UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

(Mark One)

ý         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended    December 31, 2004

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: 0-20625

 

DUKE REALTY LIMITED PARTNERSHIP

(Exact Name of Registrant as Specified in Its Charter)

 

Indiana		35-1898425
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification Number)
600 East 96th Street, Suite 100 Indianapolis, Indiana		46240
(Address of Principal Executive Offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (317) 808-6000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act:

 

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 if disclosure of delinquent filers pursuant to Item 405 Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  o   No  ý

 

The aggregate market value of the Limited Partner Units held by non-affiliates of Registrant is $274.7 million based on the last reported sale price of the common shares of Duke Realty Corporation into which Limited Partner Units are exchangeable, on June 30, 2004.

 

The aggregate number of Limited Partnership Units outstanding as of February 21, 2005, was 156,947,960.

 

Documents Incorporated by Reference

 

Portions of the registrant’s General Partner’s Definitive Proxy Statement for its 2005 Annual Meeting of Shareholders to be held on April 27, 2005, are incorporated by reference in Part III of this Annual Report on Form 10-K.

 

 

TABLE OF CONTENTS

 

Form 10-K

 

Item No.
PART I
1.		Business
2.		Properties
3.		Legal Proceedings
4.		Submission of Matters to a Vote of Security Holders
PART II
5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities
6.		Selected Financial Data
7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A.		Quantitative and Qualitative Disclosures About Market Risk
8.		Financial Statements and Supplementary Data
9.		Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
9A.		Disclosure Controls and Procedures
9B.		Other Information.
PART III
10.		Directors and Executive Officers of the Registrant
11.		Executive Compensation
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13.		Certain Relationships and Related Transactions
14.		Principal Accountant Fees and Services
PART IV
15.		Exhibits and Financial Statement Schedules
Signatures

 

 

PART I

 

Item 1.  Business

 

Risk Factors

 

There are certain risk factors associated with an investment in securities issued by Duke Realty Corporation (the “General Partner”) and Duke Realty Limited Partnership (“the Partnership”). Discussion of these risk factors can be found within Item 7, Management’s Discussion and Analysis, Financial Conditions and Results of Operations, of this Annual Report Form 10-K and in our Current Report on Form 8-K dated September 5, 2003.

 

Background

 

The Partnership was formed on October 4, 1993, when 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 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 91.3% of the common Partnership interest as of December 31, 2004 (“General Partner Units”). The remaining 8.7% of the Partnership’s common interest 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.  As of December 31, 2004, we own interest in a diversified portfolio of 893 rental properties (including 17 properties totaling 4.2 million square feet under development) which encompass over 114.2 million rentable square feet and are leased by a diverse and stable base of more than 4,200 tenants whose businesses include manufacturing, retailing, wholesale trade, distribution and professional services. We also own or control more than 4,600 acres of unencumbered land ready for development.

 

Through our Service Operations, we provide, on a fee basis, leasing, property and asset management, development, construction, build-to-suit and other tenant-related services for approximately 300 tenants in over 8.2 million square feet of space at properties owned by third-party clients. With 13 primary operating platforms, we concentrate our activities in the Midwest and Southeast United States. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” for financial information. Our rental operations are conducted through Duke Realty Limited Partnership (“DRLP”). In addition, we conduct our Service Operations through Duke Realty Services Limited Partnership (“DRSLP”) and Duke Construction Limited Partnership (“DCLP”).  In this Form 10-K Report, the terms “we,” “us” and “our” refer to the Partnership and those entities owned or controlled by the Partnership.

 

Our headquarters and executive offices are located in Indianapolis, Indiana. In addition, we have twelve regional offices located in Atlanta, Georgia; Cincinnati, Ohio; Columbus, Ohio; Cleveland, Ohio; Chicago, Illinois; Dallas, Texas; Minneapolis, Minnesota; Nashville, Tennessee; Orlando, Florida; Raleigh, North Carolina; St. Louis, Missouri; and Tampa, Florida. We had approximately 1,100 employees as of December 31, 2004.

 

1

 

Business Strategy

 

Our business objective is to increase Funds From Operations (“FFO”) by (i) maintaining and increasing property occupancy and rental rates through the management of our portfolio of existing properties; (ii) expanding existing properties in our existing markets and by entering new markets; (iii) developing and acquiring new properties for rental operations in our existing markets; (iv) using our construction expertise to act as a general contractor in our existing markets and other domestic markets on a fee basis; (v) developing properties in our existing markets and other markets which we will sell through our merchant building development program and (vi) providing a full line of real estate services to our tenants and to third parties. FFO is used by industry analysts and investors as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income (loss) determined in accordance with accounting principles generally accepted in the United States (“GAAP”), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after similar adjustments for unconsolidated partnerships and joint ventures.

 

Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. Management believes that the use of FFO, combined with the required primary GAAP presentations, has improved the understanding of operating results of REITs among the investing public and made comparisons of REIT operating results more meaningful. Management generally considers FFO to be a useful measure for reviewing comparative operating and financial performance (although FFO should be reviewed in conjunction with net income which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies.

 

As a fully integrated commercial real estate firm, we provide in-house leasing, management, development and construction services which, coupled with our significant base of commercially zoned and unencumbered land in existing business parks, should give us a competitive advantage both as a real estate operator and in future development activities.

 

We believe that the management of real estate opportunities and risks can be done most effectively at regional or local levels. As a result, we intend to continue our emphasis on increasing our market share and effective rents in the primary markets where we own properties. We also expect to utilize over 4,600 acres of unencumbered land and our many business relationships with more than 4,200 commercial tenants to expand our build-to-suit business (development projects substantially pre-leased to a single tenant) and to pursue other development and acquisition opportunities in our primary markets. We believe that this regional focus will allow us to assess market supply and demand for real estate more effectively as well as to capitalize on the strong relationships with our tenant base. In addition, we seek to further capitalize on strong customer relationships to provide third-party construction and build-for-sale services outside our primary markets.

 

2

 

Our strategy is to seek to develop and acquire primarily Class A commercial properties located in markets with high growth potential for large national and international companies and other quality regional and local firms. Our industrial and suburban office development focuses on business parks and mixed-use developments suitable for multiple projects on a single site where we can create and control the business environment. These business parks and mixed-use developments often include restaurants and other amenities, which we believe will create an atmosphere that is particularly efficient and desirable. Our retail development focuses on lifestyle, community and neighborhood centers in our existing markets and is developed primarily for held-for-sale opportunities. In 2004, we executed a new initiative with a prominent healthcare real estate developer to jointly develop, construct and lease medical office and related healthcare facilities on a merchant building basis. As a fully integrated real estate company, we are able to arrange for or provide to our industrial, office, medical and retail customers not only well located and well maintained facilities, but also additional services such as build-to-suit construction, tenant finish construction and expansion flexibility.

 

All of our properties are located in areas that include competitive properties. Institutional investors, other REITs or local real estate operators generally own such properties; however, no single competitor or small group of competitors is dominant in our current markets. The supply and demand of similar available rental properties may affect the rental rates we will receive on our properties.

 

Financing Strategy

 

We seek to maintain a well-balanced, conservative and flexible capital structure by: (i) extending and sequencing the maturity dates of debt; (ii) borrowing primarily at fixed rates by targeting a variable rate component of total debt less than 20%; (iii) pursuing current and future long-term debt financings and refinancing on an unsecured basis; (iv) maintaining conservative debt service and fixed charge coverage ratios; and (v) issuing attractively priced perpetual preferred equity for 5-10% of our total capital structure. Management believes that these strategies have enabled and should continue to enable us to favorably access capital markets for our long-term requirements such as debt refinancing and financing development and acquisitions of additional rental properties. In addition, as discussed under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we have a $500 million unsecured line of credit available for short-term fundings of development and acquisition of additional rental properties. Further, we pursue favorable opportunities to dispose of assets that no longer meet our long-term investment criteria and recycle the proceeds into new investments that we believe have excellent long-term growth prospects. Our debt to total market capitalization ratio (total market capitalization is defined as the total market value of all outstanding Common Units and Preferred equity plus outstanding indebtedness) at December 31, 2004 was 29.5%. Our ratio of earnings to debt service and ratio of earnings to fixed charges for the year ended December 31, 2004 were 1.96x and 1.72x, respectively. In computing the ratio of earnings to debt service, earnings have been calculated by adding debt service to income from continuing operations before earnings or losses from the sale of land and ownership interests in unconsolidated companies, net of impairment adjustments. Debt service consists of interest expense and recurring principal amortization (excluding maturities) and excludes amortization of debt issuance costs. In computing the ratio of earnings to fixed charges, earnings have been calculated by adding fixed charges, excluding capitalized interest, to income from continuing operations before earnings or losses from the sale of land and ownership interests in unconsolidated companies, net of impairment adjustments. Fixed charges consist of interest costs, whether expensed or capitalized, the interest component of rental expense, amortization of debt issuance costs and distribution requirements for preferred limited partner interest (“Preferred Units”).

 

3

 

Corporate Governance

 

As a limited partnership that has one general partner owning over 90% of the partnership interest, the governance of the Partnership is necessarily linked to the corporate governance of the General Partner.  The General Partner has and continues to be a leader in issues important to investors such as disclosure and corporate governance initiatives. Summarized below are highlights of the General Partner’s Corporate Governance Initiatives.

 

Board Composition		General Partner’s Board is controlled by supermajority (80%) of Independent Directors
Board Committees		General Partner’s Board Committee members are all Independent Directors
Lead Director		The Chairman of the Corporate Governance Committee serves as Lead Director of the General Partner’s Independent Directors
Board Guidelines		Code of Conduct applies to all Directors of the General Partner and Employees; waivers require the vote of the General Partner’s Independent Directors
		Effective orientation program created for new Directors of the General Partner Independence of the General Partner’s Directors is reviewed annually
		Independent Directors of the General Partner meet at least quarterly in executive session
		Independent Directors of the General Partner receive no compensation from the Partnership other than as Directors
		Equity-based compensation plans require General Partner’s shareholder approval
		Board effectiveness and performance is reviewed annually by the Corporate Governance Committee
		Corporate Governance Committee conducts an annual review of the CEO succession plan
		Independent Directors of the General Partner and all Board Committees may retain outside advisors, as they deem appropriate
		Mandatory retirement age for Directors of the General Partner
		Outstanding stock options of the General Partner may not be repriced
		Directors of the General Partner are required to offer resignation upon job change
Ownership		Minimum Stock Ownership Guidelines apply to all Directors and Executive Officers of the General Partner

 

The General Partner’s Code of Conduct (which applies to all of its Directors and employees, including the Chief Executive Officer and senior financial officers) and the Corporate Governance Guidelines are available in the investor information/corporate governance section of the General Partner’s website at www.dukerealty.com.  A copy of these documents may also be obtained without charge by writing to Duke Realty Corporation, 600 East 96th Street, Suite 100, Indianapolis, Indiana 46240, Attention: Investor Relations.

 

Other

 

For additional information regarding our investments and operations, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data.” For additional information about our business segments, see Item 8, “Financial Statements and Supplementary Data.”

 

4

 

In addition to this Annual Report, the General Partner and the Partnership file quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). All documents that are filed with the SEC are available free of charge on the General Partner’s corporate website, which is http://www.dukerealty.com. You may also read and copy any document filed at the public reference facilities of the SEC at 450 Fifth Street, N.W., Washington, D.C. 25049.  Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system (“EDGAR”) via electronic means, including the SEC’s home page on the Internet (http://www.sec.gov). In addition, since some of the General Partner’s securities are listed on the New York Stock Exchange, you may read SEC filings at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.

 

Item 2.  Properties

 

Product Review

 

As of December 31, 2004, we own an interest in a diversified portfolio of 893 commercial properties encompassing over 114.2 million net rentable square feet (including 17 properties comprising 4.2 million square feet under development) and more than 4,600 acres of land for future development.

 

Industrial Properties: We own interests in 623 industrial properties encompassing more than 84.5 million square feet (74% of total square feet) more specifically described as follows:

•                  Bulk Warehouses – Industrial warehouse/distribution buildings with clear ceiling heights of 20 feet or more. We own 410 buildings totaling 71.5 million square feet of such properties.

•                  Service Centers – Also known as flex buildings or light industrial, this product type has 12-18 foot clear ceiling heights and a combination of drive-up and dock-height loading access. We own 213 buildings totaling approximately 13.0 million square feet of such properties.

 

Office Properties:  We own interests in 264 office buildings totaling approximately 29.1 million square feet (25% of total square feet). These properties include primarily suburban office properties.

 

Retail Properties:  We own interests in six retail projects totaling approximately 600,000 square feet (1% of total square feet). These properties encompass both power and neighborhood shopping centers.

 

Land:  We own or control more than 4,600 acres of land located primarily in existing business parks. The land is ready for immediate use and is unencumbered. Over 69 million square feet of additional space can be developed on these sites and substantially all of the land is zoned for either office, industrial or retail development.

 

Service Operations:  We provide property and asset management, development, leasing and construction services to third party owners in addition to our own properties. Our current property management base for third parties includes over 8.2 million square feet of properties serving approximately 300 tenants.

 

Property Descriptions

 

The following schedule represents the geographic highlights of properties in our primary markets.

 

5

 

Duke Realty Limited Partnership

Geographic Highlights

In Service Properties as of December 31, 2004

 

		Square Feet (1)																								Annual Net Effective Rent (2)			Percent of Annual Net Effective Rent
		Industrial																					Percent of Overall
Primary Market		Service Center		Bulk					Office						Retail				Overall
Atlanta		3,024,375		7,964,013					3,327,744						29,996				14,346,128				13.03		%	87,291,761			14.26		%
Cincinnati		1,238,959		8,275,745					5,080,759						566,316				15,161,779				13.79		%	82,980,691			13.55		%
Indianapolis		1,521,578		18,146,945					2,965,480						—				22,634,003				20.58		%	77,163,312			12.60		%
St. Louis		1,333,986		2,919,800					3,548,901						—				7,802,687				7.09		%	62,531,938			10.21		%
Columbus		82,520		3,824,473					3,228,844						—				7,135,837				6.49		%	48,049,590			7.85		%
Cleveland		60,600		3,583,281					2,280,177						—				5,924,058				5.39		%	42,081,216			6.87		%
Minneapolis		2,117,064		3,489,049					975,323						—				6,581,436				5.98		%	41,160,105			6.72		%
Raleigh		1,162,729		1,814,710					2,237,183						—				5,214,622				4.74		%	40,745,033			6.65		%
Nashville		1,284,384		3,335,928					832,809						—				5,453,121				4.96		%	38,852,884			6.35		%
Chicago		276,344		5,116,560					1,813,360						—				7,206,264				6.55		%	38,257,033			6.25		%
Central Florida		350,493		2,722,877					1,278,214						—				4,351,584				3.96		%	26,866,053			4.39		%
Dallas		470,754		6,438,553					152,000						—				7,061,307				6.42		%	16,452,224			2.69		%
South Florida		—		—					677,806						—				677,806				0.62		%	9,293,695			1.52		%
Other(3)		—		436,139					—						—				436,139				0.40		%	557,914			0.09		%
Total		12,923,786		68,068,073					28,398,600						596,312				109,986,771				100.00		%	$	612,283,451		100.00		%
		11.75	%	61.89		%			25.82			%			0.54			%	100.00		%
		Occupancy%
		Industrial
Primary Market		Service Center			Bulk					Office						Retail				Overall
Atlanta		85.34	%		87.75			%		90.71			%			100.00		%		87.95		%
Cincinnati		83.95	%		93.28			%		89.03			%			100.00		%		91.35		%
Indianapolis		88.36	%		96.50			%		91.12			%			—				95.25		%
St. Louis		85.39	%		90.23			%		85.66			%			—				87.32		%
Columbus		100.00	%		95.35			%		88.85			%			—				92.46		%
Cleveland		100.00	%		92.98			%		78.13			%			—				87.34		%
Minneapolis		86.84	%		93.96			%		85.05			%			—				90.35		%
Raleigh		72.97	%		90.65			%		88.25			%			—				85.68		%
Nashville		80.45	%		90.89			%		90.16			%			—				88.32		%
Chicago		96.63	%		94.27			%		81.57			%			—				91.17		%
Central Florida		94.03	%		90.43			%		81.38			%			—				88.06		%
Dallas		95.09	%		94.76			%		100.00			%			—				94.89		%
South Florida		—			—					87.33			%			—				87.33		%
Other(3)		—			100.00			%		—						—				100.00		%
Total		85.21	%		93.45			%		87.16			%			100.00		%		90.89		%

 

(1)          Includes all wholly owned and joint venture projects shown at 100% as of report date.

 

(2)          Represents the average annual rental property revenue due from tenants in occupancy as of the date of this report, excluding additional rent due as operating expense reimbursements, landlord allowances for operating expenses and percentage rents. Joint Venture properties are shown at the Partnership’s ownership percentage.

 

(3)          Represents properties not located in the Partnership’s primary markets. These properties are located in similar midwest or southeast markets.

 

6

 

Item 3.  Legal Proceedings

 

We are not subject to any material pending legal proceedings, other than ordinary routine litigation arising in the ordinary course of business. Our management expects that these ordinary routine legal proceedings will be covered by insurance and does not expect these legal proceedings to have a material adverse effect on our financial condition, results of operations, or liquidity.

 

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

 

No matters were submitted to a vote of security holders of the General Partner during the quarter ended December 31, 2004.

 

EXECUTIVE OFFICERS OF THE GENERAL PARTNER

 

Robert M. Chapman, age 51.  Mr. Chapman has served as the General Partner’s Senior Executive Vice President, Real Estate Operations, since November 2003. From 1999 through November 2003, Mr. Chapman served in various real estate investment and operating positions of the General Partner.

 

Matthew A. Cohoat, age 45. Mr. Cohoat was named Executive Vice President and Chief Financial Officer of the General Partner on January 1, 2004. From 1990 through 2003, Mr. Cohoat held various positions in financial areas of the General Partner.

 

James B. Conner, age 46. Mr. Connor has served as Regional Executive Vice President for the Chicago Region since December 2003. Previously, Mr. Connor served as Senior Vice President responsible for the Chicago Operations since joining the General Partner in 1998.

 

Howard L. Feinsand, age 57.  Mr. Feinsand has served as the General Partner’s Executive Vice President and General Counsel since 1999. Mr. Feinsand served on the General Partner’s Board of Directors from 1988 to January 2003.

 

Robert D. Fessler, age 47. Mr. Fessler has served as a Regional Executive Vice President of the Atlanta Region since July 2003. Mr. Fessler was Senior Vice President of the Cincinnati Operations from 2001 to July 2003, and led the Cincinnati Industrial Group from 1988 through 2002.

 

Steven R. Kennedy, age 48. Mr. Kennedy was named as the General Partner’s Executive Vice President, Construction on January 1, 2004. From 1986 until 2004, he served in various capacities in the construction group, most recently as Senior Vice President.

 

Dennis D. Oklak, age 51.  Mr. Oklak was named President and Chief Executive Officer of the General Partner effective April 30, 2004. He was Co-Chief Operating Officer of the General Partner from April 2002 through January 2003, at which time he was named President and Chief Operating Officer. Mr. Oklak assumed the position of Executive Vice President and Chief Administrative Officer in 1997. From 1986 through 1997, Mr. Oklak served in various financial positions of the General Partner.

 

Christopher L. Seger, age 37. Mr. Seger was appointed Executive Vice President, National Development/Construction in December 2003. From 2001 to 2003, Mr. Seger was Senior Vice President of the Florida Group.  From 1999 to 2001, Mr. Seger was Senior Vice President of the Indiana Office Group.

 

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

There is no established public trading market for the Common Units.  The following table sets forth the cash distributions paid during each quarter.  As of February 21, 2005 there were 184 record holders of Common Units.

 

7

 

PART II

 

Quarter Ended		2004 Distributions per Common Unit			2003 Distributions per Common Unit
December 31		$	.465		$	.460
September 30		.465			.460
June 30		.460			.455
March 31		.460			.455

 

On January 26, 2005, we declared a quarterly cash distribution of $.465 per Common Unit, payable on February 28, 2005, to Common Unitholders of record on February 14, 2005.

 

Item 6.  Selected Financial Data

 

The following sets forth selected financial and operating information on a historical basis for each of the years in the five-year period ended December 31, 2004. The following information should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” included in this Form 10-K (in thousands, except per unit amounts):

 

		2004			2003			2002			2001			2000
Results of Operations:
Revenues:
Rental Operations from continuing operations		$	765,647		$	713,058		$	680,042		$	682,096		$	677,591
Service Operations from continuing operations		70,803			58,496			67,860			80,459			82,799
Total Revenues from Continuing Operations		$	836,450		$	771,554		$	747,902		$	762,555		$	760,390
Income from Continuing Operations		$	176,628		$	198,813		$	225,422		$	308,913		$	293,868
Net Income Available for Common Units		$	167,212		$	179,587		$	171,601		$	259,892		$	245,029
Per Unit Data :
Basic income per common unit:
Continuing operations		$	.90		$	1.07		$	1.10		$	1.66		$	1.62
Discontinued operations		.18			.13			.05			.10			.06
Diluted income per common unit:
Continuing operations		.89			1.06			1.09			1.64			1.60
Discontinued operations		.18			.13			.05			.10			.06
Distributions paid per common unit		1.85			1.83			1.81			1.76			1.64
Weighted average common units outstanding		155,281			150,280			149,423			147,961			145,906
Weighted average common and dilutive potential common units		157,062			151,141			150,839			151,710			147,441
Balance Sheet Data (at December 31):
Total Assets		$	5,894,644		$	5,558,711		$	5,347,055		$	5,330,246		$	5,461,233
Total Debt		2,518,704			2,335,536			2,106,285			1,814,856			1,973,215
Total Preferred Equity		616,780			511,785			415,466			583,419			689,216
Total Partners’ Equity		3,021,128			2,878,320			2,919,843			3,179,232			3,147,598
Total Common Units Outstanding		156,490			150,705			149,907			148,438			146,911
Other Data:
Funds From Operations (1)		$	388,185		$	372,519		$	358,871		$	388,355		$	365,129

 

(1)          Funds From Operations (“FFO”) is used by industry analysts and investors as a supplemental operating performance measure of an equity real estate investment trust (“REIT”). FFO is calculated in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income (loss) determined in accordance with accounting principles generally accepted in the United States (“GAAP”), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after similar adjustments for unconsolidated partnerships and joint ventures.

 

8

 

Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. Management believes that the use of FFO, combined with the required primary GAAP presentations, improves the understanding of operating results of REITs among the investing public and makes comparisons of REIT operating results more meaningful. Management considers FFO to be a useful measure for reviewing comparative operating and financial performance (although FFO should be reviewed in conjunction with net income which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies.

 

See reconciliation of FFO to GAAP net income under Year in Review section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement Regarding Forward Looking Statements

 

Certain statements in this Annual Report, including those related to our 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 our actual results, performance or achievements, 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 most significant risks, uncertainties and other important factors that may affect our business, operations, or future financial performance include, among others:

 

• Changes in general economic and business conditions, including performance of financial markets;

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

• Heightened competition for tenants and decrease in property occupancy;

• Potential increases in real estate construction costs;

• Potential changes in interest rates;

• Ability to favorably raise debt and equity in the capital markets;

• Inherent risks in the real estate business including tenant defaults, potential liability relating to environmental matters and liquidity of real estate investments; and

• Other risks and uncertainties described from time to time in the Partnership’s and the General Partner’s filings with the SEC.

 

This list of risks and uncertainties, however, is not intended to be exhaustive. We have on file with the Securities and Exchange Commission (“SEC”) a Current Report on Form 8-K dated September 5, 2003, with additional risk factor information.

 

The words “believe,” “estimate,” “expect,” “anticipate” 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 our control. New

 

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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 our business. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any of our forward-looking statements for events or circumstances that arise after the statement is made.

 

Business Overview

 

As of December 31, 2004, we:

•                  Owned or jointly controlled 893 industrial, office and retail properties (including properties under development), consisting of over 114.2 million square feet primarily located in 10 states; and

•                  Owned or jointly controlled more than 4,600 acres of land with an estimated future development potential of more than 69 million square feet of industrial, office and retail properties.

 

We provide the following services for our properties and for certain properties owned by third parties:

•                  Property leasing;

•                  Property management;

•                  Construction;

•                  Development; and

•                  Other tenant-related services.

 

Management Philosophy and Priorities

 

Our key business and financial strategies for the future include the following:

•                  Our business objective is to increase Funds from Operations (“FFO”) by (i) maintaining and increasing property occupancy and rental rates through the management of our portfolio of existing properties; (ii) expanding existing properties in our existing markets and by entering new markets; (iii) developing and acquiring new properties for rental operations in our existing markets; (iv) using our construction expertise to act as a general contractor in our existing markets and other domestic markets on a fee basis; (v) developing properties in our existing markets and other markets which we will sell through our merchant building development program and (vi) providing a full line of real estate services to our tenants and to third parties.

 

See the Year in Review section below for further explanation and definition of FFO.

 

•                  We intend to continue our capital recycling program whereby we pursue opportunities to dispose of investment properties and land held for development that no longer meet our long-term growth strategies. We intend to recycle the capital from these transactions to retire outstanding debt and invest in properties with better long-term return potential for us.

 

•                  Our financing strategy is to actively manage the components of our capital structure including common and preferred equity and debt to maintain a conservatively leveraged balance sheet and investment grade ratings from our credit rating agencies. This strategy provides us with the financial flexibility to fund both development and acquisition opportunities. We seek to maintain a well-balanced, conservative and flexible capital structure by: (i) extending and sequencing the maturity dates of debt; (ii) borrowing primarily at fixed rates by targeting a variable rate component of total debt less than 20%; (iii) pursuing current and future long-term debt financings and refinancing on an unsecured basis; (iv) maintaining conservative debt service and fixed charge ratios; and (v) issuing attractively priced perpetual preferred equity for 5-10% of our total capital structure.

 

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Year in Review

 

Year 2004 presented a combination of economic and market challenges affecting the broader real estate industry as well as our Partnership. In the face of these challenges, we achieved steady operating results while maintaining a strong balance sheet.

 

Net income available for common unitholders for the year ended December 31, 2004 was $167.2 million, or $1.07 per unit (diluted), compared to net income of $179.6 million, or $1.19 per unit (diluted) for the year ended 2003. The decrease is primarily attributable to a significant increase in depreciation expense resulting from significant capital expenditures during 2003 and 2004 related to re-leasing existing space and the effects of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS 141”) in recording acquisitions, particularly the recognition of short-lived in-place lease intangible assets. See further discussion of this policy under the Critical Accounting Polices section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. Through increased leasing activity, we achieved a growth in rental revenues in 2004 over 2003 as our in-service portfolio year-end occupancy increased from 89.3% in 2003 to 90.9% at the end of 2004. We also experienced an increase in our development and construction of new properties for both owned investments and third-party construction projects in 2004 as compared to 2003.

 

As an important performance metric for us as a real estate company, FFO available to common unitholders increased to $388.2 million for the year ended December 31, 2004 from $372.5 million for the same period in 2003, or 4.2%.

 

FFO is used by industry analysts and investors as a supplemental operating performance measure of an equity real estate investment trust (“REIT”). FFO is calculated in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income (loss) determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after similar adjustments for unconsolidated partnerships and joint ventures.

 

Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. Management believes that the use of FFO, combined with the required primary GAAP presentations, improves the understanding of operating results of REITs among the investing public and makes comparisons of REIT operating results more meaningful. Management considers FFO to be a useful measure for reviewing comparative operating and financial performance (although FFO should be reviewed in conjunction with net income which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies.

 

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The following table summarizes the calculation of FFO for the years ended December 31 (in thousands):

 

		2004			2003			2002
Net income available for common units		$	167,212		$	179,587		$	171,601
Add back (deduct):
Depreciation and amortization		228,582			196,234			175,621
Share of adjustments for unconsolidated companies		18,901			18,839			17,598
Earnings from depreciated property sales		(26,510		)	(22,141		)	(5,949		)
Funds From Operations		$	388,185		$	372,519		$	358,871

 

Throughout 2004, we continued to maintain a conservative balance sheet and investment grade debt ratings from Moody’s (Baa1), Standard & Poors (BBB+) and Fitch (BBB+). Our debt to total market capitalization ratio (total market capitalization is defined as the total market value of all outstanding Common Units and Preferred equity plus outstanding indebtedness) of 29.5% at December 31, 2004 compared to 30.8% at December 31, 2003 continues to provide us financial flexibility to fund new investments.

 

Highlights of our debt financing activity in 2004 are as follows:

•                  In January 2004, we issued $125 million of unsecured notes with an effective interest rate of 3.35%, due 2008.

•                  In February 2004, we renewed our $500 million unsecured credit facility and in the process reduced the stated interest rate by 5 basis points to LIBOR + 60 basis points and extended the maturity to 2007.

•                  In August 2004, we issued $250 million of unsecured notes with an effective interest rate of 6.33%, due 2014. A portion of the proceeds was used to retire $150 million of existing debt that had a blended effective interest rate of 7.31%.

•                  In December 2004, we issued $250 million of floating rate unsecured debt at 26 basis points over LIBOR. The debt matures in 2006, but is callable at our option after six months.

 

The General Partner issued preferred stock during 2004 allowing it to redeem existing higher rate preferred stock and continue to utilize preferred stock as a key component of its capital structure. The proceeds of these offerings are contributed to us in exchange for additional interests in the Partnership. Highlights of the General Partner’s preferred stock transactions in 2004 are as follows:

•                  In February 2004, the General Partner issued $150 million of Series K preferred stock at a dividend rate of 6.5%. This issuance was in conjunction with the redemption of the General Partner’s $100 million Series E preferred stock in January 2004, which had a dividend rate of 8.25%. Although the redemption resulted in certain non-cash charges that were dilutive to earnings in 2004, the lower dividend rate will reduce our future cost of capital.

•                  In March 2004, the General Partner called for redemption of its Series D convertible preferred stock. Prior to the redemption, nearly all outstanding preferred D shares were converted into common shares. The Series D shares carried a dividend rate of 7.375%.

•                  In November 2004, the General Partner issued $200 million of Series L preferred stock at a dividend rate of 6.6%.

 

In addition to steady operating performance and prudent balance sheet management during 2004, we continued to effectively execute our capital recycling program and began several key initiatives and projects to leverage our development and construction capabilities as follows:

•                  We disposed of nearly $150 million of older, non-strategic properties and used the proceeds to help fund over $260 million of acquisitions. The acquisitions were predominantly suburban office properties totaling 1.8 million square feet with an expected return of 9.4%.

 

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•                  We increased our investment in undeveloped land to provide greater opportunities to use our development and construction expertise in the improving economic cycle. The new land positions included the exercise of purchase options to acquire $44 million of land in our newly announced 1,700 acre, multi-year Anson mixed-use development project in suburban Indianapolis. Additionally, we acquired over $15 million of land to develop a suburban office park with retail amenities in a vibrant north Dallas suburb, thus allowing us to enter the Dallas suburban office market and leverage our development and construction plan.

•                  We formed our National Development and Construction Group in 2004 to pursue opportunities with companies that have a national presence and seek to expand in multiple locations, including those outside our core markets. This group combines our multiple disciplines including property development, legal and construction management to provide a range of development options for customers.

•                  Also, 2004 saw the creation of a strategic agreement with a developer of medical office and healthcare related facilities to jointly develop and sell medical facilities throughout the United States. Our partner will develop, lease and manage the facilities while we provide construction financing and general contractor services. We will share 50/50 in the profits upon sale of the projects. This initiative allows us to further leverage our construction capabilities in a significantly growing industry.

•                  Finally, we will continue to develop long-term investment assets to be held in our portfolio, develop assets to be sold upon completion and perform third-party construction projects. With over $400 million in our development pipeline at December 31, 2004, we are encouraged about the long-term growth opportunities in our business.

 

Key Performance Indicators

Our operating results depend primarily upon rental income from our office, industrial and retail properties (“Rental Operations”). The following highlights the areas of Rental Operations that we consider critical for future revenue growth (all square footage totals and occupancy percentages reflect both wholly-owned properties and properties in joint ventures):

 

Occupancy Analysis: As discussed above, the ability to maintain occupancy rates is a principal driver of our results of operations. The following table sets forth occupancy information regarding our in-service portfolio of rental properties as of December 31, 2004 and 2003 (in thousands, except percent occupied):

 

		Total Square Feet				Percent of Total Square Feet				Percent Occupied
Type		2004		2003		2004		2003		2004		2003
Industrial
Service Centers		12,924		13,200		11.8	%	12.4	%	85.2	%	85.8	%
Bulk		68,068		66,068		61.9	%	62.2	%	93.4	%	91.1	%
Office		28,399		26,213		25.8	%	24.7	%	87.2	%	86.2	%
Retail		596		739		0.5	%	0.7	%	100.0	%	98.5	%
Total		109,987		106,220		100.0	%	100.0	%	90.9	%	89.3	%

 

We experienced occupancy improvement in our industrial bulk and office properties during 2004 as business fundamentals improved moderately during the year.

 

Lease Expiration and Renewals: Our ability to maintain and grow occupancy rates primarily depends upon our continuing ability to re-lease expiring space. The following table reflects our in-service lease expiration schedule as of December 31, 2004, by product type. The table indicates square footage and annualized net effective rents (based on December 2004 rental revenue) under expiring leases (in thousands):

 

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		Total Portfolio							Industrial					Office					Retail
		Square							Square					Square					Square
Year of Expiration		Feet		Dollars			%		Feet		Dollars			Feet		Dollars			Feet		Dollars
2005		12,820		$	82,401		12	%	10,258		$	46,645		2,551		$	35,605		11		$	151
2006		11,279		76,066			12	%	8,941		43,882			2,338		32,184			—		—
2007		12,862		82,939			12	%	10,031		46,162			2,807		36,528			24		249
2008		12,813		80,516			12	%	9,995		44,617			2,799		35,562			19		337
2009		12,848		86,291			13	%	9,420		41,930			3,420		44,231			8		130
2010		9,257		70,347			10	%	6,631		33,337			2,618		36,847			8		163
2011		5,400		42,495			6	%	3,689		17,757			1,692		24,399			19		339
2012		5,633		34,772			5	%	4,231		16,457			1,395		17,982			7		333
2013		4,545		43,454			6	%	2,269		9,827			2,244		33,122			32		505
2014		4,154		19,262			3	%	3,592		12,251			562		7,011			—		—
2015 and Thereafter		8,360		61,011			9	%	5,565		24,594			2,327		33,576			468		2,841
		99,971		$	679,554		100	%	74,622		$	337,459		24,753		$	337,047		596		$	5,048
Total Portfolio Square Feet		109,987							80,992					28,399					596
Percent Occupied		90.9	%						92.1	%				87.2	%				100.0	%

 

We renewed 74.0% and 71.4% of our leases up for renewal totaling approximately 10.0 million and 7.6 million square feet on which we attained a 1.4% and a 1.1% growth in net effective rents in 2004 and 2003, respectively. The relatively flat growth in rental rates is indicative of excess vacancies in many of our markets requiring competitive pricing strategies to retain current tenants. Our lease renewal percentages over the past three years have remained relatively consistent at a 70-75% success rate despite the relatively weak market conditions. We do not expect this renewal percentage in 2005 to differ from that experienced in 2004.

 

The average term of renewals increased to 3.8 years in 2004 from 3.5 years in 2003. The increase in the average term is due to competitive market conditions with tenants seeking longer leases at attractive rates.

 

Future Development: Another source of growth in earnings is the development of additional rental properties. These properties should provide future earnings through Service Operations income upon sale or from Rental Operations growth as they are placed in service. We had 4.2 million square feet of property under development with total project costs of $194.9 million at December 31, 2004, compared to 2.8 million square feet and total project costs of $160.3 million at December 31, 2003. The increase in volume is attributable to a general increase in leasing activity and speculative and preleased developments in 2004. In 2003, we specifically limited the development of speculative properties due to the weakened economy. Our speculative development levels are still below historical levels; however, as certain sectors of the economy begin to improve, our level of speculative development may increase.

 

A summary of properties under development as of December 31, 2004, follows (in thousands, except percent leased and anticipated stabilized returns):

 

Anticipated In-Service Date		Square Feet		Percent Leased		Project Costs					Anticipated Stabilized Return
Held for Rental:
1st Quarter 2005		2,094		45	%	$		57,056			9.8	%
2nd Quarter 2005		320		39	%	19,617					10.2	%
3rd Quarter 2005		307		42	%	27,950					10.2	%
Thereafter		523		63	%	51,004					10.6	%
		3,244		47	%	$			155,627		10.2	%
Held-for-sale:
1st Quarter 2005		919		100	%	$	28,951				8.3	%
2nd Quarter 2005		26		100	%	4,022					9.4	%
3rd Quarter 2005		39		53	%	6,308					9.6	%
Thereafter		—		—		—					—
		984		98	%	$	39,281				8.6	%
Total		4,228		59	%	$	194,908				9.9	%

 

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Acquisition and Disposition Activity: We have an active capital recycling program based upon a strategy to dispose of non-strategic assets and utilize the proceeds to fund new development and acquisitions of more desirable properties. Through this program, we are continually improving the overall quality of our investment portfolio.

 

Sales proceeds from dispositions of held-for-rental properties in 2004 and 2003, were $147 and $126 million, respectively. The disposition proceeds were used to partially fund 2004 and 2003 acquisitions of $264 and $232 million, respectively. We will continue to pursue both disposition and acquisition opportunities that arise in 2005.

 

Results of Operations

 

A summary of our operating results and property statistics for each of the years in the three-year period ended December 31, 2004, follows (in thousands, except number of properties and per unit amounts):

 

		2004			2003			2002
Rental Operations revenues from Continuing Operations		$	765,647		$	713,058		$	680,042
Service Operations revenues from Continuing Operations		70,803			58,496			67,860
Earnings from Continuing Rental Operations		165,000			180,975			210,334
Earnings from Continuing Service Operations		24,421			21,118			29,520
Operating income		163,033			180,768			215,181
Net income available for common units		167,212			179,587			171,601
Weighted average common units outstanding		155,281			150,280			149,423
Weighted average common and dilutive potential common units		157,062			151,141			150,839
Basic income per common unit:
Continuing operations		$	.90		$	1.07		$	1.10
Discontinued operations		$	.18		$	.13		$	.05
Diluted income per common unit:
Continuing operations		$	.89		$	1.06		$	1.09
Discontinued operations		$	.18		$	.13		$	.05
Number of in-service properties at end of year		876			884			910
In-service square footage at end of year		109,987			106,220			105,196
Under development square footage at end of year		4,228			2,813			3,058

 

Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003

 

Rental Income from Continuing Operations

 

Rental income from continuing operations increased from $689.4 million in 2003 to $744.1 million in 2004. The following table reconciles rental income from continuing operations by reportable segment to total reported rental income from continuing operations for the years ended December 31, 2004 and 2003 (in thousands):

 

		2004			2003
Office		$	459,431		$	419,962
Industrial		274,393			259,762
Retail		4,893			5,863
Other		5,344			3,783
Total		$	744,061		$	689,370

 

Our three reportable segments comprising Rental Operations (office, industrial and retail) are all within the real estate industry; however, the same economic and industry conditions do not necessarily affect them. The primary causes of the increase in rental income from continuing operations, with specific references to a particular segment when applicable, are summarized below:

•                  Our in-service occupancy increased from 89.3% at December 31, 2003, to 90.9% at December 31, 2004. Improving occupancy continues to be a key management goal in 2005.

 

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