-----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, R7YtI2tSFsYRa5phZNBCLy7wESMN4VrBVQJKSGveDdDYnEJ2YXnIdrboEBzBkxfG fC+W9h/e79aD6pg7f6kcMA== 0000783280-98-000045.txt : 19980817 0000783280-98-000045.hdr.sgml : 19980817 ACCESSION NUMBER: 0000783280-98-000045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUKE REALTY LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0001003410 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] 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: 98688697 BUSINESS ADDRESS: STREET 1: 8888 KEYSTONE CROSSING STREET 2: SUITE 1200 CITY: INDIANAPOLIS STATE: IN ZIP: 46240 BUSINESS PHONE: 3175743631 MAIL ADDRESS: STREET 1: 8888 KEYSTONE CROSSING SUITE 1200 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 June 30, 1998 ------------- 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 August 7, 1998 was 91,849,876. DUKE REALTY LIMITED PARTNERSHIP INDEX PART I - FINANCIAL INFORMATION PAGE - ------------------------------ ---- ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and December 31, 1997 2 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 1998 and 1997 (Unaudited) 3 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 (Unaudited) 4 Condensed Consolidated Statement of Partners' Equity for the six months ended June 30, 1998 (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 9-17 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 19 PART I - FINANCIAL INFORMATION Item 1. Financial Statements
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands) June 30, December 31, 1998 1997 ---------- ----------- ASSETS (Unaudited) ------ Real estate investments: Land and improvements $ 271,079 $ 231,614 Buildings and tenant improvements 1,890,930 1,591,604 Construction in progress 102,455 107,242 Investments in unconsolidated companies 125,771 106,450 Land held for development 145,905 139,817 --------- --------- 2,536,140 2,176,727 Accumulated depreciation (146,350) (116,604) --------- --------- Net real estate investments 2,389,790 2,060,463 Cash 21,908 10,372 Accounts receivable from tenants, net of allowance of $511 and $420 6,898 5,932 Straight-line rent receivable, net of allowance of $841 17,874 14,746 Receivables on construction contracts 17,161 22,700 Deferred financing costs, net of accumulated amortization of $10,720 and $9,101 11,784 12,289 Deferred leasing and other costs, net of accumulated amortization of $12,828 and $9,251 42,060 34,369 Escrow deposits and other assets 24,243 16,303 --------- --------- $2,531,718 $2,177,174 ========= ========= LIABILITIES AND PARTNERS' EQUITY -------------------------------- Indebtedness: Secured debt $ 363,584 $ 367,119 Unsecured notes 590,000 340,000 Unsecured line of credit - 13,000 --------- --------- 953,584 720,119 Construction payables and amounts due subcontractors 33,062 40,786 Accounts payable 5,413 1,342 Accrued expenses: Real estate taxes 28,775 25,203 Interest 9,245 6,883 Other expenses 14,975 13,851 Other liabilities 17,270 11,720 Tenant security deposits and prepaid rents 18,242 14,268 --------- --------- Total liabilities 1,080,566 834,172 Minority interest 283 222 --------- --------- Partners' equity: General partner: Common equity 1,123,023 1,016,733 Preferred equity (liquidation preference of $225,000) 218,906 218,906 --------- --------- 1,341,929 1,235,639 Limited partners' common equity 108,940 107,141 --------- --------- Total partners' equity 1,450,869 1,342,780 --------- --------- $2,531,718 $2,177,174 ========= =========
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 Six months ended June 30, June 30, ----------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- --------- RENTAL OPERATIONS: Revenues: Rental income $80,503 $49,802 $157,338 $ 98,860 Equity in earnings of unconsolidated companies 2,576 1,784 5,417 3,644 ------ ------ ------- ------- 83,079 51,586 162,755 102,504 ------ ------ ------- ------- Operating expenses: Rental expenses 13,839 8,793 27,684 18,022 Real estate taxes 8,053 4,673 15,887 9,115 Interest expense 14,346 9,695 27,225 18,641 Depreciation and amortization 16,525 10,052 30,785 19,551 ------ ------ ------- ------- 52,763 33,213 101,581 65,329 ------ ------ ------- ------- Earnings from rental operations 30,316 18,373 61,174 37,175 ------ ------ ------- ------- SERVICE OPERATIONS: Revenues: Property management, maintenance and leasing fees 3,597 3,214 6,634 5,855 Construction management and development fees 3,131 1,645 4,690 2,711 Other income 294 270 598 502 ------ ------ ------- ------- 7,022 5,129 11,922 9,068 ------ ------ ------- ------- Operating expenses: Payroll 3,804 2,545 6,687 4,885 Maintenance 594 528 1,198 916 Office and other 804 344 1,322 1,093 ------ ------ ------- ------- 5,202 3,417 9,207 6,894 ------ ------ ------- ------- Earnings from service operations 1,820 1,712 2,715 2,174 ------ ------ ------- ------- General and administrative expense (3,103) (1,383) (5,443) (2,492) ------ ------ ------- ------- Operating income 29,033 18,702 58,446 36,857 OTHER INCOME (EXPENSE): Interest income 412 182 589 433 Earnings from property sales 368 102 954 382 Other expense (30) (376) (61) (419) Minority interest in earnings of unitholders (254) (440) (254) (425) ------ ------ ------- ------- Net income 29,529 18,170 59,674 36,828 Dividends on preferred units (4,703) (1,706) (9,406) (3,412) ------ ------ ------- ------- Net income available for common units $24,826 $16,464 $ 50,268 $ 33,416 ====== ====== ======= ======= Net income per common unit: Basic $ .27 $ .24 $ .56 $ .49 ====== ====== ======= ======= Diluted $ .27 $ .23 $ .56 $ .47 ====== ====== ======= ======= Weighted average number of common units outstanding 90,930 69,854 89,299 69,308 ====== ====== ======= ======= Weighted average number of common and dilutive potential common units 91,830 70,576 90,222 70,081 ====== ====== ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements - 3 - DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, (IN THOUSANDS) (UNAUDITED)
1998 1997 ------- ------- Cash flows from operating activities: Net income $ 59,674 $ 36,828 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of buildings and tenant improvements 27,385 17,241 Amortization of deferred financing costs 656 690 Amortization of deferred leasing and other costs 3,400 2,310 Minority interest in earnings 254 425 Straight-line rental income (3,107) (1,642) Earnings from property sales (954) (382) Construction contracts, net (2,185) 13,918 Other accrued revenues and expenses, net 18,482 5,863 Equity in earnings in excess of distributions received from unconsolidated companies (3,371) (3,046) ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 100,234 72,205 ------- ------- Cash flows from investing activities: Rental property development costs (101,464) (79,808) Acquisition of rental properties (194,703) (44,434) Acquisition of land held for development and infrastructure costs (19,377) (29,068) Recurring costs: Tenant improvements (5,216) (4,259) Leasing commissions (2,528) (2,431) Building improvements (894) (337) Other deferred leasing costs (8,049) (6,439) Other deferred costs and other assets (8,182) (1,745) Proceeds from property sales, net 3,980 23,025 Net investment in and advances to unconsolidated companies (15,468) (30,681) ------- ------- NET CASH USED BY INVESTING ACTIVITIES (351,901) (176,177) ------- ------- Cash flows from financing activities: Contributions from general partner 102,912 63,684 Payments on indebtedness including principal amortization (5,730) (1,458) Proceeds from indebtedness 250,000 - Borrowings (repayments) on lines of credit, net (20,000) 79,000 Distributions to partners (53,641) (35,476) Distributions to preferred unitholders (9,406) (3,412) Distributions to minority interest (193) (336) Deferred financing costs (739) (285) ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 263,203 101,717 ------- ------- NET INCREASE (DECREASE) IN CASH 11,536 (2,255) Cash and cash equivalents at beginning of period 10,372 5,346 ------- ------- Cash and cash equivalents at end of period $ 21,908 $ 3,091 ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements - 4 - DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS) (UNAUDITED)
General Partner Limited ----------------------- Partners' Common Preferred Common Equity Equity Equity Total ---------- --------- --------- -------- BALANCE AT DECEMBER 31, 1997 $1,016,733 $218,906 $107,141 $1,342,780 Net income 44,120 9,406 6,148 59,662 Capital contribution from General Partner 103,559 - - 103,559 Acquisition of Partnership interest for common stock of Duke Realty Investments, Inc. 5,704 - - 5,704 Acquisition of property in exchange for Limited Partner Units - - 2,199 2,199 Distributions to preferred unitholders - (9,406) - (9,406) Distributions to partners ($.60 per Common Unit) (47,093) - (6,548) (53,641) --------- ------- ------- --------- BALANCE AT JUNE 30, 1998 $1,123,023 $218,906 $108,940 $1,450,869 ========= ======= ======= ========= COMMON UNITS OUTSTANDING AT JUNE 30, 1998 80,970 10,851 91,821 ========= ======= =========
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. THE PARTNERSHIP Duke Realty Limited Partnership (the "Partnership") was formed on October 4, 1993, when Duke Realty Investments, Inc. (the "Predecessor Partnership" 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. The General Partner is the sole general partner of the Partnership and owns 88.2% of the Partnership at June 30, 1998. 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 units 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. 2. LINES OF CREDIT The Partnership has a $250 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 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 at the 30-day LIBOR rate plus .65%. -6- 3. RELATED PARTY TRANSACTIONS The Partnership provides property 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 $1.1 million and $1.7 million for such services for the six months ended June 30, 1998 and 1997, 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. 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 unit is computed by dividing the sum of net income available for common units and minority interest in earnings of unitholders, by the sum of the weighted average number of common units and dilutive potential common units outstanding for the period. The following table reconciles the components of basic and diluted net income per common unit for the three and six months ended June 30:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Basic net income available for common units $24,826 $16,464 $50,268 $33,416 ====== ====== ====== ====== Weighted average partnership units outstanding 90,930 69,854 89,299 69,308 Dilutive units for long-term compensation plans 900 722 923 773 ------ ------ ------ ------ Weighted average number of common units and dilutive potential common units 91,830 70,576 90,222 70,081 ====== ====== ====== ======
5.SUBSEQUENT EVENTS On July 23, 1998, a quarterly distribution of $.34 per Common Unit was declared payable on August 31, 1998, to common unitholders of record on August 14, 1998. On July 23, 1998, a quarterly distribution of $.56875 per depositary unit of Series A Preferred Units which is payable on August 31, 1998 to preferred unitholders of record on August 17, 1998. On July 23, 1998, a quarterly distribution of $.99875 per depositary unit of Series B Preferred Units, payable on September 30, 1998 to preferred unitholders of record on September 16, 1998. -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 June 30, 1998, the related condensed consolidated statements of operations for the three and six months ended June 30, 1998 and 1997, the related condensed consolidated statements of cash flows for the six months ended June 30, 1998 and 1997, and the related condensed consolidated statement of partners' equity for the six months ended June 30, 1998. 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, 1997, and the related consolidated statements of operations and cash flows for the year then ended (not presented herein); and in our report dated January 28, 1998, 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, 1997 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 August 5, 1998 - 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 94% the last two years. The Partnership expects to continue to maintain its overall occupancy 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 June 30, 1998 and 1997 (in thousands, except percentages):
Total Percent of Square Feet Total Square Feet Percent Occupied ------------------ ----------------- ----------------- Type 1998 1997 1998 1997 1998 1997 - ---- ---- ---- ---- ---- ---- ---- INDUSTRIAL Service Centers 5,296 3,051 10.98% 9.71% 93.58% 94.93% Bulk 28,368 18,702 58.83 59.55 93.69% 95.64% OFFICE Suburban 11,819 7,244 24.51 23.07 96.21% 96.80% CBD 699 699 1.45 2.23 92.67% 91.09% RETAIL 2,041 1,710 4.23 5.44 95.67% 95.15% ------ ------ ------- ------- Total 48,223 31,406 100.00% 100.00% 94.37% 95.71% ====== ====== ======= =======
Management expects occupancy of the in-service property portfolio to remain stable because (i) only 5.3% and 11.8% of the Partnership's occupied square footage is subject to leases expiring in the remainder of 1998 and in 1999, respectively, and (ii) the Partnership's renewal percentage averaged 81%, 80% and 65% in 1997, 1996 and 1995, respectively. - 9 - The following table reflects the Partnership's in-service portfolio lease expiration schedule as of June 30, 1998 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. Sq. Sq. Sq. Exp. Ft. Rent Ft. Rent Ft. Rent Ft. Rent - ----- ------ ------ ------- ------- ----- ------- ------ ------ 1998 1,737 $ 7,346 637 $ 7,095 19 $ 212 2,393 $ 14,653 1999 3,814 16,265 1,476 16,213 113 1,177 5,403 33,655 2000 2,976 12,655 1,166 14,638 128 1,555 4,270 28,848 2001 3,527 14,444 1,653 20,079 90 1,076 5,270 35,599 2002 4,110 17,080 1,562 17,996 153 1,684 5,825 36,760 2003 2,751 11,972 1,012 12,852 109 1,223 3,872 26,047 2004 1,364 5,646 357 4,501 17 178 1,738 10,325 2005 2,698 8,573 964 13,407 176 1,513 3,838 23,493 2006 2,122 7,793 711 10,344 8 108 2,841 18,245 2007 2,352 7,687 571 7,887 76 760 2,999 16,334 2008 and There- after 4,113 14,472 1,933 26,585 1,126 9,405 7,172 50,462 ------ ------- ------ ------- ----- ------ ------ ------- Total Leased 31,564 $123,933 12,042 $151,597 2,015 $18,891 45,621 $294,421 ====== ======= ====== ======= ===== ====== ====== ======= Total Portfolio Square Feet 33,664 12,518 2,041 48,223 ====== ====== ===== ====== Annualized net effective rent per square foot $ 3.93 $ 12.59 $ 9.38 $ 6.45 ======= ======= ====== =======
This stable occupancy, along with increasing 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 4.2 million square feet of properties under development at June 30, 1998 over the next four quarters. The 4.2 million square feet of properties under development is expected to 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 In-Service Square Percent Project Stabilized Date Feet Leased Costs Return - ------------ ------ ------- ------- ----------- 3rd Quarter 1998 609 57% $ 47,467 11.6% 4th Quarter 1998 1,621 33% 89,484 11.7% 1st Quarter 1999 1,269 27% 70,589 11.1% Thereafter 650 75% 74,523 11.0% ----- ------- 4,149 41% $282,063 11.3% ===== =======
-10- RESULTS OF OPERATIONS - --------------------- Following is a summary of the Partnership's operating results and property statistics for the three and six months ended June 30, 1998 and 1997 (in thousands, except number of properties and per unit amounts):
Three months ended Six months ended June 30, June 30, ------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Rental Operations revenue $83,079 $51,586 $162,755 $102,504 Service Operations revenue 7,022 5,129 11,922 9,068 Earnings from Rental Operations 30,316 18,373 61,174 37,175 Earnings from Service Operations 1,820 1,712 2,715 2,174 Operating income 29,033 18,702 58,446 36,857 Net income available for common units $24,826 $16,464 $50,268 $33,416 Weighted average common units outstanding 90,930 69,854 89,299 69,308 Weighted average common and dilutive potential common units 91,830 70,576 90,222 70,081 Basic income per common unit $ 0.27 $ 0.24 $ 0.56 $ 0.49 Diluted income per common unit $ 0.27 $ 0.23 $ 0.56 $ 0.47 Number of in-service properties at end of period 419 262 419 262 In-service square footage at end of period 48,223 31,406 48,223 31,406 Under development square footage at end of period 4,149 4,097 4,149 4,097
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO THREE MONTHS ENDED JUNE 30, 1997 - -------------------------------------------------------------------------------- Rental Operations - ----------------- The Partnership increased its in-service portfolio of rental properties from 262 properties comprising 31.4 million square feet at June 30, 1997 to 419 properties comprising 48.2 million square feet at June 30, 1998 through the acquisition of 124 properties totaling 10.1 million square feet and the completion of 37 properties and 3 building expansions totaling 7.0 million square feet developed by the Partnership. The Partnership also disposed of 4 properties totaling approximately 300,000 square feet. These 157 net additional rental properties primarily account for the $31.5 million increase in revenues from Rental Operations from 1997 to 1998. The increase from 1997 to 1998 in rental expenses, real estate taxes and depreciation and amortization expense is also a result of the additional 157 in- service rental properties. Interest expense increased by approximately $4.6 million from $9.7 million for the three months ended June 30, 1997 to $14.3 million for the three months ended June 30, 1998 primarily due to additional unsecured debt issued in the third quarter of 1997 and the first two quarters of 1998 to fund the development and acquisition of additional rental properties. As a result of the above-mentioned items, earnings from rental operations increased $11.9 million from $18.4 million for the three months ended June 30, 1997 to $30.3 million for the three months ended June 30, 1998. Service Operations - ------------------ Service Operations revenues increased to $7.0 million for the three months ended June 30, 1998 as compared to $5.1 million for the three months ended June 30, 1997 primarily as a result of increases in construction management fee revenue because of an increase in third- party construction volume. -11- Service Operations operating expenses increased from $3.4 million to $5.2 million for the three months ended June 30, 1998 as compared to the three months ended June 30, 1997 primarily as a result of an increase in construction activity and the overall growth of the Partnership. As a result of the above-mentioned items, earnings from Service Operations increased from $1.7 million for the three months ended June 30, 1997 to $1.8 million for the three months ended June 30, 1998. General and Administrative Expense - ---------------------------------- General and administrative expense increased from $1.4 million for the three months ended June 30, 1997 to $3.1 million for the three months ended June 30, 1998 primarily as a result of internal acquisition costs which are no longer permitted to be capitalized being charged to general and administrative expense as well as an increase in state and local income taxes resulting from the overall growth of the Partnership. Other Income (Expense) - ---------------------- Interest income increased from $182,000 for the three months ended June 30, 1997 to $412,000 for the three months ended June 30, 1998 primarily as a result of interest income which was earned on short- term investments during the three months ended June 30, 1998. 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 June 30, 1997, approximately $312,000 of costs were expensed in connection with the decision to abandon the acquisition of a large real estate portfolio. Net Income Available for Common Units - ------------------------------------- Net income available for common units for the three months ended June 30, 1998 was $24.8 million compared to net income available for common units of $16.5 million for the three months ended June 30, 1997. This increase results primarily from the operating result fluctuations in rental and service operations explained above. COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30, 1997 - ------------------------------------------------------------------------------ Rental Operations - ----------------- The Partnership increased its in-service portfolio of rental properties from 262 properties comprising 31.4 million square feet at June 30, 1997 to 419 properties comprising 48.2 million square feet at June 30, 1998 through the acquisition of 124 properties totaling 10.1 million square feet and the completion of 37 properties and 3 building expansions totaling 7.0 million square feet developed by the Partnership. The Partnership also disposed of 4 properties totaling approximately 300,000 square feet. These 157 net additional rental properties primarily account for the $60.3 million increase in revenues from Rental Operations from 1997 to 1998. The Partnership received approximately $4.0 million of lease termination payments which are included in rental income for the six months ended June 30, 1998. Included in rental income for the six months ended June 30, 1997 are approximately $1.7 million of lease termination payments. The increase from 1997 to 1998 in rental expenses, real estate taxes and depreciation and amortization expense is also a result of the additional 157 in-service rental properties. -12- Interest expense increased by approximately $8.6 million from $18.6 million for the six months ended June 30, 1997 to $27.2 million for the six months ended June 30, 1998 primarily due to additional unsecured debt issued in the third quarter of 1997 and the first two quarters of 1998 to fund the development and acquisition of additional rental properties. As a result of the above-mentioned items, earnings from rental operations increased $24.0 million from $37.2 million for the six months ended June 30, 1997 to $61.2 million for the six months ended June 30, 1998. Service Operations - ------------------ Service Operations revenues increased to $11.9 million for the six months ended June 30, 1998 as compared to $9.1 million for the six months ended June 30, 1997 primarily as a result of increases in construction management fee revenue because of an increase in third- party construction volume. Service Operations operating expenses increased from $6.9 million to $9.2 million for the six months ended June 30, 1998 as compared to the six months ended June 30, 1997 primarily as a result of an increase in construction activity and the overall growth of the Partnership. As a result of the above-mentioned items, earnings from Service Operations increased from $2.2 million for the six months ended June 30, 1997 to $2.7 million for the six months ended June 30, 1998. General and Administrative Expense - ---------------------------------- General and administrative expense increased from $2.5 million for the six months ended June 30, 1997 to $5.4 million for the six months ended June 30, 1998 primarily as a result of internal acquisition costs which are no longer permitted to be capitalized being charged to general and administrative expense as well as an increase in state and local income taxes resulting from the overall growth of the Partnership. Other Income (Expense) - --------------------- Interest income increased from $433,000 for the six months ended June 30, 1997 to $589,000 for the six months ended June 30, 1998 primarily as a result of interest income which was earned on short-term investments during the six months ended June 30, 1998. Other expense consists of costs incurred in pursuit of unsuccessful development or acquisition opportunities. During the six months ended June 30, 1997, approximately $312,000 of costs were written off in connection with the decision to terminate the pursuit of the acquisition of a large real estate portfolio -13- Net Income Available for Common Units - ------------------------------------- Net income available for common units for the six months ended June 30, 1998 was $50.3 million compared to net income available for common units of $33.4 million for the six months ended June 30, 1997. 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 $100.2 million and $72.2 million for the six months ended June 30, 1998 and 1997, respectively, represents the primary source of liquidity to fund distributions to unitholders, 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 $351.9 million and $176.2 million for the six months ended June 30, 1998 and 1997, 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. In 1998, $315.5 million was invested in the development and acquisition of additional rental properties and the acquisition of land held for development. In 1997, the investment in the development and acquisition of additional rental properties and land held for development was $153.3 million. Included in the $315.5 million of net cash used by investing activities for the development and acquisition of rental properties for the six months ended June 30, 1998 are acquisitions of five portfolios consisting of twenty-one industrial buildings and fifteen office buildings. Net cash provided by financing activities totaling $263.2 million and $101.7 million for the six months ended June 30, 1998 and 1997, respectively, represents funds from equity and debt offerings and borrowings under the lines of credit to fund the Partnership's investing activities. Also included in financing activities is the distribution of funds to unitholders and minority interests. In January 1997, the Partnership received $56.7 million of net proceeds from the General Partner's common equity offering which was used to pay down amounts outstanding on the unsecured line of credit and to fund current development activity. In 1998, the Partnership received $86.8 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. During the six months ended June 30, 1998, the Partnership received $13.8 million of net proceeds from the issuance of common stock under the General Partner's Direct Stock Purchase and Dividend Reinvestment Plan compared to $7.0 million of net proceeds received under the General Partner's Direct Stock Purchase and Dividend Reinvestment Plan during the first six months of 1997. In the first quarter of 1998, the Partnership received $100.0 million of net proceeds from the offering of 7.05% Puttable Reset Securities due March 1, 2006. In the second quarter of 1998, the Partnership received $100.0 million of proceeds from the offering of 6.75% Senior Notes due May 30, 2008. The Partnership also received $50.0 million in proceeds from the issuance of 7.25% notes under the Partnership's medium-term note program. -14- The Partnership has a $250 million unsecured line of credit which matures in April 2001 and bears interest at the 30-day LIBOR rate 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 at the 30-day LIBOR rate plus .65%. 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 July 30, 1998 of approximately $1.2 billion 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 June 30, 1998 consists of notes totaling $953.6 million with a weighted average interest rate of 7.40% maturing at various dates through 2028. The Partnership has $590.0 million of unsecured debt and $363.6 million of secured debt outstanding at June 30, 1998. Scheduled principal amortization of such debt totaled $3.4 million for the six months ended June 30, 1998. Following is a summary of the scheduled future amortization and maturities of the Partnership's indebtedness at June 30, 1998 (in thousands):
Repayments ----------------------------------------------- Weighted Average Scheduled Interest Rate of Year Amortization Maturities Total Future Repayments - ---- ------------ ---------- ------------ --------------- 1998 $ 3,524 $ 40,603 $ 44,127 7.13% 1999 5,905 30,450 36,355 6.69% 2000 6,288 64,850 71,138 7.14% 2001 5,954 74,560 80,514 8.31% 2002 6,462 50,000 56,462 7.39% 2003 4,519 66,141 70,660 8.46% 2004 3,509 177,035 180,544 7.41% 2005 3,800 100,000 103,800 7.49% 2006 4,117 100,000 104,117 7.07% 2007 3,653 14,939 18,592 7.75% Thereafter 37,275 150,000 187,275 6.89% ------ ------- ------- Total $85,006 $868,578 $953,584 7.40% ====== ======= =======
The Partnership intends to pay regular quarterly distributions from net cash provided by operating activities. A quarterly distribution of $.34 per Common Unit was declared on July 23, 1998 payable on August 31, 1998 to unitholders of record on August 14, 1998, which represents an annualized distribution of $1.36 per unit. A quarterly distribution of $.56875 per depositary preferred unit of Series A Preferred Units was declared on July 23, 1998 which is payable on August 31, 1998 to preferred unitholders of record on August 17, 1998. A quarterly distribution of $.99875 per depositary preferred unit on the Series B Preferred Units was declared on July 23, 1998 which is payable on September 30, 1998 to preferred unitholders of record on September 16, 1998. -15- 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 six months ended June 30 as follows (in thousands):
Three months ended Six months ended June 30, June 30, ------------------ ----------------- 1998 1997 1998 1997 -------- -------- -------- ------- Net income available for common units $ 24,826 $ 16,464 $ 50,268 $ 33,416 Add back: Depreciation and amortization 16,525 10,052 30,785 19,551 Share of joint venture adjustments 968 791 1,550 1,314 Earnings from property sales (368) (102) (954) (382) ------- ------- ------- ------- FUNDS FROM OPERATIONS $ 41,951 $ 27,205 $ 81,649 $ 53,899 ======= ======= ======= ======= CASH FLOW PROVIDED BY (USED BY): Operating activities $ 61,614 $ 43,326 $100,234 $ 72,205 Investing activities (242,850) (135,001) (351,901) (176,177) Financing activities 174,380 81,864 263,203 101,717
The increase in FFO for the six months ended June 30, 1998 compared to the six months ended June 30, 1997 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. RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS In March 1998, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus on Issue No. 97-11 "Accounting for Internal Costs Relating to Real Estate Property Acquisitions" which requires the internal cost of pre-acquisition activities incurred in connection with the acquisition of an operating property be expensed as incurred. During the first three months of 1998, prior to adopting Issue No. 97-11, the Partnership capitalized approximately $275,000 of internal costs of pre- acquisition activities which under Issue No. 97-11 would have been expensed. -16- YEAR 2000 The Partnership recognizes that the Year 2000 problem could effect its operations as well as the proper functioning of the embedded systems included in the Partnership's properties. In any particular property, the problem could effect the functioning of elevators, heating and air conditioning systems, security systems and other automated building systems. The Partnership has begun to evaluate the Year 2000 readiness of its operations and those of its properties, through identifying and contacting suppliers of building systems and other critical business partners to determine if the building systems are affected and whether these entities have an effective plan in place to address the Year 2000 issue. The Partnership is also in the process of evaluating its own systems to determine the impact of the Year 2000. The Partnership expects to complete this process of inventorying and evaluating its and its properties systems by September 1, 1998, and the process is currently approximately 80% completed. Thereafter the Partnership will develop a work plan detailing the tasks and resources required to ready its and its properties' operations and systems for the Year 2000. This work plan will likely include a timetable for remediation and testing of systems, as well as contingency plans if readiness cannot be achieved. In addition, in many cases the Partnership will be relying on statements from outside vendors as to the Year 2000 readiness of their systems, and will not, in most circumstances, attempt any independent verification. Because the Partnership is still in the preliminary stages of its work to address the Year 2000 problem, it currently does not have complete estimates as to the cost of achieving Year 2000 readiness and has not yet developed any contingency plans. Based on the preliminary information received to date, however, the Partnership currently expects that these costs will not be material. The Partnership expects to pass on most of the costs to achieve Year 2000 readiness in any particular property to the tenants, and will otherwise expense the costs as incurred. There can be no assurance that the Partnership will be able to identify and correct all aspects of the Year 2000 problem that effect it in sufficient time, that it will develop adequate contingency plans or that the costs of achieving Year 2000 readiness will not be material. The Partnership, however, does not currently expect the Year 2000 problem will have a material impact on the Partnership's business, operations, or financial condition. -17- 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 ------------------------------------------------------------ At the annual meeting of the shareholders of the General Partner held on April 23, 1998, the following matters received the following votes:
MATTER DESCRIPTION VOTES FOR VOTES AGAINST ABSTAINING ------------------ ----------- ------------- ---------- 1. Election of Directors: Geoffrey Button 64,800,462 - 545,771 John D. Peterson 64,813,928 - 532,305 Ngaire E. Cuneo 64,811,460 - 534,773 Darell E. Zink, Jr. 64,815,528 - 530,705 2. Proposal to approve amendment to Articles of Incorporation 63,971,813 1,205,897 168,523 3. Proposal to approve amendment to the 1995 Stock Option Plan 63,944,439 1,117,027 284,767 4. Proposal to approve amendment to the 1995 Dividend Increase Unit Plan 64,177,635 867,152 301,446
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 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 -18- 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 Partnership'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 ----------------------------------------- Exhibits The following exhibits are filed or incorporated by reference as a part of this report: Exhibit 15. Letter regarding unaudited interim financial information Exhibit 27. Financial Data Schedule (EDGAR Filing Only) Reports on Form 8-K The Partnership filed Form 8-K on May 27, 1998, to report the issuance and sale of unsecured debt securities. -19- 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: August 13, 1998 /s/ Thomas L. Hefner --------------- ------------------------------- Thomas L. Hefner President and Chief Executive Officer /s/ Darell E. Zink, Jr. ------------------------------- Darell E. Zink, Jr. Executive Vice President and Chief Financial Officer /s/ Dennis D. Oklak ------------------------------- Dennis D. Oklak Executive Vice President and Chief Administrative Officer - 20- EX-15 2 AUDITORS' LETTER Exhibit 15 The Partners Duke Realty Limited Partnership: Gentlemen: RE: Registration Statement No. 33-61361, 333-04695, and 333-26845 With respect to the subject registration statement, we acknowledge our awareness of the use therein of our report dated August 5, 1998 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 August 11, 1998 EX-27 3 1997 AMENDED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES' JUNE 30, 1997 CONSOLIDATED FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JUN-30-1997 3,091 0 27,581 (1,374) 0 26,417 1,459,765 (96,491) 1,552,867 81,855 614,857 0 0 0 855,656 1,552,867 0 112,387 57,183 0 3,837 0 17,951 33,416 0 33,416 0 0 0 33,416 $.49 $.47
EX-27 4 1998 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES' JUNE 30, 1998 CONSOLIDATED FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JUN-30-1998 21,908 0 43,285 (1,352) 0 70,210 2,536,140 (146,350) 2,531,718 127,265 953,584 0 0 0 1,450,869 2,531,718 0 176,220 89,067 0 9,660 0 27,225 50,268 0 50,268 0 0 0 50,268 $.56 $.56
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