UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________.
Commission File Number: 1-9044
DUKE REALTY LIMITED PARTNERSHIP
Indiana |
| 35-1898425 |
(State of Incorporation) |
| (IRS Employer ID Number) |
|
|
|
600 East 96th Street, Suite 100, Indianapolis, Indiana |
| 46240 |
(Address of principal executive offices) |
| (Zip Code) |
|
|
|
(317) 808-6000 | ||
(Telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
The number of Common Units outstanding as of October 31, 2001 was 17,580,718 ($.01 par value).
DUKE REALTY LIMITED PARTNERSHIP
INDEX
PART I - FINANCIAL INFORMATION
DUKE REALTY LIMITED PARTNERSHIP
Condensed Consolidated Balance Sheets
(in thousands, except per unit amounts)
|
| September 30, |
| December 31, |
| ||
ASSETS |
| 2001 |
| 2000 |
| ||
|
| (Unaudited) |
|
|
| ||
Real estate investments: |
|
|
|
|
| ||
Land and improvements |
| $ | 566,278 |
| $ | 581,530 |
|
Buildings and tenant improvements |
| 3,975,476 |
| 3,989,033 |
| ||
Construction in progress |
| 197,121 |
| 216,938 |
| ||
Investments in unconsolidated companies |
| 330,132 |
| 367,581 |
| ||
Land held for development |
| 285,333 |
| 257,779 |
| ||
|
| 5,354,340 |
| 5,412,861 |
| ||
Accumulated depreciation |
| (396,186 | ) | (338,426 | ) | ||
|
|
|
|
|
| ||
Net real estate investments |
| 4,958,154 |
| 5,074,435 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents |
| 9,966 |
| 39,200 |
| ||
Accounts receivable, net of allowance of $2,747 and $1,540 |
| 16,873 |
| 19,454 |
| ||
Straight-line rent receivable, net of allowance of $841 and $1,460 |
| 39,971 |
| 34,512 |
| ||
Receivables on construction contracts |
| 47,434 |
| 45,394 |
| ||
Deferred financing costs, net of accumulated amortization of $16,399 and $13,288 |
| 13,430 |
| 12,475 |
| ||
Deferred leasing and other costs, net of accumulated amortization of $38,440 and $31,522 |
| 94,336 |
| 102,413 |
| ||
Escrow deposits and other assets |
| 123,916 |
| 133,350 |
| ||
|
| $ | 5,304,080 |
| $ | 5,461,233 |
|
LIABILITIES AND PARTNERS' EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Indebtedness: |
|
|
|
|
| ||
Secured debt |
| $ | 367,522 |
| $ | 466,624 |
|
Unsecured notes |
| 1,376,428 |
| 1,286,591 |
| ||
Unsecured lines of credit |
| 20,000 |
| 220,000 |
| ||
|
| 1,763,950 |
| 1,973,215 |
| ||
|
|
|
|
|
| ||
Construction payables and amounts due subcontractors |
| 76,343 |
| 70,105 |
| ||
Accounts payable |
| 3,011 |
| 4,312 |
| ||
Accrued expenses: |
|
|
|
|
| ||
Real estate taxes |
| 64,623 |
| 51,328 |
| ||
Interest |
| 19,096 |
| 28,780 |
| ||
Other |
| 43,716 |
| 61,028 |
| ||
Other liabilities |
| 114,315 |
| 88,542 |
| ||
Tenant security deposits and prepaid rents |
| 29,178 |
| 34,208 |
| ||
Total liabilities |
| 2,114,232 |
| 2,311,518 |
| ||
|
|
|
|
|
| ||
Minority interest |
| 2,888 |
| 2,117 |
| ||
|
|
|
|
|
| ||
Partners’ equity: |
|
|
|
|
| ||
General Partner |
|
|
|
|
| ||
Common equity |
| 2,191,152 |
| 2,128,138 |
| ||
Preferred equity (liquidation preference of $683,753) |
| 583,448 |
| 586,261 |
| ||
|
| 2,774,600 |
| 2,714,399 |
| ||
Limited partners' common equity |
| 309,645 |
| 330,244 |
| ||
Limited partners' preferred equity |
| 102,955 |
| 102,955 |
| ||
Accumulated other comprehensive income |
| (240 | ) | - |
| ||
Total Partners' equity |
| 3,186,960 |
| 3,147,598 |
| ||
|
| $ | 5,304,080 |
| $ | 5,461,233 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30,
(in thousands, except per unit amounts)
(Unaudited)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2001 |
| 2000 |
| 2001 |
| 2000 |
| ||||
RENTAL OPERATIONS: |
|
|
|
|
|
|
|
|
| ||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Rental income |
| $ | 171,175 |
| $ | 182,525 |
| $ | 519,626 |
| $ | 528,617 |
|
Equity in earnings of unconsolidated companies |
| 7,024 |
| 3,235 |
| 24,309 |
| 10,285 |
| ||||
|
| 178,199 |
| 185,760 |
| 543,935 |
| 538,902 |
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
Rental expenses |
| 31,089 |
| 30,322 |
| 91,593 |
| 87,428 |
| ||||
Real estate taxes |
| 18,279 |
| 18,833 |
| 54,202 |
| 56,417 |
| ||||
Interest expense |
| 28,042 |
| 36,376 |
| 86,326 |
| 105,310 |
| ||||
Depreciation and amortization |
| 38,282 |
| 41,875 |
| 116,591 |
| 119,990 |
| ||||
|
| 115,692 |
| 127,406 |
| 348,712 |
| 369,145 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings from rental operations |
| 62,507 |
| 58,354 |
| 195,223 |
| 169,757 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
SERVICE OPERATIONS: |
|
|
|
|
|
|
|
|
| ||||
Revenues: |
| 4,758 |
| 5,937 |
| 19,252 |
| 18,202 |
| ||||
Property management, maintenance and leasing fees |
| 14,480 |
| 15,634 |
| 45,248 |
| 41,581 |
| ||||
Construction and development activity income |
| 2,438 |
| 332 |
| 3,125 |
| 1,226 |
| ||||
Other income |
| 21,676 |
| 21,903 |
| 67,625 |
| 61,009 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
| 9,836 |
| 13,410 |
| 37,270 |
| 36,187 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings from service operations |
| 11,840 |
| 8,493 |
| 30,355 |
| 24,822 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
General and administrative expense |
| (1,437 | ) | (5,825 | ) | (10,152 | ) | (15,499 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
| 72,910 |
| 61,022 |
| 215,426 |
| 179,080 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
| ||||
Interest income |
| 1,587 |
| 1,630 |
| 4,589 |
| 5,533 |
| ||||
Earnings from land and depreciated property dispositions |
| 30,513 |
| 4,450 |
| 43,176 |
| 21,111 |
| ||||
Other expense |
| (916 | ) | (111 | ) | (2,283 | ) | (361 | ) | ||||
Other minority interest in earnings of subsidiaries |
| (727 | ) | (697 | ) | (1,968 | ) | (1,669 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| 103,367 |
| 66,294 |
| 258,940 |
| 203,694 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Dividends on preferred units |
| (15,349 | ) | (14,345 | ) | (46,640 | ) | (43,050 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income available for common unitholders |
| $ | 88,018 |
| $ | 51,949 |
| $ | 212,300 |
| $ | 160,644 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income per common unit: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | .59 |
| $ | .36 |
| $ | 1.44 |
| $ | 1.10 |
|
Diluted |
| $ | .58 |
| $ | .35 |
| $ | 1.42 |
| $ | 1.09 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of common units outstanding |
| 148,396 |
| 146,138 |
| 147,850 |
| 145,662 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of common and dilutive potential common units |
| 158,594 |
| 147,916 |
| 151,623 |
| 147,217 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30
(in thousands)
(Unaudited)
|
| 2001 |
| 2000 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
| $ | 258,940 |
| $ | 203,694 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation of buildings and tenant improvements |
| 102,944 |
| 106,467 |
| ||
Amortization of deferred leasing and other costs |
| 13,647 |
| 13,523 |
| ||
Amortization of deferred financing costs |
| 3,611 |
| 2,702 |
| ||
Minority interest in earnings |
| 1,968 |
| 1,669 |
| ||
Straight-line rent adjustment |
| (9,316 | ) | (12,819 | ) | ||
Earnings from land and depreciated property dispositions |
| (43,176 | ) | (21,111 | ) | ||
Construction contracts, net |
| 9,970 |
| (18,342 | ) | ||
Other accrued revenues and expenses, net |
| 17,890 |
| 25,718 |
| ||
Equity in earnings in (excess)/shortfall of operating distributions received from unconsolidated companies |
| 9,968 |
| (105 | ) | ||
Net cash provided by operating activities |
| 366,446 |
| 301,396 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Development of real estate investments |
| (282,521 | ) | (409,428 | ) | ||
Acquisition of real estate investments |
| (13,927 | ) | (5,932 | ) | ||
Acquisition of land held for development and infrastructure costs |
| (69,187 | ) | (73,194 | ) | ||
Recurring tenant improvements |
| (12,236 | ) | (24,085 | ) | ||
Recurring leasing costs |
| (10,515 | ) | (14,175 | ) | ||
Recurring building improvements |
| (7,103 | ) | (4,924 | ) | ||
Other deferred leasing costs |
| (3,662 | ) | (27,941 | ) | ||
Other deferred costs and other assets |
| (17,986 | ) | (9,548 | ) | ||
Tax deferred exchange escrow, net |
| 7,157 |
| 5,235 |
| ||
Proceeds from land and depreciated property sales, net |
| 403,783 |
| 345,064 |
| ||
Capital distributions from unconsolidated companies |
| 59,468 |
| - |
| ||
Advances from (to) unconsolidated companies |
| (16,196 | ) | (24,891 | ) | ||
Net cash provided by (used for) investing activities |
| 37,075 |
| (243,819 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Contributions from General Partner |
| 106,173 |
| 21,842 |
| ||
Proceeds from indebtedness |
| 175,000 |
| - |
| ||
Payments for redemption of preferred stock |
| (75,014 | ) | - |
| ||
Payments on indebtedness including principal amortization |
| (193,830 | ) | 240,026 |
| ||
Borrowings/ (repayments) on lines of credit, net |
| (195,975 | ) | (73,810 | ) | ||
Distributions to partners |
| (195,538 | ) | (176,231 | ) | ||
Distributions to preferred unitholders |
| (47,208 | ) | (43,050 | ) | ||
Distributions to minority interest |
| (1,217 | ) | (1,349 | ) | ||
Deferred financing costs |
| (5,146 | ) | (2,400 | ) | ||
Net cash used for financing activities |
| (432,755 | ) | (34,972 | ) | ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
| (29,234 | ) | 22,605 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 39,200 |
| 18,514 |
| ||
Cash and cash equivalents at end of period |
| $ | 9,966 |
| $ | 41,119 |
|
|
|
|
|
|
| ||
Other non-cash items: |
|
|
|
|
| ||
Assumption of debt for real estate acquisitions |
| $ | 6,379 |
| $ | - |
|
Contributions of property to unconsolidated companies |
| $ | 15,812 |
| $ | - |
|
Conversion of Limited Partner Units to units |
| $ | 2,303 |
| $ | 6,806 |
|
Issuance of Limited Partner Units for real estate acquisitions |
| $ | 2,487 |
| $ | 7,615 |
|
Transfer of mortgage debt in sale of depreciated property |
| $ | - |
| $ | 72,650 |
|
Issuance of Limited Partner Units for sale of depreciated property |
| $ | 13,445 |
| $ | - |
|
See accompanying Notes to Condensed Consolidated Financial Statements
Condensed Consolidated Statement of Partners’ Equity
For the nine months ended September 30, 2001
(in thousands, except per unit data)
(Unaudited)
|
|
|
|
|
| Limited |
| Limited |
| Accumulated |
|
|
| ||||||
|
| General Partner |
| Partners' |
| Partners’ |
| Other |
|
|
| ||||||||
|
| Common |
| Preferred |
| Common |
| Preferred |
| Comprehensive |
|
|
| ||||||
|
| Equity |
| Equity |
| Equity |
| Equity |
| Income (Loss) |
| Total |
| ||||||
Balance at December 31, 2000 |
| $ | 2,128,138 |
| $ | 586,261 |
| $ | 330,244 |
| $ | 102,955 |
| $ | - |
| $ | 3,147,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| 184,979 |
| 40,902 |
| 26,753 |
| 6,306 |
| - |
| 258,940 |
| ||||||
Distributions to preferred unitholders |
| - |
| (40,902 | ) | - |
| (6,306 | ) | - |
| (47,208 | ) | ||||||
Transition adjustment resulting from adoption of FASB No. 133 |
| - |
| - |
| - |
| - |
| 398 |
| 398 |
| ||||||
Gains (losses) on derivative instruments |
| - |
| - |
| - |
| - |
| (1,143 | ) | (1,143 | ) | ||||||
Settlement of derivative instrument |
| - |
| - |
| - |
| - |
| 505 |
| 505 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Comprehensive income available for common unitholders |
|
|
|
|
|
|
|
|
|
|
| 211,492 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Capital contribution from General Partner |
| 35,058 |
| 72,235 |
| - |
| - |
| - |
| 107,293 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Acquisition of partnership interest for common stock of General Partner |
| 12,359 |
| - |
| (10,056 | ) | - |
| - |
| 2,303 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Acquisition of partnership interest for real estate investments |
| - |
| - |
| (13,445 | ) | - |
| - |
| (13,445 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Acquisition of property in exchange for Limited Partner Units |
| - |
| - |
| 2,487 |
| - |
| - |
| 2,487 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
General Partner’s redemption of Series A Preferred stock |
| - |
| (75,014 | ) | - |
| - |
| - |
| (75,014 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Conversion of Series D Preferred equity to common units |
| 34 |
| (34 | ) | - |
| - |
| - |
| - |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Retirement of common units |
| (216 | ) | - |
| - |
| - |
| - |
| (216 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Distributions to partners ($1.31 per Common Unit) |
| (169,200 | ) | - |
| (26,338 | ) | - |
| - |
| (195,538 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at September 30, 2001 |
| $ | 2,191,152 |
| $ | 583,448 |
| $ | 309,645 |
| $ | 102,955 |
| $ | (240 | ) | $ | 3,186,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common units outstanding at September 30, 2001 |
| 130,236 |
|
|
| 17,957 |
|
|
|
|
| 148,193 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
DUKE REALTY LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statements
The interim condensed consolidated financial statements included herein have been prepared by Duke Realty Limited Partnership (the “Partnership”) without audit. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with Rule 10-01 of Regulation S-X. 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 General Partner’s 2000 Annual Report to Shareholders.
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 shares 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 87.4% of the Partnership at September 30, 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 shares of the General Partner’s common stock on a one-for-one basis subject generally to a one-year holding period. The General Partner 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.
Reclassifications
Certain 2000 balances have been reclassified to conform to 2001 presentation.
2. Lines of Credit
The Partnership has the following lines of credit available:
|
| Borrowing |
|
|
|
|
| Outstanding |
| ||
|
| Capacity |
| Maturity |
| Interest |
| at September 30, 2001 |
| ||
Description |
| (in 000’s) |
| Date |
| Rate |
| (in 000’s) |
| ||
Unsecured Line of Credit |
| $ | 500,000 |
| February 2004 |
| LIBOR + .65 | % | $ | 20,000 |
|
Unsecured Line of Credit |
| 150,000 |
| July 2002 |
| LIBOR + .675 | % | 0 |
| ||
Secured Line of Credit |
| 150,000 |
| January 2003 |
| LIBOR + 1.05 | % | 56,683 |
| ||
The lines of credit are used to fund development activities, to acquire 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 September 30, 2001, bear interest 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 $1.3 million and $1.7 million for such services for the nine months ended September 30, 2001 and 2000, respectively. Management believes the amounts that the Partnership was paid for such services are equivalent to those that an unrelated third party would pay 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.
In August 2001, as part of a severance agreement between the Partnership and a former executive, the Partnership sold seven buildings totaling approximately 557,000 square feet and 5.5 acres of undeveloped land to the former executive for $31.3 million. The Partnership received approximately $17.9 million in cash and $13.4 million in Limited Partnership Units that were previously held by the former executive. The sales price was based upon the market value of the buildings and land.
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 unit is computed by dividing net income available for common unitholders by the sum of the weighted average number of common units outstanding 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 and nine months ended September 30 (in thousands):
|
| Three Months Ended |
| Nine months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2001 |
| 2000 |
| 2001 |
| 2000 |
| ||||
Net income available for common unitholders |
| $ | 88,018 |
| $ | 51,949 |
| $ | 212,300 |
| $ | 160,644 |
|
Joint venture partner convertible ownership net income |
| 810 | �� | - |
| 2,476 |
| - |
| ||||
Series D Convertible Preferred equity accrued dividend |
| 2,466 |
| - |
| - |
| - |
| ||||
Series G Convertible Preferred units accrued dividend |
| 700 |
| - |
| - |
| - |
| ||||
Diluted net income available for common unitholders |
| $ | 91,994 |
| $ | 51,949 |
| $ | 214,776 |
| $ | 160,644 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common partnership units outstanding |
| 148,396 |
| 146,138 |
| 147,850 |
| 145,662 |
| ||||
Joint venture partner convertible ownership common share equivalents |
| 2,025 |
| - |
| 2,086 |
| - |
| ||||
Series D Convertible Preferred common share equivalents |
| 5,011 |
| - |
| - |
| - |
| ||||
Series G Convertible Preferred units common share equivalents |
| 1,445 |
| - |
| - |
| - |
| ||||
Dilutive shares for long-term compensation plans |
| 1,717 |
| 1,778 |
| 1,687 |
| 1,555 |
| ||||
Weighted average number of common shares and dilutive potential common shares |
| 158,594 |
| 147,916 |
| 151,623 |
| 147,217 |
|
The Series D Convertible Preferred equity and the Series G Preferred limited partner units were dilutive for the three months ended September 30, 2001; therefore, conversion to common units is included in weighted dilutive potential common units. The dilutive effect is the result of net income for the three months ended September 30, 2001, being significantly higher due to the significant gain on depreciated property sales for the quarter. The effect on preferred equity and units was anti-dilutive for the nine months ended September 30, 2001; therefore, no conversion to common units is included in 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 the General Partner’s common shares. The effects of the option on earnings per unit was dilutive for the three months and the nine months ended September 30, 2001; therefore, 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 (“Rental Operations”) and the providing of various real estate services such as property management, maintenance, leasing, development 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. Interest expense and other non-property specific revenues and expenses are not allocated to individual segments in determining the Partnership’s performance measure.
The Partnership assesses and measures segment operating results based on industry performance measures 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.
The revenues and FFO for each of the reportable segments for the three and nine months ended September 30, 2001 and 2000, and the assets for each of the reportable segments as of September 30, 2001 and December 31, 2000, are summarized as follows (in thousands):
|
| Three Months Ended September 30, |
| Nine months Ended September 30, |
| ||||||||
|
| 2001 |
| 2000 |
| 2001 |
| 2000 |
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
Rental Operations: |
|
|
|
|
|
|
|
|
| ||||
Office |
| $ | 95,335 |
| $ | 85,183 |
| $ | 284,147 |
| $ | 248,793 |
|
Industrial |
| 71,965 |
| 88,185 |
| 218,117 |
| 256,032 |
| ||||
Retail |
| 3,617 |
| 7,659 |
| 17,200 |
| 22,325 |
| ||||
Service Operations |
| 21,676 |
| 21,903 |
| 67,625 |
| 61,009 |
| ||||
Total Segment Revenues |
| 192,593 |
| 202,930 |
| 587,089 |
| 588,159 |
| ||||
Non-Segment Revenue |
| 7,282 |
| 4,733 |
| 24,471 |
| 11,752 |
| ||||
Consolidated Revenue |
| $ | 199,875 |
| $ | 207,663 |
| $ | 611,560 |
| $ | 599,911 |
|
|
|
|
|
|
|
|
|
|
| ||||
Funds From Operations |
|
|
|
|
|
|
|
|
| ||||
Rental Operations: |
|
|
|
|
|
|
|
|
| ||||
Office |
| $ | 63,448 |
| $ | 57,274 |
| $ | 191,300 |
| $ | 168,825 |
|
Industrial |
| 56,083 |
| 69,176 |
| 169,042 |
| 199,426 |
| ||||
Retail |
| 2,882 |
| 6,165 |
| 14, 090 |
| 17,883 |
| ||||
Services Operations |
| 11,841 |
| 8,493 |
| 30,355 |
| 24,822 |
| ||||
Total Segment FFO |
| 134,254 |
| 141,108 |
| 404,787 |
| 410,956 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Non-Segment FFO: |
|
|
|
|
|
|
|
|
| ||||
Interest expense |
| (28,042 | ) | (36,376 | ) | (86,326 | ) | (105,310 | ) | ||||
Interest income |
| 1,587 |
| 1,630 |
| 4,589 |
| 5,533 |
| ||||
General and administrative expense |
| (1,437 | ) | (5,825 | ) | (10,152 | ) | (15,499 | ) | ||||
Gain on land sales |
| 1,082 |
| 2,612 |
| 4,402 |
| 6,525 |
| ||||
Other revenues and expenses,net |
| (1,499 | ) | 563 |
| (2,914 | ) | (2,157 | ) | ||||
Other minority interest in earnings of subsidiaries |
| (727 | ) | (697 | ) | (1,968 | ) | (1,669 | ) | ||||
Joint venture FFO |
| 11,506 |
| 5,298 |
| 34,258 |
| 15,751 |
| ||||
Dividends on preferred units |
| (15,349 | ) | (14,345 | ) | (46,640 | ) | (43,050 | ) | ||||
Consolidated FFO |
| $ | 101,375 |
| $ | 93,968 |
| $ | 300,036 |
| $ | 271,080 |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
| (38,282 | ) | (43,314 | ) | (116,591 | ) | (121,429 | ) | ||||
Share of joint venture adjustments |
| (4,506 | ) | (1,982 | ) | (9,919 | ) | (5,032 | ) | ||||
Earnings from depreciated property sales |
| 29,431 |
| 3,277 |
| 38,774 |
| 16,025 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income Available for Common Unitholders |
| $ | 88,018 |
| $ | 51,949 |
| $ | 212,300 |
| $ | 160,644 |
|
|
| September 30, |
| December 31, |
| |||
|
| 2001 |
| 2000 |
| |||
Assets |
|
|
|
|
| |||
Rental Operations: |
|
|
|
|
| |||
Office |
| $ | 2,572,169 |
| $ | 2,473,191 |
| |
Industrial |
| 2,146,208 |
| 2,265,237 |
| |||
Retail |
| 63,552 |
| 186,389 |
| |||
Service Operations |
| 142,353 |
| 128,249 |
| |||
Total Segment Assets |
| 4,924,282 |
| 5,053,066 |
| |||
Non-Segment Assets |
| 379,798 |
| 408,167 |
| |||
Consolidated Assets |
| $ | 5,304,080 |
| $ | 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 continually pursues favorable opportunities to dispose of real estate assets that no longer meet long-term investment objectives of the Partnership. At September 30, 2001, the Partnership held for sale six industrial properties, three office properties and one retail property comprising approximately 2.6 million square feet held for sale. Of these properties, three build-to-suit office, four build-to-suit industrial and one build-to-suit retail properties were under development at September 30, 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 nine months ended September 30, 2001 and 2000, is approximately $1.7 million and $1.5 million, respectively. Net book value of the properties held for sale at September 30, 2001, is $63.6 million. There can be no assurances that such properties will be sold.
In August 2001, the Partnership sold $159.0 million of its retail portfolio in a single transaction. The transaction consisted of 19 retail buildings totaling more than 1.7 million square feet and one vacant lot. The buildings were approximately 95% leased and provided approximately $16.7 million of net operating income per year.
7. Partners’ Equity
The following series of preferred equity are outstanding as of September 30, 2001 (in thousands, except percentages):
|
| Units |
| Dividend |
| Redemption |
| Liquidation |
|
|
|
Description |
| Outstanding |
| Rate |
| Date |
| Preference |
| Convertible |
|
Series B Preferred |
| 300 |
| 7.990 | % | September 30, 2007 |
| 150,000 |
| No |
|
Series D Preferred |
| 535 |
| 7.375 | % | December 31, 2003 |
| 133,689 |
| Yes |
|
Series E Preferred |
| 400 |
| 8.250 | % | January 20, 2004 |
| 100,000 |
| No |
|
Series F Preferred |
| 600 |
| 8.000 | % | October 10, 2002 |
| 150,000 |
| No |
|
Series I Preferred |
| 300 |
| 8.450 | % | February 1, 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 shares of the General Partner, which may include other classes or series of preferred equity.
The Series I Preferred equity was issued in February 2001.
The Series D Preferred equity is convertible at a conversion rate of 9.3677 common units for each preferred unit outstanding.
The dividend rate on the Series B Preferred units increases to 9.99% after September 12, 2012.
The General Partner redeemed the Series A Preferred equity in August 2001.
8. Derivative Instruments
The Partnership adopted Statement of Financial Accounting Standards (“SFAS”) 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. As of September 30, 2001, the Partnership recorded a net loss of $1.4 million in other expense due to the interest rate swap contract not qualifying for hedge accounting.
The Partnership had three interest rate swaps that qualified for hedge accounting under SFAS No. 133. All three were tied to an $85 million unsecured term loan to fix the interest rate. Any change in fair values on these swaps was recognized in other comprehensive income. In July 2001, the Partnership paid off the term loan and terminated the three swaps. The cost to terminate the swaps was $505,000, which was recorded as interest expense and reversed out of other comprehensive income.
9. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (or FASB) issued SFAS No. 141, Business Combinations. SFAS 141 requires the purchase method of accounting for business combinations initiated after July 30, 2001, and eliminates the pooling-of-interests method. The Partnership does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements.
In July 2001, FASB issued SFAS No., 142, Goodwill and Other Intangible Assets, which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires a transitional goodwill impairment test six months from the date of adoption. The Partnership does not believe that the adoption of SFAS 142 will have an impact on its financial statements.
10. Subsequent Events
The Board of Directors of the General Partner declared the following distributions on October 31, 2001:
|
| Quarterly |
|
|
|
|
| |
Class |
| Amount/Unit |
| Record Date |
| Payment Date |
| |
Common |
| $ | 0.45 |
| November 14, 2001 |
| November 30, 2001 |
|
Preferred (per depositary share): |
|
|
|
|
|
|
| |
Series B |
| $ | 0.99875 |
| December 17, 2001 |
| December 31, 2001 |
|
Series D |
| $ | 0.46094 |
| December 17, 2001 |
| December 31, 2001 |
|
Series E |
| $ | 0.51563 |
| December 17, 2001 |
| December 31, 2001 |
|
Series F |
| $ | 0.50000 |
| January 17, 2002 |
| January 31, 2002 |
|
Series I |
| $ | 0.52813 |
| December 17, 2001 |
| December 31, 2001 |
|
The General Partner’s Board of Directors increased the General Partner’s common share repurchase authorization from $100 million to $250 million at its October 31, 2001, meeting. As of September 30, 2001, the General Partner and the Partnership have repurchased 10,000 shares at an average price of $21.60 per share.
To the Partners
Duke Realty Limited Partnership:
We have reviewed the condensed consolidated balance sheet of Duke Realty Limited Partnership as of September 30, 2001, the related condensed consolidated statements of operations for the three months and the nine months ended September 30, 2001 and 2000, the related condensed consolidated statements of cash flows for the nine months ended September 30, 2001 and 2000, and the related condensed consolidated statement of partners’ equity for the nine months ended September 30, 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 Realty Limited Partnership 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
October 31, 2001
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including those related to the Partnership’s future operations, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Partnership, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: general economic and business conditions; competition for tenants; changes in market rental rates; ability to control variable operating costs; availability of financing; qualifications as a real estate investment trust; and other factors referenced in this report. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions or statements regarding future periods are intended to identify forward-looking statements. All forward-looking statements are inherently uncertain as they involve substantial risks and uncertainties beyond the Partnership’s control. The Partnership undertakes no obligation to update or revise any forward-looking statements for events or circumstance after the date on which such statement is made. New factors emerge from time to time, and it is not possible for the Partnership to predict all such factors. Further, the Partnership cannot assess the impact of each such factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
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 rental 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. 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.
Throughout the nine months ended September 31, 2001, the Partnership has experienced a slowed growth rate due to a combination of a deteriorating economy and the effects of selling over $500 million of assets in 2001. While these events have affected growth and related rental income, the Partnership has excellent liquidity and financial flexibility. With a debt to market capitalization ratio of 29.5% and only $20 million drawn on its $650 million unsecured lines of credit as of September 30, 2001, the Partnership is well positioned to make future opportunistic real estate investments. Additionally, the Partnership has experienced continued demand for third party construction services through its Service Operations and has significantly lowered its corporate general and administrative expenses to offset the reductions in rental income.
The Partnership tracks “Same Property” performance, which compares those properties that have been in-service for all of a two year period. The net operating income from the Same Property portfolio increased 6.2% for the nine months ended September 30, 2001, compared to the nine months ended September 30, 2000.
The following table sets forth information regarding the Partnership’s in-service portfolio of rental properties as of September 30, 2001 and 2000 (in thousands, except percentages):
|
| Total |
| Percent of |
|
|
|
|
| ||||
|
| Square Feet |
| Total Square Feet |
| Percent Occupied |
| ||||||
Type |
| 2001 |
| 2000 |
| 2001 |
| 2000 |
| 2001 |
| 2000 |
|
Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Centers |
| 13,784 |
| 13,359 |
| 13.8 | % | 13.9 | % | 89.20 | % | 92.3 | % |
Bulk |
| 62,374 |
| 59,431 |
| 62.2 | % | 62.0 | % | 91.12 | % | 94.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office |
| 23,301 |
| 20,524 |
| 23.3 | % | 21.5 | % | 86.89 | % | 92.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
| 745 |
| 2,535 |
| .7 | % | 2.6 | % | 95.95 | % | 97.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| 100,204 |
| 95,849 |
| 100.0 | % | 100.0 | % | 89.91 | % | 93.6 | % |
The following table reflects the Partnership’s in-service portfolio lease expiration schedule as of September 30, 2001, by property 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 |
| 2,472 |
| $ | 12,789 |
| 2 | % | 2,249 |
| $ | 10,043 |
| 223 |
| $ | 2,746 |
| - |
| $ | - |
|
2002 |
| 9,318 |
| 58,455 |
| 9 | % | 7,509 |
| 36,924 |
| 1,801 |
| 21,422 |
| 8 |
| 109 |
| ||||
2003 |
| 9,809 |
| 64,969 |
| 11 | % | 7,814 |
| 39,149 |
| 1,993 |
| 25,786 |
| 2 |
| 34 |
| ||||
2004 |
| 11,133 |
| 75,566 |
| 12 | % | 8,623 |
| 41,361 |
| 2,489 |
| 33,802 |
| 21 |
| 403 |
| ||||
2005 |
| 13,492 |
| 93,148 |
| 14 | % | 10,605 |
| 51,115 |
| 2,849 |
| 41,531 |
| 38 |
| 502 |
| ||||
2006 |
| 11,716 |
| 80,651 |
| 13 | % | 9,171 |
| 44,410 |
| 2,538 |
| 36,132 |
| 7 |
| 109 |
| ||||
2007 |
| 6,077 |
| 43,577 |
| 7 | % | 4,821 |
| 25,574 |
| 1,227 |
| 17,612 |
| 29 |
| 391 |
| ||||
2008 |
| 5,868 |
| 37,925 |
| 6 | % | 4,688 |
| 21,293 |
| 1,161 |
| 16,342 |
| 19 |
| 290 |
| ||||
2009 |
| 5,641 |
| 34,951 |
| 6 | % | 4,582 |
| 19,715 |
| 1,040 |
| 14,867 |
| 19 |
| 369 |
| ||||
2010 |
| 5,413 |
| 43,973 |
| 7 | % | 3,754 |
| 18,052 |
| 1,640 |
| 25,607 |
| 19 |
| 314 |
| ||||
2011 and Thereafter |
| 9,023 |
| 79,056 |
| 13 | % | 5,320 |
| 26,611 |
| 3,149 |
| 48,175 |
| 554 |
| 4,270 |
| ||||
Total Leased |
| 89,962 |
| $ | 625,060 |
| 100 | % | 69,136 |
| $ | 334,247 |
| 20,110 |
| $ | 284,022 |
| 716 |
| $ | 6,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Square Feet |
| 100,204 |
|
|
|
|
| 76,158 |
|
|
| 23,301 |
|
|
| 745 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Annualized net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
effective rent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
per square foot |
|
|
| $ | 6.95 |
|
|
|
|
| $ | 4.83 |
|
|
| $ | 14.12 |
|
|
| $ | 9.48 |
|
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 6.3 million square feet of properties under development by the Partnership at September 30, 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 |
| Square |
| Percent |
| Project |
| Stabilized |
| |
Date |
| Feet |
| Leased |
| Costs |
| Return |
| |
Held For Rental: |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
4th Quarter 2001 |
| 2,527 |
| 17 | % | $ | 109,385 |
| 11.5 | % |
1st Quarter 2002 |
| 838 |
| 33 | % | 64,754 |
| 11.5 | % | |
2ND quarter 2002 |
| 1,140 |
| 5 | % | 61,818 |
| 11.2 | % | |
Thereafter |
| 120 |
| 100 | % | 12,352 |
| 11.7 | % | |
|
| 4,625 |
| 19 | % | $ | 248,309 |
| 11.4 | % |
|
|
|
|
|
|
|
|
|
| |
Build-to-Suit for Sale: |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
4th Quarter 2001 |
| 1,035 |
| 100 | % | $ | 47,202 |
|
|
|
1st Quarter 2002 |
| 402 |
| 100 | % | 33,433 |
|
|
| |
2nd Quarter 2002 |
| 194 |
| 92 | % | 15,006 |
|
|
| |
Thereafter |
| - |
| - |
| - |
|
|
| |
|
| 1,631 |
| 99 | % | $ | 95,641 |
|
|
|
Total |
| 6,256 |
| 40 | % | $ | 343,950 |
|
|
|
Results of Operations
Following is a summary of the Partnership’s operating results and property statistics for the three and nine months ended September 30, 2001 and 2000 (in thousands, except number of properties and per share amounts):
|
| Three Months Ended September 30, |
| Nine months Ended September 30, |
| ||||||||
|
| 2001 |
| 2000 |
| 2001 |
| 2000 |
| ||||
Rental Operations revenue |
| $ | 178,199 |
| $ | 185,760 |
| $ | 543,935 |
| $ | 538,902 |
|
Service Operations revenue |
| 21,676 |
| 21,903 |
| 67,625 |
| 61,009 |
| ||||
Earnings from Rental Operations |
| 62,507 |
| 58,354 |
| 195,223 |
| 169,757 |
| ||||
Earnings from Service Operations |
| 11,840 |
| 8,493 |
| 30,355 |
| 24,822 |
| ||||
Operating income |
| 72,910 |
| 61,022 |
| 215,426 |
| 179,080 |
| ||||
Net income available for common units |
| $ | 88,018 |
| $ | 51,949 |
| $ | 212,300 |
| $ | 160,644 |
|
Weighted average common units outstanding |
| 148,396 |
| 146,138 |
| 147,850 |
| 145,662 |
| ||||
Weighted average common and dilutive potential common units |
| 158,594 |
| 147,916 |
| 151,623 |
| 147,217 |
| ||||
Basic income per common unit |
| $ | .59 |
| $ | .36 |
| $ | 1.44 |
| $ | 1.10 |
|
Diluted income per common unit |
| $ | .58 |
| $ | .35 |
| $ | 1.42 |
| $ | 1.09 |
|
Number of in-service properties at end of period |
| 878 |
| 878 |
| 878 |
| 878 |
| ||||
In-service square footage at end of period |
| 100,204 |
| 95,849 |
| 100,204 |
| 95,849 |
| ||||
Under development square footage at end of period |
| 6,256 |
| 7,910 |
| 6,256 |
| 7,910 |
|
Comparison of Three Months Ended September 30, 2001 to Three Months Ended September 30, 2000
Rental Operations
Rental Operations revenue decreased from $185.8 million for the three months ended September 30, 2000, to $178.2 million for the same period in 2001, caused primarily by a 6.2% decline in rental income. The decline is a result of in-service occupancy decreasing 3.7% from September 30, 2000, to September 30, 2001. Also contributing to the decline in rental income is the effects of the Partnership’s capital recycling program. Since the program was actively began in 2000, the Partnership has sold approximately $770 million of held for rental properties from its in-service portfolio through September 30, 2001. A majority of these properties were in excess of 90% leased and the developments placed in-service over the same time period have experienced slower lease-up activity and, therefore, less rental income to the Partnership. This decline in rental income was somewhat offset by the Partnership’s equity in earnings of unconsolidated companies increasing from $3.2 million for the three months ended September 30, 2000, to $7.0 million for the same period in 2001. This increase is mainly the result of the Partnership contributing $469 million of property to a joint venture in October 2000. The Partnership holds a 50% interest in this venture. 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 |
| 41 |
| 6,920 |
|
Dispositions |
| (81 | ) | (7,936 | ) |
|
|
|
|
|
|
September 30, 2001 |
| 878 |
| 100,204 |
|
Rental and real estate expenses were comparable during the three months ended September 30, 2000, and 2001, as the Partnership's portfolio of in-service property has not changed significantly over the past year. Additionally, the Partnership has placed a greater emphasis on cost cutting measures within its in-service portfolio over the past year in an effort to control operating expenses.
The $8.3 million decrease in interest expense is primarily attributable to lower outstanding balances on the Partnership's lines of credit associated with the financing of the Partnership's investment and operating activities. The Partnership has maintained a significantly lower balance on its lines of credit throughout 2001 compared to 2000 as a result of its capital recycling program generating proceeds used to fund future development, coupled with a smaller development backlog compared to prior years. Additionally, the Partnership paid off approximately $60.0 million of secured mortgage loans which matured in the third quarter of 2001, as well as an $85 million unsecured term loan that was not due until December 2001.
Depreciation and amortization expense decreased in the three months ended September 30, 2001, compared to the same period in 2000, again primarily due to the significant number of properties disposed of over the last twelve to eighteen months.
As a result of the above-mentioned items, earnings from Rental Operations increased $4.1 million from $58.4 million for the three months ended September 30, 2000, to $62.5 million for the three months ended September 30, 2001.
Service Operations
Service Operations revenues decreased by $200,000 from $21.9 million for the three months ended September 30, 2000, to $21.7 million for the three months ended September 30, 2001. Property management, maintenance and leasing fee revenues decreased approximately $1.2 million due to a decrease in landscaping maintenance revenue associated with the sale of the landscape business in the third quarter (see discussion below). Construction income decreased over this same time period as a result of timing of the Partnership’s recognition of profit on third party construction. During the three months ended September 30, 2000, the Partnership had two large third party construction projects in progress for which fees were recognized in the period. In 2001, the fees recognized under the percentage of completion are lower due to volume and timing of jobs. These decreases were offset by a $1.8 million gain the Partnership recognized on the sale of its landscape business in the third quarter of 2001. The sale of the landscape business resulted in a net profit of over $9 million after deducting all related expenses. This gain will be recognized in varying amounts over the next seven years due to the Partnership’s on-going contract to provide future services to the buyer. The $1.8 million gain is recorded in Service Operations other income.
Service Operations expenses decreased for the three months ended September 30, 2001, compared to the same period in 2000, as the Partnership has reduced overhead and employee-related costs throughout 2001 in an effort to minimize the effects of decreased construction and development activity. The sale of the landscaping business resulted in a $1.6 million decrease in overhead expenses for the three months ended September 30, 2001, compared to September 30, 2000.
As a result, earnings from Service Operations increased from $8.5 million for the three months ended September 30, 2000, to $11.8 million for the three months ended September 30, 2001.
Other Income and Expenses
The Partnership’s disposition strategy is to pursue favorable opportunities to dispose of real estate assets that no longer meet long-term investment objectives of the Partnership. This strategy resulted in net sales proceeds of $216.2 million and a net gain of $30.5 million during the three months ended September 30, 2001.
In connection with this disposition strategy, included in net real estate investments are 10 buildings with a net book value of $63.6 million, which were classified as held for sale by the Partnership at September 30, 2001. The Partnership expects to complete these and other dispositions and use the proceeds to fund future investments in real estate assets.
Other expense for the three months ended September 30, 2001, includes a $690,000 expense related to an interest rate swap that does not qualify for hedge accounting under SFAS 133. See Note 8 to the Partnership’s Condensed Consolidated Financial Statements.
Net Income Available for Common Unitholders
Net income available for common unitholders for the three months ended September 30, 2001, was $88.0 million, compared to $51.9 million for the three months ended September 30, 2000. This increase results from the increased number of properties disposed of in the third quarter of 2001 compared to 2000.
Comparison of Nine months Ended September 30, 2001 to Nine months Ended September 30, 2000
Rental Operations
Rental Operations revenue increased to $543.9 million for the nine months ended September 30, 2001, compared to $538.9 million for the same period in 2000. This increase is due to a $14.0 million increase in equity in earnings of unconsolidated companies, attributable to the Partnership’s significant contribution of property to a 50% owned joint venture in October 2000 as discussed earlier in the analysis of the three month Rental Operations results.
Rental income for the nine months ended September 30, 2001, is down approximately 1.7% from the same period in 2000, due to the effects of the Partnership’s property dispositions as noted above in the analysis of the three months Rental Operations results.
Rental, real estate and depreciation and amortization expenses were comparable during the nine months ended September 30, 2000 and 2001, due to the Partnership's portfolio of in-service properties remaining consistent from 2000 to 2001 and the Partnership’s concentrated efforts to reduce operational expenses within its rental properties.
The $19.0 million decrease in interest expense is primarily attributable to lower outstanding debt balances on the Partnership's lines of credit, due to the effects of the Partnership’s capital recycling program as discussed in the three months analysis of interest expense.
As a result of the above-mentioned items, earnings from Rental Operations increased $25.4 million from $169.8 million for the nine months ended September 30, 2000, to $195.2 million for the nine months ended September 30, 2001.
Service Operations
Service Operations revenues increased by $6.6 million from $61.0 million for the nine months ended September 30, 2000, to $67.6 million for the nine months ended September 30, 2001, primarily as a result of increases in construction and development income from third party construction. Other service income for the nine months also increased as a result of the $1.8 million gain on the sale of the landscaping business in August 2001 as discussed earlier in the analysis of the three month Service Operations results.
Service Operations operating expenses increased from $36.2 million for the nine months ended September 30, 2000, to $37.3 million for the nine months ended September 30, 2001. The Partnership has reduced overhead related expenses within its Service Operations throughout 2001, which has enabled it to keep expenses at or near 2000 levels despite growth in the activities within the Service Operations.
Overall, earnings from Service Operations increased from $24.8 million for the nine months ended September 30, 2000, to $30.4 million for the nine months ended September 30, 2001.
Other Income and Expenses
Pursuant to the Partnership’s disposition strategy, the Partnership disposed of real estate assets which resulted in net sales proceeds of $403.8 million and a net gain of $43.2 million during the nine months ended September 30, 2001.
Net Income Available for Common Unitholders
Net income available for common unitholders for the nine months ended September 30, 2001, was $212.3 million, compared to $160.6 million for the nine months ended September 30, 2000. This increase results from the improved operating results in the Service Operations and the increased number of held for rental properties disposed of in 2000, as described above.
Liquidity and Capital Resources
Net cash provided by operating activities totaling $366.4 million and $301.4 million for the nine months ended September 30, 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 provided by (used) by investing activities totaling $37.1 million and ($243.8) million for the nine months ended September 30, 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 property sales. As noted in the three and nine months analysis, the Partnership has sold a significant amount of held for rental property in 2001 which has yielded proceeds of $403.8 million. In addition, the Partnership has received approximately $60.0 million from distributions from unconsolidated companies in 2001, which represents the Partnership’s share of financing proceeds from leveraging activities within the unconsolidated companies.
Net cash used for financing activities totaling $432.8 million and $35.0 million for the nine months ended September 30, 2001 and 2000, respectively, is comprised of debt and equity issuances, net of distributions to shareholders and minority interests and repayments of outstanding indebtedness. In the first nine months of 2001, the Partnership received $33.9 million of net proceeds from the General Partner’s issuance of common shares and $72.2 million of net proceeds from the General Partner’s issuance of preferred shares. Additionally, the Partnership received $175.0 million of proceeds from the issuance of unsecured debt. All proceeds were used to reduce amounts outstanding under the Partnership’s lines of credit and to fund the development and acquisition of additional rental properties.
During the three months ended September 30, 2001, the General Partner redeemed its Series A Preferred stock at a cost of $75.0 million. The Partnership also paid off approximately $60.0 million of secured mortgage debt and a $85.0 million unsecured term loan.
The Partnership has the following lines of credit available:
|
| Borrowing |
|
|
|
|
| Outstanding |
| ||
|
| Capacity |
| Maturity |
| Interest |
| at September 30, 2001 |
| ||
Description |
| (in 000’s) |
| Date |
| Rate |
| (in 000’s) |
| ||
Unsecured Line of Credit |
| $ | 500,000 |
| February 2004 |
| LIBOR + .65 | % | $ | 20,000 |
|
Unsecured Line of Credit |
| 150,000 |
| July 2002 |
| LIBOR + .675 | % | $ | 0 |
| |
Secured Line of Credit |
| 150,000 |
| January 2003 |
| LIBOR + 1.05 | % | $ | 56,683 |
| |
The lines of credit are used to fund development activities, to acquire 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 at September 30, 2001, bear interest at LIBOR + .65%.
The General Partner and the Partnership currently have on file a Form S-3 Registration Statement with the Securities and Exchange Commission (“Shelf Registration”) which had remaining availability as of September 30, 2001, of approximately $542.9 million to issue common stock, preferred stock or unsecured debt securities. The General Partner and the Partnership intend to issueadditional equity or debt under this Shelf Registration as capital needs arise to fund the development and acquisition of additional rental properties and also plans to file additional shelf registrations as necessary.
The Partnership’s total debt outstanding at September 30, 2001, consisted of notes totaling approximately $1.8 billion with a weighted average interest rate of 7.1% maturing at various dates through 2028. The Partnership has $1.4 billion of unsecured debt and $367.5 million of secured debt outstanding at September 30, 2001. Scheduled principal amortization of such debt totaled $7.7 million for the nine months ended September 30, 2001.
Following is a summary of the scheduled future amortization and maturities of the Partnership’s indebtedness at September 30, 2001 (in thousands):
|
| Future Repayments |
| Weighted Average |
| |||||||
|
| Scheduled |
|
|
|
|
| Interest Rate of |
| |||
Year |
| Amortization |
| Maturities |
| Total |
| Future Repayments |
| |||
2001 |
| $ | 2,617 |
| $ | 17,342 |
| $ | 19,959 |
| 7.68 | % |
2002 |
| 11,437 |
| 53,750 |
| 65,187 |
| 7.26 | % | |||
2003 |
| 10,264 |
| 337,445 |
| 347,709 |
| 6.98 | % | |||
2004 |
| 8,497 |
| 196,186 |
| 204,683 |
| 6.99 | % | |||
2005 |
| 7,061 |
| 219,642 |
| 226,703 |
| 7.17 | % | |||
2006 |
| 5,908 |
| 146,179 |
| 152,087 |
| 7.09 | % | |||
2007 |
| 4,028 |
| 116,554 |
| 120,582 |
| 7.09 | % | |||
2008 |
| 3,605 |
| 100,000 |
| 103,605 |
| 6.74 | % | |||
2009 |
| 3,863 |
| 275,000 |
| 278,863 |
| 7.31 | % | |||
2010 |
| 4,189 |
| - |
| 4,189 |
| 6.57 | % | |||
Thereafter |
| 15,383 |
| 225,000 |
| 240,383 |
| 6.86 | % | |||
Total |
| $ | 76,852 |
| $ | 1,687,098 |
| $ | 1,763,950 |
| 7.06 | % |
Funds From Operations
Management believes that FFO (as defined in Note 5 to the Partnership’s Condensed Consolidated Financial Statements) is the industry standard for reporting the operations of real estate investment trusts.
The following table reflects the calculation of the Partnership’s FFO for the three and nine months ended September 30 as follows (in thousands):
|
| Three Months Ended September 30, |
| Nine months Ended September 30, |
| ||||||||
|
| 2001 |
| 2000 |
| 2001 |
| 2000 |
| ||||
Net income available for common unitholders |
| $ | 88,018 |
| $ | 51,949 |
| $ | 212,300 |
| $ | 160,644 |
|
Add back (deduct): |
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
| 38,282 |
| 41,875 |
| 116,591 |
| 119,990 |
| ||||
Share of joint venture adjustments |
| 4,506 |
| 1,982 |
| 9,919 |
| 5,032 |
| ||||
(Earnings) loss from depreciated operating property dispositions |
| (29,431 | ) | (1,838 | ) | (38,774 | ) | (14,586 | ) | ||||
Funds From Operations |
| $ | 101,375 |
| $ | 93,968 |
| $ | 300,036 |
| $ | 271,080 |
|
Cash flow provided by (used by): |
|
|
|
|
|
|
|
|
| ||||
Operating activities |
| $ | 147,327 |
| $ | 126,831 |
| $ | 366,446 |
| $ | 301,396 |
|
Investing activities |
| 59,393 |
| 14,421 |
| 37,075 |
| (243,819 | ) | ||||
Financing activities |
| (296,623 | ) | (141,764 | ) | (432,755 | ) | (34,972 | ) |
The increase in FFO for the three months ended September 30, 2001, compared to the three months ended September 30, 2000, results from increases in Service Operations net income combined with savings in interest expense and general and administrative expense.
The increase in FFO for the nine months ended September 30, 2001, compared to the same period in 2000 is attributable to increases in equity in earnings of unconsolidated companies, Service Operations net income, and reduction in interest and general and administrative expenses.
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 meet funding requirements.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 15. Letter regarding unaudited interim financial information
Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
| DUKE REALTY LIMITED PARTNERSHIP | |
|
|
|
| |
|
|
|
| |
Date: | November 9, 2001 | /s/ Thomas L. Hefner |
| |
|
|
| Thomas L. Hefner |
|
|
|
| President and Chief Executive Officer | |
|
|
|
|
|
|
|
|
|
|
|
|
| /s/ Darell E. Zink, Jr. |
|
|
|
| Darell E. Zink, Jr. | |
|
|
| Executive Vice President and Chief Financial Officer | |
|
|
|
|
|
|
|
|
|
|
|
|
| /s/ Dennis D. Oklak |
|
|
|
| Dennis D. Oklak | |
|
|
| Executive Vice President and Chief Administrative Officer | |
|
|
| (Chief Accounting Officer) |