branch		113,415,210		2,114,926
Thomas L. Hefner		113,420,064		2,110,071
L. Ben Lytle		113,397,855		2,132,281
John W. Nelley, Jr.		113,409,393		2,120,744

 

The remaining directors, Geoffrey Button, William Cavanaugh III, Ngaire Cuneo, Charles R. Eitel, Howard L. Feinsand, William O. McCoy, James E. Rogers and Darell E. Zink, Jr., continued in office following the annual meeting. In addition, at a Board meeting held that same day, the Board of Directors elected Robert J. Woodward, Jr. to fill a vacancy on the Board.

 

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At the Annual meeting, the shareholders also ratified the appointment of KPMG LLP as the Partnership’s independent auditors.  111,433,820 votes were cast in favor of the appointment; 3,509,440 votes were cast against it, and 566,870 votes abstained.

 

Item 5.  Other Information

 

None

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)   Exhibits

 

Exhibit 15.   Letter regarding unaudited interim financial information

 

(b)   Reports on Form 8-K

 

None

 

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SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	DUKE REALTY LIMITED PARTNERSHIP
	By: Duke Realty Corporation
		Its General Partner
Date:  August 14, 2002	/s/		Thomas L. Hefner
	Thomas L. Hefner
	President and Chief Executive Officer
	/s/		Darell E. Zink, Jr.
	Darell E. Zink, Jr.
	Executive Vice President and Chief Financial Officer
	/s/		Matthew A. Cohoat
	Matthew A. Cohoat
	Senior Vice President and Corporate Controller

 

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