UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act).

 

Yes   o   No   ý

 

The number of Common Units outstanding as of May 7, 2003 was 150,122,770 ($.01 par value).

 

 

DUKE REALTY LIMITED PARTNERSHIP

 

INDEX

 

Part I - Financial Information
Item 1.  Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2003 (Unaudited) and December 31, 2002
		Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2003 and 2002
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2003 and 2002
		Condensed Consolidated Statement of Partners’ Equity (Unaudited) for the three months ended March 31, 2003
		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
Item3.  Quantitative and Qualitative Disclosure About Market Risks
Item4.  Controls and Procedures
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)

 

		March 31, 2003			December 31, 2002
		(Unaudited)
ASSETS
Real estate investments:
Land and improvements		$	614,461		$	608,995
Buildings and tenant improvements		4,291,679			4,237,360
Construction in progress		87,345			85,756
Investments in unconsolidated companies		299,829			315,589
Land held for development		321,673			326,250
		5,614,987			5,573,950
Accumulated depreciation		(588,629		)	(555,858		)
Net real estate investments		5,026,358			5,018,092
Cash and cash equivalents		13,170			17,129
Accounts receivable, net of allowance of $2,108 and $2,008		14,501			15,415
Straight-line rent receivable, net of allowance of $2,491		55,881			52,062
Receivables on construction contracts		26,438			23,181
Deferred financing costs, net of accumulated amortization of $15,601 and $15,390		13,043			11,431
Deferred leasing and other costs, net of accumulated amortization of $53,291 and $50,543		121,986			112,772
Escrow deposits and other assets		107,928			96,973
		$	5,379,305		$	5,347,055
LIABILITIES AND SHAREHOLDERS’ EQUITY
Indebtedness:
Secured debt		$	275,558		$	299,147
Unsecured notes		1,701,077			1,526,138
Unsecured lines of credit		205,000			281,000
		2,181,635			2,106,285
Construction payables and amounts due subcontractors		37,050			43,232
Accounts payable		1,241			548
Accrued expenses:
Real estate taxes		56,887			51,472
Interest		23,204			27,374
Other		35,494			52,485
Other liabilities		103,086			106,893
Tenant security deposits and prepaid rents		39,985			33,710
Total liabilities		2,478,582			2,421,999
Minority interest		4,544			5,213
Partners’ equity:
General Partner
Common equity		2,185,153			2,203,060
Preferred equity (liquidation preference of ($440,869)		415,446			415,466
		2,600,599			2,618,526
Limited Partners’ common equity		230,896			235,473
Limited Partners’ preferred equity		67,955			67,955
Accumulated other comprehensive income		(3,271		)	(2,111		)
		2,896,179			2,919,843
		$	5,379,305		$	5,347,055

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

2

 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

For the three months ended March 31,

(in thousands, except per unit amounts)

(Unaudited)

 

		2003			2002
RENTAL OPERATIONS
Revenues:
Rental income		$	180,747		$	168,185
Equity in earnings of unconsolidated companies		4,269			6,296
		185,016			174,481
Operating expenses:
Rental expenses		40,471			31,164
Real estate taxes		20,571			19,117
Interest expense		32,713			27,192
Depreciation and amortization		47,654			42,337
		141,409			119,810
Earnings from rental operations		43,607			54,671
SERVICE OPERATIONS
Revenues:
General contractor gross revenue		50,142			45,933
General contractor costs		(44,880		)	(40,219		)
Net general contractor revenue		5,262			5,714
Property management, maintenance and leasing fees		4,094			3,199
Construction and development activity income		(193		)	20,393
Other income		19			215
Total revenue		9,182			29,521
Operating expenses		7,300			13,989
Total earnings from service operations		1,882			15,532
General and administrative expense		(5,919		)	(7,238		)
Operating income		39,570			62,965
OTHER INCOME (EXPENSE)
Interest income		991			421
Earnings from land and depreciable property dispositions, net of impairment adjustment		9,402			1,111
Other revenue (expense)		(550		)	212
Minority interest in earnings of subsidiaries		(23		)	(385		)
Income from continuing operations		49,390			64,324
Discontinued operations:
Net income from discontinued operations		202			929
Gain on sale of discontinued operations		2,354			—
Income from discontinued operations		2,556			929
Net income		51,946			65,253
Dividends on preferred units		(10,154		)	(14,210		)
Net income available for common unitholders		$	41,792		$	51,043
Basic net income per common unit:
Continuing operations		$	0.26		$	0.33
Discontinued operations		0.02			0.01
Total		$	0.28		$	0.34
Diluted net income per common unit:
Continuing operations		$	0.26		$	0.33
Discontinued operations		0.02			0.01
Total		$	0.28		$	0.34
Weighted average number of common units outstanding		149,972			148,670
Weighted average number of common and dilutive potential common units		150,627			150,270

 

See accompanying Notes to Consolidated Financial Statements.

 

3

 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31

(in thousands)

(Unaudited)

 

		2003			2002
Cash flows from operating activities:
Net income		$	51,946		$	65,253
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of buildings and tenant improvements		41,771			37,186
Amortization of deferred leasing and other costs		5,901			5,633
Amortization of deferred financing costs		999			965
Minority interest in earnings		23			385
Straight-line rent adjustment		(4,574		)	(1,386		)
Earnings from land and depreciated property dispositions		(11,756		)	(1,111		)
Build-to-suit operations, net		(15,257		)	101,178
Construction contracts, net		(8,491		)	(10,598		)
Other accrued revenues and expenses, net		(8,105		)	8,473
Equity in earnings in shortfall of operating distributions received from unconsolidated companies		6,408			5,288
Net cash provided by operating activities		58,865			211,266
Cash flows from investing activities:
Development of real estate investments		(28,995		)	(36,733		)
Acquisition of real estate investments		(34,602		)	(8,375		)
Acquisition of land held for development and infrastructure costs		(7,120		)	(4,396		)
Recurring tenant improvements		(8,258		)	(5,952		)
Recurring leasing costs		(4,901		)	(4,274		)
Recurring building improvements		(2,625		)	(2,399		)
Other deferred leasing costs		(6,078		)	(3,586		)
Other deferred costs and other assets		2,343			(315		)
Exercise purchase option on ground lease		(12,042		)	—
Tax deferred exchange escrow, net		(8,207		)	—
Proceeds from land and depreciated property sales, net		51,368			25,395
Advances to unconsolidated companies		(1,313		)	(8,794		)
Net cash used by investing activities		(60,430		)	(49,429		)
Cash flows from financing activities:
Contribution from General Partner		2,861			7,023
Payments for General Partner’s redemption of preferred equity		(20		)	—
Proceeds from indebtedness		175,000			—
Proceeds from debt refinancing		38,340			—
Payments on indebtedness including principal amortization		(61,706		)	(5,193		)
Repayments on lines of credit, net		(75,095		)	(79,392		)
Distributions to partners		(68,209		)	(66,780		)
Distributions to preferred unitholders		(10,154		)	(14,210		)
Distributions to minority interest		(710		)	(330		)
Deferred financing costs		(2,701		)	(154		)
Net cash used for financing activities		(2,394		)	(159,036		)
Net increase (decrease) in cash and cash equivalents		(3,959		)	2,801
Cash and cash equivalents at beginning of period		17,129			10,453
Cash and cash equivalents at end of period		$	13,170		$	13,254
Other non-cash items:
Assumption of debt for real estate acquisitions		$	—		$	7,791
Conversion of Limited Partner Units to common shares of General Partner		$	968		$	6,712
Issuance of Limited Partner Units for real estate acquisitions		$	—		$	4,687
Impairment adjustment on undeveloped land		$	420		$	—

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

4

 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Condensed Consolidated Statement of Partners’ Equity

For the nine months ended March 31, 2003

(in thousands,  except per unit data)

(Unaudited)

 

								Limited Partners’ Common Equity			Limited Partners’ Preferred Equity			Accumulated Other Comprehensive Income (Loss)			Total
		General Partner
		Common Equity			Preferred Equity
Balance at December 31, 2002		$	2,203,060		$	415,466		$	235,473		$	67,955		$	(2,111	)	$	2,919,843
Comprehensive income:
Net income		37,667			8,752			4,125			1,402			—			51,946
Distributions to preferred unitholders		—			(8,752		)	—			(1,402		)	—			(10,154		)
Gains (losses) on derivative instruments														(1,160		)	(1,160		)
Comprehensive income available for common unitholders		—			—			—			—			—			40,632
Capital contribution from General Partner		2,861			—			—			—			—			2,861
Acquisition of Partnership interest for common stock of General Partner		2,927			—			(1,959		)	—			—			968
General Partner’s repurchase of Series D Preferred Shares		—			(20		)	—			—			—			(20		)
Tax benefits from employee stock plans		94			—			—			—			—			94
FASB 123 Compensation expense		10			—			—			—			—			10
Distributions to General Partner		36			—			—			—			—			36
Distributions to partners ($.455 per Common Unit)		(61,502		)	—			(6,743		)	—			—			(68,245		)
Balance at March 31, 2003		$	2,185,153		$	415,446		$	230,896		$	67,955		$	(3,271	)	$	2,896,179
Common units outstanding at March 31, 2003		135,270						14,784									150,054

 

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, 2002). The financial 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 of the Securities Exchange Act of 1934. 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 for the year ended December 31, 2002.

 

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 shares of the General Partner through an 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.  The General Partner is the sole general partner of the Partnership, owning 90.1% of the partnership interest as of March 31, 2003 (“General Partner Units”). The remaining 9.9% of the Partnership is owned by limited partners (“Limited Partner Units” and, together with the General Partner Units, the “Common Units”). The Limited Partner Units are exchangeable for shares 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 March 31, 2003 (in 000’s)
Unsecured Line of Credit		$	500,000		February 2004		LIBOR + .65	%	$	205,000
Secured Line of Credit		100,000			January 2006		LIBOR + .60	%	24,800

 

6

 

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

 

The $500 million line of credit provides the Partnership with 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 March 31, 2003, are at LIBOR + .65% (1.95% at March 31, 2003).

 

3.              Related Party Transactions

 

The Partnership provides management, maintenance, leasing, construction, and other tenant-related services to properties in which certain of its General Partner’s 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 $364,000  and $316,000 for services provided to the Option Properties for the three months ended March 31, 2003 and 2002, 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 units 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 months ended March 31 (in thousands):

 

		2003			2002
Basic and diluted net income available for common unitholders		$	41,792		$	51,043
Weighted average number of common units outstanding		149,972			148,670
Dilutive units for stock based compensation plans		655			1,600
Weighted average number of common units and dilutive potential common units		150,627			150,270

 

The Series D Convertible Preferred equity was anti-dilutive for the three months ended March 31, 2003 and 2002; therefore, no conversion to common units is included in weighted dilutive potential common units.

 

7

 

 

 

5.              Segment Reporting

 

The Partnership is engaged in four operating segments; the ownership and rental of office, industrial and retail real estate investments (collectively, “Rental Operations”), 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 consists mainly of equity in earnings of unconsolidated companies. Non-segment assets consist of corporate assets including cash, deferred financing costs and investments in unconsolidated companies.

 

The Partnership assesses and measures segment operating results based upon an industry performance measure referred to as Funds From Operations (“FFO”), which management believes is a useful indicator of the Partnership’s operating performance. The National Association of Real Estate Investment Trusts defines FFO as 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. 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 months ended March 31, 2003 and 2002, and the assets for each of the reportable segments as of March 31, 2003 and December 31, 2002, are summarized as follows (in thousands):

 

		Three Months Ended March 31,
		2003			2002
Revenues
Rental Operations:
Office		$	107,105		$	96,654
Industrial		70,531			69,369
Retail		2,096			1,588
Service Operations		9,182			29,521
Total Segment Revenues		188,914			197,132
Non-Segment Revenue		5,284			6,870
Consolidated Revenue from continuing operations		194,198			204,002
Discontinued Operations		504			2,237
Consolidated Revenue		$	194,702		$	206,239

 

8

 

		Three Months Ended March 31,
		2003			2002
Funds From Operations
Rental Operations:
Office		$	68,654		$	64,194
Industrial		50,065			52,839
Retail		1,608			1,372
Services Operations		1,882			15,532
Total Segment FFO		122,209			133,937
Non-Segment FFO:
Interest expense		(32,713		)	(27,192		)
Interest income		991			421
General and administrative expense		(5,919		)	(7,238		)
Gain on land sales		3,143			1,208
Other expenses		(1,271		)	(355		)
Minority interest in earnings of subsidiaries		(23		)	(385		)
Joint venture FFO		9,371			10,776
Dividends on preferred units		(10,154		)	(14,210		)
Discontinued operations		220			1,411
Consolidated FFO		85,854			98,373
Depreciation and amortization on continuing operations		(47,654		)	(42,337		)
Depreciation and amortization on discontinued operations		(18		)	(482		)
Share of joint venture adjustments		(5,003		)	(4,415		)
Earnings (loss) from depreciated property sales on continuing operations		6,259			(96		)
Earnings from depreciated property sales on discontinued operations		2,354			—
Net Income Available for Common Unitholders		$	41,792		$	51,043

 

		March 31, 2003			December 31, 2002
Assets
Rental Operations:
Office		$	2,705,254		$	2,677,427
Industrial		2,155,966			2,144,686
Retail		71,488			71,072
Service Operations		91,852			91,399
Total Segment Assets		5,024,560			4,984,584
Non-Segment Assets		354,745			362,471
Consolidated Assets		$	5,379,305		$	5,347,055

 

6.              Real Estate Investments

 

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 which has either been disposed or is classified as held for sale, unless certain conditions are met.

 

The Partnership has classified operations of ten buildings as discontinued operations in accordance with SFAS 144. As a result, the Partnership classified net income, net of minority interest, of $182,000 and $824,000 as net income from discontinued operations for the three months ended March 31, 2003 and 2002. In addition, five of the properties classified in discontinued operations were sold during the first quarter of 2003; therefore, the gains on disposal for these properties, net of minority interest, of $2.1 million are also reported in discontinued operations.

 

At March 31, 2003, the Partnership had 2 industrial, 5 office and 6 retail properties comprising approximately 1.1 million square feet held for sale. Of these properties, 4 build-to-suit office and 3 build-to-suit retail properties were under development. 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 three months ended March 31, 2003 and 2002 is approximately $882,000 and $382,000, respectively. Net book value of the properties held for sale at March 31, 2003, is approximately $53.7 million. There can be no assurance that such properties held for sale will be sold.

 

9

 

In association with a contract for a sale of one parcel of land entered into by the Partnership in the first quarter of 2003, the Company recognized an impairment adjustment of $420,000 to reflect the anticipated loss on the sale of this land.

 

7.              Partners’ Equity

 

The General Partner periodically accesses the public equity markets to fund the development and acquisition of additional rental properties. The proceeds of these offerings are contributed to the Partnership in exchange for additional interests in the Partnership.

 

The following series of preferred equity are outstanding as of March 31, 2003 (in thousands, except percentages):

 

Description		Shares Outstanding		Dividend Rate		Initial Optional Redemption Date		Liquidation Preference			Convertible
Series B Preferred		265		7.990	%	March 31, 2007		$	132,250		No
Series D Preferred		535		7.375	%	December 31, 2003		$	133,619		Yes
Series E Preferred		400		8.250	%	January 20, 2004		$	100,000		No
Series I Preferred		300		8.450	%	February 6, 2006		$	75,000		No

 

All series of preferred equity require cumulative distributions and have no stated maturity date (although the General Partner may redeem them on or following their initial optional redemption dates).

 

The Series D Preferred equity are 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 2002 balances have been reclassified to conform to 2003 presentation.

 

9.              Derivative Instruments

 

The Partnership is exposed to capital market risk, such as changes in interest rates.  In order to manage the volatility relating to interest rate risk, the Partnership may enter into interest rate hedging arrangements from time to time. The Partnership does not utilize derivative financial instruments for trading or speculative purposes. The Partnership accounts for derivative instruments under Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended (“SFAS 133”).

 

In December 2002, the Partnership simultaneously entered into two $50 million forward-starting interest rate swaps. The Partnership designated the aggregate $100 million swaps as a hedge to effectively fix the rate on financing expected in 2003. The Partnership expects and intends that the financing will be a ten-year fixed-rate semi-annual financing, pricing between May 1, 2003 and November 1, 2003. The fair value of the swaps was a liability of ($3.3) million as of March 31, 2003, and is recorded in other liabilities in the accompanying balance sheet. The swaps qualify for hedge accounting under SFAS 133; therefore, changes in fair value are recorded in other comprehensive income.

 

10

 

In February 2003, the Partnership simultaneously entered into two $25 million forward-starting interest rate swaps. The Partnership designated the aggregate $50 million swaps as a hedge to effectively fix the rate on financing expected in 2003. The Partnership expects and intends that the financing will be a ten-year fixed-rate semi-annual financing, pricing between May 1, 2003 and November 1, 2003. The fair value of the swaps was an asset of $75,000 as of March 31, 2003, and is netted in other liabilities in the accompanying balance sheet. The swaps qualify for hedge accounting under SFAS 133; therefore, changes in fair value are recorded in other comprehensive income.

 

10.       Stock Based Compensation

 

For all issuances prior to 2002, the Partnership applies the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for these plans.

 

Effective January 1, 2002, the Partnership prospectively adopted the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to all awards granted after January 1, 2002.

 

The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in each period.

 

		2003			2002
Net income, as reported		$	41,792		$	51,043
Add:  Stock-based employee compensation expense included in net income determined under fair value method		178			101
Deduct:  Total stock based compensation expense determined under fair value method for all awards		(353		)	(333		)
Proforma Net Income		$	41,617		$	50,811

 

				2003			2002
Basic net income per unit		As reported		$	.28		$	.34
		Pro forma		$	.28		$	.34
Diluted net income per unit		As reported		$	.28		$	.34
		Pro forma		$	.28		$	.34

 

11.       Subsequent Events

 

The Board of Directors of the General Partner declared the following distributions at its April 30, 2003 regularly scheduled Board meeting:

 

Class		Quarterly Amount/Share			Record Date		Payment Date
Common		$	0.455		May 14, 2003		May 30, 2003
Preferred (per depositary share):
Series B		$	0.99875		June 16, 2003		June 30, 2003
Series D		$	0.46094		June 16, 2003		June 30, 2003
Series E		$	0.51563		June 16, 2003		June 30, 2003
Series I		$	0.52813		June 16, 2003		June 30, 2003

 

11

 

The Partners

Duke Realty Limited Partnership:

 

We have reviewed the condensed consolidated balance sheet of Duke Realty Limited Partnership and subsidiaries as of March 31, 2003, the related condensed consolidated statements of operations for the three months ended March 31, 2003 and 2002, the related condensed consolidated statements of cash flows for the three months ended March 31, 2003 and 2002, and the related condensed consolidated statement of partners’ equity for the three months ended March 31, 2003. 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, 2002, 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 29, 2003, 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, 2002 is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

KPMG LLP

Indianapolis, Indiana

April 30, 2003

 

12

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement Regarding Forward Looking Statements

 

Certain statements in this quarterly report, 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. These 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 predictions of future results, performance or achievements that we express or imply in this report. Some of the risks, uncertainties and other important factors that may affect future results include, among others:

 

•                  General economic and business conditions;

•                  The Partnership’s continued qualification as a real estate investment trust;

•                  Competition for tenants and decrease in property occupancy;

•                  Potential increases in real estate construction costs;

•                  Potential changes in interest rates;

•                  Continuing ability to favorably raise debt and equity in the 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.

 

This list of risks and uncertainties, however, is not intended to be exhaustive. The General Partner has on file with the Securities and Exchange Commission (“SEC”) a Report on Form 8K dated December 6, 2001, with additional risk factor information.

 

The words “believe,” “estimate,” “expect” and similar expressions or statements regarding future periods are intended to identify forward-looking statements. Although we believe that the plans, expectations and results expressed in or suggested by our forward-looking statements are reasonable, all forward-looking statements are inherently uncertain as they involve substantial risks and uncertainties beyond the Partnership’s control. New factors emerge from time to time, and it is not possible for us to predict the nature or assess the potential impact of each new factor on the Partnership’s business. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements. The Partnership undertakes no obligation to update or revise any of its forward-looking statements for events or circumstances that arise after the statement is made.

 

Business Overview

 

The Partnership is a self-administered and self managed real estate investment trust that began operations through a related entity in 1972. As of March 31, 2003, the Partnership:

 

•                 Owned or controlled 924 industrial, office and retail properties (including properties under development), consisting of nearly 109 million square feet located in 12 states; and

•                 Owned or controlled more than 4,000 acres of land with an estimated future development potential of more than 62 million square feet of industrial, office and retail properties.

 

13

 

The Partnership provides the following services for its properties and for certain properties owned by third parties:

 

•                 leasing;

•                 management;

•                 construction;

•                 development; and

•                 other tenant-related services.

 

The Partnership’s operating results depend primarily upon income from the Rental Operations of its properties. This rental income is substantially influenced by the supply and demand for the Partnership’s rental space. The Partnership’s continued growth is dependent upon its ability to 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.

 

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):

 

Same Property Performance: The Partnership tracks same property performance, which measures the performance of properties that were in-service for all reported portions of a two-year period by comparing the results of the second year with the results of the first year. For the three months ended March 31, 2003, net operating income from the same property portfolio decreased 3.1% from the same period in 2002. The decrease resulted from lower occupancies in the properties that rolled into the same property population in 2003, coupled with the fact that a majority of the properties sold over the past two and a half years were from the same property population and were over 90% leased.

 

Occupancy Analysis: As discussed above, the ability to maintain occupancy rates is a principal driver of the Partnership’s results of operations. The following table sets forth information regarding the Partnership’s in-service portfolio of rental properties as of March 31, 2003 and 2002 (square feet in thousands):

 

 

The Partnership’s lower occupancy percentage in the three months ended March 31, 2003 as compared to the three months ended March 31, 2002 was primarily caused by slower lease-up of new developments placed in service during 2002 and reduced demand for existing space.

 

14

 

Lease Expiration: The following table reflects the Partnership’s in-service portfolio lease expiration schedule as of March 31, 2003, by property 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 of Revenue		Square Feet		Ann. Rent Revenue			Square Feet		Ann. Rent Revenue			Square Feet		Ann. Rent Revenue
2003		8,170		$	48,434		8	%	7,029		$	33,802		1,141		$	14,632		—		$	—
2004		11,059		77,193			12	%	8,398		39,732			2,641		37,080			20		381
2005		13,556		94,784			14	%	10,716		53,982			2,808		40,372			32		430
2006		11,101		76,845			12	%	8,820		45,963			2,279		30,849			2		33
2007		10,554		74,838			12	%	7,945		39,764			2,557		34,412			52		662
2008		9,560		59,615			9	%	7,614		33,958			1,919		25,201			27		456
2009		7,142		44,361			7	%	5,754		25,107			1,367		18,853			21		401
2010		6,484		50,421			8	%	4,657		22,295			1,811		27,862			16		264
2011		3,603		31,284			5	%	2,335		11,252			1,247		19,682			21		350
2012		4,373		27,450			4	%	3,347		13,114			1,004		13,745			22		591
2013 and Thereafter		6,631		56,525			9	%	3,749		16,986			2,261		34,600			621		4,939
Total Leased		92,233		$	641,750		100	%	70,364		$	335,955		21,035		$	297,288		834		$	8,507
Total Portfolio Square Feet		105,384							79,835					24,709					840
Percent Occupied		87.52	%						88.14	%				85.13	%				99.33	%

 

Future Development: The Partnership 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 3.5 million square feet of properties under development at March 31, 2003. These properties 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):

 

Anticipated In-Service Date		Square Feet			Percent Leased			Project Costs			Estimated Stabilized Return
Held For Rental:
2nd Quarter 2003		349			77%			$	38,988		10.8	%
3rd Quarter 2003		38			69%			3,373			11.9	%
4th Quarter 2003		973			87%			37,522			10.8	%
Thereafter		1,581			79%			65,492			9.9	%
		2,941			81%			$	145,375		10.4	%
Build-to-Suit for Sale:
2nd Quarter 2003		61			77%			$	6,942		11.1	%
3rd Quarter 2003		159			70%			15,204			12.1	%
4th Quarter 2003		274			100%			30,857			8.9	%
Thereafter		110			100%			12,377			10.5	%
		604			90%			$	65,380		10.2	%
Total		3,545			82%			$	210,755		10.3	%

 

Lease Renewals: The Partnership renewed 61.6% of leases up for renewal in the three months ended March 31, 2003, totaling 1.1 million square feet. This compares to renewals of 70.0% for the three months ended March 31, 2002, totaling 2.0 million square feet.

 

15

 

Results of Operations

 

A summary of the Partnership’s operating results and property statistics for the three months ended March 31, 2003 and 2002, is as follows (in thousands, except number of properties and per share amounts):

 

		2003			2002
Rental Operations revenue		$	185,016		$	174,481
Service Operations revenue		9,182			29,521
Earnings from Rental Operations		43,607			54,671
Earnings from Service Operations		1,882			15,532
Operating income		39,570			62,965
Net income available for common unitholders		$	41,792		$	51,043
Weighted average common units outstanding		149,972			148,670
Weighted average common and dilutive potential common unit		150,627			150,270
Basic income per common unit:
Continuing operations		$	.26		$	.33
Discontinued operations		$	.02		$	.01
Diluted income per common unit:
Continuing operations		$	.26		$	.33
Discontinued operations		$	.02		$	.01
Number of in-service properties at end of period		908			894
In-service square footage at end of period		105,384			102,119
Under development square footage at end of period		3,545			3,718

 

Comparison of Three Months Ended March 31, 2003 to Three Months Ended March 31, 2002

 

Rental Operations

 

Rental Operations are comprised of net income from rental properties (“Rental Net Income”) and equity in earnings from unconsolidated companies (“Equity in Earnings”). Rental Net Income is defined as rental income less rental expenses and real estate taxes. Overall, Rental Net Income increased from $117.9 million in 2002 to $119.7 million in 2003. The increase is primarily attributable to the Partnership recognizing $9.3 million of lease termination fees during the three months ended March 31, 2003 and 2002, compared to $5.3 million for the same period in 2002. This increase was offset somewhat by an increase in rental expenses as a result of snow removal and other weather related expenses increasing significantly in the first quarter of 2003 as several of the Partnership’s markets experienced prolonged effects of winter weather. The Partnership has experienced a slight decrease in occupancy of its in-service portfolio from 87.9% at March 31, 2002 to 87.5% at March 31, 2003; however, occupancy has increased slightly since the fourth quarter of 2002.

 

The Partnership analyzes the results of Rental Operations by office, industrial and retail portfolios. The following highlights the financial results for each of the Partnership’s Rental Operations portfolios.

 

16

 

Office

 

Rental Net Income for Office properties increased from $64.2 million for the three months ended March 31, 2002, to $68.7 million for the three months ended March 31, 2003 as a result of the following:

 

•                  The Partnership experienced a slight decrease in its in-service Office portfolio occupancy from 85.3% at March 31, 2002, to 85.1% at March 31, 2003.

•                  The Partnership’s in-service Office portfolio has increased from 233 properties at March 31, 2002, to 239 properties at March 31, 2003.

•                  The Partnership recognized $8.2 million in termination fees associated with this segment for the three months ended March 31, 2003, compared to $4.8 million for the same period in 2002.

 

Industrial

 

Rental Net Income for Industrial properties decreased from $52.8 million for the three months ended March 31, 2002, to $50.1 million for the three months ended March 31, 2003 as a result of the following:

 

•                  The Partnership experienced a decrease in its in-service Industrial portfolio occupancy from 88.6% at March 31, 2002, to 88.1% at March 31, 2003.

•                  The Partnership’s in-service Industrial portfolio increased from 651 properties at March 31, 2002 to 659 properties at March 31, 2003.

 

Retail

 

Rental Net Income for Retail properties increased to $1.6 million for the three months ended March 31, 2003, from $1.4 million for the same period in 2002.

 

Equity in earnings decreased from $6.3 million for the first quarter of 2002 to $4.3 million for the same period in 2003. The decrease is primarily the result of increased rental expenses for snow removal from prolonged winter weather in many of the markets in which the Partnership is a joint venture partner.  There were no significant effects on equity in earnings from lease terminations during the three months ended March 31, 2003 or 2002. Combined occupancy of all the Partnership’s investments in unconsolidated companies was 92.2% at March 31, 2003 compared to 89.5% at March 31, 2002.  During the first quarter of 2003, the Partnership sold its 50% interest in an office joint venture in South Florida, recognizing a gain of $6.3 million, which is reflected in earnings from land and depreciable property dispositions as the venture owned and operated real estate property and held land for future development.

 

17

 

Depreciation and amortization expense increased from $42.3 million for the first three months of 2002 to $47.7 million for the same period in 2003 as a result of the following trends:

 

•                  The Partnership increased its building basis in its held for investment property portfolio by approximately $100 million from March 31, 2002 to March 31, 2003, primarily through developments placed in-service throughout 2002 and a $50 million building acquisition in December of 2002;

•                  Tenant improvements increased from $318.0 million at March 31, 2002 to $374.4 million at March 31, 2003 as the Partnership continues to incur capital expenditures to lease-up vacant space.

 

The $5.5 million increase in interest expense is attributable to the following:

 

•                  Interest capitalized on development projects decreased from $4.6 million in 2002 to $1.9 million in 2003 as a result of decreased development activity by the Partnership over the past twelve months in response to soft demand in most of the Partnership’s markets.

•                  Interest expense on corporate unsecured debt increased from $24.5 million in 2002 to $28.4 million in 2003. The Partnership issued $175 million of seven-year unsecured debt in January 2003 at an effective interest rate of 5.365%.  Interest expense on this new issuance for the first quarter totaled $1.9 million. In addition, interest expense on two debt issuances from the third quarter of 2002 totaled $2.9 million for the first quarter of 2003.

 

As a result of the above-mentioned items, earnings from Rental Operations decreased $11.1 million from $54.7 million for the three months ended March 31, 2002, to $43.6 million for the three months ended March 31, 2003.

 

Service Operations

 

Service Operations primarily consist of leasing, management, construction and development services for joint venture properties and properties owned by third parties. Service Operations revenues decreased from $29.5 million for the three months ended March 31, 2002, to $9.2 million for the three months ended March 31, 2003. The decrease is primarily attributable to a decline in activity from the Partnership’s held for sale program whereby the Partnership develops a property for sale upon completion. During the first quarter of 2002, the Partnership recognized gains totaling $19.9 million on sales of properties developed for immediate sale compared to no such sales in the first quarter of 2003.

 

Service Operations expenses decreased from $14.0 million in 2002 to $7.3 million in 2003 as a result of income tax expense of $6.6 million being recognized in 2002 on the sale of properties sold from the Partnership’s held for sale program as noted above.

 

As a result of the above, earnings from Service Operations decreased from $15.5 million for the three months ended March 31, 2002, to $1.9 million for the same period in 2003.

 

18

 

General and Administrative Expense

 

General and Administrative Expense decreased from $7.2 million for the three months ended March 31, 2002 to $5.9 million for the same period in 2003. The decrease is attributable to a combination of the following:

 

•                  A decrease in state and local tax expense based upon estimated revenues for 2003 being lower than 2002;

 

•                  An increase in levels of construction and leasing activity during the end of 2002 and into 2003 which allowed for more overhead costs to be applied to projects versus expensed in general and administrative expenses.

 

Other Income and Expenses

 

Gain on sale of land and depreciable property dispositions, net of impairment adjustment, is comprised of the following amounts for the three months ended March 31,  2003 and 2002:

 

 

Gain on sales of depreciable properties represent sales of previously identified held for sale rental properties prior to adoption of FASB 144. All future sales of held for investment properties will be classified as discontinued operations.

 

Gain on land sales represents sales of undeveloped land owned by the Partnership. The Partnership pursues opportunities to dispose of land in markets with a high concentration of undeveloped land and those markets where the land no longer meets strategic development plans of the Partnership.

 

In January 2003, the Partnership sold its 50% interest in a joint venture for $16.1 million in proceeds.  The joint venture develops and operates real estate assets; thus the gain was not included in operating income.

 

The Partnership recorded a $420,000 adjustment in 2003 associated with a contract to sell one parcel of land.

 

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. SFAS 144 requires the Partnership to report in discontinued operations the results of operations of a property that has either been sold or is classified as held for sale, unless certain conditions are met.

 

19

 

The Partnership has classified operations of ten buildings as discontinued operations in accordance with SFAS 144. As a result, the Partnership classified net income, of $202,000 and $929,000 as net income from discontinued operations for the three months ended March 31, 2003 and 2002. In addition, five of the properties classified in discontinued operations were sold during the first quarter of 2003; therefore, the gains on disposal for these properties of $2.4 million are also reported in discontinued operations.

 

Net Income Available for Common Unitholders

 

Net income available for common unitholders for the three months ended March 31, 2003 was $41.8 million compared to $51.0 million for the same period ended March 31, 2002. This decrease results primarily from the operating result fluctuations in Rental Operations, Service Operations, General and Administrative Expenses and earnings from sales of depreciable property as discussed above.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

The Partnership expects to meet liquidity requirements over the next twelve months, including payments of dividends and distributions as well as recurring capital expenditures relating to maintaining the Partnership’s current real estate assets, primarily through the following:

 

•                 working capital; and

•                 net cash provided by operating activities.

 

The Partnership expects to meet long-term liquidity requirements, such as scheduled mortgage debt maturities, the retirement of unsecured notes and amounts outstanding under the unsecured credit facility, property acquisitions, financing of development activities and other non-recurring capital improvements, through the following:

 

•                 issuance of additional unsecured notes;

•                 undistributed cash available for distribution, if any; and

•                 proceeds received from real estate dispositions.

 

Credit Facilities

 

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

 

 

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

 

Associated with the $500 million line of credit are financial covenants that require the Partnership to meet defined levels of performance.  As of March 31, 2003, the Partnership is in compliance with all covenants pertaining to the $500 million line of credit.

 

20

 

Debt and Equity Securities

 

The Partnership currently has on file with the SEC an effective shelf registration statement that permits the Partnership to sell up to an additional $420 million of unsecured debt securities.  In addition, the General Partner has on file with the SEC an effective shelf registration statement that permits the General Partner to sell up to an additional $250.7 million of common and preferred stock. From time-to-time, the Partnership and General Partner expects to issue additional securities under these registration statements to fund development and acquisition of additional rental properties and to fund the repayment of the credit facilities and other long-term debt upon maturity.

 

The indenture governing the Partnership’s unsecured notes also requires the Partnership to comply with financial ratios and other covenants regarding the operations of the Partnership. The Partnership is currently in compliance with all such covenants and expects to remain in compliance in the foreseeable future.

 

In January 2003, the Partnership completed an issuance of unsecured debt totaling $175.0 million bearing an effective interest rate of 5.365%, due 2010.

 

Uses of Liquidity

 

The Partnership’s principal uses of liquidity include the following:

 

•                 Property investments and recurring leasing/capital costs;

•                 Dividends and distributions to shareholders and unitholders;

•                 Long-term debt maturities; and

•                 The General Partner’s common stock repurchase program.

 

Property Investments and Other Capital Expenditures

 

One of the Partnership’s principal uses of its liquidity is for the development, acquisition and recurring leasing/capital expenditures of its real estate investments.

 

A summary of the Partnership’s recurring capital expenditures is as follows (in thousands):

 

		March 31, 2003			March 31, 2002
Tenant improvements		$	8,258		$	5,952
Leasing costs		4,901			4,274
Building improvements		2,625			2,399
Totals		$	15,784		$	12,625

 

Debt Maturities

 

Debt outstanding at March 31, 2003, totals $2.2 billion with a weighted average interest rate of 6.29% maturing at various dates through 2028. The Partnership had $1.9 billion of unsecured debt and $275.6 million of secured debt outstanding at March 31, 2003. Scheduled principal amortization of such debt totaled $2.4 million for the quarter ended March 31, 2003.

 

21

 

Following is a summary of the scheduled future amortization and maturities of the Partnership’s indebtedness at March 31, 2003 (in thousands):

 

Weighted Average					Future Repayments
Year		Scheduled Amortization			Maturities			Total			Interest Rate of Future Repayments
2003		$	6,845		$	249,436		$	256,281		7.62	%
2004		7,793			372,386			380,179			4.34	%
2005		7,825			205,980			213,805			7.16	%
2006		7,409			164,986			172,395			6.33	%
2007		5,933			114,616			120,549			7.07	%
2008		5,021			134,028			139,049			6.31	%
2009		4,802			275,000			279,802			7.31	%
2010		4,193			175,000			179,193			5.27	%
2011		3,463			175,000			178,463			6.93	%
2012		1,977			200,000			201,977			5.76	%
Thereafter		9,942			50,000			59,942			6.53	%
		$	65,203		$	2,116,432		$	2,181,635		6.29	%

 

Historical Cash Flows

 

Cash and cash equivalents were $13.2 million and $13.3 million at March 31, 2003 and 2002, respectively.  The decrease is the result of the following increases/(decreases) in cash flows (amounts in thousands):

 

 

Operating Activities

 

The decrease in net cash provided by operating activities resulted primarily from the following:

 

•                  The Partnership received net proceeds of $101.2 million from its Build-to-Suit operations during the three months ended March 31, 2002, compared to incurring net development costs of $15.3 million for the same period in 2003.  During the first quarter of 2002, the Partnership sold five properties from its Build-to-Suit portfolio.

 

22

 

Investing Activities

 

The increase in net cash used by investing activities from the first quarter of 2002 to 2003 was attributable to the following:

 

•                  Dispositions of land and depreciated property provided $51.4 million in net proceeds during the first quarter of 2003, compared to $25.4 million in 2002.  The Partnership pursues opportunistic dispositions when conditions and terms are favorable.

•                  Real estate development costs decreased from $36.7 million in 2002 to $29.0 million in 2003, due to a reduction in new development starts in 2002 in response to weakened demand in many of the Partnership’s markets.

•                  The Partnership acquired $34.6 million of real estate assets during the first quarter of 2003 compared to $8.4 million during the same period in 2002.  The acquisitions in 2003 consisted of two office buildings that are each 100% leased.

•                  The Partnership paid $12.0 million when it exercised a purchase option on a ground lease during the first quarter of 2003.

 

Financing Activities

 

The decrease in net cash used for financing activities resulted from the following:

 

•                  In 2003, the Partnership issued $175.0 million of unsecured debt.

•                  The Partnership paid off $21.0 million of secured debt, net of a $38.3 million secured debt refinancing during the first quarter of 2003 compared to $2.7 million in 2002.

 

Derivative Financial Instruments

 

The Partnership is exposed to capital market risk, such as changes in interest rates.  In order to manage the volatility relating to interest rate risk, the Partnership may enter into interest rate hedging arrangements from time to time. The Partnership does not utilize derivative financial instruments for trading or speculative purposes.

 

In December 2002, the Partnership simultaneously entered into two $50 million forward-starting interest rate swaps. The Partnership designated the aggregate $100 million swaps as a hedge to effectively fix the rate on financing expected in 2003. The Partnership expects and intends that the financing will be a ten-year fixed-rate semi-annual financing, pricing between May 1, 2003 and November 1, 2003. The fair value of the swaps was a liability of ($3.3) million as of March 31, 2003, and is recorded in other liabilities in the accompanying balance sheet. The swaps qualify for hedge accounting under SFAS 133; therefore, changes in fair value will be recorded in other comprehensive income.

 

In February 2003, the Partnership simultaneously entered into two $25 million forward-starting interest rate swaps. The Partnership designated the aggregate $50 million swaps as a hedge to effectively fix the rate on financing expected in 2003. The Partnership expects and intends that the financing will be a ten-year fixed-rate semi-annual financing, pricing between May 1, 2003 and November 1, 2003. The fair value of the swaps was an asset of $75,000 as of March 31, 2003, and is

 

23

 

netted in other liabilities in the accompanying balance sheet. The swaps qualify for hedge accounting under SFAS 133; therefore, changes in fair value will be recorded in other comprehensive income.

 

Investments in Unconsolidated Companies

 

The Partnership has equity interests ranging from 10 – 64% in unconsolidated partnerships and joint ventures that own and operate rental properties and hold land for development. The equity method of accounting is used for these investments in which the Partnership has the ability to exercise significant influence, but not control, over operating and financial policies. As a result, the assets and liabilities of these joint ventures are not included on the Partnership’s balance sheet.

 

The Partnership’s investment in unconsolidated companies represents less than 6% of the Partnership’s total assets as of March 31, 2003. This investment provides several benefits to the Partnership including increased market share and an additional source of capital to fund real estate projects.

 

Funds From Operations

 

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 comparing and reporting the operating performance of real estate companies.  Management believes that FFO is a useful indicator of the Partnership’s operating performance.

 

The following table provides a reconciliation of GAAP net income to FFO for the three months ended March 31 as follows (in thousands):

 

		2003			2002
Net income available for common units		$	41,792		$	51,043
Add back (deduct):
Depreciation and amortization		47,672			42,819
Share of joint venture adjustments		5,003			4,415
(Earnings) loss from depreciable property dispositions		(8,613		)	96
Funds From Operations		$	85,854		$	98,373

 

Recent Accounting Pronouncements

 

In January 2003, FASB issued Interpretation 46, Consolidation of Variable Interest Entities (“Interpretation 46”), which addresses consolidation of certain variable interest entities.  Interpretation 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date.  The interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Partnership will review its investments in unconsolidated companies based on this new accounting pronouncement, but does not anticipate that the adoption of Interpretation 46 will have a material impact on its financial statements

 

24

 

Item 3.   Quantitative and Qualitative Disclosure About Market Risks

 

The Partnership is exposed to interest rate changes primarily as a result of its line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Partnership’s real estate investment portfolio and operations. The Partnership’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Partnership borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Partnership does not enter into derivative or interest rate transactions for speculative purposes.

 

Item 4.  Controls and Procedures

 

The Partnership maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our annual and periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures are further designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer, chief financial officer and chief operating officer, to allow timely decisions regarding required disclosure.

 

Based on the most recent evaluation, which was completed within 90 days of the filing of this report, our chief executive officer and chief financial officer believe that our disclosure controls and procedures are effective. There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

 

25

 

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

 

None

 

Item 5.  Other Information

 

None

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)	Exhibits
	Exhibit 15.	Letter regarding unaudited interim financial information
	Exhibit 99.1	Certification Pursuant to 18 U.S. C. Section 13.50, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 99.2	Certification Pursuant to 18 U.S. C. Section 13.50, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 99.3	Certification Pursuant to 18 U.S. C. Section 13.50, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b)	Reports on Form 8-K
	The Partnership filed a Current Report on Form 8-K, dated January 9, 2003, to report to a $175.0 million unsecured debt offering.

 

 

26

 

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:  May 13, 2003	/s/               Thomas L. Hefner
	Thomas L. Hefner
	Chairman and Chief Executive Officer and Director of the General Partner
	/s/               Darell E. Zink, Jr.
	Darell E. Zink, Jr.
	Vice Chairman, Executive Vice President and Chief Financial Officer of the General Partner
	/s/               Dennis D. Oklak
	Dennis D. Oklak
	President and Chief Operating Officer of the General Partner
	/s/               Matthew A. Cohoat
	Matthew A. Cohoat
	Senior Vice President and Corporate Controller of the General Partner

 

27

 

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2003

 

I, Thomas L. Hefner, certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q of Duke Realty Limited Partnership;

 

2.             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this quarterly report;

 

4.             The Partnership’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership and we have:

 

(a)           designed such disclosure controls and procedures to ensure that material information relating to the Partnership, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

(b)           evaluated the effectiveness of the Partnership’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

(c)           presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.             The Partnership’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Partnership’s auditors and the audit committee of the General Partner’s board of directors (or persons performing the equivalent function):

 

(a)           all significant deficiencies in the design or operation of internal controls which could adversely affect the Partnership’s ability to record, process, summarize and report financial data and have identified for the Partnership’s auditors any material weaknesses in internal controls; and

 

(b)           any fraud, whether or not material, that involves management or other employees who have a significant role in the Partnership’s internal controls; and

 

6.             The Partnership’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  May 13, 2003

 

 

/s/               Thomas L. Hefner
Thomas L. Hefner
Chairman and Chief Executive Officer
Duke Realty Corporation of the
General Partner

 

28

 

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2003

 

I, Darell E. Zink, Jr., certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q of Duke Realty Limited Partnership;

 

2.             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this quarterly report;

 

4.             The Partnership’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership and we have:

 

(a)           designed such disclosure controls and procedures to ensure that material information relating to the Partnership, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

(b)           evaluated the effectiveness of the Partnership’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

(c)           presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.             The Partnership’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Partnership’s auditors and the audit committee of the General Partner’s board of directors (or persons performing the equivalent function):

 

(a)           all significant deficiencies in the design or operation of internal controls which could adversely affect the Partnership’s ability to record, process, summarize and report financial data and have identified for the Partnership’s auditors any material weaknesses in internal controls; and

 

(b)           any fraud, whether or not material, that involves management or other employees who have a significant role in the Partnership’s internal controls; and

 

6.             The Partnership’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  May 13, 2003

 

 

/s/               Darell E. Zink, Jr.
Darell E. Zink, Jr.
Vice Chairman, Executive Vice
President and Chief Financial Officer
Duke Realty Corporation of General Partner

 

29

 

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2003

 

I, Dennis D. Oklak, certify that:

 

I have reviewed this quarterly report on Form 10-Q of Duke Realty Limited Partnership;

 

2.             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this quarterly report;

 

4.             The Partnership’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership and we have:

 

(a)           designed such disclosure controls and procedures to ensure that material information relating to the Partnership, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

(b)           evaluated the effectiveness of the Partnership’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

(c)           presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.             The Partnership’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Partnership’s auditors and the audit committee of the General Partner’s board of directors (or persons performing the equivalent function):

 

(a)           all significant deficiencies in the design or operation of internal controls which could adversely affect the Partnership’s ability to record, process, summarize and report financial data and have identified for the Partnership’s auditors any material weaknesses in internal controls; and

 

(b)           any fraud, whether or not material, that involves management or other employees who have a significant role in the Partnership’s internal controls; and

 

6.             The Partnership’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  May 13, 2003

 

 

/s/               Dennis D. Oklak
Dennis D. Oklak
President and Chief Operating Officer
Duke Realty Corporation of the General Partner

 

30