EX-99.2 5 a05-15820_1ex99d2.htm EX-99.2

Exhibit 99.2

 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Balance Sheets

As of December 31,

(in thousands, except per unit amounts)

 

 

 

 

2004

 

 

2003

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate investments:

 

 

 

 

 

 

 

Land and improvements

 

$

710,379

 

$

641,544

 

Buildings and tenant improvements

 

 

4,666,715

 

 

4,452,624

 

Construction in progress

 

 

109,788

 

 

119,441

 

Investments in unconsolidated companies

 

 

287,554

 

 

295,837

 

Land held for development

 

 

393,100

 

 

314,446

 

 

 

 

6,167,536

 

 

5,823,892

 

Accumulated depreciation

 

 

(788,900)

 

 

(677,357)

 

 

 

 

 

 

 

 

 

Net real estate investments

 

 

5,378,636

 

 

5,146,535

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

5,770

 

 

12,695

 

Accounts receivable, net of allowance of $1,238 and $1,524

 

 

17,127

 

 

17,121

 

Straight-line rent receivable, net of allowance of $1,646 and $2,146

 

 

89,497

 

 

70,143

 

Receivables on construction contracts

 

 

59,342

 

 

44,905

 

Deferred financing costs, net of accumulated amortization of $9,006 and $10,703

 

 

31,924

 

 

13,358

 

Deferred leasing and other costs, net of accumulated amortization of $88,888 and $67,317

 

 

203,882

 

 

158,562

 

Escrow deposits and other assets

 

 

108,466

 

 

95,392

 

 

 

$

5,894,644

 

$

5,558,711

 

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indebtedness:

 

 

 

 

 

 

 

Secured debt

 

$

203,081

 

$

208,649

 

Unsecured notes

 

 

2,315,623

 

 

1,775,887

 

Unsecured line of credit

 

 

-

 

 

351,000

 

 

 

 

2,518,704

 

 

2,335,536

 

 

 

 

 

 

 

 

 

Construction payables and amounts due subcontractors

 

 

67,740

 

 

60,789

 

Accounts payable

 

 

526

 

 

2,268

 

Accrued expenses:

 

 

 

 

 

 

 

Real estate taxes

 

 

55,745

 

 

52,955

 

Interest

 

 

36,531

 

 

33,259

 

Other

 

 

48,605

 

 

49,029

 

Other liabilities

 

 

105,838

 

 

107,321

 

Tenant security deposits and prepaid rents

 

 

39,827

 

 

37,975

 

Total liabilities

 

 

2,873,516

 

 

2,679,132

 

 

 

 

 

 

 

 

 

Minority interest

 

 

-

 

 

1,259

 

 

 

 

 

 

 

 

 

Partners’ equity:

 

 

 

 

 

 

 

General Partner

 

 

 

 

 

 

 

Common equity

 

 

2,214,473

 

 

2,153,844

 

Preferred equity (liquidation preferences of $657,250)

 

 

616,780

 

 

511,785

 

 

 

 

2,831,253

 

 

2,665,629

 

Limited partners’ common equity

 

 

196,422

 

 

212,691

 

Accumulated other comprehensive income (loss)

 

 

(6,547)

 

 

-

 

Total partners’ equity

 

 

3,021,128

 

 

2,878,320

 

 

 

 

 

 

 

 

 

 

 

$

5,894,644

 

$

5,558,711

 

 

See accompanying Notes to Consolidated Financial Statements.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Statements of Operations

For the Years Ended December 31

(in thousands, except per unit amounts)

 

 

 

 

2004

 

 

2003

 

 

2002

 

RENTAL OPERATIONS:

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Rental income from continuing operations

 

$

731,775

 

$

677,882

 

$

639,304

 

Equity in earnings of unconsolidated companies

 

 

21,586

 

 

23,688

 

 

27,180

 

 

 

 

753,361

 

 

701,570

 

 

666,484

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Rental expenses

 

 

152,852

 

 

138,085

 

 

119,583

 

Real estate taxes

 

 

83,317

 

 

75,828

 

 

68,456

 

Interest expense

 

 

132,936

 

 

123,423

 

 

109,269

 

Depreciation and amortization

 

 

217,216

 

 

184,558

 

 

162,627

 

 

 

 

586,321

 

 

521,894

 

 

459,935

 

Earnings from continuing rental operations

 

 

167,040

 

 

179,676

 

 

206,549

 

 

 

 

 

 

 

 

 

 

 

 

SERVICE OPERATIONS:

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

General contractor gross revenue

 

 

357,133

 

 

286,689

 

 

194,439

 

General contractor costs

 

(329,545)

 

(259,930)

 

(172,559)

 

Net general contractor revenue

 

 

27,588

 

 

26,759

 

 

21,880

 

 

 

 

 

 

 

 

 

 

 

 

Property management, maintenance and leasing fees

 

 

15,000

 

 

14,731

 

 

14,301

 

Construction management and development activity income

 

 

25,002

 

 

15,486

 

 

29,428

 

Other income

 

 

3,213

 

 

1,520

 

 

2,251

 

Total revenue

 

 

70,803

 

 

58,496

 

 

67,860

 

Operating expenses

 

 

46,382

 

 

37,378

 

 

38,340

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from service operations

 

 

24,421

 

 

21,118

 

 

29,520

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expense

 

(26,386)

 

(21,314)

 

(24,666)

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

165,075

 

 

179,480

 

 

211,403

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

5,213

 

 

3,613

 

 

3,833

 

Earnings from sale of land, depreciable property and ownership interests
in unconsolidated companies, net of impairment adjustment

 

 

10,202

 

 

15,752

 

 

7,292

 

Other revenue (expense)

 

 

(567)

 

 

(734)

 

 

182

 

Other minority interest in earnings of subsidiaries

 

 

(1,253)

 

 

(586)

 

 

(1,093)

 

Income from continuing operations

 

 

178,670

 

 

197,525

 

 

221,617

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

Net income (loss) from discontinued operations

 

 

(283)

 

 

8,263

 

 

15,711

 

Gain (loss) on sale of discontinued operations, net of impairment
adjustment

 

 

26,247

 

 

13,024

 

 

(4,969)

 

Income from discontinued operations

 

 

25,964

 

 

21,287

 

 

10,742

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

204,634

 

 

218,812

 

 

232,359

 

Dividends on preferred units

 

(33,777)

 

(39,225)

 

(52,613)

 

Adjustments for redemption of preferred units

 

 

(3,645)

 

 

-

 

 

(8,145)

 

Net income available for common unitholders

 

$

167,212

 

$

179,587

 

$

171,601

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common unit:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.91

 

$

1.06

 

 

1.08

 

Discontinued operations

 

 

.17

 

 

.14

 

 

.07

 

Total

 

$

1.08

 

$

1.20

 

$

1.15

 

Diluted net income per common unit:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.90

 

$

1.05

 

$

1.07

 

Discontinued operations

 

 

.17

 

 

.14

 

 

.07

 

Total

 

$

1.07

 

$

1.19

 

$

1.14

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common units outstanding

 

 

155,281

 

 

150,280

 

 

149,423

 

Weighted average number of common and dilutive potential
common units

 

 

157,062

 

 

151,141

 

 

150,839

 

 

See accompanying Notes to Consolidated Financial Statements.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Years Ended December 31

(in thousands)

 

 

 

 

2004

 

 

2003

 

 

2002

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net income

 

$

204,634

 

$

218,812

 

$

232,359

 

Adjustments to reconcile net income to net
cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation of buildings and tenant improvements

 

 

189,119

 

 

168,959

 

 

154,565

 

Amortization of deferred leasing and other costs

 

 

39,463

 

 

27,275

 

 

21,056

 

Amortization of deferred financing costs

 

 

4,904

 

 

3,626

 

 

3,725

 

Minority interest in earnings

 

 

1,253

 

 

586

 

 

1,093

 

Straight-line rent adjustment

 

(22,436)

 

(22,387)

 

(12,500)

 

Earnings from land and depreciated property sales

 

(36,449)

 

(28,776)

 

 

(1,048)

 

Build-for-sale operations, net

 

 

(41)

 

(20,899)

 

168,199

 

Construction contracts, net

 

(11,047)

 

 

(3,210)

 

(11,656)

 

Other accrued revenues and expenses, net

 

 

(551)

 

 

15,319

 

 

8,605

 

Operating distributions received in excess of equity
in earnings from unconsolidated companies

 

 

10,447

 

 

8,783

 

 

4,575

 

Net cash provided by operating activities

 

 

379,296

 

 

368,088

 

 

568,973

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Development of real estate investments

 

(145,629)

 

(129,199)

 

(158,131)

 

Acquisition of real estate investments

 

(204,361)

 

(201,819)

 

(98,062)

 

Acquisition of land held for development and infrastructure costs

 

(116,669)

 

(32,944)

 

(27,182)

 

Recurring tenant improvements

 

(58,847)

 

(35,972)

 

(28,011)

 

Recurring leasing costs

 

(27,777)

 

(20,932)

 

(17,975)

 

Recurring building improvements

 

(21,029)

 

(19,544)

 

(13,373)

 

Other deferred leasing costs

 

(16,386)

 

(17,167)

 

(18,219)

 

Other deferred costs and other assets

 

(15,413)

 

(24,412)

 

(17,350)

 

Proceeds from land and depreciated property sales, net

 

178,301

 

 

167,891

 

 

52,186

 

Advances to unconsolidated companies

 

 

(3,033)

 

 

(5,481)

 

(11,130)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used by investing activities

 

(430,843)

 

(319,579)

 

(337,247)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Contribution from General Partner, common units

 

 

12,259

 

 

14,026

 

 

22,651

 

Contribution from General Partner, preferred units

 

 

338,360

 

 

96,700

 

 

-

 

Payments for redemption of General Partner’s preferred equity

 

(102,652)

 

(65,020)

 

(202,953)

 

Payment for exercise of warrants

 

 

(2,881)

 

 

(4,692)

 

 

-

 

Proceeds from indebtedness

 

 

690,000

 

 

425,000

 

 

200,000

 

Payments on unsecured debt

 

(150,000)

 

(175,000)

 

 

-

 

Proceeds from debt refinancing

 

 

-

 

 

38,340

 

 

-

 

Proceeds from issuance of secured debt

 

 

-

 

 

40,000

 

 

-

 

Payments on indebtedness including principal amortization

 

(39,430)

 

(143,542)

 

(71,953)

 

Borrowings (payments) on lines of credit, net

 

(351,000)

 

 

46,105

 

 

157,305

 

Distributions to common unitholders

 

(286,913)

 

(275,282)

 

(271,659)

 

Distributions to preferred unitholders

 

(31,828)

 

(42,180)

 

(54,613)

 

Distributions to minority interest

 

 

(1,134)

 

 

(1,531)

 

 

(565)

 

Deferred financing costs

 

(30,159)

 

 

(5,867)

 

 

(3,263)

 

Net cash provided by (used for) financing activities

 

 

44,622

 

(52,943)

 

(225,050)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(6,925)

 

 

(4,434)

 

 

6,676

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

 

12,695

 

 

17,129

 

 

10,453

 

Cash and cash equivalents at end of year

 

$

5,770

 

$

12,695

 

$

17,129

 

Other non-cash items:

 

 

 

 

 

 

 

 

 

 

Assumption of debt for real estate acquisitions

 

$

29,824

 

$

-

 

$

9,566

 

Contributions of property to unconsolidated companies

 

$

-

 

$

5,009

 

$

-

 

Conversion of Limited Partner Units to common shares
of General Partner

 

$

11,408

 

$

9,984

 

$

13,226

 

Issuance of Limited Partner Units for real estate acquisitions

 

$

7,575

 

$

3,187

 

$

4,686

 

Transfer of debt in sale of depreciated property

 

$

-

 

$

-

 

$

2,432

 

Acquisition of partners’ interest in unconsolidated companies

 

$

-

 

$

20,630

 

$

12,149

 

 

See accompanying Notes to Consolidated Financial Statements.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Statements of Partners’ Equity

(in thousands, except per unit data)

 

 

 

 

 

 

 

 

Limited

 

Limited

 

Accumulated

 

 

 

 

 

 

General Partner

 

 

Partners’

 

Partners’

 

 

Other

 

 

 

 

 

 

 

Common

 

 Preferred

 

Common

 

Preferred

 

Comprehensive

 

 

 

 

 

 

Equity

 

 Equity

 

Equity

 

Equity

 

 

Income

 

 

 

Total

 

Balance at December 31, 2001

 

$

2,203,291

 

$

583,419

 

$

286,759

 

$

102,955

 

$

(192)

 

$

3,176,232

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

159,178

 

 

47,053

 

 

18,568

 

 

7,560

 

 

-

 

 

232,359

 

Distributions to preferred unitholders

 

 

-

 

 

(47,053)

 

 

-

 

 

(7,560)

 

 

-

 

 

(54,613)

 

Gains (losses) on derivative instruments

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,919)

 

 

(1,919)

 

Comprehensive income available for common unitholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

175,827

 

Capital contribution from General Partner

 

 

22,651

 

 

-

 

 

-

 

 

-

 

 

-

 

 

22 651

 

Acquisition of partnership interest for common stock of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Partner

 

 

60,509

 

 

-

 

 

(47,283)

 

 

-

 

 

-

 

 

13,226

 

Acquisition of property in exchange for Limited Partner Units

 

 

-

 

 

-

 

 

5,439

 

 

-

 

 

-

 

 

5,439

 

Repurchase of Series D Preferred units

 

 

-

 

 

(25)

 

 

-

 

 

-

 

 

-

 

 

(25)

 

Redemption of Series B Preferred units

 

 

-

 

 

(17,928)

 

 

-

 

 

-

 

 

-

 

 

(17,928)

 

Redemption of Series F Preferred units

 

 

-

 

(150,000)

 

 

-

 

 

-

 

 

-

 

 

(150,000)

 

Redemption of Series G Preferred units

 

 

-

 

 

-

 

 

-

 

(35,000)

 

 

-

 

 

(35,000)

 

Tax benefits from Employee Stock Plans

 

 

856

 

 

-

 

 

-

 

 

-

 

 

-

 

 

856

 

FASB 123 Compensation Expense

 

 

224

 

 

-

 

 

-

 

 

-

 

 

-

 

 

224

 

Distributions to General Partner

 

 

(1,174)

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,174)

 

Distributions to partners ($1.81 per Common Unit)

 

 

(242,475)

 

 

-

 

 

(28,010)

 

 

-

 

 

-

 

 

(270,485)

 

Balance at December 31, 2002

 

$

2,203,060

 

$

415,466

 

$

235,473

 

$

67,955

 

$

(2,111)

 

$

2,919,843

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

162,041

 

 

37,321

 

 

17,546

 

 

1,904

 

 

-

 

 

218,812

 

Distributions to preferred unitholders

 

 

-

 

 

(37,321)

 

 

-

 

 

(1,904)

 

 

-

 

 

(39,225)

 

Gains (losses) on derivative instruments

 

 

-

 

 

-

 

 

-

 

 

-

 

 

2,111

 

 

2,111

 

Comprehensive income available for common unitholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

181,698

 

Capital contribution from General Partner

 

 

14,160

 

 

96,700

 

 

-

 

 

-

 

 

-

 

 

110,860

 

Acquisition of partnership interest for common stock of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Partner

 

 

26,546

 

 

-

 

 

(16,562)

 

 

-

 

 

-

 

 

9,984

 

Acquisition of property in exchange for Limited Partner Units

 

 

-

 

 

-

 

 

3,187

 

 

-

 

 

-

 

 

3,187

 

Redemption of Series H Preferred units

 

 

-

 

 

-

 

 

-

 

(67,955)

 

 

-

 

 

(67,955)

 

Repurchase of Series D Preferred units

 

 

-

 

 

(20)

 

 

-

 

 

-

 

 

-

 

 

(20)

 

Conversion of Series D Preferred units

 

 

361

 

 

(361)

 

 

-

 

 

-

 

 

-

 

 

-

 

Exercise of General Partner warrants

 

 

(4,692)

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(4,692)

 

Tax benefits from Employee Stock Plans

 

 

542

 

 

-

 

 

-

 

 

-

 

 

-

 

 

542

 

FASB 123 Compensation Expense

 

 

155

 

 

-

 

 

-

 

 

-

 

 

-

 

 

155

 

Distribution to General Partner

 

 

(229)

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(229)

 

Distributions to partners ($1.83 per Common Unit)

 

 

(248,100)

 

 

-

 

 

(26,953)

 

 

-

 

 

-

 

 

(275,053)

 

Balance at December 31, 2003

 

$

2,153,844

 

$

511,785

 

$

212,691

 

$

-

 

$

-

 

$

2,878,320

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

154,926

 

 

33,777

 

 

15,931

 

 

-

 

 

-

 

 

204,634

 

Distributions to preferred unitholders

 

 

-

 

 

(33,777)

 

 

-

 

 

-

 

 

-

 

 

(33,777)

 

Gains (losses) on derivative instruments

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(6,547)

 

 

(6,547)

 

Comprehensive income available for common unitholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

164,310

 

Capital contribution from General Partner

 

 

12,367

 

 

338,312

 

 

-

 

 

-

 

 

-

 

 

350,679

 

Acquisition of Partnership interest for common stock of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Partner

 

 

25,376

 

 

-

 

 

(13,968)

 

 

-

 

 

-

 

 

11,408

 

Acquisition of property in exchange for Limited Partner Units

 

 

-

 

 

-

 

 

7,575

 

 

-

 

 

-

 

 

7,575

 

Redemption of Series E Preferred Units

 

 

-

 

(100,029)

 

 

-

 

 

-

 

 

-

 

 

(100,029)

 

General Partner’s redemption of Series D Preferred Units

 

 

-

 

 

(2,623)

 

 

-

 

 

-

 

 

-

 

 

(2,623)

 

General Partner’s conversion of Series D Preferred Units

 

 

130,665

 

(130,665)

 

 

-

 

 

-

 

 

-

 

 

-

 

Exercise of General Partner warrants

 

 

(2,881)

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(2,881)

 

Tax benefits from employee stock plans

 

 

770

 

 

-

 

 

-

 

 

-

 

 

-

 

 

770

 

FASB 123 compensation expense

 

 

512

 

 

-

 

 

-

 

 

-

 

 

-

 

 

512

 

Distribution to General Partner

 

 

(45)

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(45)

 

Distributions to partners ($1.85 per Common Unit)

 

 

(261,061)

 

 

-

 

 

(25,807)

 

 

-

 

 

-

 

 

(286,868)

 

Balance at December 31, 2004

 

$

2,214,473

 

$

616,780

 

$

196,422

 

$

-

 

$

(6,547)

 

$

3,021,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Units outstanding at December 31, 2004

 

 

142,894

 

 

 

 

 

13,596

 

 

 

 

 

 

 

 

156,490

 

 

See accompanying Notes to Consolidated Financial Statements.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

(1)                     The Partnership

 

Duke Realty Limited Partnership (the “Partnership”) was formed on October 4, 1993, when Duke Realty Corporation (the “General Partner”) contributed all of its properties and related assets and liabilities, along with the net proceeds of $309.2 million from the issuance of an additional 14,000,833 shares of the General Partner through an offering to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest. The General Partner was formed in 1985 and qualifies as a Real Estate Investment Trust (“REIT”) under provisions of the Internal Revenue Code. The General Partner is the sole general partner of the Partnership, owning 91.3% of the common partnership interests as of December 31, 2004 (“General Partner Units”). The remaining 8.7% of the Partnership’s common interest is owned by limited partners (“Limited Partner Units” and, together with the General Partner Units, the “Common Units”). The Limited Partner Units are exchangeable for shares of the General Partner’s common stock on a one-for-one basis subject generally to a one-year holding period.

 

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

 

(2)                     Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include our accounts and our controlled subsidiaries. The equity interests in these controlled subsidiaries not owned by us are reflected as minority interests in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. Investments in entities that we do not control through majority voting interest or where the other owner has substantial participating rights are not consolidated and are reflected as investments in unconsolidated companies under the equity method of reporting.

 

Reclassifications

 

Certain 2003 and 2002 balances have been reclassified to conform to the 2004 presentation.

 

Real Estate Investments

 

Rental real property, including land, land improvements, buildings and building improvements, are included in real estate investments and are generally stated at cost. Buildings and land improvements are depreciated on the straight-line method over their estimated life not to exceed 40 and 15 years, respectively, and tenant improvement costs are depreciated using the straight-line method over the term of the related lease.

 

Direct and certain indirect costs clearly associated and incremental to the development, construction, leasing or expansion of real estate investments are capitalized as a cost of the property. In addition, all leasing commissions paid to third parties for new leases or lease renewals are capitalized. We capitalize a portion of our indirect costs associated with our construction/development and leasing efforts. In assessing the amount of direct and indirect costs to be capitalized, allocations are made based on estimates of

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

the actual amount of time spent in each activity. The capitalized cost pool does not include any costs allocable to its executive officers. Additionally, we do not capitalize any costs attributable to downtime or to unsuccessful projects of leasing activities.

 

Within our Rental Operations, direct and indirect costs are capitalized under the guidelines of Statement of Financial Accounting Standard (“SFAS”) No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects (“SFAS67”), and interest costs are capitalized under the guidelines of SFAS No. 34, Capitalization of Interest Cost (“SFAS 34”). The Partnership capitalizes these project costs associated with the initial construction of a property up to the time the property is substantially complete and ready for its intended use. In addition, the Partnership capitalizes costs, including real estate taxes, insurance, and utilities, that have been allocated to vacant space based on the square footage of the portion of the building not held available for immediate occupancy during the extended lease-up periods after construction of the building shell has been completed if costs are being incurred to ready the vacant space for its intended use. If costs and activities incurred to ready the vacant space cease, then cost capitalization is also discontinued until such activities are resumed. Once necessary work has been completed on a vacant space, project costs are no longer capitalized. We cease capitalization of all project costs on extended lease-up periods after the shorter of a one-year period after the completion of the building shell or when the property attains 90% occupancy. Tenant improvement costs are generally not incurred on vacant space until a lease is signed and specific improvements are identified in the lease.

 

Construction in process and land held for development are included in real estate investments and are stated at cost. Real estate investments also include our equity interests in unconsolidated joint ventures that own and operate rental properties and hold land for development. We analyze our investments in joint ventures under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (R), Consolidation of Variable Interest Entities, to determine if the joint venture is considered a variable interest entity and would require consolidation. The equity method of accounting is used for these investments in which we have the ability to exercise significant influence, but not control, over operating and financial policies. Any difference between the carrying amount of these investments and the underlying equity in net assets is amortized to equity in earnings of unconsolidated companies over the depreciable life of the property, generally 40 years.

 

We adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets (“SFAS144”), in 2002.  In accordance with this statement, properties held for rental are individually evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future cash flows (on an undiscounted basis) from a rental property over its anticipated holding period is less than its historical net cost basis. Upon determination that a permanent impairment has occurred, a loss is recorded to reduce the net book value of that property to its fair market value. Real properties to be disposed of are reported at the lower of net historical cost basis or the estimated fair market value, less the estimated costs to sell. Once a property is designated as held for disposal, no further depreciation expense is recorded.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

In accordance with SFAS No. 141, Business Combinations (“SFAS 141”), we allocate the purchase price of acquired properties to net tangible and identified intangible assets based on their respective fair values. The allocation to tangible assets (buildings, tenant improvements and land) is based upon management’s determination of the value of the property as if it were vacant using discounted cash flow models similar to those used by independent appraisers. Factors considered by management include an estimate of carrying costs during the expected lease-up periods considering current market conditions, and costs to execute similar leases. The remaining purchase price is allocated among three categories of intangible assets consisting of the above or below market component of in-place leases, the value of in-place leases and the value of customer relationships.

 

The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term and (ii) management’s estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above or below market leases are included in deferred leasing and other costs in the balance sheet and are amortized to rental income over the remaining terms of the respective leases.

 

The total amount of intangible assets is further allocated to in-place lease values and to customer relationship values based upon management’s assessment of their respective values. These intangible assets are included in deferred leasing and other costs in the balance sheet and are depreciated over the remaining term of the existing lease, or the anticipated life of the customer relationship, as applicable.

 

Cash Equivalents

 

Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents.

 

Valuation of Receivables

 

We reserve the entire receivable balance, including straight-line rent, of any tenant with an amount outstanding over 90 days. Straight-line rent receivables for any tenant with long-term risk, regardless of the status of rent receivables, are reviewed and reserved as necessary.

 

Deferred Costs

 

Costs incurred in connection with obtaining financing are amortized to interest expense on the straight-line method, which approximates a constant spread over the term of the related loan. All direct and indirect costs, including estimated internal costs, associated with the leasing of real estate investments owned by us are capitalized and amortized over the term of the related lease. Unamortized costs are charged to expense upon the early termination of the lease or upon early payment of the financing.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

Revenues

 

Rental Operations

 

Rental income from leases with scheduled rental increases during their terms is recognized on a straight-line basis.

 

Service Operations

 

Management fees are based on a percentage of rental receipts of properties managed and are recognized as the rental receipts are collected. Maintenance fees are based upon established hourly rates and are recognized as the services are performed. Construction management and development fees represent fee based third party contracts and are recognized as earned based on the terms of the contract, which approximates the percentage of completion method.

 

We recognize income on construction contracts where we serve as a general contractor on the percentage of completion method. Using this method, profits are recorded based on our estimates of the percentage of completion of individual contracts, commencing when the work performed under the contracts reach a point where the final costs can be estimated with reasonable accuracy. The percentage of completion estimates are based on a comparison of the contract expenditures incurred to the estimated final costs. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

 

Property Sales

 

Gains from sales of depreciated property are recognized in accordance with SFAS No. 66, Accounting for Sales of Real Estate (“SFAS 66”), and are included in earnings from sales of land and depreciable property dispositions, net of any impairment adjustments, in the Statement of Operations if identified as held-for-sale prior to adoption of SFAS 144 and in discontinued operations if identified as held-for-sale after adoption of SFAS 144.

 

Gains or losses to our sale of property that were developed with the intent to sell and not for long-term rental are recognized in accordance with SFAS 66 and are included in construction management and development activity income in the Statement of Operations.

 

Net Income Per Common Unit

 

Basic net income per common unit is computed by dividing net income available for common units by the weighted average number of common units outstanding for the period. Diluted net income per common unit is computed by dividing the sum of net income available for common unitholders by the sum of the weighted average number of common units outstanding, including any dilutive potential common units for the period.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

The following table reconciles the components of basic and diluted net income per common unit (in thousands):

 

 

 

   2004

 

    2003

 

       2002

 

Basic and diluted net income available for common unitholders

 

$

167,212

 

$179,587

 

$171,601

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common units outstanding

 

 

155,281

 

 

150,280

 

 

149,423

 

Weighted average conversion of Series D preferred units (1)

 

 

877

 

 

-

 

 

-

 

Dilutive units for stock-based compensation plans

 

 

904

 

 

861

 

 

1,416

 

Weighted average number of common units and dilutive potential
common units

 

 

157,062

 

 

151,141

 

 

150,839

 

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

 

The Series D Convertible Preferred Stock was anti-dilutive for the years ended December 31, 2003 and 2002; therefore, no conversion to common shares was included in weighted average dilutive potential common shares.

 

A joint venture partner in one of our unconsolidated companies has the option to convert a portion of its ownership to the General Partner’s common shares, which would require the issuance of additional Common units to the General Partner. The effect of this option on earnings per unit was anti-dilutive for the years ended December 31, 2004, 2003 and 2002.

 

Federal Income Taxes

 

We recorded federal and state income taxes of $5.9 million, $3.7 million and $11.2 million for 2004, 2003 and 2002, respectively, which were primarily attributable to the earnings of our taxable REIT subsidiaries. The taxable REIT subsidiaries had no significant deferred income tax items.

 

As a partnership, the allocated share of income and loss other than the operations of the taxable REIT subsidiaries is included in the income tax returns of the partners; accordingly, no accounting for federal income taxes is required in the accompanying consolidated financial statements.

 

Stock Based Compensation

 

Under the limited partnership agreement of the Partnership, we are required to issue one Common Unit to the General Partner for each share of common stock issued by the General Partner.  Accordingly, the issuance of common shares by the General Partner under its stock based compensation plans requires the issuance of a corresponding number of Common Units by us to the General Partner.

 

We apply the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting, for all stock based awards issued by the General Partner prior to 2002. Accordingly, for stock options granted prior to 2002, no compensation expense is reflected in net income as all options granted had an exercise price equal to the market value of the General Partner’s underlying common stock on the date of the grant.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

In 2002, we prospectively adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), for all awards granted after January 1, 2002.

 

Awards under the General Partner’s stock based employee compensation plans generally vest over five years at 20% per year. Therefore, the expense related to these plans is less than that which would have been recognized if the fair value method had been applied to all awards since the original effective date of SFAS 123. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in each period (in thousands, except per unit amounts).

 

 

 

 

2004

 

 

2003

 

 

2002

 

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

167,212

 

$

179,587

 

$

171,601

 

Add: Stock-based employee compensation expense included in net income determined under fair value method

 

 

455

 

 

155

 

 

224

 

Deduct: Total stock based compensation expense determined under fair value method for all awards

 

 

(923)

 

 

(778)

 

 

(1,153)

 

Proforma Net Income

 

$

166,744

 

$

178,964

 

$

170,672

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per unit

 

 

 

 

 

 

 

 

 

 

As reported

 

$

1.08

 

$

1.20

 

$

1.15

 

Pro forma

 

$

1.07

 

$

1.19

 

$

1.14

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per unit

 

 

 

 

 

 

 

 

 

 

As reported

 

$

1.07

 

$

1.19

 

$

1.14

 

Pro forma

 

$

1.06

 

$

1.18

 

$

1.13

 

 

Derivative Financial Instruments

 

We periodically enter into certain interest rate protection agreements to effectively convert or cap floating rate debt to a fixed rate, and to hedge anticipated future financing transactions. Net amounts paid or received under these agreements are recognized as an adjustment to the interest expense of the corresponding debt. We do not utilize derivative financial instruments for trading or speculative purposes.

 

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”), requires that all derivative instruments be recorded on the balance sheet as assets or liabilities at their fair value. Derivatives that are not hedges must be adjusted to fair value through the recording of income or expense. If a derivative qualifies as a hedge, the changes in fair value of the effective portion of the hedge are recognized in other comprehensive income, while the ineffective portion of the derivative’s change in fair value is recognized in earnings. We estimate the fair value of derivative instruments using standard market conventions and techniques such as discounted cash flow analysis, option pricing models and termination cost at each balance sheet date.

 

Use Of Estimates

 

The preparation of the financial statements requires management to make a number of estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

(3)    Related Party Transactions

 

We provide property management, leasing, construction and other tenant related services to properties in which former executive officers and current directors have ownership interests. We received fees totaling approximately $693,000, $1.2 million, and $1.4 million in 2004, 2003 and 2002, respectively, for services provided to these properties. The fees we charged for such services are equivalent to those charged to unrelated third-party owners for similar services. We had an option to acquire the executive officers’ interests in these properties. Two of these properties, the Bank One Towers office buildings in Cincinnati, Ohio, were acquired in August 2003 at a price of $45.5 million. The terms of this acquisition were reviewed and approved by the independent members of the General Partner’s Board of Directors. The options on the remaining properties expired in October 2003, as the independent members of the General Partner’s Board of Directors determined that it was not in our best interests to exercise the options.

 

We provide property management, leasing, construction and other tenant related services to unconsolidated companies in which we have an equity interest. For each of the years ended December 31, 2004, 2003 and 2002, we received management fees of $4.9 million from these unconsolidated companies. In addition, for each of the years ended December 31, 2004, 2003 and 2002, respectively, we received from these entities leasing fees of $2.6 million, $2.3 million and $2.5 million and construction and development fees of $1.5 million, $1.4 million and $4.5 million. These fees were charged at market rates and we eliminated our ownership percentage of these fees in the consolidated financial statements.

 

In 2002, we received lease termination fees totaling $7.7 million from a tenant that is a subsidiary of Progress Energy, Inc. At that time, William Cavanaugh III was President and Chief Executive Officer of Progress Energy, Inc. and a member of the General Partner’s Board of Directors. The General Partner’s independent directors approved the transaction and management believes that the amount received approximates a value that would have been charged to tenants with similar lease terms and commitments.

 

(4)    Investments in Unconsolidated Companies

 

We have equity interests ranging from 10% – 64% in unconsolidated joint ventures that own and operate rental properties and hold land for development.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

Combined summarized financial information for the unconsolidated companies as of December 31, 2004 and 2003, and for the years ended December 31, 2004, 2003, and 2002, are as follows (in thousands):

 

 

 

2004

 

2003

 

2002

 

Rental revenue

 

$

167,803

 

$

170,227

 

$

169,683

 

Net income

 

$

40,138

 

$

41,065

 

$

51,013

 

Earnings distributions received

 

$

30,309

 

$

30,844

 

$

29,238

 

 

 

 

 

 

 

 

 

 

 

Land, buildings and tenant improvements, net

 

$

1,158,068

 

$

1,173,232

 

 

 

Land held for development

 

 

50,173

 

 

51,328

 

 

 

Other assets

 

 

62,190

 

 

62,196

 

 

 

 

 

$

1,270,431

 

$

1,286,756

 

 

 

Property indebtedness

 

$

570,941

 

$

577,732

 

 

 

Other liabilities

 

 

51,377

 

 

41,691

 

 

 

 

 

 

622,318

 

 

619,423

 

 

 

Owners’ equity

 

 

648,113

 

 

667,333

 

 

 

 

 

$

1,270,431

 

$

1,286,756

 

 

 

 

Our share of the scheduled payments of long term debt for the unconsolidated joint ventures for each of the next five years and thereafter as of December 31, 2004, are as follows (in thousands):

 

Year

 

Future Repayments

 

2005

 

$

31,713

 

 

2006

 

 

13,740

 

 

2007

 

 

62,254

 

 

2008

 

 

1,507

 

 

2009

 

 

70,473

 

 

Thereafter

 

 

104,595

 

 

 

 

$

284,282

 

 

 

The following significant transactions involving the unconsolidated companies have occurred over the past three years:

 

During 2003, we purchased our partners’ interests in three separate joint ventures. We had a 50% interest in each of these ventures prior to their acquisition. We also sold our 50% interest in two separate joint ventures to our partners. In addition, we contributed cash and undeveloped land to a joint venture that owns undeveloped land and an office building in return for a 50% interest.

 

In 2002, we recognized a gain of $1.8 million on the sale of a building that was developed for sale by a joint venture in which we owned a 50% interest. The gain was included in equity in earnings in the Statement of Operations. We also bought out our other partners’ interest in six separate joint ventures.  We had a 50% interest in each of these ventures prior to such acquisitions.

 

(5)                     Real Estate Investments

 

The amounts described in the following paragraphs and tables have been reclassified from the previously filed consolidated financial statements to reflect the reclassification to discontinued operations for dispositions of properties held for sale through June 30, 2005. During the period January 1, 2005 through June 30, 2005 we sold or held for sale sixteen properties owned by us and not classified as assets held for sale as of December 31, 2004. The results of operations from such properties have been reclassified as income (loss) from discontinued operations for the years ended December 31, 2004, 2003 and 2002 in the consolidated statements of operations. The effect of these reclassifications resulted in a decrease to income from discontinued operations for the year ended December 31, 2004 of $2.0 million. For the years ended December 31, 2003 and 2002, these reclassifications resulted in increases of $1.3 million and $3.8 million, respectively.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

After the effects of the above reclassification, we have classified operations of 102 buildings as discontinued operations as of December 31, 2004. These 102 buildings consist of 78 industrial, 18 office and six retail properties. As a result of the reclassification, net income (loss) of $(283,000), $8.3 million and $15.7 million are now reported as net income (loss) from discontinued operations for the years ended December 31, 2004, 2003 and 2002, respectively. Forty-one of these properties were sold during 2004, 42 properties were sold during 2003, two properties were sold during 2002 and seventeen operating properties are classified as held-for-sale at December 31, 2004. The gains on disposal of these properties, net of impairment adjustment, of $26.2 million and $13.0 million for the years ended December 31, 2004 and 2003, respectively, are also reported in discontinued operations. For the year ended December 31, 2002, a $5.0 million loss on disposal of properties, net of impairment adjustment, is reported in discontinued operations due to impairment charges of $7.7 million recorded on three properties in 2002 that were later sold in 2003 and 2004.

 

The following table illustrates the major classes of assets and operations affected by the 102 buildings identified as discontinued operations at December 31, 2004 (in thousands):

 

 

 

 

2004

 

 

2003

 

 

2002

 

Statement of Operations:

 

 

 

 

 

 

 

 

 

 

Revenues

 

$24,202

 

$41,362

 

$51,258

 

Expenses:

 

 

 

 

 

 

 

 

 

 

Operating

 

 

8,402

 

 

13,290

 

 

13,495

 

Interest

 

 

4,673

 

 

8,083

 

 

9,014

 

Depreciation and Amortization

 

 

11,366

 

 

11,676

 

 

12,994

 

General and Administrative

 

 

44

 

 

52

 

 

70

 

Operating Income (Loss)

 

 

(283)

 

 

8,261

 

 

15,685

 

Other Income

 

 

-

 

 

2

 

 

26

 

Income (loss) from discontinued operations, before gain on sale

 

 

(283)

 

 

8,263

 

 

15,711

 

Gain (loss) on sale of property, net of impairment adjustment

 

 

26,247

 

 

13,024

 

 

(4,969)

 

Income from discontinued operations

 

$25,964

 

$21,287

 

$

10,742

 

Balance Sheet:

 

 

 

 

 

 

 

 

 

 

Real estate investments, net

 

$ 71,599

 

 

 

 

 

 

 

Other Assets

 

 

23,429

 

 

 

 

 

 

 

Total Assets

 

$ 95,028

 

 

 

 

 

 

 

Accrued Expenses

 

$

1,250

 

 

 

 

 

 

 

Other Liabilities

 

 

829

 

 

 

 

 

 

 

Equity

 

 

92,949

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$ 95,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

At December 31, 2004, we had on industrial property comprising approximately 81,000 square feet classified as held-for-sale.  The net book value of the property held-for-sale at December 31, 2004, was approximately $3.4 million.

 

In 2004 we recorded $424,000 of impairment adjustments for three land parcels that were held-for-sale. We also recorded a $180,000 impairment adjustment for the industrial building classified as held-for-sale at December 31, 2004. These adjustments reflect the

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

write-down of the carrying values of the properties to their projected sales prices, less selling expenses, once it became probable that the properties would be sold. The industrial building was sold in the second quarter of 2005. Each of the land parcel properties were sold in 2004.

 

In 2003 we recorded $1.1 million of impairment adjustments for one industrial building and three land parcels that were held-for-sale. These adjustments reflect the write-down of the carrying values of the properties to their projected sales prices, less selling expenses, once it became probable that the properties would be sold. Each of these properties was later sold in 2003.

 

We recorded a $9.4 million impairment adjustment for six properties in 2002. This total consisted of a $7.7 million adjustment for three industrial properties and a $1.7 million adjustment for three office properties. The properties were identified as impaired upon the comparison of their projected undiscounted cash flows to their carrying values. The impairment adjustment reflects the write-down of the carrying values of the properties to their estimated fair market values. In estimating fair market value, management considers valuation factors used by independent appraisers, including the sales of comparable properties, replacement cost and the capitalization of future expected net operating income.

 

(6)                     Indebtedness

 

Indebtedness at December 31 consists of the following (in thousands):

 

 

 

 

2004

 

 

2003

 

Fixed rate secured debt, weighted average interest rate of 6.51% at December 31, 2004,
and 6.94% at December 31, 2003, maturity dates ranging from 2005 to 2017

 

$

163,607

 

$

153,460

 

 

 

 

 

 

 

 

 

Variable rate secured debt, weighted average interest rate of 3.43% at December 31, 2004,
and 2.42% at December 31, 2003, maturity dates ranging from 2006 to 2025

 

 

39,474

 

 

55,189

 

 

 

 

 

 

 

 

 

Fixed rate unsecured notes, weighted average interest rate of 6.02% at December 31, 2004,
and 6.41% at December 31, 2003, maturity dates ranging from 2005 to 2028

 

 

2,065,623

 

 

1,775,887

 

 

 

 

 

 

 

 

 

Unsecured line of credit, facility unused at December 31, 2004, interest rate of 1.77% at
December 31, 2003, maturity date 2007

 

 

-

 

 

351,000

 

 

 

 

 

 

 

 

 

Variable rate unsecured note, interest rate of 2.78% at December 31, 2004, maturity date of 2006

 

 

250,000

 

 

-

 

 

 

$

2,518,704

 

$

2,335,536

 

 

 

 

 

 

 

 

 

The fair value of our indebtedness as of December 31, 2004, was $2.7 billion.

 

As of December 31, 2004, the $203.1 million of secured debt was collateralized by rental properties with a carrying value of $464.6 million and by letters of credit in the amount of $14 million.

 

We had one unsecured line of credit available at December 31, 2004, described as follows (in thousands):

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

Borrowing

 

 

Maturity

 

 

  Interest

 

at December

 

Description

 

Capacity

 

 

Date

 

 

Rate

 

31, 2004

 

Unsecured Line of Credit

 

$500,000

 

January 2007

 

LIBOR + .60%

 

$           -

 

 

The stated interest rate under the line is LIBOR plus 60 basis points. However, the facility provides us with an option to obtain borrowings from financial institutions that participate in the line, at rates lower than the stated interest rate, subject to certain restrictions. At December 31, 2004, we were not using this facility.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

The line of credit also contains financial covenants that require us to meet defined levels of performance. As of December 31, 2004, we are in compliance with all covenants and expect to remain in compliance for the foreseeable future.

 

In January 2004, we issued $125 million of four-year unsecured debt at an effective interest rate of 3.35%.

 

In August 2004, we issued $250 million of 5.40% unsecured notes due in 2014. The notes were issued as part of an exchange of securities for $100 million principal amount of our 6.95% unsecured debt due August 2004. The remaining cash proceeds were used to fund costs associated with the offering and exchange of debt, and to reduce amounts outstanding under our unsecured line of credit.

 

In December 2004, we issued $250.0 million of unsecured floating rate debt at 26 basis points over LIBOR.  The debt matures in 2006, but is callable by us after six months.

 

At December 31, 2004, the scheduled amortization and maturities of all indebtedness for the next five years and thereafter were as follows  (in thousands):

 

Year

 

 

Amount

 

2005

 

$

279,666

 

2006

 

 

423,504

 

2007

 

 

221,506

 

2008

 

 

265,059

 

2009

 

 

280,867

 

Thereafter

 

 

1,048,102

 

 

 

$

2,518,704

 

 

The amount of interest paid in 2004, 2003 and 2002 was $136.2 million, $130.1 million and $125.9 million, respectively. The amount of interest capitalized in 2004, 2003 and 2002 was $6.0 million, $6.7 million and $13.5 million, respectively.

 

(7)      Segment Reporting

 

The amounts in the segment disclosure have also been reclassifed from the previously filed consolidated financial statements to reflect the reclassification to discontinued operations for the additional sixteen properties disposed of or identified as held-for-sale through June 30, 2005.

 

We are engaged in four operating segments, the first three of which consist of the ownership and rental of office, industrial and retail real estate investments (collectively, “Rental Operations”). The fourth segment consists of our build-to-suit for sale operations and the providing of various real estate services such as property management, maintenance, leasing, development and construction management to third-party property owners and joint ventures (“Service Operations”). Our reportable segments offer different products or services and are managed separately because each requires different operating strategies and management expertise. There are no material intersegment sales or transfers.

 

Non-segment revenue consists mainly of equity in earnings of unconsolidated companies. Segment FFO information is calculated by subtracting operating expenses attributable to the applicable segment from segment revenues. Non-segment assets consist of corporate assets including cash, deferred financing costs and investments in unconsolidated companies. Interest expense and other non-property specific revenues and expenses are not allocated to individual segments in determining our performance measure.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

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

 

The revenues and FFO for each of the reportable segments for the years ended December 31, 2004, 2003 and 2002, and the assets of each reportable segment as of December 31, 2004 and 2003 are summarized as follows (in thousands):

 

 

 

 

2004

 

 

 

2003

 

 

 

2002

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Office

 

$

453,226

 

 

$

413,845

 

 

$

386,348

 

 

Industrial

 

 

268,375

 

 

 

254,453

 

 

 

244,356

 

 

Retail

 

 

4,830

 

 

 

5,801

 

 

 

4,672

 

 

Service Operations

 

 

70,803

 

 

 

58,496

 

 

 

67,860

 

 

Total Segment Revenues

 

 

797,234

 

 

 

732,595

 

 

 

703,236

 

 

Non-Segment Revenue

 

 

26,930

 

 

 

27,471

 

 

 

31,108

 

 

Consolidated Revenue from continuing operations

 

 

824,164

 

 

 

760,066

 

 

 

734,344

 

 

Discontinued Operations

 

 

24,202

 

 

 

41,362

 

 

 

52,533

 

 

Consolidated Revenue

 

$

848,366

 

 

$

801,428

 

 

$

786,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds From Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Office

 

$

290,193

 

 

$

269,764

 

 

$

258,405

 

 

Industrial

 

 

201,314

 

 

 

191,361

 

 

 

189,297

 

 

Retail

 

 

3,894

 

 

 

4,876

 

 

 

4,075

 

 

Services Operations

 

 

24,421

 

 

 

21,118

 

 

 

29,520

 

 

Non-Segment FFO:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(132,936)

 

 

(123,423)

 

 

(109,269)

 

 

Interest income

 

 

5,213

 

 

 

3,613

 

 

 

3,833

 

 

General and administrative expense

 

 

(26,386)

 

 

(21,314)

 

 

(24,666)

 

 

Gain on land sales

 

 

10,119

 

 

 

7,135

 

 

 

4,478

 

 

Impairment charges on depreciable property

 

 

(180)

 

 

 

(500)

 

 

 

(9,379)

 

 

Other expenses

 

 

(363)

 

 

 

(2,765)

 

 

 

(330)

 

 

Minority interest in earnings of subsidiaries

 

 

(1,253)

 

 

 

(586)

 

 

 

(1,093)

 

 

Joint venture FFO

 

 

40,488

 

 

 

42,526

 

 

 

44,778

 

 

Dividends on preferred units

 

 

(33,777)

 

 

(39,225)

 

 

(52,613)

 

 

Adjustment for redemption of preferred units

 

 

(3,645)

 

 

 

-

 

 

 

(8,145)

 

 

Discontinued operations

 

 

11,083

 

 

 

19,939

 

 

 

29,980

 

 

Consolidated FFO

 

 

388,185

 

 

 

372,519

 

 

 

358,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization on continuing operations

 

 

(217,216)

 

 

(184,558)

 

 

(162,627)

 

 

Depreciation and amortization on discontinued operations

 

 

(11,366)

 

 

(11,676)

 

 

(12,994)

 

 

Share of joint venture adjustments

 

 

(18,901)

 

 

(18,839)

 

 

(17,598)

 

 

Earnings from depreciated property sales and ownership interests
in unconsolidated companies on continuing operations

 

 

83

 

 

 

8,617

 

 

 

4,491

 

 

Earnings from depreciated property sales on discontinued operations

 

 

26,427

 

 

 

13,524

 

 

 

1,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common unitholders

 

$

167,212

 

 

$

179,587

 

 

$

171,601

 

 

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

 

 

 

December 31,

 

 

December 31,

 

 

 

 

2004

 

 

2003

 

Assets

 

 

 

 

 

 

 

 

 

Rental Operations

 

 

 

 

 

 

 

 

 

Office

 

$3,128,387

 

 

$

2,884,834

 

 

Industrial

 

 

2,211,509

 

 

 

2,177,483

 

 

Retail

 

 

84,625

 

 

 

47,293

 

 

Service Operations

 

 

131,218

 

 

 

111,318

 

 

Total Segment Assets

 

 

5,555,739

 

 

 

5,220,928

 

 

Non-Segment Assets

 

 

338,905

 

 

 

337,783

 

 

Consolidated Assets

 

$5,894,644

 

 

$

5,558,711

 

 

 

 

 

 

 

 

 

 

 

 

In addition to revenues and FFO, we also review our recurring capital expenditures in measuring the performance of our individual Rental Operations segments. These recurring capital expenditures consist of tenant improvements, leasing commissions and building improvements. We review these expenditures to determine the costs associated with re-leasing vacant space and maintaining the condition of our properties. Our recurring capital expenditures by segment are summarized as follows for the years ended December 31, 2004, 2003 and 2002, respectively (in thousands):

 

 

 

 

2004

 

 

 

2003

 

 

 

2002

 

 

Recurring Capital Expenditures

 

 

 

 

 

 

 

 

 

 

 

 

 

Office

 

$

68,535

 

 

$

44,602

 

 

$

31,616

 

 

Industrial

 

 

39,096

 

 

 

31,711

 

 

 

27,398

 

 

Retail

 

 

22

 

 

 

135

 

 

 

345

 

 

Total

 

$

107,653

 

 

$

76,448

 

 

$

59,359

 

 

 

(8)       Leasing Activity

 

Future minimum rents due to us under non-cancelable operating leases at December 31, 2004, are as follows (in thousands):

 

 

Year

 

 

 

Amount

 

2005

 

 

$

567,801

 

2006

 

 

 

518,136

 

2007

 

 

 

441,843

 

2008

 

 

 

358,202

 

2009

 

 

 

289,451

 

Thereafter

 

 

 

832,194

 

 

 

 

$

3,007,627

 

 

In addition to minimum rents, certain leases require reimbursements of specified operating expenses that amounted to $137.9 million, $130.3 million, and $121.0 million for the years ended December 31, 2004, 2003 and 2002, respectively.

 

(9)       Employee Benefit Plans

 

We maintain a 401(k) plan for full-time employees.  We make matching contributions up to an amount equal to three percent of the employee’s salary and may also make annual discretionary contributions. The total expense  recognized for this plan was $1.9 million, $1.6 million and $1.7 million for the years ended 2004, 2003 and 2002, respectively.

 

We make contributions to a contributory health and welfare plan as necessary to fund claims not covered by employee contributions. The total expense we recognized related to this plan was $7.2 million, $6.4 million and $5.4 million for 2004, 2003 and 2002, respectively. These expense amounts include estimates based upon the historical experience of claims incurred but not reported as of year-end.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

(10)              Partners’ Equity

 

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

 

The following series of preferred units were outstanding as of December 31, 2004 (in thousands, except percentages):

 

 

 

Units

 

Dividend

 

Redemption

 

Liquidation

 

 

 

 

Description

 

 

Outstanding

 

 

Rate

 

 

 

Date

 

 

Preference

 

 

 

 

Convertible

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series B Preferred

 

265

 

7.990%

 

September 30, 2007

 

$132,250

 

No

 

Series I Preferred

 

300

 

8.450%

 

February 6, 2006

 

75,000

 

No

 

Series J Preferred

 

400

 

6.625%

 

August 29, 2008

 

100,000

 

No

 

Series K Preferred

 

600

 

6.500%

 

February 13, 2009

 

150,000

 

No

 

Series L Preferred

 

800

 

6.600%

 

November 30, 2009

 

200,000

 

No

 

 

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

 

The Series B, Series I, Series J, Series K and Series L Preferred Units may be redeemed only at the General Partner’s option, in whole or in part.

 

The General Partner issued $150 million of Series K Preferred Units in February 2004 at a dividend rate of 6.50% and $200 million of Series L Preferred Units in November 2004 at a dividend rate of 6.60%.

 

The dividend rate on the Series B Preferred units increases to 9.99% after September 12, 2012. The General Partner repurchased 355,000 shares of its Series B Preferred stock in September 2002, which resulted in the repurchase of 355,000 Series B Preferred units by the Partnership from the General Partner. The repurchase transaction was initiated by a group of Series B Preferred shareholders who voluntarily approached the General Partner with an opportunity for the General Partner to buy back these shares before their earliest stated redemption date.

 

The General Partner called for the redemption of the Series D Convertible Preferred Units as of March 16, 2004. Prior to the redemption date, 5,242,635 Series D Convertible Preferred Units were converted into 4,911,143 Common Units. The remaining 103,695 Series D Convertible Preferred Units outstanding on March 16, 2004 were redeemed.

 

The General Partner redeemed its $100 million Series E Preferred Units on January 20, 2004, at par value.

 

(11)              Stock Based Compensation

 

At December 31, 2004, the General Partner had nine stock-based employee compensation plans that are described more fully below.  The General Partner is authorized to issue up to 7,144,711 shares of the General Partner’s common stock under these Plans.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

Fixed Stock Option Plans

 

The General Partner had options outstanding under six fixed stock option plans as of December 31, 2004. Additional grants may be made under three of those plans.

 

A summary of the status of the fixed stock option plans as of December 31, 2004, 2003 and 2002 and changes during the years ended on those dates follows:

 

 

 

2004

 

2003

 

2002

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Average

 

 

 

Average

 

 

 

 

 

Exercise

 

 

 

Exercise

 

 

 

Exercise

 

 

 

 

 

Price

 

 

 

Price

 

 

 

   Price

 

Outstanding, beginning of year

 

 

3,586,360

 

$22.65

 

 

 

3,920,198

 

$22.09

 

 

 

4,691,659

 

$21.12

 

 

Granted

 

 

506,688

 

32.49

 

 

 

609,390

 

25.48

 

 

 

676,038

 

23.37

 

 

Exercised

 

 

(728,250)

 

20.85

 

 

 

(773,625)

 

21.87

 

 

 

(1,203,534)

 

18.82

 

 

Forfeited

 

 

(12,329)

 

27.20

 

 

 

(169,603)

 

23.63

 

 

 

 

(243,965)

 

22.96

 

 

Outstanding, end of year

 

 

3,352,469

 

24.51

 

 

 

3,586,360

 

22.65

 

 

 

 

3,920,198

 

22.09

 

 

Options exercisable,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

end of year

 

 

1,844,256

 

 

 

 

2,014,875

 

 

 

 

 

2,297,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average fair value of options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

granted during the year

 

$

2.84

 

 

 

$

1.81

 

 

 

 

$

2.05

 

 

 

 

The fair values of the options were determined using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

 

2004

 

 

2003

 

 

2002

 

Dividend yield

 

6.50%

 

7.25%

 

 

7.25%

 

Volatility

 

20.0%

 

20.0%

 

 

20.0%

 

Risk-free interest rate

 

3.6%

 

3.2%

 

 

4.7%

 

Expected life

 

6 years

 

6 years

 

 

6 years

 

 

The options outstanding at December 31, 2004, under the fixed stock option plans have a range of exercise prices from $12.94 to $34.14 with a weighted average exercise price of $24.51 and a weighted average remaining contractual life of 6.11 years. The options exercisable at December 31, 2004 have a weighted average exercise price of $22.55.

 

Each option’s maximum term is ten years. With limited exceptions, options vest at 20% per year, or, if earlier, upon the death, retirement or disability of the optionee or a change in control of the General Partner.

 

Performance Based Stock Plans

 

Performance shares are granted under the 2000 Performance Share Plan, with each performance share economically equivalent to one share of the General Partner’s common stock. The performance shares vest over a five-year period with the vesting percentage for a year dependent upon the General Partner’s attainment of certain predefined levels of earnings growth for such year. The value of vested performance shares are payable in cash upon the retirement or termination of employment of the participant. At December 31, 2004, plan participants had the right to receive up to 200,726 performance shares, of which 48,760 were vested and 152,002 were contingent upon future earnings achievement.

 

The amount of compensation cost was based upon the intrinsic value of the vested performance shares at the end of each applicable reporting period. The compensation cost that was charged against income for this plan was $1.7 million, $529,000 and $96,000 for 2004, 2003 and 2002, respectively.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

In October 2002, the General Partner amended its Shareholder Value Plan (“SVP Plan”) and Dividend Increase Unit Plans (“DIU Plans”) by requiring that all payouts under these two plans to be in cash only. Payments made under the General Partner’s SVP Plan are based upon the General Partner’s cumulative shareholder return for a three-year period as compared to the cumulative total return of the S&P 500 and the NAREIT Equity REIT Total Return indices. Payments under the DIU Plans are based upon increases in the General Partner’s dividend per common share. The total compensation cost that was charged against income for these two plans was $2.3 million, $1.6 million and $4.6 million for 2004, 2003 and 2002, respectively.

 

Directors Stock Payment Plan

 

Under the General Partner’s 1999 Directors’ Stock Payment Plan, non-employee members of the General Partner’s board of directors are entitled to 1,600 shares of its common stock per year as partial compensation for services as a board member. The shares are fully vested when issued and we record the value of the shares as an expense. The amount of that expense was $525,000, $415,000 and $274,000 for 2004, 2003 and 2002, respectively.

 

Employee Stock Purchase Plan

 

Under the General Partner’s Employee Stock Purchase Plan, employees are entitled to purchase the General Partner’s common stock at a 15% discount through payroll deductions. Under SFAS 123, we are required to record the amount of the discount as compensation expense. The amount of that expense for 2004 and 2003 was $255,000 and $219,000, respectively.

 

(12)                          Financial Instruments

 

We are exposed to capital market risk, such as changes in interest rates. In order to manage the volatility relating to interest rate risk, we may enter into interest rate hedging arrangements from time to time. We do not utilize derivative financial instruments for trading or speculative purposes. We account for derivative instruments under SFAS 133.

 

During the first quarter of 2004, we funded a $65 million note receivable secured by a first mortgage on a portfolio of office properties owned by a third party located in Atlanta, Georgia. The note receivable had a maximum two-year term with an interest rate of 5.5% for the first 6 months and 6.5% thereafter. In order to fund the note receivable, we borrowed $65 million under a variable interest rate term loan. The loan bears interest at the rate of LIBOR + 75 basis points, has a maturity date of January 2005, and contains two six month renewal options. To hedge our variable interest rate risk on the loan, we entered into two interest rate swaps totaling $65 million that effectively fixed the rate at 2.184% through maturity. The hedge accounting rules are being used for the swaps, which allow for changes in market value of the swaps to be recorded through Other Comprehensive Income (“OCI”) in equity versus the Statement of Operations. In the third quarter of 2004, the $65 million note receivable was repaid in connection with our acquisition of the properties that secured the note. However, our $65 million note payable and related interest swaps were not retired. As of December 31, 2004, the fair value of the hedge was $51,000, which was reflected through an increase in other assets and OCI on our balance sheet.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

In June 2004, we simultaneously entered into three forward-starting interest rate swaps aggregating $144.3 million, which effectively fixed the rate on financing expected in 2004 at 5.346%, plus our credit spread over the swap rate. The swaps qualified for hedge accounting under SFAS 133; therefore, changes in the fair value were recorded in OCI. In August 2004, we settled these three swaps when we issued $250.0 million of unsecured notes with an effective interest rate of 6.33%, due in 2014. We paid $6.85 million to unwind the swaps, which will be amortized from OCI into interest expense over the life of the new 6.33% notes.

 

In December 2002, we simultaneously entered into two $50 million forward-starting interest rate swaps as a hedge to effectively fix the rate on unsecured debt financings expected in 2003. Then again in February 2003, we simultaneously entered into two additional $25 million forward-starting interest rate swaps as a hedge to effectively fix the rate on unsecured debt financings expected in 2003.  All four swaps qualified for hedge accounting under SFAS 133; therefore, changes in fair value were recorded in other comprehensive income. In July 2003, we terminated the swaps for a net gain of $643,000, which is included in other revenue in the Statements of Operations. The swaps were terminated because our capital needs were met through the issuance of the Series J Preferred Stock in lieu of the previously contemplated issuance of debt.

 

During the year ended December 31, 2002, we recorded a $1.4 million gain associated with an interest rate contract that did not qualify for hedge accounting. The contract expired on December 30, 2002.

 

In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and otherwise is effective July 1, 2003. We include the operations of one joint venture in our consolidated financial statements. This joint venture is partially owned by unaffiliated parties that have noncontrolling interests. SFAS 150 requires the disclosure of the estimated settlement value of these noncontrolling interests. As of December 31, 2004, the estimated settlement value of the noncontrolling interest in this consolidated joint venture was approximately $1.0 million as compared to the minority interest asset recorded on our books for this joint venture of $142,000.

 

(13)                          Recent Accounting Pronouncements

 

In December 2004, FASB issued SFAS No. 123 (R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock Based Compensation, and is effective July 2005. We are currently evaluating the impact on our financial position and results of operations.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

(14)         Commitments and Contingencies

 

In 1998 and 1999, certain members of management and the General Partner’s Board of Directors purchased $69 million of the General Partner’s common stock in connection with an Executive and Senior Officer Stock Purchase Plan. The purchases were financed by five-year personal loans at market interest rates from financial institutions. As of December 31, 2004, the outstanding balance on these loans was approximately $1.6 million as some participants have extended their involvement in the program beyond the original five years. These loans were secured by common shares of the General Partner with a fair market value of approximately $2.5 million purchased through this program and owned by the remaining plan participants at December 31, 2004. As a condition of the financing agreement with the financial institution, we guaranteed repayment of principal, interest and other obligations for each participant, but are fully indemnified by the participants. In the opinion of management, it is not probable that we will be required to satisfy these guarantees.

 

In October 2000, we sold or contributed industrial properties and undeveloped land with a fair value of $487 million to a joint venture (Dugan Realty LLC) in which we have a 50% interest and recognized a net gain of $35.2 million. This transaction expanded an existing joint venture with an institutional real estate investor. As a result of the total transactions, we received $363.9 million of proceeds. The joint venture partially financed this transaction with $350 million of secured mortgage debt, the repayment of which we directly or indirectly guaranteed. The guarantee associated with $260 million of such debt expired in December 2003 without us being required to satisfy the guarantee. The remaining $90 million of such debt is still guaranteed by us. In connection with this transaction, the joint venture partners were given an option to put up to a $50 million interest in the joint venture to us in exchange for the General Partner’s common stock or cash (at our option), subject to certain timing and other restrictions. As a result of this put option, we deferred $10.2 million of gain on sale of depreciated property and recorded a $50 million liability.

 

We have guaranteed the repayment of $12.3 million of economic development bonds issued by various municipalities in connection with certain commercial developments. We will be required to make payments under our guarantees to the extent that incremental taxes from specified developments are not sufficient to pay the bond debt service.  Management does not believe that it is probable that we will be required to make any significant payments in satisfaction of these guarantees.

 

We have also guaranteed the repayment of a $2 million mortgage loan encumbering the real estate of one of our unconsolidated joint ventures. Management believes that the value of the real estate exceeds the loan balance and that we will not be required to satisfy this guarantee.

 

We evaluated our guarantees under FASB Interpretation 45 (“FIN 45”) in order to determine the amount of potential liability we may incur resulting from the guarantees. For this evaluation we used discounted cash flow projections for expected incremental financing to be generated from anticipated development. Based upon these projections, no liability was recorded at December 31, 2004.

 


 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

We have entered into agreements, subject to the completion of due diligence requirements, resolution of certain contingencies and completion of customary closing conditions, for the future acquisition of land totaling $43.8 million. We have also entered into an agreement to acquire a single building for $8.0 million, which is expected to close in 2005.

 

We renewed all of our major insurance policies in 2004. These policies include coverage for acts of terrorism for our properties. We believe that this insurance provides adequate coverage against normal insurance risks and that any loss experienced would not have a significant impact on our liquidity, financial position, or results of operations.

 

We are subject to various legal proceedings and claims that arise in the ordinary course of business.  In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect our consolidated financial statements or results of operations.

 

(15)                          Subsequent Events

 

Effective as of January 1, 2005, the Partnership, the General Partner, Duke Management, Inc (“DMI”), an Indiana corporation, and DRSLP entered into a Contribution Agreement, pursuant to which DMI contributed to the Partnership all of DMI’s limited partnership interest in DRSLP in exchange for the issuance to DMI of 435,814 DRLP limited partnership units. As a result, the Partnership and the General Partner now own 100% of the partnership interests in DRSLP. In addition, DMI owns a total of 501,349 DRLP limited partnership units as a result of the transaction.

 

See additional information regarding this transaction in a Current Report on Form 8-K filed by the General Partner with the SEC on January 4, 2005.