UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

 

Commission File Number: 0-20625

 

DUKE REALTY LIMITED PARTNERSHIP

(Exact Name of Registrant as Specified in Its Charter)

 

 

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

 

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 April 30, 2005 was 156,969,629.

 

DUKE REALTY LIMITED PARTNERSHIP

 

INDEX

 

Part I - Financial Information
Item 1. Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004
	Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2005 and 2004
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2005 and 2004
	Condensed Consolidated Statement of Partners’ Equity (Unaudited) for the three months ended March 31, 2005
	Notes to Condensed Consolidated Financial Statements  (Unaudited)
	Report of Independent Registered Public Accounting Firm
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II - Other Information
Item 1.		Legal Proceedings
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.		Defaults Upon Senior Securities
Item 4.		Submission of Matters to a Vote of Security Holders
Item 5.		Other Information
Item 6.		Exhibits

 

 

 

 

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)

 

		March 31,			December 31,
ASSETS		2005			2004
		(Unaudited)
Real estate investments:
Land and improvements		$	722,210		$	710,379
Buildings and tenant improvements		4,693,700			4,666,715
Construction in progress		102,853			109,788
Investments in unconsolidated companies		294,718			287,554
Land held for development		412,710			393,100
		6,226,191			6,167,536
Accumulated depreciation		(825,902		)	(788,900		)
Net real estate investments		5,400,289			5,378,636
Cash and cash equivalents		3,181			5,770
Accounts receivable, net of allowance of $1,199 and $1,238		16,676			17,127
Straight-line rent receivable, net of allowance of $1,568 and $1,646		94,724			89,497
Receivables on construction contracts, including retentions		70,033			59,342
Deferred financing costs, net of accumulated amortization of $10,379 and $9,006		31,013			31,924
Deferred leasing and other costs, net of accumulated amortization of $97,850 and $88,888		205,556			203,882
Escrow deposits and other assets		122,591			108,466
		$	5,944,063		$	5,894,644
LIABILITIES AND PARTNERS’ EQUITY
Indebtedness:
Secured debt		$	201,188		$	203,081
Unsecured notes		2,150,565			2,315,623
Unsecured lines of credit		272,000			—
		2,623,753			2,518,704
Construction payables and amounts due subcontractors, including retentions		66,335			67,740
Accounts payable		559			526
Accrued expenses:
Real estate taxes		60,398			55,745
Interest		23,796			36,531
Other		32,624			48,605
Other liabilities		107,289			105,838
Tenant security deposits and prepaid rents		37,984			39,827
Total liabilities		2,952,738			2,873,516
Partners’ equity:
General Partner
Common equity		2,190,656			2,214,473
Preferred equity (liquidation preference of $657,250)		616,780			616,780
		2,807,436			2,831,253
Limited Partner’s common equity		192,115			196,422
Accumulated other comprehensive income		(8,226		)	(6,547		)
Total Partners’ equity		2,991,325			3,021,128
		$	5,944,063		$	5,894,644

 

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 data)
(Unaudited)

 

		Three Months Ended
		2005			2004
RENTAL OPERATIONS
Revenues:
Rental income from continuing operations		$	191,030		$	181,424
Equity in earnings of unconsolidated companies		5,206			4,525
		196,236			185,949
Operating expenses:
Rental expenses		44,296			39,100
Real estate taxes		22,847			21,026
Interest expense		35,226			32,196
Depreciation and amortization		62,876			50,756
		165,245			143,078
Earnings from continuing rental operations		30,991			42,871
SERVICE OPERATIONS
Revenues:
General contractor gross revenue		86,616			82,723
General contractor costs		(79,559		)	(76,036		)
Net general contractor revenue		7,057			6,687
Property management, maintenance and leasing fees		3,879			3,935
Construction management and development activity income		7,994			579
Other income		2,765			234­
Total revenue		21,695			11,435
Operating expenses		10,775			9,393
Total earnings from service operations		10,920			2,042
General and administrative expense		(7,580		)	(8,317		)
Operating income		34,331			36,596
OTHER INCOME (EXPENSE)
Interest income		1,320			1,507
Earnings from sale of land, net of impairment adjustments		143			4,629
Other expenses		(78		)	(3		)
Other minority interest in earnings of subsidiaries		(37		)	(307		)
Income from continuing operations		35,679			42,422
Discontinued operations:
Net income from discontinued operations		401			1,005
Gain on sale of discontinued operations, net of impairment adjustment		3,701			4,009
Income from discontinued operations		4,102			5,014
Net income		39,781			47,436
Dividends on preferred units		(11,620		)	(7,600		)
Adjustments for redemption of preferred units		—			(3,614		)
Net income available for common unitholders		$	28,161		$	36,222
Basic net income per common unit:
Continuing operations		$	.15		$	.21
Discontinued operations		.03			.03
Total		$	.18		$	.24
Diluted net income per common unit:
Continuing operations		$	.15		$	.20
Discontinued operations		.03			.03
Total		$	.18		$	.23
Weighted average number of common units outstanding		156,947			152,444
Weighted average number of common units and dilutive potential common units		157,720			156,913

 

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)

 

		2005			2004
Cash flows from operating activities:
Net income		$	39,781		$	47,436
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of buildings and tenant improvements		51,563			43,012
Amortization of deferred leasing and other costs		11,663			9,385
Amortization of deferred financing costs		1,544			1,067
Minority interest in earnings		37			308
Straight-line rent adjustment		(6,170		)	(5,892		)
Earnings from land and depreciated property sales		(3,843		)	(8,638		)
Build-for-sale operations, net		5,562			(2,672		)
Construction contracts, net		(9,935		)	(2,689		)
Other accrued revenues and expenses, net		(24,363		)	(15,146		)
Operating distributions received in excess of (less than) equity in earnings from unconsolidated companies		(867		)	3,399
Net cash provided by operating activities		64,972			69,570
Cash flows from investing activities:
Development of real estate investments		(29,693		)	(22,114		)
Acquisition of real estate investments		—			(9,606		)
Acquisition of land held for development and infrastructure costs		(34,742		)	—
Recurring tenant improvements		(13,732		)	(14,244		)
Recurring leasing costs		(8,811		)	(6,652		)
Recurring building improvements		(2,446		)	(4,555		)
Other deferred leasing costs		(4,401		)	(5,426		)
Other deferred costs and other assets		(1,786		)	(7,153		)
Tax deferred exchange escrow, net		—			(1,334		)
Proceeds from land and depreciated property sales, net		13,608			29,405
Investment in secured mortgage loan		—			(65,000		)
Advances to unconsolidated companies		(6,441		)	(701		)
Net cash used for investing activities		(88,444		)	(107,380		)
Cash flows from financing activities:
Contributions from General Partner, common units		633			8,534
Contributions from General Partner, preferred units		—			144,975
Payments for redemption of General Partner’s preferred equity		—			(102,621		)
Payments for exercise of warrants		—			(2,881		)
Proceeds from indebtedness		—			125,000
Payments on unsecured debt		(100,000		)	—
Proceeds (payments) from (on) term loan		(65,000		)	65,000
Payments on secured indebtedness including principal amortization		(1,697		)	(1,707		)
Borrowings (payments) on lines of credit, net		272,000			(121,000		)
Distributions to common unitholders		(72,971		)	(69,722		)
Distributions to preferred unitholders		(11,620		)	(6,381		)
Distributions to minority interest		—			(209		)
Deferred financing costs		(462		)	(3,963		)
Net cash provided by financing activities		20,883			35,025
Net decrease in cash and cash equivalents		(2,589		)	(2,785		)
Cash and cash equivalents at beginning of period		5,770			12,695
Cash and cash equivalents at end of period		$	3,181		$	9,910
Other non-cash items:
Conversion of Limited Partner Units to common shares of General Partner		$	708		$	1,816
Conversion of Series D Preferred Units to common shares of General Partner		$	—		$	130,665
Issuance of Limited Partner Units for acquisition of minority interest		$	15,000		$	—

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

4

 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Partners’ Equity
For the three months ended March 31, 2005
(in thousands, except per unit data)
(Unaudited)

 

								Limited			Accumulated
		General Partner						Partners’			Other
		Common			Preferred			Common			Comprehensive
		Equity			Equity			Equity			Income (Loss)			Total
Balance at December 31, 2004		$	2,214,473		$	616,780		$	196,422		$	(6,547	)	$	3,021,128
Comprehensive income:
Net income		25,483			11,620			2,678			—			39,781
Distributions to preferred unitholders		—			(11,620		)	—			—			(11,620		)
Gains (losses) on derivative instruments		—			—			—			(1,679		)	(1,679		)
Comprehensive income available for common unitholders														26,482
Capital contribution from General Partner		683			—			—			—			683
Acquisition of partnership interest for common stock of General Partner		16,169			—			(15,461		)	—			708
Acquisition of minority interest in exchange for Limited Partner Units		—			—			15,000			—			15,000
Tax benefits from Employee Stock Plans		25			—			—			—			25
FASB 123 Compensation Expense		282			—			—			—			282
Distribution to General Partner		(3		)	—			—			—			(3		)
Distributions to partners ($.465 per Common Unit)		(66,456		)	—			(6,524		)	—			(72,980		)
Balance at March 31, 2005		$	2,190,656		$	616,780		$	192,115		$	(8,226	)	$	2,991,325

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

5

 

 

DUKE REALTY LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.       General Basis of Presentation

 

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, 2004). 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and the condensed consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

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 from the issuance of additional 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 91.4% of the common partnership interests as of March 31, 2005 (“General Partner Units”). The remaining 8.6% 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. The General Partner also owns preferred partnership interests in the Partnership (“Preferred Units”).

 

We own and operate a portfolio of industrial, office and retail properties in the midwestern and southeastern United States and provides real estate services to third-party owners. We conduct Service Operations through Duke Realty Services LLC (“DRS”), Duke Realty Services Limited Partnership (“DRSLP”) and Duke Construction Limited Partnership (“DCLP”).

 

2.       Indebtedness

 

We have one unsecured line of credit available at March 31, 2005, described as follows (in thousands):

 

Description		Borrowing Capacity		Maturity Date		Interest Rate		Outstanding at March 31, 2005
Unsecured Line of Credit		$500,000		January 2007		LIBOR + .60	%	$272,000

 

The line of credit is used to fund development activities, acquire additional rental properties and provide working capital.

 

The line of credit provides us with an option to obtain borrowings from financial institutions that participate in the line, at rates lower than the stated interest rate, subject to certain restrictions. Amounts outstanding on the unsecured line of credit at March 31, 2005, range from LIBOR + .19 to .60 (3.00% to 3.45% at March 31, 2005).

 

6

 

The line of credit also contains financial covenants that require us to meet defined levels of performance.  As of March 31, 2005, we are in compliance with all covenants and expect to remain in compliance for the foreseeable future.

 

In January 2005, we retired our $65.0 million variable rate term loan. In March 2005, we retired $100.0 million of 6.94% senior unsecured debt that matured.

 

3.       Related Party Transactions

 

We provide property management, leasing, construction and other tenant related services to unconsolidated companies in which we have equity interests. For the three months ended March 31, 2005 and 2004, respectively, we received management fees of $1.2 million and $1.2 million, leasing fees of $922,000 and $815,000 and construction and development fees of $517,000 and $501,000 from these unconsolidated companies. These fees were recorded at market rates and we eliminated our ownership percentage of these fees in the condensed consolidated financial statements.

 

Effective as of January 1, 2005, the Partnership (“DRLP”), Duke Management, Inc. (“DMI”), an Indiana corporation, and DRSLP entered into a Contribution Agreement, pursuant to which DMI contributed to DRLP all of DMI’s limited partnership interest in DRSLP in exchange for the issuance to DMI of 435,814 DRLP limited partnership units. This transaction was at fair market value and was recorded under the purchase accounting method. As a result, we now own 100% of the partnership interests in DRSLP. On March 1, 2005, DMI merged into the Partnership.  For more details regarding this transaction, see our General Partner’s Current Report on Form 8-K filed with the SEC on January 4, 2005.

 

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 the sum of net income available for common unitholders by the sum of the weighted average number of common units outstanding, including any 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, 2005 and 2004, respectively (in thousands):

 

(1)          The General Partner called for the redemption of the Series D preferred units as of March 16, 2004. Prior to the redemption date, nearly 5.3 million Series D preferred units were converted into 4.9 million common units. These units represent the weighted effect, assuming the Series D units had been converted on January 1, 2004.

 

 

7

 

5.                    Segment Reporting

 

We are engaged in four operating segments, the first three of which consist of the ownership and rental of office, industrial and retail real estate investments (collectively, “Rental Operations”). The fourth segment consists of our build-to-suit for sale operations and the providing of various real estate services such as property management, maintenance, leasing, development and construction management to third-party property owners and joint ventures (“Service Operations”). Our 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. Segment FFO information is calculated by subtracting operating expenses attributable to the applicable segment from segment revenues.  Non-segment assets consist of corporate assets including cash, deferred financing costs and investments in unconsolidated companies. Interest expense and other non-property specific revenues and expenses are not allocated to individual segments in determining our performance measure.

 

We assess and measure segment operating results based upon an industry performance measure referred to as Funds From Operations (“FFO”), which management believes is a useful indicator of our operating performance. Funds From Operations 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.

 

The revenues and FFO for each of the reportable segments for the three months ended March 31, 2005, and 2004, and the assets for each of the reportable segments as of March 31, 2005 and December 31, 2004, are summarized as follows (in thousands):

 

 

8

 

		Three Months Ended March 31,
		2005			2004
Revenues
Rental Operations:
Office		$	119,289		$	111,701
Industrial		69,583			67,403
Retail		1,042			1,161
Service Operations		21,695			11,435
Total Segment Revenues		211,609			191,700
Non-Segment Revenue		6,322			5,683
Consolidated Revenue from continuing operations		217,931			197,383
Discontinued Operations		1,535			5,678
Consolidated Revenue		$	219,466		$	203,061
Funds From Operations
Rental Operations:
Office		$	73,584		$	71,000
Industrial		49,555			49,188
Retail		803			915
Services Operations		10,920			2,042
Total Segment FFO		134,862			123,145
Non-Segment FFO:
Interest expense		(35,226		)	(32,196		)
Interest income		1,320			1,507
General and administrative expense		(7,581		)	(8,317		)
Gain on land sales		143			4,629
Impairment adjustments on depreciable property		(2,809		)	—
Other income (expenses)		(133		)	193
Minority interest in earnings of subsidiaries		(37		)	(307		)
Joint venture FFO		10,072			9,112
Dividends on preferred units		(11,620		)	(7,600		)
Adjustment for redemption of preferred units		—			(3,614		)
Discontinued operations		751			2,646
Consolidated FFO		89,742			89,198
Depreciation and amortization on continuing operations		(62,876		)	(50,756		)
Depreciation and amortization on discontinued operations		(350		)	(1,641		)
Share of joint venture adjustments		(4,865		)	(4,588		)
Earnings from depreciated property sales on discontinued operations		6,510			4,009
Net income available for common unitholders		$	28,161		$	36,222

 

		March 31,			December 31,
		2005			2004
Assets
Rental Operations:
Office		$	3,093,225		$	3,128,387
Industrial		2,239,441			2,211,509
Retail		111,691			84,625
Service Operations		154,871			131,218
Total Segment Assets		5,599,228			5,555,739
Non-Segment Assets		344,835			338,905
Consolidated Assets		$	5,944,063		$	5,894,644

 

9

 

In addition to revenues and FFO, we also review our recurring capital expenditures in measuring the performance of our individual Rental Operations segments. These recurring capital expenditures consist of tenant improvements, leasing commissions and building improvements. We review these expenditures to determine the costs associated with re-leasing vacant space and maintaining the condition of our properties. Our recurring capital expenditures by segment are summarized as follows for the three months ended March 31, 2005 and 2004, respectively  (in thousands):

 

 

6.              Real Estate Investments

 

We have classified the operations of 50 buildings as discontinued operations as of March 31, 2005. These 50 buildings consist of 41 industrial, six office and three retail properties. As a result, we classified net income from operations of $401,000 and $1.0 million as net income from discontinued operations for the three months ended March 31, 2005 and 2004, respectively. Two of the properties classified in discontinued operations were sold during the first quarter of 2005 and 41 properties were sold during 2004. The gains on disposal of these properties, net of impairment adjustments of $3.7 million and $4.0 million for the three months ended March 31, 2005 and 2004, respectively, are also reported in discontinued operations.

 

At March 31, 2005, we had five industrial properties, one office property and one retail property, which comprised approximately 660,000 square feet classified as held-for-sale. At March 31, 2005, these properties have signed contracts, but there can be no assurance that such properties classified as held-for-sale will be sold.

 

The following table illustrates the operations of the 50 buildings reflected in discontinued operations, at March 31, 2005 and 2004, respectively (in thousands):

 

 

 

10

 

 

The following table illustrates the aggregate balance sheet of our seven properties identified as held-for-sale at March 31, 2005 (in thousands):

 

 

We allocate interest expense to discontinued operations as permitted under EITF 87-24, “Allocation of Interest to Discontinued Operations,” and have included such interest expense in computing net income from discontinued operations. Interest expense allocable to discontinued operations includes interest on any debt on secured properties included in discontinued operations and an allocable share of our consolidated unsecured interest expense for unencumbered properties. The allocation of unsecured interest expense to discontinued operations was based upon the gross book value of the discontinued operations unencumbered population as it related to our entire unencumbered population.

 

For the three months ended March 31, 2005 and 2004, we recorded impairment adjustments of $2.8 million and $100,000, respectively. The $2.8 million of impairment recorded in the first quarter of 2005 reflects the write-down of the carrying value of one held-for-sale office building, five held-for-sale industrial buildings and one land parcel contracted to sell in 2005. The $100,000 impairment recorded in the first quarter of 2004 reflects the write-down of the carrying value of a land parcel that was later sold in 2004.

 

Effective January 1, 2005, we have changed the estimated useful lives on building improvements from 40 years to a  10-year life. This change has been applied prospectively. The change in estimated useful lives is based upon management’s belief that a 10-year life on building improvements represents a better estimate of the asset’s useful life. These building improvements will continue to be depreciated using the straight-line method.

 

7.              Partners’ Equity

 

The General Partner periodically accesses the public equity markets to fund the development and acquisition of additional rental properties or to pay down debt. The proceeds of these offerings are contributed to us in exchange for an additional interest in the Partnership.

 

The following series of preferred units are outstanding as of March 31, 2005 (in thousands, except percentage data):

 

		Units		Dividend		Redemption		Liquidation
Description		Outstanding		Rate		Date		Preference			Convertible
Series B Preferred		265		7.990	%	September 30, 2007		$	132,250		No
Series I Preferred		300		8.450	%	February 6, 2006		75,000			No
Series J Preferred		400		6.625	%	August 29, 2008		100,000			No
Series K Preferred		600		6.500	%	February 13, 2009		150,000			No
Series L Preferred		800		6.600	%	November 30, 2009		200,000			No

 

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

 

 

11