UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
-------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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- ---------------------------------------------------------------------------
Commission File Number: 0-20625
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DUKE REALTY LIMITED PARTNERSHIP
State of Incorporation: IRS Employer ID Number:
Indiana 35-1898425
- ----------------------- ----------------------
Address of principal executive offices:
8888 Keystone Crossing, Suite 1200
----------------------------------
Indianapolis, Indiana 46240
------------------------------
Telephone: (317) 846-4700
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of Limited Partnership Units outstanding as of August 6, 1997
was 35,045,984.
DUKE REALTY LIMITED PARTNERSHIP
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
June 30, 1997 (Unaudited) and December 31, 1996 2
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1997 and 1996
(Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996 (Unaudited) 4
Condensed Consolidated Statement of Partners' Equity for
the six months ended June 30, 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6-8
Independent Accountants' Review Report 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, December 31,
1997 1996
----------- ------------
ASSETS (UNAUDITED)
------
Real estate investments:
Land and improvements $ 157,298 $ 140,391
Buildings and tenant improvements 1,141,879 1,041,040
Construction in progress 77,808 44,060
Land held for development 82,780 65,185
--------- ---------
1,459,765 1,290,676
Accumulated depreciation (96,491) (82,207)
--------- ---------
Net real estate investments 1,363,274 1,208,469
Cash 3,091 5,346
Accounts receivable from tenants,
net of allowance of $533 and $709 2,992 5,255
Straight-line rent receivable, net
of allowance of $841 12,376 10,956
Receivables on construction contracts 10,839 12,859
Investments in unconsolidated companies 112,837 79,362
Deferred financing costs, net of
accumulated amortization of $4,537
and $3,529 7,562 8,127
Deferred leasing and other costs, net
of accumulated amortization of
$10,468 and $8,276 30,401 24,293
Escrow deposits and other assets 9,495 7,732
--------- ---------
$1,552,867 $1,362,399
========= =========
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Indebtedness:
Secured debt $ 271,857 $ 261,815
Unsecured notes 240,000 240,000
Unsecured line of credit 103,000 24,000
--------- ---------
614,857 525,815
Construction payables and amounts
due subcontractors 35,065 23,167
Accounts payable 2,545 1,585
Accrued real estate taxes 15,034 14,888
Accrued interest 5,106 4,437
Other accrued expenses 6,980 6,935
Other liabilities 7,807 8,312
Tenant security deposits and prepaid rents 9,348 7,611
--------- ---------
Total liabilities 696,742 592,750
--------- ---------
Minority interest 469 380
--------- ---------
Partners' equity:
General partner
Common equity 764,403 683,710
Preferred equity 72,856 72,856
--------- ---------
837,259 756,566
Limited partners' common equity 18,397 12,703
--------- ---------
Total partners' equity 855,656 769,269
--------- ---------
$1,552,867 $1,362,399
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements
- 2 -
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
---------------------- -------------------
1997 1996 1997 1996
--------- -------- --------- --------
RENTAL OPERATIONS:
Revenues:
Rental income $49,802 $36,379 $ 98,860 $71,714
Equity in earnings of
unconsolidated companies 1,784 1,345 3,644 2,547
------ ------ ------- ------
51,586 37,724 102,504 74,261
------ ------ ------- ------
Operating expenses:
Rental expenses 8,793 6,684 18,022 13,814
Real estate taxes 4,673 3,299 9,115 6,507
Interest expense 9,349 6,650 17,951 14,617
Depreciation and amortization 10,398 9,111 20,241 16,157
------ ------ ------- ------
33,213 25,744 65,329 51,095
------ ------ ------- ------
Earnings from rental operations 18,373 11,980 37,175 23,166
------ ------ ------- ------
SERVICE OPERATIONS:
Revenues:
Property management, maintenance
and leasing fees 3,214 2,948 5,855 5,662
Construction management and
development fees 1,645 1,836 2,711 3,153
Other income 270 353 502 668
------ ------ ------- ------
5,129 5,137 9,068 9,483
------ ------ ------- ------
Operating expenses:
Payroll 2,545 2,382 4,885 4,617
Maintenance 528 421 916 717
Office and other 344 707 1,093 1,339
------ ------ ------- ------
3,417 3,510 6,894 6,673
------ ------ ------- ------
Earnings from service operations 1,712 1,627 2,174 2,810
------ ------ ------- ------
General and administrative
expense (1,383) (1,043) (2,492) (1,964)
------ ------ ------- ------
Operating income 18,702 12,564 36,857 24,012
OTHER INCOME (EXPENSE):
Interest income 182 264 433 608
Earnings from property sales 102 1,618 382 1,604
Other expense (376) (53) (419) (67)
Minority interest in earnings
of subsidiaries (440) (243) (425) (430)
------ ------ ------- ------
Net income 18,170 14,150 36,828 25,727
Dividend on preferred units (1,706) - (3,412) -
------ ------ ------- ------
Net income available for
common units $16,464 $14,150 $ 33,416 $25,727
====== ====== ======= ======
Net income per common unit $ .47 $ .43 $ .96 $ .83
====== ====== ======= ======
Weighted average number of
common units outstanding 34,927 33,011 34,654 30,848
====== ====== ====== ======
See accompanying Notes to Condensed Consolidated Financial Statements
- 3 -
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS)
(UNAUDITED)
1997 1996
------------ -----------
Cash flows from operating activities:
Net income $36,828 $25,727
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of buildings and tenant
improvements 17,241 13,839
Amortization of deferred financing costs 690 603
Amortization of deferred leasing and
other costs 2,310 1,715
Minority interest in earnings 425 430
Straight-line rental income (1,642) (1,544)
Earnings from property sales (382) (1,604)
Construction contracts, net 13,918 (3,261)
Other accrued revenues and expenses, net 5,863 3,713
Equity in earnings in excess of income
distributions received from
unconsolidated companies (3,046) (468)
------- -------
Net cash provided by operating activities 72,205 39,150
------- -------
Cash flows from investing activities:
Rental property development costs (79,808) (60,452)
Acquisition of rental properties (44,434) (65,426)
Acquisition of undeveloped land and
infrastructure costs (29,068) (6,832)
Recurring costs:
Tenant improvements (4,259) (3,092)
Leasing costs (2,431) (1,385)
Building improvements (337) (219)
Other deferred costs and other assets (8,184) 1,814
Proceeds from property sales, net 23,025 35,468
Other distributions received from
unconsolidated companies - 6,935
Net investment in and advances to
unconsolidated companies (30,681) (409)
------- -------
Net cash used by investing activities (176,177) (93,598)
------- ------
Cash flows from financing activities:
Contributions from general partner 63,684 126,083
Payments on indebtedness including
principal amortization (1,458) (1,030)
Borrowings (repayments) on lines of
credit, net 79,000 (45,000)
Distributions to partners (38,888) (30,237)
Distributions to minority interest (336) (233)
Deferred financing costs (285) (543)
------- -------
Net cash provided by financing activities 101,717 49,040
------- -------
Net decrease in cash (2,255) (5,408)
------- -------
Cash at beginning of period 5,346 5,682
------- -------
Cash at end of period $ 3,091 $ 274
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements
- 4 -
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
(UNAUDITED)
General Partner Limited
-------------------------- Partners'
Common Preferred Common
Equity Equity Equity Total
-------- --------- --------- --------
BALANCE AT DECEMBER 31, 1996 $683,710 $72,856 $12,703 $769,269
Net income 30,086 3,412 3,330 36,828
Capital contribution from
Duke Realty Investments,
Inc. 63,779 - - 63,779
Acquisition of partnership
interest for Common Stock
of Duke Realty Investments,
Inc. 18,739 - - 18,739
Acquisition of property in
exchange for Limited
Partner Units - - 5,929 5,929
Distributions to preferred
unitholders - (3,412) - (3,412)
Distributions to partners
($1.02 per Common Unit) (31,911) - (3,565) (35,476)
------- ------ ------ -------
BALANCE AT JUNE 30, 1997 $764,403 $72,856 $18,397 $855,656
======= ====== ====== =======
COMMON UNITS OUTSTANDING
AT JUNE 30, 1997 31,660 3,380 35,040
======= ====== =======
See accompanying Notes to Condensed Consolidated Financial Statements
- 5 -
DUKE REALTY LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. FINANCIAL STATEMENTS
The interim condensed consolidated financial statements included
herein have been prepared by Duke Realty Limited Partnership (the
"Partnership") without audit. The statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions for Form 10-Q and Rule 10-
01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. These financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included
in the Partnership's Annual Financial Statements.
THE PARTNERSHIP
The Partnership was formed on October 4, 1993, when Duke Realty
Investments, Inc. (the "Predecessor Company" or the "General
Partner") contributed all of its properties and related assets
and liabilities along with the net proceeds from the issuance of
an additional 14,000,833 units through a common stock
offering to the Partnership. Simultaneously, the Partnership completed
the acquisition of Duke Associates, a full-service commercial real
estate firm operating in the Midwest. The General Partner was formed
in 1985 and qualifies as a real estate investment trust under
provisions of the Internal Revenue Code. In connection with the Common
Stock, the formation of the Partnership and the acquisition of Duke
Associates, the General Partner effected a 1 for 4.2 reverse stock
split of its existing common units. The General Partner is the sole
general partner of the Partnership and owns 90.35% of the Partnership
at June 30, 1997. The remaining limited partnership interest ("Limited
Partner Units") (together with the units of general partner interests,
the ("Common Units")) are mainly owned by the previous partners of
Duke Associates. The Limited Partner Units are exchangeable for units
of the General Partner's common stock on a one-for-one basis subject
generally to a one-year holding period. The General Partner
periodically acquires a portion of the minority interest in the
Partnership through the issuance of shares of common stock for a like
number of Common Units. The acquisition of the minority interest is
accounted for under the purchase method with assets acquired recorded
at the fair market value of the General Partner's common stock on the
date of acquisition.
The service operations are conducted through Duke Realty Services
Limited Partnership and Duke Construction Limited Partnership, in
which the Partnership has an 89% profits interest (after certain
preferred returns on partners' capital accounts) and effective control
of their operations. The consolidated financial statements include the
accounts of the Partnership and its majority-owned or controlled
subsidiaries. The equity interests in these majority-owned or
controlled subsidiaries not owned by the Partnership are reflected as
minority interests in the consolidated financial statements.
2. LINES OF CREDIT
The Partnership has a $150 million unsecured revolving credit
facility which is available to fund the development and acquisition
of additional rental properties and to provide working capital. The
revolving line of credit matures in April 1998 and bears interest
payable at the 30-day London
- 6 -
Interbank Offered Rate ("LIBOR") plus 1.00%. The Partnership also has
a demand $10 million secured revolving credit facility which is
available to provide working capital. This facility bears interest
payable monthly at the 30-day LIBOR rate plus .75%.
3. RELATED PARTY TRANSACTIONS
The Partnership provides management, maintenance, leasing, construction,
and other tenant related services to properties in which certain
executive officers have continuing ownership interests. The Partnership
was paid fees totaling $1.7 million and $1.6 million for such services
for the six months ended June 30, 1997 and 1996, respectively. Management
believes the terms for such services are equivalent to those available in
the market. The Partnership has an option to purchase the executive officers'
interest in each of these properties which expires October 2003. The
option price of each property was established at the date the option
was granted.
4. DERIVATIVE FINANCIAL INSTRUMENTS
The Partnership may enter into derivative financial instruments such
as interest rate swaps and treasury locks in order to mitigate its
interest rate risk on a related financial instrument. The Partnership
has designated these derivative financial instruments as hedges and
applies deferral accounting as the instrument to be hedged exposes the
Partnership to interest rate risk and the derivative financial
instrument reduces that exposure. Gains and losses related to the
derivative financial instrument are deferred and amortized to interest
expense over the term of the hedged instrument.
In April 1997, the Partnership entered into a Forward Treasury Lock
Agreement in order to hedge its exposure to interest rate fluctuations
on an anticipated $100 million unsecured debt financing expected to
close in the third quarter of 1997. Any gain or loss under the
agreement will be amortized to interest expense over the term of the
financing. Based on the applicable treasury rates as of June 30, 1997,
the amount of loss to be amortized to interest expense would have been
approximately $2.4 million.
5. SUBSEQUENT EVENTS
On July 24, 1997, a quarterly distribution of $.59 per Common Unit
was declared payable on August 29, 1997, to common unitholders of
record on August 15, 1997.
On July 24, 1997, a quarterly distribution was declared of $.56875
per depositary unit of Series A Preferred Units which is payable on
August 29, 1997 to the preferred unitholders of record on August
15, 1997.
- 7 -
On July 11, 1997, the General Partner issued $150 million of Series
B Cumulative Step-up Redeemable Preferred Shares raising net
proceeds of $146.1 million and contributed these proceeds to the
Partnership in exchange for Series B Preferred Units. These
securities are not redeemable prior to September 30, 2007 and offer
a cumulative preferential distribution of 7.99% through September
2012, and 9.99% thereafter. On July 24, 1997, a quarterly
distribution of $.88778 per depositary unit of the Series B
Cumulative Step-up Redeemable Preferred Units was declared. The
distribution is payable on September 30, 1997 to preferred
unitholders of record on September 16, 1997 and is applicable to
the period beginning July 11, 1997 and ending September 30, 1997.
On August 7, 1997, the Partnership declared a 2-for-1 Common Unit
split in the form of a 100% common unit distribution on its common
units. The common unit distribution will be payable August 25, 1997
to unitholders of record on August 18, 1997.
- 8 -
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
--------------------------------------
The Partners
DUKE REALTY LIMITED PARTNERSHIP:
We have reviewed the condensed consolidated balance sheet of Duke
Realty Limited Partnership and subsidiaries as of June 30, 1997,
the related condensed consolidated statements of operations for
the three and six months ended June 30, 1997 and 1996, the
related condensed consolidated statements of cash flows for the
six months ended June 30, 1997 and 1996, and the related
condensed consolidated statement of partners' equity for the six
months ended June 30, 1997. These condensed consolidated
financial statements are the responsibility of the Partnership's
management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Duke Realty
Limited Partnership and subsidiaries as of December 31, 1996, and
the related consolidated statements of operations, partners'
equity and cash flows for the year then ended (not presented
herein); and in our report dated January 29, 1997, we expressed
an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December
31, 1996 is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
KPMG Peat Marwick LLP
Indianapolis, Indiana
July 31, 1997
- 9 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
--------
The Partnership's operating results depend primarily upon income
from the rental operations of its industrial, office and retail
properties located in its primary markets. This income from
rental operations is substantially influenced by the supply and
demand for the Partnership's rental space in its primary markets.
In addition, the Partnership's continued growth is dependent upon
its ability to maintain occupancy rates and increase rental rates
of its in-service portfolio and to continue development and
acquisition of additional rental properties.
The Partnership's primary markets in the Midwest have continued
to offer strong and stable local economies and have provided
attractive new development opportunities because of their central
location, established manufacturing base, skilled work force and
moderate labor costs. Consequently, the Partnership's occupancy
rate of its in-service portfolio has exceeded 92% the last two
years and was at 95.71% at June 30, 1997. The Partnership expects
to continue to maintain its overall occupancy levels at
comparable levels and also expects to be able to increase rental
rates as leases are renewed or new leases are executed. This
stable occupancy as well as increasing rental rates should
improve the Partnership's results of operations from its in-
service properties. The Partnership's strategy for continued
growth also includes developing and acquiring additional rental
properties in its primary markets and expanding into other
attractive Midwestern markets.
The following table sets forth information regarding the
Partnership's in-service portfolio of rental properties as of
June 30, 1997 and 1996 (in thousands, except percentages):
Total Percent of
Square Feet Total Square Feet Percent Occupied
------------------ ----------------- ----------------
Type 1997 1996 1997 1996 1997 1996
---- -------- -------- ------- ------ ------- ------
INDUSTRIAL
Service Centers 3,051 2,971 9.71% 12.80% 94.93% 93.62%
Bulk 18,702 12,926 59.55 55.67 95.64% 90.50%
OFFICE
Suburban 6,875 4,684 21.89 20.17 96.86% 97.12%
CBD 699 699 2.22 3.01 91.09% 81.29%
Medical 369 333 1.18 1.43 95.79% 90.26%
RETAIL 1,710 1,606 5.45 6.92 95.15% 92.98%
------ ------ ------ ------
Total 31,406 23,219 100.00% 100.00% 95.71% 92.13%
====== ====== ====== ======
Management expects occupancy of the in-service property portfolio
to remain stable because (i) only 5.5% and 10.8% of the
Partnership's occupied square footage is subject to leases
expiring in the remainder of 1997 and in 1998, respectively, and
(ii) the Partnership's renewal percentage averaged 80%, 65% and
73% in 1996, 1995 and 1994, respectively.
- 10 -
The following table reflects the Partnership's in-service
portfolio lease expiration schedule as of June 30, 1997 by
product type indicating square footage and annualized net
effective rents under expiring leases (in thousands, except per
square foot amounts):
Industrial Office Retail Total Portfolio
----------------- ---------------- ---------------- ---------------
Yr.of Sq. Contractual Sq. Contractual Sq. Contractual Sq. Contractual
Exp. Ft. Rent Ft. Rent Ft. Rent Ft. Rent
----- ---- ----------- ---- ----------- ---- ----------- ---- -----------
1997 1,334 $ 5,285 299 $ 3,111 25 $ 277 1,658 $ 8,673
1998 2,357 9,029 769 8,348 111 1,182 3,237 18,559
1999 2,217 9,568 1,036 11,164 117 1,191 3,370 21,923
2000 2,112 8,862 788 9,513 107 1,290 3,007 19,665
2001 2,644 10,248 874 9,688 88 1,061 3,606 20,997
2002 2,604 9,161 1,002 10,787 157 1,669 3,763 21,617
2003 301 1,816 249 2,849 40 342 590 5,007
2004 934 3,810 213 2,609 13 125 1,160 6,544
2005 1,440 4,586 698 9,736 177 1,507 2,315 15,829
2006 2,284 7,141 509 8,078 5 67 2,798 15,286
2007
and
There-
after 2,555 7,878 1,213 15,856 787 6,760 4,555 30,494
------ ------ ----- ------ ----- ------ ------ -------
Total
Leased 20,782 $77,384 7,650 $91,739 1,627 $15,471 30,059 $184,594
====== ====== ===== ====== ===== ====== ====== =======
Total
Portfolio
Sq.Ft. 21,753 7,943 1,710 31,406
====== ===== ===== ======
Annualized
net effective
rent per
sq.ft. $ 3.72 $ 11.99 $ 9.51 $ 6.14
====== ====== ====== =======
This stable occupancy, along with stable rental rates in each of
the Partnership's markets, will allow the in-service portfolio to
continue to provide a comparable or increasing level of earnings
from rental operations. The Partnership also expects to realize
growth in earnings from rental operations through (i) the
development and acquisition of additional rental properties in its
primary markets; (ii) the expansion into other attractive
Midwestern markets; and (iii) the completion of the 4.1 million
square feet of properties under development at June 30, 1997 over
the next five quarters. The 4.1 million square feet of properties
under development should provide future earnings from rental
operations growth for the Partnership as they are placed in service
as follows (in thousands, except percent leased and stabilized
returns):
Anticipated
In-Service Square Percent Project Stabilized
Date Feet Leased Costs Return
----------- ------ ------- ------- ----------
3rd Quarter 1997 1,329 65% $ 54,840 11.3%
4th Quarter 1997 1,717 37% 77,353 11.5%
1st Quarter 1998 699 95% 25,086 11.3%
Thereafter 352 27% 38,151 11.9%
----- -------
4,097 55% $195,430 11.5%
===== =======
RESULTS OF OPERATIONS
---------------------
Following is a summary of the Partnership's operating results and
property statistics for the three and six months ended June 30,
1997 and 1996 (in thousands, except number of properties and per
unit amounts):
- 11 -
Three months ended Six months ended
June 30, June 30,
------------------- --------------------
1997 1996 1997 1996
------ ------ ------ ------
Rental Operations revenue $51,586 $37,724 $102,504 $74,261
Service Operations revenue 5,129 5,137 9,068 9,483
Earnings from Rental
Operations 18,373 11,980 37,175 23,166
Earnings from Service
Operations 1,712 1,627 2,174 2,810
Operating income 18,702 12,564 36,857 24,012
Net income available for
common units $16,464 $14,150 $33,416 $25,727
Weighted average common
units outstanding 34,927 33,011 34,654 30,848
Net income per common unit $ .47 $ .43 $ .96 $ .83
Number of in-service
properties at end of period 262 219 262 219
In-service square footage at
end of period 31,406 23,219 31,406 23,219
Under development square
footage at end of period 4,097 3,400 4,097 3,400
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 TO THREE MONTHS ENDED
JUNE 30, 1996
--------------------------------------------------------------------------
Rental Operations
-----------------
The Partnership increased its in-service portfolio of rental
properties from 219 properties comprising 23.2 million square
feet at June 30, 1996 to 262 properties comprising 31.4 million
square feet at June 30, 1997 through the acquisition of 28
properties totaling 3.6 million square feet and the completion of
19 properties and 4 building expansions totaling 5.1 million
square feet developed by the Partnership. The Partnership also
disposed of 4 properties totaling 495,000 square feet. These 43
net additional rental properties primarily account for the $13.9
million increase in revenues from Rental Operations from 1996 to
1997. The increase from 1996 to 1997 in rental expenses, real
estate taxes and depreciation and amortization expense is also a
result of the additional 43 in-service rental properties.
Interest expense increased by approximately $2.6 million from
$6.7 million for the three months ended June 30, 1996 to $9.3
million for the three months ended June 30, 1997 due to
additional unsecured debt issued in its medium-term note program
in the last two quarters of 1996 to fund the development and
acquisition of additional rental properties.
As a result of the above-mentioned items, earnings from rental
operations increased $6.4 million from $12.0 million for the
three months ended June 30, 1996 to $18.4 million for the three
months ended June 30, 1997.
Service Operations
------------------
Service Operation revenues and total operating expenses remained
stable for both the three months ended June 30, 1997 and 1996. As
a result, earnings from Service Operations increased slightly
from $1.6 million for the three months ended June 30, 1996 to
$1.7 million for the three months ended June 30, 1997.
General and Administrative Expense
----------------------------------
General and administrative expense increased from $1.0 million
for the three months ended June 30, 1996 to $1.4 million for the
three months ended June 30, 1997 primarily as a result of
increased state and local taxes due to the growth in revenues and
net income of the Partnership.
- 12 -
Other Income (Expense)
----------------------
Interest income decreased from $264,000 for the three months
ended June 30, 1996 to $182,000 for the three months ended June
30, 1997 primarily as a result of interest income which was
earned on certain escrows during the three months ended June 30,
1996 which were refunded later in 1996. Other expense consists of
costs incurred during the pursuit of various build-to-suit
development projects or the acquisition of real estate assets.
During the three months ended June 30, 1997, approximately
$312,000 of costs were expensed in connection with the decision
to abandon the acquisition of a large real estate portfolio.
Net Income Available for Common Units
-------------------------------------
Net income available for common units for the three months ended
June 30, 1997 was $16.5 million compared to net income available
for common units of $14.2 million for the three months ended June
30, 1996. This increase results primarily from the operating
result fluctuations in rental and service operations explained
above.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO SIX MONTHS ENDED
JUNE 30, 1996
------------------------------------------------------------------------
Rental Operations
-----------------
The Partnership increased its in-service portfolio of rental
properties from 219 properties comprising 23.2 million square
feet at June 30, 1996 to 262 properties comprising 31.4 million
square feet at June 30, 1997 through the acquisition of 28
properties totaling 3.6 million square feet and the completion of
19 properties and 4 building expansions totaling 5.1 million
square feet developed by the Partnership. The Partnership also
disposed of 4 properties totaling 495,000 square feet. These 43
net additional rental properties primarily account for the $28.2
million increase in revenues from Rental Operations from 1996 to
1997. The Partnership also received a $1.2 million net lease
termination payment made by a tenant in one of the Partnership's
office properties which is included in rental income for the six
months ended June 30, 1997. The increase from 1996 to 1997 in
rental expenses, real estate taxes and depreciation and
amortization expense is also a result of the additional 43 in-
service rental properties.
Interest expense increased by approximately $3.3 million from
$14.6 million for the six months ended June 30, 1996 to $17.9
million for the six months ended June 30, 1997 due to additional
unsecured debt issued in its medium-term note program in the last
two quarters of 1996 to fund the development and acquisition of
additional rental properties.
As a result of the above-mentioned items, earnings from rental
operations increased $14.0 million from $23.2 million for the six
months ended June 30, 1996 to $37.2 million for the six months
ended June 30, 1997.
- 13 -
Service Operations
------------------
Service Operation revenues decreased to $9.1 million for the six
months ended June 30, 1997 as compared to $9.5 million for the
six months ended June 30, 1996. This decrease was primarily the
result of a decrease in construction management fees caused by
certain higher profit third-party construction projects that were
in process during the six months ended June 30, 1996 which
resulted in higher revenue margins. Service Operation operating
expenses increased from $6.7 million to $6.9 million for the six
months ended June 30, 1997 as compared to the six months ended
June 30, 1996 primarily as a result of an increase in operating
expenses resulting from the overall growth of the Partnership.
As a result of the above-mentioned items, earnings from Service
Operations decreased from $2.8 million for the six months ended
June 30, 1996 to $2.2 million for the six months ended June 30,
1997.
General and Administrative Expense
----------------------------------
General and administrative expense increased from $2.0 million
for the six months ended June 30, 1996 to $2.5 million for the
six months ended June 30, 1997 primarily as a result of increased
state and local taxes due to the growth in revenues and net
income of the Partnership.
Other Income (Expense)
----------------------
Interest income decreased from $608,000 for the six months ended
June 30, 1996 to $433,000 for the six months ended June 30, 1997
primarily as a result of interest income which was earned on
certain escrows during the six months ended June 30, 1996 which
were refunded later in 1996. Other expense consists of the write-
off of costs incurred during the pursuit of various build-to-suit
development projects or the acquisition of real estate assets.
During the six months ended June 30, 1997, approximately $312,000
of costs were written-off in connection with the decision to
terminate the pursuit of the acquisition of a large real estate
portfolio.
Net Income Available for Common Units
-------------------------------------
Net income available for common units for the six months ended
June 30, 1997 was $33.4 million compared to net income available
for common units of $25.7 million for the six months ended June
30, 1996. This increase results primarily from the operating
result fluctuations in rental and service operations explained
above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaling $72.2 million
and $39.2 million for the six months ended June 30, 1997 and
1996, respectively, represents the primary source of liquidity to
fund distributions to unitholders and the other minority
interests and to fund recurring costs
- 14 -
associated with the renovation and re-letting of the
Partnership's properties. This increase is primarily a result of,
as discussed above under "Results of Operations," the increase in
net income resulting from the expansion of the in-service
portfolio through development and acquisitions of additional
rental properties.
Net cash used by investing activities totaling $176.2 million and
$93.6 million for the six months ended June 30, 1997 and 1996,
respectively, represents the investment of funds by the
Partnership to expand its portfolio of rental properties through
the development and acquisition of additional rental properties
net of proceeds received from property sales. In 1997, $153.3
million was invested in the development and acquisition of
additional rental properties and the acquisition of land held for
development. In 1996, the investment in the development and
acquisition of additional rental properties and land held for
development was $132.7 million. During the six months ended June
30, 1997, the Partnership invested over $30 million in a newly
formed joint venture with an institutional investor which allowed
the joint venture to purchase a 345,000 square foot office
property in Chicago, Illinois which was over 95% occupied.
Net cash provided by financing activities totaling $101.2 million
and $49.0 million for the six months ended June 30, 1997 and
1996, respectively, represents the source of funds from equity
and debt offerings and borrowings on the lines of credit to fund
the Partnership's investing activities. Also included in
financing activities are the distribution of funds to unitholders
and minority interests. In 1996, the Partnership received $126.1
million of net proceeds from the General Partner's common equity
offering which was used to pay down amounts outstanding on the
unsecured line of credit and to fund current development and
acquisition activity. In January 1997, the Partnership received
$56.7 million of net proceeds from the General Partner's common
equity offering which was used to pay down amounts outstanding on
the unsecured line of credit and to fund current development
activity. During the six months ended June 30, 1997, the
Partnership also received $7.0 million of net proceeds from the
issuance of common stock under the General Partner's Direct Stock
Purchase and Dividend Reinvestment Plan and the exercise of
employee stock options.
The Partnership has a $150 million unsecured line of credit which
matures in April 1998. In January 1996, the borrowing rate was
LIBOR plus 1.625%. In September 1996, the borrowing rate was
reduced to LIBOR plus 1.25%. On March 27, 1997 the borrowing rate
was further reduced to LIBOR plus 1.00%. The Partnership also has
a demand $10 million secured revolving credit facility which is
available to provide working capital. This facility bears
interest payable at the 30-day LIBOR rate plus .75%.
The General Partner and the Partnership currently have on file
Form S-3 Registration Statements with the Securities and Exchange
Commission ("Shelf Registrations") which had remaining
availability as of July 30, 1997 of approximately $760.0 million
to issue common stock, preferred stock or unsecured debt
securities. The General Partner and the Partnership intend to
issue additional equity or debt under these Shelf Registrations
as capital needs arise to fund the development and acquisition of
additional rental properties.
The total debt outstanding at June 30, 1997 consists of notes
totaling $614.9 million with a weighted average interest rate of
7.44% maturing at various dates through 2017. The Partnership has
$343.0 million of unsecured debt and $271.9 million of secured
debt
- 15 -
outstanding at June 30, 1997. Scheduled principal amortization of
such debt totaled $1.5 million for the six months ended June 30,
1997.
Following is a summary of the scheduled future amortization and
maturities of the Partnership's indebtedness at June 30, 1997 (in
thousands):
Repayments
------------------------------------------ Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
---- ------------ ---------- -------- -----------------
1997 $ 2,033 $ 10,000 $ 12,033 6.61%
1998 4,574 149,590 154,164 6.84%
1999 5,323 28,470 33,793 6.17%
2000 3,418 44,853 48,271 7.39%
2001 3,137 59,954 63,091 8.71%
2002 3,412 50,000 53,412 7.37%
2003 1,144 68,216 69,360 8.48%
2004 1,239 50,000 51,239 7.15%
2005 1,346 100,000 101,346 7.48%
2006 1,465 - 1,465 7.58%
Thereafter 17,391 9,292 26,683 7.71%
------ ------- -------
Total $44,482 $570,375 $614,857 7.44%
====== ======= =======
The 1997 maturities consist of the outstanding balance on the
Partnership's $10 million demand secured line of credit.
The Partnership intends to pay regular quarterly distributions
from net cash provided by operating activities. A quarterly
distribution of $.59 per common unit was declared on July 24,
1997 payable on August 29, 1997 to unitholders of record on
August 15, 1997, which represents an annualized distribution of
$2.36 per share. A quarterly distribution of $.56875 per
depositary preferred unit of Series A Preferred Units was
declared on July 24, 1997 which is payable on August 29, 1997 to
preferred unitholders of record on July 24, 1997. On July 24,
1997, the Board of Directors declared a distribution of $.88778
per depositary preferred unit of Series B Cumulative Step-up
Redeemable Preferred Units. The distribution is payable on
September 30, 1997 to preferred unitholders of record on
September 16, 1997 and is applicable to the period beginning July
11, 1997 and ending September 30, 1997. Each depositary unit
represents one-tenth of a unit of the Partnership's 7.99% Series
B Preferred Units.
FUNDS FROM OPERATIONS
Management believes that Funds From Operations ("FFO"), which is
defined by the National Association of Real Estate Investment
Trusts as net income or loss excluding gains or losses from debt
restructuring and sales of property plus depreciation and
amortization, and after adjustments for minority interest,
unconsolidated partnerships and joint ventures (adjustments for
minority interest, unconsolidated partnerships and joint ventures
are calculated to reflect FFO on the same basis), is the industry
standard for reporting the operations of real estate investment
trusts.
The following table reflects the calculation of the Partnership's
FFO for the three and six months ended June 30 as follows (in
thousands):
- 16 -
Three months ended Six months ended
June 30, June 30,
---------------------- --------------------
1997 1996 1997 1996
-------- -------- ------- --------
Net income available for
common units $ 16,464 $14,150 $ 33,416 $25,727
Add back:
Depreciation and amortization 10,052 8,793 19,551 15,554
Share of joint venture
depreciation and
amortization 791 443 1,314 883
Earnings from property sales (102) (1,618) (382) (1,604)
------ ------ ------- ------
Funds From Operations $ 27,205 $21,768 $ 53,899 $40,560
====== ====== ======= ======
Cash flow provided by
(used by):
Operating activities $ 43,326 $24,845 $ 72,205 $39,150
Investing activities (135,001) (13,733) (176,177) (93,598)
Financing activities 81,864 (22,719) 101,717 49,040
The increase in FFO for the three and six months ended June 30,
1997 compared to the three and six months ended June 30, 1996
results primarily from the increased in-service rental property
portfolio as discussed above under "Results of Operations."
While management believes that FFO is the most relevant and
widely used measure of the Partnership's operating performance,
such amount does not represent cash flow from operations as
defined by generally accepted accounting principles, should not
be considered as an alternative to net income as an indicator of
the Partnership's operating performance, and is not indicative of
cash available to fund all cash flow needs.
- 17 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
None
Item 2. Changes in Securities
- ------------------------------
None
Item 3. Defaults upon Senior Securities
- ----------------------------------------
None
Item 4. Submission of Matters to a Vote of
Security Holders
- -------------------------------------------------
None
Item 5. Other Information
- ------------------------------
When used in this Form 10-Q, the words "believes," "expects," "estimates"
and similar expressions are intended to identify forward looking-
statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially.
In particular, among the factors that could cause actual results to
differ materially are continued qualification of the General Partner
as a real estate investment trust, general business and economic
conditions, competition, increases in real estate construction costs,
interest rates, accessibility of debt and equity capital markets and
other risks inherent in the real estate business including tenant
defaults, potential liability relating to environmental matters and
illiquidity of real estate investments. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Partnership undertakes no obligation
to publicly release the results of any revisions to these forward-
looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are also advised to refer to the General
Partner's Form 8-K Report as filed with the U.S. Securities and
Exchange Commission on March 29, 1996 for additional information
concerning these risks.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Exhibit 15. Letter regarding unaudited interim financial information
Exhibit 27. Financial Data Schedule (EDGAR Filing Only)
- 18 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUKE REALTY LIMITED PARTNERSHIP
-------------------------------
By: Duke Realty Investments, Inc.,
General Partner
Registrant
Date: August 8, 1997 /s/ Thomas L. Hefner
--------------- --------------------------------
President and
Chief Executive Officer
/s/ Darell E. Zink, Jr.
---------------------------------
Executive Vice President and
Chief Financial Officer
/s/ Dennis D. Oklak
---------------------------------
Vice President and Treasurer
(Chief Accounting Officer)
- 19 -