-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PD3jW/5a5xD19sT/ccgGuqYE3hpblzdoLEb8POOUVMDUGvVcI8kW8qVS7UBy5Elr OCUQ1o+gQZ8FE6B20fXZmA== 0000783280-97-000090.txt : 19971117 0000783280-97-000090.hdr.sgml : 19971117 ACCESSION NUMBER: 0000783280-97-000090 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUKE REALTY LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0001003410 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 351898425 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20625 FILM NUMBER: 97718321 BUSINESS ADDRESS: STREET 1: 8888 KEYSTONE CROSSING STREET 2: SUITE 1200 CITY: INDIANAPOLIS STATE: IN ZIP: 46240 BUSINESS PHONE: 3175743631 MAIL ADDRESS: STREET 2: 8888 KEYSTONE CROSSING SUITE 1200 CITY: INDIANAPOLIS STATE: IN ZIP: 46240 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 --------------------- OR / / 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 State of Incorporation: IRS Employer ID Number: Indiana 35-1898425 - ----------------------- ----------------------- Address of principal executive offices: 8888 Keystone Crossing, Suite 1200 --------------------------------- Indianapolis, Indiana 46240 ---------------------------- Telephone: (317) 846-4700 --------------------------- 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 X No --- --- The number of Limited Partnership Units outstanding as of November 12, 1997 was 10,988,469. DUKE REALTY LIMITED PARTNERSHIP INDEX PART I - FINANCIAL INFORMATION PAGE - ------------------------------ ---- ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of September 30, 1997 (Unaudited) and December 31, 1996 2 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 1997 and 1996 (Unaudited) 3 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (Unaudited) 4 Condensed Consolidated Statement of Partners' Equity for the nine months ended September 30, 1997 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6-7 Independent Accountants' Review Report 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-16 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 30, December 31, 1997 1996 ------------- ------------ ASSETS (Unaudited) ------- Real estate investments: Land and improvements $ 176,967 $ 140,391 Buildings and tenant improvements 1,284,726 1,041,040 Construction in progress 101,041 44,060 Land held for development 102,781 65,185 --------- --------- 1,665,515 1,290,676 Accumulated depreciation (103,236) (82,207) --------- --------- Net real estate investments 1,562,279 1,208,469 Cash 173,910 5,346 Accounts receivable from tenants, net of allowance of $395 and $709 3,855 5,255 Straight-line rent receivable, net of allowance of $841 12,785 10,956 Receivables on construction contracts 17,168 12,859 Investments in unconsolidated companies 102,224 79,362 Deferred financing costs, net of accumulated amortization of $4,771 and $3,529 8,187 8,127 Deferred leasing and other costs, net of accumulated amortization of $11,781 and $8,276 34,899 24,293 Escrow deposits and other assets 12,148 7,732 --------- --------- $1,927,455 $1,362,399 ========= ========= LIABILITIES AND PARTNERS' EQUITY -------------------------------- Indebtedness: Secured debt $ 256,239 $ 261,815 Unsecured notes 340,000 240,000 Unsecured line of credit - 24,000 --------- --------- 596,239 525,815 --------- --------- Construction payables and amounts due subcontractors 40,766 23,167 Accounts payable 2,216 1,585 Accrued real estate taxes 20,020 14,888 Accrued interest 3,969 4,437 Other accrued expenses 8,659 6,935 Other liabilities 8,613 8,312 Tenant security deposits and prepaid rents 10,815 7,611 --------- --------- Total liabilities 691,297 592,750 --------- --------- Minority interest 166 380 --------- --------- Partners' equity: General partner Common equity 998,992 683,710 Preferred equity 218,906 72,856 --------- --------- 1,217,898 756,566 Limited partners' common equity 18,094 12,703 --------- --------- Total partners' equity 1,235,992 769,269 --------- --------- $1,927,455 $1,362,399 ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements - 2 - DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES Condensed Consolidated Statements of Operations (in thousands, except per unit amounts) (Unaudited)
Three months ended Nine months ended September 30, September 30, ----------------------- --------------------- 1997 1996 1997 1996 -------- -------- -------- -------- RENTAL OPERATIONS: Revenues: Rental income $53,729 $40,001 $152,589 $111,715 Equity in earnings of unconsolidated companies 2,489 1,447 6,133 3,994 ------ ------ ------- ------- 56,218 41,448 158,722 115,709 ------ ------ ------- ------- Operating expenses: Rental expenses 10,204 7,282 28,226 21,096 Real estate taxes 5,252 3,451 14,367 9,958 Interest expense 9,271 7,858 27,222 22,475 Depreciation and amortization 11,037 7,075 31,278 23,232 ------ ------ ------- ------- 35,764 25,666 101,093 76,761 ------ ------ ------- ------- Earnings from rental operations 20,454 15,782 57,629 38,948 ------ ------ ------- ------- SERVICE OPERATIONS: Revenues: Property management, maintenance and leasing fees 3,315 3,027 9,170 8,689 Construction management and development fees 2,385 1,744 5,096 4,897 Other income 217 271 719 939 ------ ------ ------- ------- 5,917 5,042 14,985 14,525 Operating expenses: ------ ------ ------- ------- Payroll 2,542 2,179 7,427 6,796 Maintenance 498 417 1,414 1,134 Office and other 552 619 1,645 1,958 ------ ------ ------- ------- 3,592 3,215 10,486 9,888 ------ ------ ------- ------- Earnings from service operations 2,325 1,827 4,499 4,637 ------ ------ ------- ------- General and administrative expense (2,048) (931) (4,540) (2,895) ------ ------ ------- ------- Operating income 20,731 16,678 57,588 40,690 OTHER INCOME (EXPENSE): Interest income 798 314 1,231 920 Earnings (loss) from property sales 1,425 (235) 1,807 1,369 Other Expense (220) (46) (639) (113) Minority interest in earnings of subsidiaries (350) (268) (775) (698) ------ ------ ------- ------- Net income 22,384 16,443 59,212 42,168 Allocation to preferred units (4,370) (872) (7,782) (872) ------ ------ ------- ------- Net income available for common units $18,014 $15,571 $ 51,430 $41,296 ====== ====== ======= ======= Net income per common unit $ .25 $ .24 $ .73 $ .65 ====== ====== ======= ======= Weighted average number of common units outstanding 72,069 66,106 70,238 63,178 ====== ====== ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements - 3 - DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, (in thousands) (Unaudited)
1997 1996 ---------- ---------- Cash flows from operating activities: Net income $ 59,212 $ 42,168 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of buildings and tenant improvements 26,707 19,632 Amortization of deferred financing costs 1,025 895 Amortization of deferred leasing and other costs 3,546 2,705 Minority interest in earnings 775 698 Straight-line rent adjustment (2,507) (2,362) Earnings from property sales (1,807) (1,369) Construction contracts, net 13,290 527 Other accrued revenues and expenses, net 13,409 6,710 Equity in earnings in excess of distributions received from unconsolidated companies (3,901) (560) ------- ------- Net cash provided by operating activities 109,749 69,044 ------- ------- Cash flows from investing activities: Rental property development costs (142,028) (95,384) Acquisition of rental properties (213,673) (132,225) Acquisition of undeveloped land and infrastructure costs (58,865) (11,187) Recurring costs: Tenant improvements (5,901) (4,333) Leasing costs (3,614) (2,157) Building improvements (480) (405) Other deferred costs and other assets (17,038) 79 Proceeds from property sales, net 31,741 36,657 Other distributions received from unconsolidated companies 60,000 6,935 Net investment in and advances to unconsolidated companies (30,636) (383) ------- ------- Net cash used by investing activities (380,494) (202,403) ------- ------- Cash flows from financing activities: Contributions from general partner 446,635 201,447 Proceeds from indebtedness 100,000 40,000 Repayments on lines of credit, net (34,000) (26,000) Repayments on indebtedness including principal amortization (7,076) (27,410) Distributions to partners (63,935) (47,095) Distributions to minority interest (989) (654) Deferred financing costs (1,326) (707) ------- ------- Net cash provided by financing activities 439,309 139,581 ------- ------- Net increase in cash 168,564 6,222 ------- ------- Cash at beginning of period 5,346 5,682 ------- ------- Cash at end of period $173,910 $ 11,904 ======= =======
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 September 30, 1997 (in thousands) (Unaudited)
General Partner Limited --------------------- Partners' Common Preferred Common Equity Equity Equity Total ------- --------- -------- --------- BALANCE AT DECEMBER 31, 1996 $683,710 $ 72,856 $12,703 $ 769,269 Net income 46,409 7,782 5,021 59,212 Capital contribution from Duke Realty Investments, Inc. 300,728 146,050 - 446,778 Acquisition of partnership interest for Common Stock of Duke Realty Investments, Inc. 18,739 - - 18,739 Acquisition of property in exchange for Limited Partner Units - - 5,929 5,929 Distributions to preferred unitholders - (7,782) - (7,782) Distributions to partners ($.805 per Common Unit) (50,594) - (5,559) (56,153) ------- ------- ------ --------- BALANCE AT SEPTEMBER 30, 1997 $998,992 $218,906 $18,094 $1,235,992 ======= ======= ====== ========= COMMON UNITS OUTSTANDING AT SEPTEMBER 30, 1997 74,982 6,760 81,742 ======= ====== =========
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. The statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles 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 Financial Statements. Unit and per unit amounts in the consolidated financial statements of the Partnership have been restated to reflect the two-for-one split of the Partnership's common units payable on August 25, 1997 to common unitholders of record on August 18, 1997. THE PARTNERSHIP The Partnership was formed on October 4, 1993, when Duke Realty Investments, Inc. (the "Predecessor Company" or the "General Partner") contributed all of its properties and related assets and liabilities along with the net proceeds from the issuance of an additional 14,000,833 units through a common stock 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 under provisions of the Internal Revenue Code. In connection with the Common Stock, the formation of the Partnership and the acquisition of Duke Associates, the General Partner effected a 1 for 4.2 reverse stock split of its existing common units. The General Partner is the sole general partner of the Partnership and owns 91.7% of the Partnership at September 30, 1997. The remaining limited partnership interest ("Limited Partner Units") (together with the units of general partner interests, the ("Common Units")) are mainly owned by the previous partners of Duke Associates. The Limited Partner Units are exchangeable for units of the General Partner's common stock on a one-for-one basis subject generally to a one-year holding period. The General Partner periodically acquires a portion of the minority interest in the Partnership through the issuance of shares of common stock for a like number of Common Units. The acquisition of the minority interest is accounted for under the purchase method with assets acquired recorded at the fair market value of the General Partner's common stock on the date of acquisition. The service operations are conducted through Duke Realty Services Limited Partnership and Duke Construction Limited Partnership, in which the Partnership has an 89% profits interest (after certain preferred returns on partners' capital accounts) and effective control of their operations. The consolidated financial statements include the accounts of the Partnership and its majority-owned or controlled subsidiaries. The equity interests in these majority-owned or controlled subsidiaries not owned by the Partnership are reflected as minority interests in the consolidated financial statements. - 6 - 2. LINES OF CREDIT The Partnership has a $200 million unsecured revolving credit facility which is available to fund the development and acquisition of additional rental properties and to provide working capital. The revolving line of credit matures in April 2001 and bears interest payable at the 30-day London Interbank Offered Rate ("LIBOR") plus .80%. The Partnership also has a demand $7 million secured revolving credit facility which is available to provide working capital. This facility bears interest payable monthly at the 30-day LIBOR rate plus .75%. 3. RELATED PARTY TRANSACTIONS The Partnership provides management, maintenance, leasing, construction, and other tenant related services to properties in which certain executive officers have continuing ownership interests. The Partnership was paid fees totaling $2.4 million and $2.5 million for such services for the nine months ended September 30, 1997 and 1996, respectively. Management believes the terms for such services are equivalent to those available in the market. The Partnership has an option to purchase the executive officers' interest in each of these properties which expires October 2003. The option price of each property was established at the date the option was granted. 4. DERIVATIVE FINANCIAL INSTRUMENTS The Partnership may enter into derivative financial instruments such as interest rate swaps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Partnership has designated these derivative financial instruments as hedges and applies deferral accounting as the instrument to be hedged exposes the Partnership to interest rate risk and the derivative financial instrument reduces that exposure. Gains and losses related to the derivative financial instrument are deferred and amortized to interest expense over the term of the hedged instrument. 5. SUBSEQUENT EVENTS On October 23, 1997, a quarterly distribution of $.30 per Common Unit was declared payable on November 28, 1997, to common unitholders of record on November 14, 1997. On October 23, 1997, a quarterly distribution was declared of $.56875 per depositary unit of Series A Preferred Units which is payable on November 28, 1997 to the preferred unitholders of record on November 14, 1997. On October 23, 1997, a quarterly distribution was declared of $.99875 per depositary unit of Series B Preferred Units which is payable on December 31, 1997 to preferred unitholders of record on December 17, 1997. - 7 - INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Partners DUKE REALTY LIMITED PARTNERSHIP: We have reviewed the condensed consolidated balance sheet of Duke Realty Limited Partnership and subsidiaries as of September 30, 1997, the related condensed consolidated statements of operations for the three and nine months ended September 30, 1997 and 1996, the related condensed consolidated statements of cash flows for the nine months ended September 30, 1997 and 1996, and the related condensed consolidated statement of partners' equity for the nine months ended September 30, 1997. 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 generally accepted auditing standards, 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Duke Realty Limited Partnership and subsidiaries as of December 31, 1996, 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, 1997, 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, 1996 is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG Peat Marwick LLP Indianapolis, Indiana October 27, 1997 - 8 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW -------- The Partnership's operating results depend primarily upon income from the rental operations of its industrial, office and retail properties located in its primary markets. This income from rental operations is substantially influenced by the supply and demand for the Partnership's rental space in its primary markets. In addition, the Partnership's continued growth is dependent upon its ability to maintain occupancy rates and increase rental rates of its in-service portfolio and to continue development and acquisition of additional rental properties. The Partnership's primary markets in the Midwest have continued to offer strong and stable local economies and have provided attractive new development opportunities because of their central location, established manufacturing base, skilled work force and moderate labor costs. Consequently, the Partnership's occupancy rate of its in-service portfolio has exceeded 92% the last two years and was at 95.1% at September 30, 1997. The Partnership expects to continue to maintain its overall occupancy levels at comparable levels and also expects to be able to increase rental rates as leases are renewed or new leases are executed. This stable occupancy as well as increasing rental rates should improve the Partnership's results of operations from its in-service properties. The Partnership's strategy for continued growth also includes developing and acquiring additional rental properties in its primary markets and expanding into other attractive Midwestern markets. The following table sets forth information regarding the Partnership's in-service portfolio of rental properties as of September 30, 1997 and 1996 (in thousands, except percentages):
Total Percent of Square Feet Total Square Feet Percent Occupied --------------- ----------------- ---------------- Type 1997 1996 1997 1996 1997 1996 ------- ---- ---- ---- ---- ---- ---- INDUSTRIAL Service Centers 3,122 3,047 9.1% 11.7% 93.4% 93.9% Bulk 20,134 14,296 58.8 55.1 94.6% 94.0% OFFICE Suburban 8,303 5,815 24.3 22.4 96.8% 95.8% CBD 699 699 2.0 2.7 94.0% 85.2% Medical 290 333 0.9 1.3 98.4% 91.6% RETAIL 1,692 1,766 4.9 6.8 96.3% 95.5% ------ ------ ----- ----- Total 34,240 25,956 100.0% 100.0% 95.1% 94.2% ====== ====== ===== =====
Management expects occupancy of the in-service property portfolio to remain stable because (i) only 3.0% and 10.3% of the Partnership's occupied square footage is subject to leases expiring in the remainder of 1997 and in 1998, respectively, and (ii) the Partnership's renewal percentage averaged 80%, 65% and 73% in 1996, 1995 and 1994, respectively. - 9 - The following table reflects the Partnership's in-service portfolio lease expiration schedule as of September 30, 1997 by product type indicating square footage and annualized net effective rents under expiring leases (in thousands, except per square foot amounts):
Industrial Office Retail Total Portfolio ---------------- ---------------- --------------- ---------------- Yr.of Sq. Contractual Sq. Contractual Sq. Contractual Sq. Contractual Exp. Ft. Rent Ft. Rent Ft. Rent Ft. Rent ----- ---- ----------- ---- ----------- --- ----------- ---- ----------- 1997 758 $ 3,146 212 $ 2,170 21 $ 239 991 $ 5,555 1998 2,431 9,054 835 9,745 94 1,019 3,360 19,818 1999 2,281 9,775 1,169 12,639 114 1,181 3,564 23,595 2000 2,159 8,973 914 11,322 122 1,461 3,195 21,756 2001 2,644 10,225 1,370 16,022 93 1,100 4,107 27,347 2002 2,964 10,953 1,260 14,118 155 1,669 4,379 26,740 2003 403 2,321 338 3,959 43 381 784 6,661 2004 938 3,832 270 3,309 17 168 1,225 7,309 2005 1,440 4,501 771 10,729 177 1,509 2,388 16,739 2006 1,853 6,298 533 8,340 5 67 2,391 14,705 2007 and There- after 4,094 14,523 1,305 17,367 789 6,807 6,188 38,697 ------ ------ ----- ------- ----- ------ ------ ------- Total Leased 21,965 $83,601 8,977 $109,720 1,630 $15,601 32,572 $208,922 ====== ====== ===== ======= ===== ====== ====== ======= Total Portfolio Square Feet 23,256 9,292 1,692 34,240 ====== ===== ===== ====== Annualized net effective rent per square foot $ 3.81 $ 12.22 $ 9.57 $ 6.41 ====== ======= ====== =======
This stable occupancy, along with stable rental rates in each of the Partnership's markets, will allow the in-service portfolio to continue to provide a comparable or increasing level of earnings from rental operations. The Partnership also expects to realize growth in earnings from rental operations through (i) the development and acquisition of additional rental properties in its primary markets; (ii) the expansion into other attractive Midwestern markets; and (iii) the completion of the 4.5 million square feet of properties under development at September 30, 1997 over the next four quarters. The 4.5 million square feet of properties under development should provide future earnings from rental operations growth for the Partnership as they are placed in service as follows (in thousands, except percent leased and stabilized returns):
Anticipated Anticipated In-Service Square Percent Project Stabilized Date Feet Leased Costs Return ---------------- ------ ------- --------- ----------- 4th Quarter 1997 1,557 50% $ 81,142 11.7% 1st Quarter 1998 1,036 82% 38,973 11.4% 2nd Quarter 1998 1,548 54% 78,467 11.5% Thereafter 349 55% 32,825 11.5% ----- ------- 4,490 59% $231,407 11.6% ===== ======= - 10 - RESULTS OF OPERATIONS --------------------- Following is a summary of the Partnership's operating results and property statistics for the three and nine months ended September 30, 1997 and 1996 (in thousands, except number of properties and per unit amounts):
Three months ended Nine months ended September 30, September 30, ------------------------ ----------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Rental Operations revenue $56,218 $41,448 $158,722 $115,709 Service Operations revenue 5,917 5,042 14,985 14,525 Earnings from Rental Operations 20,454 15,782 57,629 38,948 Earnings from Service Operations 2,325 1,827 4,499 4,637 Operating income 20,731 16,678 57,588 40,690 Net income available for common units $18,014 $15,571 $51,430 $41,296 Weighted average common units outstanding 72,069 66,106 70,238 63,178 Net income per common unit $ .25 $ .24 $ .73 $ .65 Number of in-service properties at end of period 278 233 278 233 In-service square footage at end of period 34,240 25,956 34,240 25,956 Under development square footage at end of period 4,490 2,980 4,490 2,980
Comparison of Three Months Ended September 30, 1997 to Three ----------------------------------------------------------------- Months Ended September 30, 1996 ------------------------------- Rental Operations ----------------- The Partnership increased its in-service portfolio of rental properties from 233 properties comprising 25.9 million square feet at September 30, 1996 to 278 properties comprising 34.2 million square feet at September 30, 1997 through the acquisition of 32 properties totaling 4.2 million square feet and the completion of 20 properties and 2 building expansions totaling 4.7 million square feet developed by the Partnership. The Partnership also disposed of 7 properties totaling 592,000 square feet. These 45 net additional rental properties primarily account for the $14.8 million increase in revenues from Rental Operations from 1996 to 1997. The increase from 1996 to 1997 in rental expenses, real estate taxes and depreciation and amortization expense is also a result of the additional 45 in-service rental properties. Interest expense increased by approximately $1.4 million from $7.9 million for the three months ended September 30, 1996 to $9.3 million for the three months ended September 30, 1997 due to additional unsecured debt issued in the Partnership's medium-term note program in the last quarter of 1996 to fund the development and acquisition of additional rental properties as well as $100 million of unsecured debt issued in the third quarter to fund 1997 development and acquisition activity. As a result of the above-mentioned items, earnings from rental operations increased $4.6 million from $15.8 million for the three months ended September 30, 1996 to $20.4 million for the three months ended September 30, 1997. - 11 - Service Operations ------------------ Service Operation revenues increased by $900,000 from $5.0 million for the three months ended September 30, 1996 to $5.9 million for the three months ended September 30, 1997 due mainly to increased construction fee revenue related to increased construction volume. As a result, earnings from Service Operations increased slightly from $1.8 million for the three months ended September 30, 1996 to $2.3 million for the three months ended September 30, 1997. General and Administrative Expense ---------------------------------- General and administrative expense increased from $931,000 for the three months ended September 30, 1996 to $2.0 million for the three months ended September 30, 1997 primarily as a result of increased state and local taxes due to the growth in revenues and net income of the Partnership. Other Income (Expense) ---------------------- Interest income increased from $314,000 for the three months ended September 30, 1996 to $798,000 for the three months ended September 30, 1997 primarily as a result of interest income which was earned on excess cash balances resulting from the General Partner's September 1997 Common Stock offerings which were contributed to the Partnership. Other expense consists of costs incurred during the pursuit of various build- to-suit development projects or the acquisition of real estate assets. During the three months ended September 30, 1997, approximately $174,000 of costs were expensed in connection with the decision to terminate the pursuit of the acquisition of two large real estate portfolios. Net Income Available for Common Units ------------------------------------- Net income available for common units for the three months ended September 30, 1997 was $18.0 million compared to net income available for common units of $15.6 million for the three months ended September 30, 1996. This increase results primarily from the operating result fluctuations in rental and service operations explained above. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE --------------------------------------------------------------- MONTHS ENDED SEPTEMBER 30, 1996 ------------------------------- Rental Operations ------------------ The Partnership increased its in-service portfolio of rental properties from 233 properties comprising 25.9 million square feet at September 30, 1996 to 278 properties comprising 34.2 million square feet at September 30, 1997 through the acquisition of 32 properties totaling 4.2 million square feet and the completion of 20 properties and 2 building expansions totaling 4.7 million square feet developed by the Partnership. The Partnership also disposed of 7 properties totaling 592,000 square feet. These 45 net additional rental properties primarily account for the $43.0 million increase in revenues from Rental Operations from 1996 to 1997. - 12 - The increase from 1996 to 1997 in rental expenses, real estate taxes and depreciation and amortization expense is also a result of the additional 45 in-service rental properties. Interest expense increased by approximately $4.7 million from $22.5 million for the nine months ended September 30, 1996 to $27.2 million for the nine months ended September 30, 1997 due to additional unsecured debt issued in its medium-term note program in the last two quarters of 1996 to fund the development and acquisition of additional rental properties as well as $100 million of unsecured debt issued in the third quarter to fund 1997 development and acquisitions. As a result of the above-mentioned items, earnings from rental operations increased $18.7 million from $38.9 million for the nine months ended September 30, 1996 to $57.6 million for the nine months ended September 30, 1997. Service Operations ------------------ Service Operation revenues increased to $15.0 million for the nine months ended September 30, 1997 as compared to $14.5 million for the nine months ended September 30, 1996. This increase was primarily the result of an increase in third-party maintenance fee revenue. Service Operation operating expenses increased from $9.9 million to $10.5 million for the nine months ended September 30, 1997 as compared to the nine months ended September 30, 1996 primarily as a result of an increase in operating expenses resulting from the overall growth of the Partnership. As a result of the above-mentioned items, earnings from Service Operations decreased slightly from $4.6 million for the nine months ended September 30, 1996 to $4.5 million for the nine months ended September 30, 1997. General and Administrative Expense ---------------------------------- General and administrative expense increased from $2.9 million for the nine months ended September 30, 1996 to $4.5 million for the nine months ended September 30, 1997 primarily as a result of increased state and local taxes due to the growth in revenues and net income of the Partnership. Other Income (Expense) ---------------------- Interest income increased from $920,000 for the nine months ended September 30, 1996 to $1.2 million for the nine months ended September 30, 1997 primarily as a result of interest income which was earned on excess cash balances resulting from the General Partner's September 1997 Common Stock offerings which were contributed to the Partnership. Other expense consists of the write-off of costs incurred during the pursuit of various build-to-suit development projects or the acquisition of real estate assets. During the nine months ended September 30, 1997, approximately $486,000 of costs were expensed in connection with the decision to terminate the pursuit of the acquisition of two large real estate portfolios. - 13 - Net Income Available for Common Units ------------------------------------- Net income available for common units for the nine months ended September 30, 1997 was $51.4 million compared to net income available for common units of $41.3 million for the nine months ended September 30, 1996. This increase results primarily from the operating result fluctuations in rental and service operations explained above. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities totaling $109.7 million and $69.1 million for the nine months ended September 30, 1997 and 1996, respectively, represents the primary source of liquidity to fund distributions to unitholders and the other minority interests and to fund recurring costs associated with the renovation and re-letting of the Partnership's properties. This increase is primarily a result of, as discussed above under "Results of Operations," the increase in net income resulting from the expansion of the in- service portfolio through development and acquisitions of additional rental properties. Net cash used by investing activities totaling $380.5 million and $202.4 million for the nine months ended September 30, 1997 and 1996, respectively, represents the investment of funds by the Partnership to expand its portfolio of rental properties through the development and acquisition of additional rental properties net of proceeds received from property sales. In 1997, $414.6 million was invested in the development and acquisition of additional rental properties and the acquisition of land held for development. In 1996, the investment in the development and acquisition of additional rental properties and land held for development was $238.8 million. During the nine months ended September 30, 1997, the Partnership contributed properties to an existing joint venture at an agreed value of approximately $60 million. The Partnership recorded its investment in the joint venture related to this additional contribution at its carrying value of $48.6 million. The joint venture partner contributed cash to the venture equal to 49.9% of the agreed value of the properties contributed, $30.0 million, and this cash was distributed to the Partnership and reduced its recorded investment in the venture. This same joint venture received $60 million of proceeds from a mortgage loan financing and distributed 50.1% of the proceeds to the Partnership. During the nine months ended September 30, 1997, the Partnership invested over $30 million in a newly formed joint venture with an institutional investor which allowed the joint venture to purchase a 345,000 square foot office property in Chicago, Illinois which was over 95% occupied. Net cash provided by financing activities totaling $439.3 million and $139.6 million for the nine months ended September 30, 1997 and 1996, respectively, represents the source of funds from equity and debt offerings and borrowings on the lines of credit to fund the Partnership's investing activities. Also included in financing activities are the distribution of funds to unitholders and minority interests. In 1996, the Partnership received $129.2 million of net proceeds from the General Partner's common equity offerings which was used to pay down amounts outstanding on the unsecured line of credit and to fund current development and acquisition activity. In 1997, the Partnership received $300.5 million of net proceeds from the - 14 - General Partner's common equity offerings which was used to pay down amounts outstanding on the unsecured line of credit and to fund current development activity. In the third quarter of 1997, the Partnership received $146.1 million of net proceeds from the offering of the General Partner's 7.99% Series B Step-Up Redeemable Preferred Shares and $100 million from the offering of 6.95% Pass-Through Asset Trust Securities due August 2004. The Partnership has a $200 million unsecured line of credit which matures in April 2001. This facility bears interest payable at the 30-day LIBOR rate plus .80%. The Partnership has been able to reduce the borrowing rate on this line of credit from LIBOR plus 1.625% at December 31, 1996 to the current interest rate of LIBOR plus .80%. The Partnership also has a demand $7 million secured revolving credit facility which is available to provide working capital. This facility bears interest payable at the 30-day LIBOR rate plus .75%. The General Partner and the Partnership currently have on file Form S-3 Registration Statements with the Securities and Exchange Commission ("Shelf Registrations") which had remaining availability as of September 30, 1997 of approximately $514.0 million to issue common stock, preferred stock or unsecured debt securities. The General Partner and the Partnership intend to issue additional equity or debt under these Shelf Registrations as capital needs arise to fund the development and acquisition of additional rental properties. The total debt outstanding at September 30, 1997 consists of notes totaling $596.2 million with a weighted average interest rate of 7.57% maturing at various dates through 2017. The Partnership has $340.0 million of unsecured debt and $256.2 million of secured debt outstanding at September 30, 1997. Scheduled principal amortization of such debt totaled $2.6 million for the nine months ended September 30, 1997. Following is a summary of the scheduled future amortization and maturities of the Partnership's indebtedness at September 30, 1997 (in thousands):
Repayments --------------------------------------- Weighted Average Scheduled Interest Rate of Year Amortization Maturities Total Future Repayments ------ ------------ ---------- ----------- ----------------- 1997 $ 915 $ - $ 915 7.77% 1998 4,574 42,090 46,664 7.15% 1999 5,323 28,470 33,793 6.17% 2000 3,418 44,853 48,271 7.39% 2001 3,137 59,954 63,091 8.71% 2002 3,412 50,000 53,412 7.37% 2003 1,144 68,216 69,360 8.48% 2004 1,239 150,000 151,239 7.28% 2005 1,346 100,000 101,346 7.48% 2006 1,465 - 1,465 7.58% Thereafter 17,391 9,292 26,683 7.70% ------ ------- ------- Total $43,364 $552,875 $596,239 7.57% ====== ======= =======
Unit and per unit amounts in the consolidated financial statements of the Partnership have been restated to reflect the two-for-one split of the Partnership's common units payable on August 25, 1997 to common unitholders of record on August 18, 1997. - 15 - The Partnership intends to pay regular quarterly distributions from net cash provided by operating activities. A quarterly distribution of $.30 per Common Unit was declared on October 23, 1997 payable on November 28, 1997 to unitholders of record on November 14, 1997, which represents an annualized distribution of $1.20 per unit. A quarterly distribution of $.56875 per depositary unit of Series A Preferred Units was declared on October 23, 1997 which is payable on November 28, 1997 to preferred unitholders of record on November 14, 1997. On October 23, 1997, the Board of Directors declared a distribution of $.99875 per depositary unit on the Series B Cumulative Step-Up Redeemable Preferred Units. The distribution is payable on December 31, 1997 to preferred unitholders of record on December 17, 1997. Each depositary unit represents one-tenth of a unit of the Partnership's 7.99% Series B Preferred Units. FUNDS FROM OPERATIONS Management believes that Funds From Operations ("FFO"), which is defined by the National Association of Real Estate Investment Trusts as net income or loss excluding gains or losses from debt restructuring and sales of property plus depreciation and amortization, and after adjustments for minority interest, unconsolidated partnerships and joint ventures (adjustments for minority interest, unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis), is the industry standard for reporting the operations of real estate investment trusts. The following table reflects the calculation of the Partnership's FFO for the three and nine months ended September 30 as follows (in thousands):
Three months ended Nine months ended September 30, September 30, ------------------ ----------------- 1997 1996 1997 1996 ------ ------ ------ ------ Net income available for common units $18,014 $15,571 $51,430 $41,296 Add back: Depreciation and amortization 10,702 6,783 30,253 22,337 Share of joint venture depreciation and amortization 757 484 2,071 1,367 (Earnings) loss from property sales (1,425) 235 (1,807) (1,369) ------ ------ ------ ------ Funds From Operations $28,048 $23,073 $81,947 $63,631 ====== ====== ====== ====== Cash flow provided by (used by): Operating activities $ 37,544 $29,894 $109,749 $ 69,044 Investing activities (204,317) (108,805) (380,494) (202,403) Financing activities 337,592 90,541 439,309 139,581
The increase in FFO for the three and nine months ended September 30, 1997 compared to the three and nine months ended September 30, 1996 results primarily from the increased in- service rental property portfolio as discussed above under "Results of Operations." While management believes that FFO is the most relevant and widely used measure of the Partnership's operating performance, such amount does not represent cash flow from operations as defined by generally accepted accounting principles, should not be considered as an alternative to net income as an indicator of the Partnership's operating performance, and is not indicative of cash available to fund all cash flow needs. - 16 - 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 - -------------------------- When used in this Form 10-Q, the words "believes," "expects," "estimates" and similar expressions are intended to identify forward looking-statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially. In particular, among the factors that could cause actual results to differ materially are continued qualification of the General Partner as a real estate investment trust, general business and economic conditions, competition, increases in real estate construction costs, interest rates, accessibility of debt and equity capital markets and other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters and illiquidity of real estate investments. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Partnership undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also advised to refer to the General Partner's Form 8- K Report as filed with the U.S. Securities and Exchange Commission on March 29, 1996 for additional information concerning these risks. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- Exhibit 15. Letter regarding unaudited interim financial information Exhibit 27. Financial Data Schedule (EDGAR Filing Only) - 17 - 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 Investments, Inc., General Partner Registrant Date: November 13, 1997 /s/ Thomas L. Hefner ------------------- ---------------------------- President and Chief Executive Officer /s/ Darell E. Zink, Jr. ---------------------------- Executive Vice President and Chief Financial Officer /s/ Dennis D. Oklak ----------------------------- Executive Vice President and Chief Administrative Officer (Chief Accounting Officer) - 18 - EX-15 2 Exhibit 15 - ---------- The Partners Duke Realty Limited Partnership: Gentlemen: RE: Registration Statement No. 333-04695 and 333-26845 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated October 27, 1997 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant, or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. KPMG Peat Marwick LLP Indianapolis, Indiana November 10, 1997 EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES SEPTEMBER 30, 1997 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1997 173,910 0 35,044 (1,236) 0 207,081 1,665,515 (103,236) 1,927,455 95,058 0 0 0 0 1,235,992 1,927,455 0 176,745 89,536 0 8,557 0 27,222 51,430 0 51,430 0 0 0 51,430 $.73 0
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