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 September 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 .
------- --------
- ------------------------------------------------------------------------
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
November 12, 1997 was 10,988,469.
DUKE REALTY LIMITED PARTNERSHIP
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
September 30, 1997 (Unaudited) and December 31, 1996 2
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1997 and 1996
(Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 (Unaudited) 4
Condensed Consolidated Statement of Partners' Equity for
the nine months ended September 30, 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6-7
Independent Accountants' Review Report 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-16
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
1997 1996
------------- ------------
ASSETS (Unaudited)
-------
Real estate investments:
Land and improvements $ 176,967 $ 140,391
Buildings and tenant improvements 1,284,726 1,041,040
Construction in progress 101,041 44,060
Land held for development 102,781 65,185
--------- ---------
1,665,515 1,290,676
Accumulated depreciation (103,236) (82,207)
--------- ---------
Net real estate investments 1,562,279 1,208,469
Cash 173,910 5,346
Accounts receivable from tenants,
net of allowance of $395 and $709 3,855 5,255
Straight-line rent receivable,
net of allowance of $841 12,785 10,956
Receivables on construction contracts 17,168 12,859
Investments in unconsolidated companies 102,224 79,362
Deferred financing costs, net of accumulated
amortization of $4,771 and $3,529 8,187 8,127
Deferred leasing and other costs,
net of accumulated amortization of
$11,781 and $8,276 34,899 24,293
Escrow deposits and other assets 12,148 7,732
--------- ---------
$1,927,455 $1,362,399
========= =========
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Indebtedness:
Secured debt $ 256,239 $ 261,815
Unsecured notes 340,000 240,000
Unsecured line of credit - 24,000
--------- ---------
596,239 525,815
--------- ---------
Construction payables and amounts due
subcontractors 40,766 23,167
Accounts payable 2,216 1,585
Accrued real estate taxes 20,020 14,888
Accrued interest 3,969 4,437
Other accrued expenses 8,659 6,935
Other liabilities 8,613 8,312
Tenant security deposits and prepaid rents 10,815 7,611
--------- ---------
Total liabilities 691,297 592,750
--------- ---------
Minority interest 166 380
--------- ---------
Partners' equity:
General partner
Common equity 998,992 683,710
Preferred equity 218,906 72,856
--------- ---------
1,217,898 756,566
Limited partners' common equity 18,094 12,703
--------- ---------
Total partners' equity 1,235,992 769,269
--------- ---------
$1,927,455 $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 Nine months ended
September 30, September 30,
----------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
RENTAL OPERATIONS:
Revenues:
Rental income $53,729 $40,001 $152,589 $111,715
Equity in earnings of
unconsolidated
companies 2,489 1,447 6,133 3,994
------ ------ ------- -------
56,218 41,448 158,722 115,709
------ ------ ------- -------
Operating expenses:
Rental expenses 10,204 7,282 28,226 21,096
Real estate taxes 5,252 3,451 14,367 9,958
Interest expense 9,271 7,858 27,222 22,475
Depreciation and
amortization 11,037 7,075 31,278 23,232
------ ------ ------- -------
35,764 25,666 101,093 76,761
------ ------ ------- -------
Earnings from rental
operations 20,454 15,782 57,629 38,948
------ ------ ------- -------
SERVICE OPERATIONS:
Revenues:
Property management,
maintenance and
leasing fees 3,315 3,027 9,170 8,689
Construction management
and development fees 2,385 1,744 5,096 4,897
Other income 217 271 719 939
------ ------ ------- -------
5,917 5,042 14,985 14,525
Operating expenses: ------ ------ ------- -------
Payroll 2,542 2,179 7,427 6,796
Maintenance 498 417 1,414 1,134
Office and other 552 619 1,645 1,958
------ ------ ------- -------
3,592 3,215 10,486 9,888
------ ------ ------- -------
Earnings from service
operations 2,325 1,827 4,499 4,637
------ ------ ------- -------
General and administrative
expense (2,048) (931) (4,540) (2,895)
------ ------ ------- -------
Operating income 20,731 16,678 57,588 40,690
OTHER INCOME (EXPENSE):
Interest income 798 314 1,231 920
Earnings (loss) from
property sales 1,425 (235) 1,807 1,369
Other Expense (220) (46) (639) (113)
Minority interest in
earnings of subsidiaries (350) (268) (775) (698)
------ ------ ------- -------
Net income 22,384 16,443 59,212 42,168
Allocation to preferred
units (4,370) (872) (7,782) (872)
------ ------ ------- -------
Net income available for
common units $18,014 $15,571 $ 51,430 $41,296
====== ====== ======= =======
Net income per common unit $ .25 $ .24 $ .73 $ .65
====== ====== ======= =======
Weighted average number of
common units outstanding 72,069 66,106 70,238 63,178
====== ====== ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements
- 3 -
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30,
(in thousands)
(Unaudited)
1997 1996
---------- ----------
Cash flows from operating activities:
Net income $ 59,212 $ 42,168
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation of buildings and tenant improvements 26,707 19,632
Amortization of deferred financing costs 1,025 895
Amortization of deferred leasing and other costs 3,546 2,705
Minority interest in earnings 775 698
Straight-line rent adjustment (2,507) (2,362)
Earnings from property sales (1,807) (1,369)
Construction contracts, net 13,290 527
Other accrued revenues and expenses, net 13,409 6,710
Equity in earnings in excess of distributions
received from unconsolidated companies (3,901) (560)
------- -------
Net cash provided by operating activities 109,749 69,044
------- -------
Cash flows from investing activities:
Rental property development costs (142,028) (95,384)
Acquisition of rental properties (213,673) (132,225)
Acquisition of undeveloped land and
infrastructure costs (58,865) (11,187)
Recurring costs:
Tenant improvements (5,901) (4,333)
Leasing costs (3,614) (2,157)
Building improvements (480) (405)
Other deferred costs and other assets (17,038) 79
Proceeds from property sales, net 31,741 36,657
Other distributions received from unconsolidated
companies 60,000 6,935
Net investment in and advances to unconsolidated
companies (30,636) (383)
------- -------
Net cash used by investing activities (380,494) (202,403)
------- -------
Cash flows from financing activities:
Contributions from general partner 446,635 201,447
Proceeds from indebtedness 100,000 40,000
Repayments on lines of credit, net (34,000) (26,000)
Repayments on indebtedness including principal
amortization (7,076) (27,410)
Distributions to partners (63,935) (47,095)
Distributions to minority interest (989) (654)
Deferred financing costs (1,326) (707)
------- -------
Net cash provided by financing activities 439,309 139,581
------- -------
Net increase in cash 168,564 6,222
------- -------
Cash at beginning of period 5,346 5,682
------- -------
Cash at end of period $173,910 $ 11,904
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements
- 4 -
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidated Statement of Partners' Equity
For the nine months ended September 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 46,409 7,782 5,021 59,212
Capital contribution
from Duke Realty
Investments, Inc. 300,728 146,050 - 446,778
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 - (7,782) - (7,782)
Distributions to partners
($.805 per Common Unit) (50,594) - (5,559) (56,153)
------- ------- ------ ---------
BALANCE AT SEPTEMBER 30,
1997 $998,992 $218,906 $18,094 $1,235,992
======= ======= ====== =========
COMMON UNITS OUTSTANDING
AT SEPTEMBER 30, 1997 74,982 6,760 81,742
======= ====== =========
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.
Unit and per unit amounts in the consolidated financial statements
of the Partnership have been restated to reflect the two-for-one
split of the Partnership's common units payable on August 25, 1997
to common unitholders of record on August 18, 1997.
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 91.7% of the Partnership at September 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.
- 6 -
2. LINES OF CREDIT
The Partnership has a $200 million unsecured revolving credit
facility which is available to fund the development and
acquisition of additional rental properties and to provide
working capital. The revolving line of credit matures in April
2001 and bears interest payable at the 30-day London Interbank
Offered Rate ("LIBOR") plus .80%. The Partnership also has a
demand $7 million secured revolving credit facility which is
available to provide working capital. This facility bears
interest 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 $2.4 million
and $2.5 million for such services for the nine months ended
September 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.
5. SUBSEQUENT EVENTS
On October 23, 1997, a quarterly distribution of $.30 per Common
Unit was declared payable on November 28, 1997, to common
unitholders of record on November 14, 1997.
On October 23, 1997, a quarterly distribution was declared of
$.56875 per depositary unit of Series A Preferred Units which is
payable on November 28, 1997 to the preferred unitholders of
record on November 14, 1997.
On October 23, 1997, a quarterly distribution was declared of
$.99875 per depositary unit of Series B Preferred Units which is
payable on December 31, 1997 to preferred unitholders of record
on December 17, 1997.
- 7 -
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Partners
DUKE REALTY LIMITED PARTNERSHIP:
We have reviewed the condensed consolidated balance sheet of
Duke Realty Limited Partnership and subsidiaries as of
September 30, 1997, the related condensed consolidated
statements of operations for the three and nine months ended
September 30, 1997 and 1996, the related condensed
consolidated statements of cash flows for the nine months
ended September 30, 1997 and 1996, and the related condensed
consolidated statement of partners' equity for the nine
months ended September 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
October 27, 1997
- 8 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
--------
The Partnership's operating results depend primarily upon
income from the rental operations of its industrial, office
and retail properties located in its primary markets. This
income from rental operations is substantially influenced by
the supply and demand for the Partnership's rental space in
its primary markets. In addition, the Partnership's continued
growth is dependent upon its ability to maintain occupancy
rates and increase rental rates of its in-service portfolio
and to continue development and acquisition of additional
rental properties.
The Partnership's primary markets in the Midwest have
continued to offer strong and stable local economies and have
provided attractive new development opportunities because of
their central location, established manufacturing base,
skilled work force and moderate labor costs. Consequently, the
Partnership's occupancy rate of its in-service portfolio has
exceeded 92% the last two years and was at 95.1% at September
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
September 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 3,122 3,047 9.1% 11.7% 93.4% 93.9%
Bulk 20,134 14,296 58.8 55.1 94.6% 94.0%
OFFICE
Suburban 8,303 5,815 24.3 22.4 96.8% 95.8%
CBD 699 699 2.0 2.7 94.0% 85.2%
Medical 290 333 0.9 1.3 98.4% 91.6%
RETAIL 1,692 1,766 4.9 6.8 96.3% 95.5%
------ ------ ----- -----
Total 34,240 25,956 100.0% 100.0% 95.1% 94.2%
====== ====== ===== =====
Management expects occupancy of the in-service property
portfolio to remain stable because (i) only 3.0% and 10.3% 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.
- 9 -
The following table reflects the Partnership's in-service
portfolio lease expiration schedule as of September 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 758 $ 3,146 212 $ 2,170 21 $ 239 991 $ 5,555
1998 2,431 9,054 835 9,745 94 1,019 3,360 19,818
1999 2,281 9,775 1,169 12,639 114 1,181 3,564 23,595
2000 2,159 8,973 914 11,322 122 1,461 3,195 21,756
2001 2,644 10,225 1,370 16,022 93 1,100 4,107 27,347
2002 2,964 10,953 1,260 14,118 155 1,669 4,379 26,740
2003 403 2,321 338 3,959 43 381 784 6,661
2004 938 3,832 270 3,309 17 168 1,225 7,309
2005 1,440 4,501 771 10,729 177 1,509 2,388 16,739
2006 1,853 6,298 533 8,340 5 67 2,391 14,705
2007 and
There-
after 4,094 14,523 1,305 17,367 789 6,807 6,188 38,697
------ ------ ----- ------- ----- ------ ------ -------
Total
Leased 21,965 $83,601 8,977 $109,720 1,630 $15,601 32,572 $208,922
====== ====== ===== ======= ===== ====== ====== =======
Total
Portfolio
Square
Feet 23,256 9,292 1,692 34,240
====== ===== ===== ======
Annualized
net
effective
rent per
square foot $ 3.81 $ 12.22 $ 9.57 $ 6.41
====== ======= ====== =======
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 4.5 million square feet of properties under
development at September 30, 1997 over the next four quarters.
The 4.5 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 Anticipated
In-Service Square Percent Project Stabilized
Date Feet Leased Costs Return
---------------- ------ ------- --------- -----------
4th Quarter 1997 1,557 50% $ 81,142 11.7%
1st Quarter 1998 1,036 82% 38,973 11.4%
2nd Quarter 1998 1,548 54% 78,467 11.5%
Thereafter 349 55% 32,825 11.5%
----- -------
4,490 59% $231,407 11.6%
===== =======
- 10 -
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, 1997 and 1996 (in thousands, except number of
properties and per unit amounts):
Three months ended Nine months ended
September 30, September 30,
------------------------ -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
Rental Operations revenue $56,218 $41,448 $158,722 $115,709
Service Operations revenue 5,917 5,042 14,985 14,525
Earnings from Rental
Operations 20,454 15,782 57,629 38,948
Earnings from Service
Operations 2,325 1,827 4,499 4,637
Operating income 20,731 16,678 57,588 40,690
Net income available for
common units $18,014 $15,571 $51,430 $41,296
Weighted average common
units outstanding 72,069 66,106 70,238 63,178
Net income per common unit $ .25 $ .24 $ .73 $ .65
Number of in-service
properties at end
of period 278 233 278 233
In-service square
footage at end
of period 34,240 25,956 34,240 25,956
Under development
square footage
at end of period 4,490 2,980 4,490 2,980
Comparison of Three Months Ended September 30, 1997 to Three
-----------------------------------------------------------------
Months Ended September 30, 1996
-------------------------------
Rental Operations
-----------------
The Partnership increased its in-service portfolio of rental
properties from 233 properties comprising 25.9 million square
feet at September 30, 1996 to 278 properties comprising 34.2
million square feet at September 30, 1997 through the
acquisition of 32 properties totaling 4.2 million square feet
and the completion of 20 properties and 2 building expansions
totaling 4.7 million square feet developed by the Partnership.
The Partnership also disposed of 7 properties totaling 592,000
square feet. These 45 net additional rental properties
primarily account for the $14.8 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 45 in-service rental properties.
Interest expense increased by approximately $1.4 million from
$7.9 million for the three months ended September 30, 1996 to
$9.3 million for the three months ended September 30, 1997 due
to additional unsecured debt issued in the Partnership's
medium-term note program in the last quarter of 1996 to fund
the development and acquisition of additional rental
properties as well as $100 million of unsecured debt issued in
the third quarter to fund 1997 development and acquisition
activity.
As a result of the above-mentioned items, earnings from rental
operations increased $4.6 million from $15.8 million for the
three months ended September 30, 1996 to $20.4 million for the
three months ended September 30, 1997.
- 11 -
Service Operations
------------------
Service Operation revenues increased by $900,000 from $5.0
million for the three months ended September 30, 1996 to $5.9
million for the three months ended September 30, 1997 due
mainly to increased construction fee revenue related to
increased construction volume. As a result, earnings from
Service Operations increased slightly from $1.8 million for
the three months ended September 30, 1996 to $2.3 million for
the three months ended September 30, 1997.
General and Administrative Expense
----------------------------------
General and administrative expense increased from $931,000 for
the three months ended September 30, 1996 to $2.0 million for
the three months ended September 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 increased from $314,000 for the three months
ended September 30, 1996 to $798,000 for the three months
ended September 30, 1997 primarily as a result of interest
income which was earned on excess cash balances resulting from
the General Partner's September 1997 Common Stock offerings
which were contributed to the Partnership. 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 September 30, 1997,
approximately $174,000 of costs were expensed in connection
with the decision to terminate the pursuit of the acquisition
of two large real estate portfolios.
Net Income Available for Common Units
-------------------------------------
Net income available for common units for the three months
ended September 30, 1997 was $18.0 million compared to net
income available for common units of $15.6 million for the
three months ended September 30, 1996. This increase results
primarily from the operating result fluctuations in rental and
service operations explained above.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE
---------------------------------------------------------------
MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------
Rental Operations
------------------
The Partnership increased its in-service portfolio of rental
properties from 233 properties comprising 25.9 million square
feet at September 30, 1996 to 278 properties comprising 34.2
million square feet at September 30, 1997 through the
acquisition of 32 properties totaling 4.2 million square feet
and the completion of 20 properties and 2 building expansions
totaling 4.7 million square feet developed by the Partnership.
The Partnership also disposed of 7 properties totaling 592,000
square feet. These 45 net additional rental properties
primarily account for the $43.0 million increase in revenues
from Rental Operations from 1996 to 1997.
- 12 -
The increase from 1996 to 1997 in rental expenses, real estate
taxes and depreciation and amortization expense is also a result
of the additional 45 in-service rental properties.
Interest expense increased by approximately $4.7 million from
$22.5 million for the nine months ended September 30, 1996 to
$27.2 million for the nine months ended September 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
well as $100 million of unsecured debt issued in the third
quarter to fund 1997 development and acquisitions.
As a result of the above-mentioned items, earnings from rental
operations increased $18.7 million from $38.9 million for the
nine months ended September 30, 1996 to $57.6 million for the
nine months ended September 30, 1997.
Service Operations
------------------
Service Operation revenues increased to $15.0 million for the
nine months ended September 30, 1997 as compared to $14.5
million for the nine months ended September 30, 1996. This
increase was primarily the result of an increase in third-party
maintenance fee revenue. Service Operation operating expenses
increased from $9.9 million to $10.5 million for the nine
months ended September 30, 1997 as compared to the nine months
ended September 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 slightly from $4.6 million for
the nine months ended September 30, 1996 to $4.5 million for
the nine months ended September 30, 1997.
General and Administrative Expense
----------------------------------
General and administrative expense increased from $2.9 million
for the nine months ended September 30, 1996 to $4.5 million
for the nine months ended September 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 increased from $920,000 for the nine months
ended September 30, 1996 to $1.2 million for the nine months
ended September 30, 1997 primarily as a result of interest
income which was earned on excess cash balances resulting from
the General Partner's September 1997 Common Stock offerings
which were contributed to the Partnership. 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 nine months
ended September 30, 1997, approximately $486,000 of costs were
expensed in connection with the decision to terminate the
pursuit of the acquisition of two large real estate
portfolios.
- 13 -
Net Income Available for Common Units
-------------------------------------
Net income available for common units for the nine months
ended September 30, 1997 was $51.4 million compared to net
income available for common units of $41.3 million for the
nine months ended September 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 $109.7
million and $69.1 million for the nine months ended September
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
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 $380.5 million
and $202.4 million for the nine months ended September 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, $414.6 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 $238.8
million. During the nine months ended September 30, 1997, the
Partnership contributed properties to an existing joint
venture at an agreed value of approximately $60 million. The
Partnership recorded its investment in the joint venture
related to this additional contribution at its carrying value
of $48.6 million. The joint venture partner contributed cash
to the venture equal to 49.9% of the agreed value of the
properties contributed, $30.0 million, and this cash was
distributed to the Partnership and reduced its recorded
investment in the venture. This same joint venture received
$60 million of proceeds from a mortgage loan financing and
distributed 50.1% of the proceeds to the Partnership. During
the nine months ended September 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 $439.3
million and $139.6 million for the nine months ended September
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 $129.2 million of net
proceeds from the General Partner's common equity offerings
which was used to pay down amounts outstanding on the
unsecured line of credit and to fund current development and
acquisition activity. In 1997, the Partnership received $300.5
million of net proceeds from the
- 14 -
General Partner's common equity offerings which was used to
pay down amounts outstanding on the unsecured line of credit
and to fund current development activity. In the third quarter
of 1997, the Partnership received $146.1 million of net
proceeds from the offering of the General Partner's 7.99%
Series B Step-Up Redeemable Preferred Shares and $100 million
from the offering of 6.95% Pass-Through Asset Trust Securities
due August 2004.
The Partnership has a $200 million unsecured line of credit
which matures in April 2001. This facility bears interest
payable at the 30-day LIBOR rate plus .80%. The Partnership
has been able to reduce the borrowing rate on this line of
credit from LIBOR plus 1.625% at December 31, 1996 to the
current interest rate of LIBOR plus .80%. The Partnership also
has a demand $7 million secured revolving credit facility
which is available to provide working capital. This facility
bears interest 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 September 30, 1997 of
approximately $514.0 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 September 30, 1997 consists of
notes totaling $596.2 million with a weighted average interest
rate of 7.57% maturing at various dates through 2017. The
Partnership has $340.0 million of unsecured debt and $256.2
million of secured debt outstanding at September 30, 1997.
Scheduled principal amortization of such debt totaled $2.6
million for the nine months ended September 30, 1997.
Following is a summary of the scheduled future amortization
and maturities of the Partnership's indebtedness at September
30, 1997 (in thousands):
Repayments
--------------------------------------- Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
------ ------------ ---------- ----------- -----------------
1997 $ 915 $ - $ 915 7.77%
1998 4,574 42,090 46,664 7.15%
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 1,239 150,000 151,239 7.28%
2005 1,346 100,000 101,346 7.48%
2006 1,465 - 1,465 7.58%
Thereafter 17,391 9,292 26,683 7.70%
------ ------- -------
Total $43,364 $552,875 $596,239 7.57%
====== ======= =======
Unit and per unit amounts in the consolidated financial
statements of the Partnership have been restated to reflect
the two-for-one split of the Partnership's common units
payable on August 25, 1997 to common unitholders of record
on August 18, 1997.
- 15 -
The Partnership intends to pay regular quarterly distributions
from net cash provided by operating activities. A quarterly
distribution of $.30 per Common Unit was declared on October
23, 1997 payable on November 28, 1997 to unitholders of record
on November 14, 1997, which represents an annualized
distribution of $1.20 per unit. A quarterly distribution of
$.56875 per depositary unit of Series A Preferred Units was
declared on October 23, 1997 which is payable on November 28,
1997 to preferred unitholders of record on November 14, 1997.
On October 23, 1997, the Board of Directors declared a
distribution of $.99875 per depositary unit on the Series B
Cumulative Step-Up Redeemable Preferred Units. The
distribution is payable on December 31, 1997 to preferred
unitholders of record on December 17, 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 nine months ended
September 30 as follows (in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ ------
Net income available for
common units $18,014 $15,571 $51,430 $41,296
Add back:
Depreciation and
amortization 10,702 6,783 30,253 22,337
Share of joint venture
depreciation and
amortization 757 484 2,071 1,367
(Earnings) loss from
property sales (1,425) 235 (1,807) (1,369)
------ ------ ------ ------
Funds From Operations $28,048 $23,073 $81,947 $63,631
====== ====== ====== ======
Cash flow provided by
(used by):
Operating activities $ 37,544 $29,894 $109,749 $ 69,044
Investing activities (204,317) (108,805) (380,494) (202,403)
Financing activities 337,592 90,541 439,309 139,581
The increase in FFO for the three and nine months ended
September 30, 1997 compared to the three and nine months ended
September 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.
- 16 -
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)
- 17 -
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: November 13, 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
-----------------------------
Executive Vice President and
Chief Administrative Officer
(Chief Accounting Officer)
- 18 -