| | 2001
| 2000
|
| Cash flows from operating activities: | | |
| Net income | $82,779 | $70,647 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation of buildings and tenant improvements | 35,860 | 35,714 |
| Amortization of deferred leasing and other costs | 4,454 | 3,653 |
| Amortization of deferred financing costs | 1,565 | 678 |
| Minority interest in earnings | 911 | 661 |
| Straight-line rent adjustment | (3,634) | (3,676) |
| Earnings from land and depreciable property dispositions | (12,517) | (14,274) |
| Construction contracts, net | 6,164 | 1,913 |
| Other accrued revenues and expenses, net | (16,461) | 3,640 |
| Equity in earnings in (excess)/shortfall of distributions received from unconsolidated companies | (5,668)
| 168
|
| Net cash provided by operating activities | 93,453
| 99,124
|
| | | |
| Cash flows from investing activities: | | |
| Development of real estate investments | (108,581) | (190,141) |
| Acquisition of real estate investments | (13,927) | - |
| Acquisition of land held for development and infrastructure costs | (17,538) | (21,082) |
| Recurring tenant improvements | (3,529) | (7,411) |
| Recurring leasing costs | (2,824) | (5,387) |
| Recurring building improvements | (1,975) | (1,351) |
| Other deferred leasing costs | (5,400) | (10,027) |
| Other deferred costs and other assets | 13,578 | (3,762) |
| Tax deferred exchange escrow, net | (5,775) | (97,558) |
| Proceeds from land and depreciated property sales, net | 93,518 | 163,783 |
| Capital distributions from unconsolidated companies | 6,810 | - |
| Advances (from) unconsolidated companies, net | 2,248
| (9,120)
|
| Net cash used by investing activities | (43,395)
| (182,056)
|
| | | |
| Cash flows from financing activities: | | |
| Contributions from general partner | 86,149 | 10,317 |
| Proceeds from indebtedness | 175,000 | - |
| Payments on indebtedness including principal amortization | (28,446) | (5,383) |
| Borrowings/(repayments) on lines of credit, net | (199,679) | 168,741 |
| Distributions to partners | (63,264) | (56,561) |
| Distributions to preferred unitholders | (15,374) | (14,354) |
| Distributions to minority interest | (328) | (117) |
| Deferred financing costs | (4,250)
| (369)
|
| Net cash provided by (used for) financing activities | (50,192)
| 102,274
|
| | | |
| Net increase (decrease) in cash and cash equivalents | (134) | 19,342 |
| | | |
| Cash and cash equivalents at beginning of period | 39,200
| 18,514
|
| | | |
| Cash and cash equivalents at end of period | $39,066
| $37,856
|
| | | |
| Other non-cash items: | | |
| Assumption of debt for real estate acquisitions | $6,379
| $-
|
| Contributions of land and depreciable property to unconsolidated companies | $15,812
| $-
|
| Conversion of Limited Partner Units to shares | $518
| $(18)
|
| Issuance of Limited Partner Units for real estate acquisitions | $526
| $3,937
|
See accompanying Notes to Consolidated Financial Statements.
DUKE-WEEKS REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidated Statement of Partners’ Equity
For the Three months Ended March 31, 2001
(in thousands)
(Unaudited)
| | General Partner
| Limited
Partners'
Common
Equity
| Limited
Partners’
Preferred
Equity
| Accumulated
Other
Comprehensive
Income (Loss)
| Total
|
| | Common
Equity
| Preferred
Equity
|
| Balance at December 31, 2000 | $2,128,138 | $586,261 | $330,244 | $102,955 | $- | $3,147,598 |
| Comprehensive Income: | | | | | | |
| Net income | 58,770 | 13,272 | 8,635 | 2,102 | - | 82,779 |
| Distributions to preferred uniholders | - | (13,272) | - | (2,102) | - | (15,374) |
| Transition adjustments resulting from adoption of FASB 133 | - | - | - | - | 398 | 398 |
| Gains (losses) on derivative instruments | - | - | - | - | (1,036) | (1,036) |
| | | | | | |
|
| Comprehensive income available for common unitholders | - | - | - | - | - | 66,767 |
| Capital contribution from (repayments to) General Partner | 14,932 | 72,266 | - | - | - | 87,198 |
Acquisition of partnership interest for common stock of
General Partner | 3,802 | - | (3,284) | - | - | 518 |
Acquisition of property in exchange for Limited Partner
Units | - | - | 526 | - | - | 526 |
| Distributions to partners ($.43 per Common Unit) | (55,159)
| -
| (8,105)
| -
| -
| (63,264)
|
| | | | | | | |
| Balance at March 31, 2001 | $2,150,483
| $658,527
| $328,016
| $102,955
| $(638)
| $3,239,343
|
| Common units outstanding at March 31, 2001 | 128,791
| | 18,848
| | | 147,639
|
See accompanying Notes to Condensed Consolidated Financial Statements
DUKE-WEEKS 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-Weeks Realty Limited Partnership (the “Partnership”) without audit. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Partnership’s Annual Financial Statements.
The Partnership
The Partnership was formed on October 4, 1993, when the General Partner contributed all of its properties and related assets and liabilities along with the net proceeds 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 87.2% of the Partnership at March 31, 2001. The remaining limited partnership interest (“Limited Partner Units”) (together with the units of general partner interests, the (“Common Units”)) are mainly owned by the previous partners of Duke Associates. The Limited Partner Units are exchangeable for units of the General Partner’s common stock on a one-for-one basis subject generally to a one-year holding period. The General Partner periodically acquires a portion of the minority interest in the Partnership through the issuance of shares of common stock for a like number of Common Units. The acquisition of the minority interest is accounted for under the purchase method with assets acquired recorded at the fair market value of the General Partner's common stock on the date of acquisition.
The service operations are conducted through Duke Realty Services Limited Partnership and Duke Construction Limited Partnership, in which the Partnership has an 89% profits interest (after certain preferred returns on partners’ capital accounts) and effective control of their operations. The consolidated financial statements include the accounts of the Partnership and its majority-owned or controlled subsidiaries. The equity interests in these majority-owned or controlled subsidiaries not owned by the Partnership are reflected as minority interests in the consolidated financial statements.
2. Lines of Credit
The Partnership has the following lines of credit available (in thousands):
Description
| Borrowing
Capacity
| Maturity
Date
| Interest
Rate
| Outstanding
at March
31, 2001
|
| Unsecured Line of Credit | $500,000 | February 2004 | LIBOR + .65% | $15,000 |
| Unsecured Line of Credit | 150,000 | June 2001 | LIBOR + .775% | - |
| Secured Line of Credit | 150,000 | January 2003 | LIBOR + 1.05% | 57,434 |
The lines of credit are used to fund development and acquisition of additional rental properties and to provide working capital.
The $500 million line of credit allows the Partnership an option to obtain borrowings from the financial institutions that participate in the line of credit at rates lower than the stated interest rate, subject to certain restrictions. Amounts outstanding on the line of credit at March 31, 2001 are at LIBOR + .65%.
3. Related Party Transactions
The Partnership provides management, maintenance, leasing, construction, and other tenant related services to properties in which certain executive officers have continuing ownership interests. The Partnership was paid fees totaling approximately $519,000 and $536,000 for such services for the three months ended March 31, 2001 and 2000, 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 unitholders by the weighted average number of common units outstanding for the period. Diluted net income per common unit is computed by dividing net income available for common unitholders by the sum of the weighted average number of common units and dilutive potential common units for the period.
The following table reconciles the components of basic and diluted net income per common unit for the three months ended March 31:
| | 2001
| 2000
|
| | | |
| Net income available for common unitholders | $67,405 | $56,293 |
| Joint venture partner convertible ownership | $729
| $-
|
| Diluted net income available for common unitholders | $68,134
| $56,293
|
| | | |
| Weighted average partnership common units outstanding | 147,240 | 145,125 |
| Joint venture partner convertible ownership common unit equivalents | 2,101 | - |
| Dilutive units for long-term compensation plans | 1,690
| 1,201
|
| Weighted average number of common units and dilutive | | |
| potential common units | 151,031
| 146,326
|
The Preferred D Series Convertible equity and Preferred G Convertible units were both anti-dilutive at March 31, 2001; therefore, no conversion to common units is included in weighted dilutive potential common units.
A joint venture partner in one of the Partnership's unconsolidated ventures has the option to convert a portion of its ownership to General Partners common shares. The effects of the option on earnings per unit was dilutive at March 31, 2001; therefore, additional equity in earnings is included in diluted net income available for common unitholders and conversion to common units is included in weighted dilutive potential common units.
5. Segment Reporting
The Partnership is engaged in four operating segments; the ownership and rental of office, industrial and retail real estate investments and the providing of various real estate services such as property management, maintenance, leasing and construction management to third-party property owners (“Service Operations”). The Partnership’s 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 to reconcile to total revenue consists mainly of equity in earnings of unconsolidated companies. Non-segment assets to reconcile to total assets consist of corporate assets including cash, deferred financing costs and investments in unconsolidated companies.
The Partnership assesses and measures segment operating results based on an industry performance measure referred to as Funds From Operations (“FFO”). The National Association of Real Estate Investment Trusts defines FFO as net income or loss, excluding gains or losses from debt restructuring and sales of depreciated operating property, plus operating property depreciation and amortization and adjustments for minority interest and unconsolidated companies on the same basis. FFO is not a measure of operating results or cash flows from operating activities as measured by generally accepted accounting principles, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. Interest expense and other non-property specific revenues and expenses are not allocated to individual segments in determining the Partnership’s performance measure.
The revenues and FFO for each of the reportable segments for the three months ended March 31, 2001 and 2000 and the assets for each of the reportable segments as of March 31, 2001 and December 31, 2000 are summarized as follows:
| | Three Months Ended March 31
|
| | 2001
| 2000
|
| Revenues | | |
| Rental Operations: | | |
| Office | $92,452 | $80,254 |
| Industrial | 73,434 | 83,743 |
| Retail | 7,004 | 7,123 |
| Service Operations | 22,322
| 14,065
|
| Total Segment Revenues | 195,212 | 185,185 |
| Non-Segment Revenue | 11,078
| 3,614
|
| Consolidated Revenue | $206,290
| $188,799
|
| | | |
| Funds From Operations | | |
| Rental Operations: | | |
| Office | $62,546 | $54,178 |
| Industrial | 56,610 | 65,158 |
| Retail | 5,723 | 5,512 |
| Service Operations | 9,288
| 5,376
|
| Total Segment FFO | 134,167 | 130,224 |
| | | |
| Non-Segment FFO: | | |
| Interest expense | (29,613) | (32,681) |
| Interest income | 1,435 | 1,620 |
| General and administrative expense | (4,027) | (5,164) |
| Gain on land sales | 677 | 3,616 |
| Other expenses | (526) | (469) |
| Minority interest in earnings of subsidiaries | (911) | (661) |
| Joint venture FFO | 11,188 | 4,288 |
| Dividends on preferred units | (15,374)
| (14,354)
|
| Consolidated FFO | 97,016 | 86,419 |
| | | |
| Depreciation and amortization | (40,314) | (39,367) |
| Share of joint venture adjustments | (1,137) | (1,417) |
| Earnings from depreciated property sales | 11,840
| 10,658
|
| | | |
| Net Income Available for Common Unitholders | $67,405
| $56,293
|
| | March 31, | December 31, |
| | 2001
| 2000
|
| Assets | | |
| Rental Operations: | | |
| Office | $2,501,196 | $2,473,191 |
| Industrial | 2,261,267 | 2,265,237 |
| Retail | 184,701 | 186,389 |
| Service Operations | 126,918
| 128,249
|
| Total Non-Segment Assets | 5,074,082 | 5,053,066 |
| Non-Segment Assets | 406,669
| 408,167
|
| Consolidated Assets | $5,480,751
| $5,461,233
|
6. Real Estate Assets Held for Sale
In order to redeploy capital, the Partnership has an active sales program through which it is continually pursuing favorable opportunities to dispose of real estate assets that do not meet long-term investment objectives of the Partnership. At March 31, 2001, the Partnership had 25 industrial, 6 office and three retail properties comprising approximately 4.1 million square feet held for sale. Of these properties, six build-to-suit industrial, four build-to-suit office and two build-to-suit retail properties were under development at March 31, 2001. Net operating income (defined as total property revenues, less property expenses, which include real estate taxes, repairs and maintenance, property management, utilities, insurance and other expenses) of the properties held for sale for the three months ended March 31, 2001, was approximately $2.3 million. Net book value of the properties were $152.1 million. There can be no assurances that such properties will be sold.
7. Partners’ Equity
The following series of preferred equity are outstanding as of March 31, 2001 (in thousands, except percentages):
Description
| Units
Outstanding
| Dividend
Rate
| Redemption
Date
| Liquidation
Preference
| Convertible
|
| Preferred A Series | 300 | 9.100% | August 31, 2001 | $75,000 | No |
| Preferred B Series | 300 | 7.990% | September 30, 2007 | 150,000 | No |
| Preferred D Series | 539 | 7.375% | December 31, 2003 | 134,883 | Yes |
| Preferred E Series | 400 | 8.250% | January 20, 2004 | 100,000 | No |
| Preferred F Series | 600 | 8.000% | October 10, 2002 | 150,000 | No |
| Preferred I Series | 300 | 8.450% | February 6, 2006 | 75,000 | No |
All series of preferred equity require cumulative distributions, have no stated maturity date, and the redemption price of each series may only be paid from the proceeds of other capital contributions of the General Partner, which may include other classes or series of preferred equity.
The Preferred I Series equity was issued in February 2001.
The Preferred D Series equity is convertible at a conversion rate of 9.3677 common units for each preferred unit outstanding.
The dividend rate on the Preferred B Series equity increases to 9.99% after September 12, 2012.
The Partnership intends to redeem the Preferred A Series shares in September 2001.
8. Other Matters
Reclassifications
Certain 2000 balances have been reclassified to conform to 2001 presentation.
9. Derivative Instruments
The Partnership adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) as amended by SFAS No. 137 and No. 138 on January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Partnership uses derivative financial instruments such as interest rate swaps to mitigate its interest rate risk on a related financial instrument. SFAS 133 requires that changes in fair value of derivatives that qualify as cash flow hedges be recognized in other comprehensive income while the ineffective portion of the derivative's change in fair value be recognized immediately in earnings. One of the Partnership's interest rate swap contracts did not meet the criteria of SFAS 133 to qualify for hedge accounting. SFAS 133 requires that unrealized gains and losses on derivatives not qualifying as hedge accounting be recognized currently in earnings. The cumulative effect of a change in accounting principle due to the adoption of SFAS 133 as of January 1, 2001, was $398,000 and was recorded in accumulated other comprehensive income as a transition adjustment. The Partnership recorded a net loss of $1.0 million in other comprehensive income for its interest rate swap contracts qualifying for hedge accounting and a net loss of $659,000 in other expense for the interest rate swap contract that did not qualify for hedge accounting for the three month period ended March 31, 2001.
10. Subsequent Events
The Board of Directors of the General Partner declared the following distributions on April 25, 2001:
| | Quarterly | | |
| Class
| Amount/Unit
| Record Date
| Payment Date
|
| Common | $0.43 | May 15, 2001 | May 31, 2001 |
| Preferred: | | | |
| Series A | $0.56875 | May 17, 2001 | May 31, 2001 |
| Series B | $0.99875 | June 15, 2001 | June 29, 2001 |
| Series D | $0.46094 | June 15, 2001 | June 29, 2001 |
| Series E | $0.51563 | June 15, 2001 | June 29, 2001 |
| Series F | $0.50000 | July 17, 2001 | July 31, 2001 |
| Series I | $0.52813 | June 15, 2001 | June 29, 2001 |
Independent Accountants’ Review Report
The Partners
Duke-Weeks Realty Limited Partnership:
We have reviewed the condensed consolidated balance sheet of Duke-Weeks Realty Limited Partnership and subsidiaries as of March 31, 2001, the related condensed consolidated statements of operations for the three months ended March 31, 2001 and 2000, the related condensed consolidated statements of cash flows for the three months ended March 31, 2001 and 2000, and the related condensed consolidated statement of partners’ equity for the three months ended March 31, 2001. 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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Duke-Weeks Realty Limited Partnership and subsidiaries as of December 31, 2000, and the related consolidated statements of operations, partners’ equity and cash flows for the year then ended (not presented herein); and in our report dated January 25, 2001, 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, 2000 is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
KPMG LLP
Indianapolis, Indiana
April 25, 2001
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 have continued to offer strong and stable local economies and have provided attractive new development opportunities because of their established manufacturing base, skilled work force and moderate labor costs. The Partnership expects to continue to maintain its overall occupancy levels and also expects to be able to maintain rental rates as leases are renewed or new leases are executed. This combination 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 markets.
The Partnership tracks Same Property performance which compares those properties that were in-service for all of a two year period. The net operating income from the same property portfolio increased 7.58% for the three months ended March 31, 2001 compared to the three months ended March 31, 2000.
The following table sets forth information regarding the Partnership’s in-service portfolio of rental properties as of March 31, 2001 and 2000 (in thousands, except percentages):
| | Total
Square Feet
| Percent of
Total Square Feet
| Percent Occupied
|
Type
| 2001
| 2000
| 2001
| 2000
| 2001
| 2000
|
| Industrial | | | | | | |
| Service Centers | 13,667 | 12,870 | 13.5% | 14.0% | 90.7% | 93.1% |
| Bulk | 63,408 | 57,749 | 62.5% | 62.7% | 93.5% | 90.5% |
| Office | | | | | | |
| Suburban | 21,054 | 17,982 | 20.8% | 19.5% | 90.4% | 90.9% |
| CBD | 861 | 861 | .8% | .9% | 94.1% | 93.6% |
| Retail | 2,463
| 2,703
| 2.4%
| 2.9%
| 96.7%
| 96.5%
|
| Total | 101,453
| 92,165
| 100.0%
| 100.0%
| 92.6%
| 91.2%
|
The following table reflects the Partnership’s in-service portfolio lease expiration schedule as of March 31, 2001 by product type indicating square footage and annualized net effective rents under expiring leases (in thousands, except per square foot amounts):
| | Total | | | |
| | Portfolio
| Industrial
| Office
| Retail
|
| Year of | Square | Ann. Rent | | Square | Ann. Rent | Square | Ann. Rent | Square | Ann. Rent |
Expiration
| Feet
| Revenue
| Percent
| Feet
| Revenue
| Feet
| Revenue
| Feet
| Revenue
|
| 2001 | 6,614 | $41,046 | 6% | 5,258 | $24,496 | 1,308 | $15,963 | 48 | $587 |
| 2002 | 10,167 | 63,036 | 10% | 8,211 | 39,248 | 1,882 | 22,755 | 74 | 1,033 |
| 2003 | 10,379 | 68,465 | 11% | 8,284 | 41,313 | 1,976 | 25,709 | 119 | 1,443 |
| 2004 | 11,135 | 75,233 | 12% | 8,653 | 41,456 | 2,388 | 32,466 | 94 | 1,311 |
| 2005 | 13,908 | 97,369 | 15% | 10,633 | 51,139 | 2,981 | 43,252 | 294 | 2,978 |
| 2006 | 9,783 | 64,747 | 10% | 7,731 | 36,047 | 2,010 | 28,130 | 42 | 570 |
| 2007 | 5,819 | 40,688 | 6% | 4,739 | 25,151 | 1,031 | 14,947 | 49 | 590 |
| 2008 | 5,761 | 36,592 | 6% | 4,639 | 21,324 | 1,065 | 14,635 | 57 | 633 |
| 2009 | 6,248 | 38,238 | 6% | 5,125 | 21,941 | 1,040 | 15,086 | 83 | 1,211 |
| 2010 | 5,886 | 48,454 | 8% | 3,902 | 19,145 | 1,697 | 26,845 | 287 | 2,464 |
| 2011 and Thereafter | 8,230
| 70,100
| 10%
| 4,526
| 21,416
| 2,470
| 36,703
| 1,234
| 11,981
|
| Total Leased | 93,930
| $643,968
| 100%
| 71,701
| $342,676
| 19,848
| $276,491
| 2,381
| $24,801
|
| | | | | | | | | | |
| | | | | | | | | | |
| Total Portfolio Square Feet | 101,453
| | | 77,075
| | 21,915
| | 2,463
| |
| | | | | | | | | | |
| Annualized net effective rent per square foot | | $6.86
| | | $4.78
| | $13.93
| | $10.42
|
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 markets; and (iii) the completion of the 8.9 million square feet of properties under development at March 31, 2001 over the next three quarters and thereafter. These properties under development should provide future earnings through Service Operations income upon sale or 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 Date
| Square
Feet
| Percent
Leased
| Project
Costs
| Stabilized
Return
| |
|
| | | | | | |
| Held for Rental: | | | | | |
| | | | | | |
| 2nd Quarter 2001 | 1,500 | 14% | $105,355 | 11.66% | |
| 3rd Quarter 2001 | 1,841 | 20% | 61,002 | 11.43% | |
| 4th Quarter 2001 | 1,553 | 25% | 61,590 | 11.33% | |
| Thereafter | 346
| 38%
| 48,328
| 11.60%
| |
| | 5,240
| 21%
| $276,275
| 11.53%
| |
| Build-to-Suit for Sale: | | | | | |
| | | | | | |
| 2nd Quarter 2001 | 559 | 59% | $38,423 | | |
| 3rd Quarter 2001 | 1,704 | 92% | 101,347 | | |
| 4th Quarter 2001 | 1,035 | 100% | 46,927 | | |
| Thereafter | 402
| 100%
| 33,535
| | |
| | 3,700
| 90%
| $220,232
| | |
| Total | 8,940
| 49%
| $496,507
| | |
Results of Operations
Following is a summary of the Partnership’s operating results and property statistics for the three months ended March 31, 2001 and 2000 (in thousands, except number of properties and per unit amounts):
| | 2001
| 2000
|
| | | |
| Rental Operations revenue | $183,968 | $174,734 |
| Service Operations revenue | 22,322 | 14,065 |
| Earnings from Rental Operations | 65,416 | 55,324 |
| Earnings from Service Operations | 9,288 | 5,376 |
| Operating income | 70,677 | 55,536 |
| Net income available for common unitholders | 67,405 | 56,293 |
| Weighted average common units outstanding | 147,240 | 145,125 |
Weighted average common and dilutive potential
common units | 151,031 | 146,326 |
| Basic income per common unit | $.46 | $.39 |
| Diluted income per common unit | $.45 | $.39 |
| Number of in-service properties at end of period | 912 | 871 |
| In-service square footage at end of period | 101,453 | 92,165 |
| Under development square footage at end of period | 8,940 | 9,876 |
Comparison of Three Months Ended March 31, 2001 to Three Months Ended March 31, 2000
Rental Operations
Rental Operations revenue increased to $184.0 million from $174.7 million for the three months ended March 31, 2001, compared to the same period in 2000. This increase is primarily due to the increase in the number of in-service properties during the respective periods. As of March 31, 2001, the Partnership had 912 properties in service compared to 871 properties at March 31, 2000. The following is a summary of the Partnership's acquisition and development activity since January 1, 2000:
| | | Square |
| | Buildings
| Feet
|
| Properties owned as of: | | |
| January 1, 2000 | 865 | 92,502 |
| Acquisitions | 2 | 169 |
| Developments placed in service | 75 | 11,546 |
| Dispositions | (53) | (6,586) |
| Contributions from joint venture Partners | 24
| 3,331
|
| December 31, 2000 | 913 | 100,962 |
| Acquisitions | 5 | 258 |
| Developments placed in service | 13 | 2,356 |
| Dispositions | (19)
| 2,123
|
| March 31, 2001 | 912
| 101,453
|
Rental property and depreciation and amortization expenses increased for the three months ended March 31, 2001, compared to the same period in 2000, due to the increase in the number of in-service properties during the respective periods.
The $3.1 million decrease in interest expense is primarily attributable to lower outstanding debt balances on the Partnership's lines of credit associated with the financing of the Partnership's investment activities.
As a result of the above-mentioned items, earnings from Rental Operations increased $10.1 million from $55.3 million for the three months ended March 31, 2000, to $65.4 million for the three months ended March 31, 2001.
Service Operations
Service Operations revenues increased by $8.2 million from $14.1 million for the three months ended March 31, 2000, to $22.3 million for the three months ended March 31, 2001, primarily as a result of increases in construction and development income from increased third-party construction.
Service Operations operating expenses increased from $8.7 million for the three months ended March 31, 2000, to $13.0 million for the three months ended March 31, 2001, primarily due to increases in payroll and maintenance expenses due to the overall growth of the Partnership and the increased portfolio of buildings associated with this growth.
As a result, earnings from Service Operations increased from $5.4 million for the three months ended March 31, 2000, to $9.3 million for the three months ended March 31, 2001.
Other Income and Expenses
The Partnership has a disposition strategy to pursue favorable opportunities to dispose of real estate assets that no longer meet long-term investment objectives of the Partnership, which resulted in net sales proceeds of $93.5 million and a net gain of $12.5 million during the three months ended March 31, 2001. In conjunction with this disposition strategy, included in net real estate investments are 34 buildings with a net book value of $152.1 million which were classified as held for sale by the Partnership at March 31, 2001. The Partnership expects to complete these and other dispositions and use the proceeds to fund future investments in real estate assets.
The Partnership adopted Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) as amended by SFAS No. 137 and No. 138 on January 1, 2001. A net loss of $659,000 was recorded in other expense for an interest rate swap contract which did not qualify for hedge accounting for the three month period ended March 31, 2001.
Net Income Available for Common Unitholders
Net income available for common unitholders for the three months ended March 31, 2001, was $67.4 million compared to $56.3 million for the three months ended March 31, 2000. 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 $93.5 million and $99.1 million for the three months ended March 31, 2001 and 2000, respectively, represents the primary source of liquidity to fund distributions to unitholders and the other minority interests and to fund recurring costs associated with the renovation and re-letting of the Partnership’s properties.
Net cash used by investing activities totaling $43.4 million and $182.1 million for the three months ended March 31, 2001 and 2000, respectively, represents the investment of funds by the Partnership to expand its portfolio of rental properties through the development and acquisition of additional rental properties net of proceeds received from land and depreciated property sales.
Net cash used for financing activities of $50.2 million for the three months ended March 31, 2001 compared to $102.3 million for the three months ended March 31, 2000, is comprised of debt and equity issuances, net of distributions to unitholders and repayment on outstanding indebtedness. During the first three months of 2001, the Partnership received $72.3 million of net proceeds from the issuance of preferred stock and $175.0 million of proceeds from the issuance of 10 year 6.95% unsecured debt.
The Partnership has the following lines of credit available (in thousands):
Description
| Borrowing
Capacity
| Maturity
Date
| Interest
Rate
| Outstanding
at March
31, 2001
|
| Unsecured Line of Credit | $500,000 | February 2004 | LIBOR + .65% | $15,000 |
| Unsecured Line of Credit | 150,000 | June 2001 | LIBOR + .775% | - |
| Secured Line of Credit | 150,000 | January 2003 | LIBOR + 1.05% | 57,434 |
The lines of credit are used to fund development and acquisition of additional rental properties and to provide working capital.
The $500 million line of credit allows the Partnership an option to obtain borrowings from the financial institutions that participate in the line of credit at rates lower than the stated interest rate, subject to certain restrictions. Amounts outstanding on the line of credit at March 31, 2001 are at LIBOR + .65%.
The General Partners and the Partnership currently have on file one Form S-3 Registration Statement with the Securities and Exchange Commission (“Shelf Registration”) which had remaining availability as of March 31, 2001 of approximately $718.0 million to issue common stock, preferred stock or unsecured debt securities. The General Partners and the Partnership intend to issue additional equity or debt under the Shelf Registration as capital needs arise to fund the development and acquisition of additional rental properties. The General Partners and the Partnership also plan to file additional shelf registrations as necessary.
The total debt outstanding at March 31, 2001 consists of notes totaling $1.9 billion with a weighted average interest rate of 7.19% maturing at various dates through 2028. The Partnership has $1.5 billion of unsecured debt and $449.7 million of secured debt outstanding at March 31, 2001. Scheduled principal amortization of such debt totaled $3.1 million for the three months ended March 31, 2001.
Following is a summary of the scheduled future amortization and maturities of the Partnership’s indebtedness at March 31, 2001 (in thousands):
| | Future Repayments
| | |
| | Scheduled Amortization
| Maturities
| Total
| Weighted Average
Interest Rate of
Future Repayments
| |
|
| | | | | | |
| 2001 | $8,226 | $193,013 | $201,239 | 7.21% | |
| 2002 | 11,095 | 50,000 | 61,095 | 7.29% | |
| 2003 | 10,931 | 338,647 | 349,578 | 7.37% | |
| 2004 | 9,212 | 176,186 | 185,398 | 7.39% | |
| 2005 | 7,824 | 219,642 | 227,466 | 7.17% | |
| 2006 | 6,730 | 146,178 | 152,908 | 7.10% | |
| 2007 | 4,910 | 116,555 | 121,465 | 7.10% | |
| 2008 | 3,605 | 100,000 | 103,605 | 6.75% | |
| 2009 | 3,863 | 150,000 | 153,863 | 7.73% | |
| 2010 | 4,190 | - | 4,190 | 6.87% | |
| Thereafter | 15,382
| 350,000
| 365,382
| 6.87%
| |
| Total | $85,968
| $1,840,220
| $1,926,189
| 7.19%
| |
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 depreciated property, plus operating property depreciation and amortization and adjustments for minority interest and unconsolidated companies 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 months ended March 31 as follows (in thousands):
| | 2001
| 2000
|
| | | |
| Net income available for common unitholders | $67,405 | $56,293 |
| Add back (deduct): | | |
| Depreciation and amortization | 40,314 | 39,367 |
| Share of joint venture adjustments | 1,137 | 1,417 |
| Earnings from depreciated property sales | (11,840)
| (10,658)
|
| Funds From Operations | $97,016
| $86,419
|
| Cash flow provided by (used by): | | |
| Operating activities | $93,453 | $99,124 |
| Investing activities | (43,395) | (182,056) |
| Financing activities | (50,192) | 102,274 |
The increase in FFO for the three months ended March 31, 2001 compared to the three months ended March 31, 2000 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.
Part II - 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 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.
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-WEEKS REALTY LIMITED PARTNERSHIP |
| | | |
| | | Registrant |
| | | |
Date: May 15, 2001
| | |
| | | /s/ Thomas L. Hefner
|
| | | |
| | | President and |
| | | Chief Executive Officer |
| | | |
| | | |
| | | /s/ Darell E. Zink, Jr.
|
| | | Executive Vice President and |
| | | Chief Financial Officer |
| | | |
| | | |
| | | /s/ Dennis D. Oklak
|
| | | |
| | | Executive Vice President and |
| | | Chief Administrative Officer |
| | | (Chief Accounting Officer) |
