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EX-32.4 - EXHIBIT 32.4 - DUKE REALTY CORPa1stq2015ex324.htm
EX-12.2 - EXHIBIT 12.2 - DUKE REALTY CORPa1stq2015ex122.htm
EX-31.3 - EXHIBIT 31.3 - DUKE REALTY CORPa1stq2015ex313.htm
EX-31.1 - EXHIBIT 31.1 - DUKE REALTY CORPa1stq2015ex311.htm
EX-12.1 - EXHIBIT 12.1 - DUKE REALTY CORPa1stq2015ex121.htm
EX-31.2 - EXHIBIT 31.2 - DUKE REALTY CORPa1stq2015ex312.htm
EX-32.3 - EXHIBIT 32.3 - DUKE REALTY CORPa1stq2015ex323.htm
EX-31.4 - EXHIBIT 31.4 - DUKE REALTY CORPa1stq2015ex314.htm
EX-32.2 - EXHIBIT 32.2 - DUKE REALTY CORPa1stq2015ex322.htm
EX-32.1 - EXHIBIT 32.1 - DUKE REALTY CORPa1stq2015ex321.htm
EX-10.2 - EXHIBIT 10.2 - DUKE REALTY CORPexhibit102psapool2.htm
EX-10.4 - EXHIBIT 10.4 - DUKE REALTY CORPexhibit104psapool4.htm
EX-10.1 - EXHIBIT 10.1 - DUKE REALTY CORPexhibit101psapool1.htm
EX-10.7 - EXHIBIT 10.7 - DUKE REALTY CORPexhibit107newrsuawardwith2.htm
EX-10.6 - EXHIBIT 10.6 - DUKE REALTY CORPexhibit106annualrsuawardfo.htm
EX-10.5 - EXHIBIT 10.5 - DUKE REALTY CORPexhibit105directorscompplan.htm
EXCEL - IDEA: XBRL DOCUMENT - DUKE REALTY CORPFinancial_Report.xls
EX-10.3 - EXHIBIT 10.3 - DUKE REALTY CORPexhibit103psapool3.htm
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 March 31, 2015
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 Corporation) 0-20625 (Duke Realty Limited Partnership)
DUKE REALTY CORPORATION
DUKE REALTY LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)
Indiana (Duke Realty Corporation)
 
35-1740409 (Duke Realty Corporation)
Indiana (Duke Realty Limited Partnership)
 
35-1898425 (Duke Realty Limited Partnership)
(State or Other Jurisdiction
of Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
600 East 96thStreet, Suite 100
Indianapolis, Indiana
 
46240
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's Telephone Number, Including Area Code: (317) 808-6000
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.
Duke Realty Corporation
Yes x
 No   o
 
Duke Realty Limited Partnership
Yes x
 No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Duke Realty Corporation
Yes x
No  o
 
Duke Realty Limited Partnership
Yes x
No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Duke Realty Corporation:
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
Duke Realty Limited Partnership:
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  x
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Duke Realty Corporation
Yes  o 
No  x
 
Duke Realty Limited Partnership
Yes  o
No  x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Class
 
Outstanding Common Shares of Duke Realty Corporation at May 1, 2015
Common Stock, $.01 par value per share
 
345,048,546




EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2015 of both Duke Realty Corporation and Duke Realty Limited Partnership. Unless stated otherwise or the context otherwise requires, references to "Duke Realty Corporation" or the "General Partner" mean Duke Realty Corporation and its consolidated subsidiaries; and references to the "Partnership" mean Duke Realty Limited Partnership and its consolidated subsidiaries. The terms the "Company," "we," "us" and "our" refer to the General Partner and the Partnership, collectively, and those entities owned or controlled by the General Partner and/or the Partnership.
Duke Realty Corporation is a self-administered and self-managed real estate investment trust ("REIT") and is the sole general partner of the Partnership, owning 98.9% of the common partnership interests of the Partnership ("General Partner Units") as of March 31, 2015. The remaining 1.1% of the common partnership interests ("Limited Partner Units" and, together with the General Partner Units, the "Common Units") are owned by limited partners. As the sole general partner of the Partnership, the General Partner has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Partnership. The General Partner also owns all of the issued and outstanding preferred partnership interests in the Partnership ("Preferred Units"), to the extent the Partnership has issued Preferred Units.
The General Partner and the Partnership are operated as one enterprise. The management of the General Partner consists of the same members as the management of the Partnership. As the sole general partner with control of the Partnership, the General Partner consolidates the Partnership for financial reporting purposes, and the General Partner does not have any significant assets other than its investment in the Partnership. Therefore, the assets and liabilities of the General Partner and the Partnership are substantially the same.
We believe combining the quarterly reports on Form 10-Q of the General Partner and the Partnership into this single report results in the following benefits:
enhances investors' understanding of the General Partner and the Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation of information since a substantial portion of the Company's disclosure applies to both the General Partner and the Partnership; and
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
 
We believe it is important to understand the few differences between the General Partner and the Partnership in the context of how we operate as an interrelated consolidated company. The General Partner's only material asset is its ownership of partnership interests in the Partnership. As a result, the General Partner does not conduct business itself, other than acting as the sole general partner of the Partnership and issuing public equity from time to time. The General Partner does not issue any indebtedness, but does guarantee some of the unsecured debt of the Partnership. The Partnership holds substantially all the assets of the business, directly or indirectly, and holds the ownership interests related to certain of the Company's investments. The Partnership conducts the operations of the business and has no publicly traded equity. Except for net proceeds from equity issuances by the General Partner, which are contributed to the Partnership in exchange for General Partner Units or Preferred Units, the Partnership generates the capital required by the business through its operations, its incurrence of indebtedness and the issuance of Limited Partner Units to third parties.
Noncontrolling interests, shareholders' equity and partners' capital are the main areas of difference between the consolidated financial statements of the General Partner and those of the Partnership. The noncontrolling interests in the Partnership's financial statements include the interests in consolidated investees not wholly owned by the Partnership. The noncontrolling interests in the General Partner's financial statements include the same noncontrolling interests at the Partnership level, as well as the common limited partnership interests in the Partnership, which are accounted for as partners' capital by the Partnership.
In order to highlight the differences between the General Partner and the Partnership, there are separate sections in this report, as applicable, that separately discuss the General Partner and the Partnership, including separate financial statements and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the General Partner and the Partnership, this report refers to actions or holdings as being actions or holdings of the collective Company.




DUKE REALTY CORPORATION/DUKE REALTY LIMITED PARTNERSHIP
INDEX
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
Duke Realty Corporation:
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2015 and 2014
 
 
 
 
 
 
 
Duke Realty Limited Partnership:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Duke Realty Corporation and Duke Realty Limited Partnership:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
 
March 31,
2015
 
December 31,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
1,383,889

 
$
1,412,867

Buildings and tenant improvements
4,815,764

 
4,986,390

Construction in progress
194,918

 
246,062

Investments in and advances to unconsolidated companies
341,911

 
293,650

Undeveloped land
473,562

 
499,960

 
7,210,044

 
7,438,929

Accumulated depreciation
(1,176,719
)
 
(1,235,337
)
Net real estate investments
6,033,325

 
6,203,592

 
 
 
 
Real estate investments and other assets held-for-sale
840,018

 
725,051

 
 
 
 
Cash and cash equivalents
17,806

 
17,922

Accounts receivable, net of allowance of $2,772 and $2,742
28,961

 
26,168

Straight-line rent receivable, net of allowance of $7,578 and $8,405
110,635

 
109,657

Receivables on construction contracts, including retentions
44,860

 
36,224

Deferred financing costs, net of accumulated amortization of $32,742 and $38,863
36,427

 
38,734

Deferred leasing and other costs, net of accumulated amortization of $264,027 and $259,883
374,862

 
387,635

Escrow deposits and other assets
243,610

 
209,856

 
$
7,730,504

 
$
7,754,839

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
Secured debt
$
877,751

 
$
942,478

Unsecured debt
3,113,617

 
3,364,161

Unsecured line of credit
453,000

 
106,000

 
4,444,368

 
4,412,639

 
 
 
 
Liabilities related to real estate investments held-for-sale
65,105

 
59,092

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
46,723

 
69,470

Accrued real estate taxes
70,130

 
76,308

Accrued interest
34,634

 
55,110

Other accrued expenses
38,766

 
62,632

Other liabilities
98,532

 
95,566

Tenant security deposits and prepaid rents
38,063

 
44,142

Total liabilities
4,836,321

 
4,874,959

Shareholders' equity:
 
 
 
Common shares ($.01 par value); 600,000 shares authorized; 345,046 and 344,112 shares issued and outstanding
3,450

 
3,441

Additional paid-in capital
4,952,319

 
4,944,800

Accumulated other comprehensive income
2,739

 
3,026

Distributions in excess of net income
(2,084,810
)
 
(2,090,942
)
Total shareholders' equity
2,873,698

 
2,860,325

Noncontrolling interests
20,485

 
19,555

Total equity
2,894,183

 
2,879,880

 
$
7,730,504

 
$
7,754,839

See accompanying Notes to Consolidated Financial Statements

3


DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three months ended March 31,
(in thousands, except per share amounts)
(Unaudited)
 
2015
 
2014
Revenues:
 
 
 
Rental and related revenue
$
214,615

 
$
208,646

General contractor and service fee revenue
52,820

 
55,820

 
267,435

 
264,466

Expenses:
 
 
 
Rental expenses
36,124

 
42,041

Real estate taxes
30,779

 
29,203

General contractor and other services expenses
47,023

 
47,271

Depreciation and amortization
81,903

 
88,298

 
195,829

 
206,813

Other operating activities:
 
 
 
Equity in earnings of unconsolidated companies
6,246

 
2,321

Gain on sale of properties
23,484

 
15,853

Gain on land sales
5,425

 
152

Other operating expenses

(1,557
)
 
(2,216
)
General and administrative expenses
(17,004
)
 
(14,694
)
 
16,594

 
1,416

Operating income
88,200

 
59,069

Other income (expenses):
 
 
 
Interest and other income, net
338

 
351

Interest expense
(49,610
)
 
(49,261
)
Acquisition-related activity
(28
)
 
(14
)
Income from continuing operations before income taxes
38,900

 
10,145

Income tax expense
(1,484
)
 
(2,674
)
Income from continuing operations
37,416

 
7,471

Discontinued operations:
 
 
 
Income before gain on sales
10,178

 
1,325

Gain on sale of depreciable properties, net of tax
18,375

 
16,775

Income from discontinued operations
28,553

 
18,100

Net income
65,969

 
25,571

Dividends on preferred shares

 
(7,037
)
Adjustments for redemption/repurchase of preferred shares

 
483

Net income attributable to noncontrolling interests
(725
)
 
(334
)
Net income attributable to common shareholders
$
65,244

 
$
18,683

Basic net income per common share:
 
 
 
Continuing operations attributable to common shareholders
$
0.11

 
$
0.00

Discontinued operations attributable to common shareholders
0.08

 
0.06

Total
$
0.19

 
$
0.06

Diluted net income per common share:
 
 
 
Continuing operations attributable to common shareholders
$
0.11

 
$
0.00

Discontinued operations attributable to common shareholders
0.08

 
0.06

Total
$
0.19

 
$
0.06

Weighted average number of common shares outstanding
344,597

 
327,106

Weighted average number of common shares and potential dilutive securities
348,653

 
331,716

 
 
 
 
Comprehensive income:
 
 
 
Net income
$
65,969

 
$
25,571

Other comprehensive loss:
 
 
 
Amortization of interest contracts
(287
)
 
(287
)
Total other comprehensive loss
(287
)
 
(287
)
Comprehensive income
$
65,682

 
$
25,284

See accompanying Notes to Consolidated Financial Statements

4


DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31,
(in thousands)
(Unaudited)
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
65,969

 
$
25,571

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
66,835

 
71,393

Amortization of deferred leasing and other costs
18,585

 
26,871

Amortization of deferred financing costs
2,130

 
2,499

Straight-line rental income and expense, net
(8,819
)
 
(5,974
)
Gains on land and depreciated property sales
(47,284
)
 
(30,106
)
Third-party construction contracts, net
(1,240
)
 
411

Other accrued revenues and expenses, net
(52,033
)
 
(33,911
)
Operating distributions received in excess of (less than) equity in earnings from unconsolidated companies
(1,465
)
 
2,383

Net cash provided by operating activities
42,678

 
59,137

Cash flows from investing activities:
 
 
 
Development of real estate investments
(66,754
)
 
(105,413
)
Acquisition of real estate investments and related intangible assets
(890
)
 
(17,224
)
Acquisition of undeveloped land

 
(2,270
)
Second generation tenant improvements, leasing costs and building improvements
(17,496
)
 
(19,631
)
Other deferred leasing costs
(13,122
)
 
(8,706
)
Other assets
13,283

 
5,539

Proceeds from land and depreciated property sales, net
109,892

 
70,673

Capital distributions from unconsolidated companies
2,164

 
2,546

Capital contributions and advances to unconsolidated companies
(49,689
)
 
(420
)
Net cash used for investing activities
(22,612
)
 
(74,906
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common shares, net
4,882

 
23,783

Payments for redemption/repurchase of preferred shares

 
(17,656
)
Payments on unsecured debt
(250,544
)
 
(511
)
Payments on secured indebtedness including principal amortization
(63,151
)
 
(21,471
)
Borrowings on line of credit, net
347,000

 
92,000

Distributions to common shareholders
(58,607
)
 
(55,596
)
Distributions to preferred shareholders

 
(7,140
)
Distributions to noncontrolling interests, net
(706
)
 
(770
)
Change in book overdrafts
1,054

 
3,629

Deferred financing costs
(110
)
 
(300
)
Net cash provided by (used for) financing activities
(20,182
)
 
15,968

Net increase (decrease) in cash and cash equivalents
(116
)
 
199

Cash and cash equivalents at beginning of period
17,922

 
19,275

Cash and cash equivalents at end of period
$
17,806

 
$
19,474

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Assumption of indebtedness and other liabilities in real estate acquisitions
$

 
$
76

Conversion of Limited Partner Units to common shares
$
350

 
$

See accompanying Notes to Consolidated Financial Statements


5


DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the three months ended March 31, 2015
(in thousands, except per share data)
(Unaudited)
 
 
Common Shareholders
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
 
Distributions
in Excess of
Net Income
 
Noncontrolling
Interests
 
Total
Balance at December 31, 2014
 
$
3,441

 
$
4,944,800

 
$
3,026

 
$
(2,090,942
)
 
$
19,555

 
$
2,879,880

Net income
 

 

 

 
65,244

 
725

 
65,969

Other comprehensive loss
 

 

 
(287
)
 

 

 
(287
)
Issuance of common shares
 
2

 
4,880

 

 

 

 
4,882

Stock-based compensation plan activity
 
6

 
2,290

 

 
(505
)
 
1,261

 
3,052

Conversion of Limited Partner Units
 
1

 
349

 

 

 
(350
)
 

Distributions to common shareholders ($0.17 per share)
 

 

 

 
(58,607
)
 

 
(58,607
)
Distributions to noncontrolling interests, net
 

 

 

 

 
(706
)
 
(706
)
Balance at March 31, 2015
 
$
3,450

 
$
4,952,319

 
$
2,739

 
$
(2,084,810
)
 
$
20,485

 
$
2,894,183

See accompanying Notes to Consolidated Financial Statements



6


DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)

 
March 31, 2015
 
December 31, 2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
     Land and improvements
$
1,383,889

 
$
1,412,867

     Buildings and tenant improvements
4,815,764

 
4,986,390

     Construction in progress
194,918

 
246,062

     Investments in and advances to unconsolidated companies
341,911

 
293,650

     Undeveloped land
473,562

 
499,960

 
7,210,044

 
7,438,929

     Accumulated depreciation
(1,176,719
)
 
(1,235,337
)
              Net real estate investments
6,033,325

 
6,203,592

 
 
 
 
Real estate investments and other assets held-for-sale
840,018

 
725,051

 
 
 
 
Cash and cash equivalents
17,806

 
17,922

Accounts receivable, net of allowance of $2,772 and $2,742
28,961

 
26,168

Straight-line rent receivable, net of allowance of $7,578 and $8,405
110,635

 
109,657

Receivables on construction contracts, including retentions
44,860

 
36,224

Deferred financing costs, net of accumulated amortization of $32,742 and $38,863
36,427

 
38,734

Deferred leasing and other costs, net of accumulated amortization of $264,027 and $259,883
374,862

 
387,635

Escrow deposits and other assets
243,610

 
209,856

 
$
7,730,504

 
$
7,754,839

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
     Secured debt
$
877,751

 
$
942,478

     Unsecured debt
3,113,617

 
3,364,161

     Unsecured line of credit
453,000

 
106,000

 
4,444,368

 
4,412,639

 
 
 
 
Liabilities related to real estate investments held-for-sale
65,105

 
59,092

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
46,723

 
69,470

Accrued real estate taxes
70,130

 
76,308

Accrued interest
34,634

 
55,110

Other accrued expenses
38,943

 
62,812

Other liabilities
98,532

 
95,566

Tenant security deposits and prepaid rents
38,063

 
44,142

     Total liabilities
4,836,498

 
4,875,139

Partners' equity:
 
 
 
  General Partner:
 
 
 
     Common equity (345,046 and 344,112 General Partner Units issued and outstanding)
2,870,782

 
2,857,119

 
2,870,782

 
2,857,119

     Limited Partners' common equity (3,650 and 3,717 Limited Partner Units issued and outstanding)
18,255

 
17,289

     Accumulated other comprehensive income
2,739

 
3,026

            Total partners' equity
2,891,776

 
2,877,434

Noncontrolling interests
2,230

 
2,266

     Total equity
2,894,006

 
2,879,700

 
$
7,730,504

 
$
7,754,839

See accompanying Notes to Consolidated Financial Statements

7


DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three months ended March 31,
(in thousands, except per unit amounts)
(Unaudited)
 
2015
 
2014
Revenues:
 
 
 
Rental and related revenue
$
214,615

 
$
208,646

General contractor and service fee revenue
52,820

 
55,820

 
267,435

 
264,466

Expenses:
 
 
 
Rental expenses
36,124

 
42,041

Real estate taxes
30,779

 
29,203

General contractor and other services expenses
47,023

 
47,271

Depreciation and amortization
81,903

 
88,298

 
195,829

 
206,813

Other operating activities:
 
 
 
Equity in earnings of unconsolidated companies
6,246

 
2,321

Gain on sale of properties
23,484

 
15,853

Gain on land sales
5,425

 
152

Other operating expenses
(1,557
)
 
(2,216
)
General and administrative expenses
(17,004
)
 
(14,694
)
 
16,594

 
1,416

Operating income
88,200

 
59,069

Other income (expenses):
 
 
 
Interest and other income, net
338

 
351

Interest expense
(49,610
)
 
(49,261
)
Acquisition-related activity
(28
)
 
(14
)
Income from continuing operations before income taxes
38,900

 
10,145

Income tax expense
(1,484
)
 
(2,674
)
Income from continuing operations
37,416

 
7,471

Discontinued operations:
 
 
 
Income before gain on sales
10,178

 
1,325

Gain on sale of depreciable properties, net of tax
18,375

 
16,775

           Income from discontinued operations
28,553

 
18,100

Net income
65,969

 
25,571

Distributions on Preferred Units

 
(7,037
)
Adjustments for redemption/repurchase of Preferred Units

 
483

Net income attributable to noncontrolling interests
(26
)
 
(84
)
Net income attributable to common unitholders
$
65,943

 
$
18,933

Basic net income per Common Unit:
 
 
 
Continuing operations attributable to common unitholders
$
0.11

 
$
0.00

Discontinued operations attributable to common unitholders
0.08

 
0.06

Total
$
0.19

 
$
0.06

Diluted net income per Common Unit:
 
 
 
Continuing operations attributable to common unitholders
$
0.11

 
$
0.00

Discontinued operations attributable to common unitholders
0.08

 
0.06

Total
$
0.19

 
$
0.06

Weighted average number of Common Units outstanding
348,292

 
331,493

Weighted average number of Common Units and potential dilutive securities
348,653

 
331,716

 
 
 
 
Comprehensive income:
 
 
 
Net income
$
65,969

 
$
25,571

Other comprehensive loss:
 
 
 
Amortization of interest contracts
(287
)
 
(287
)
Total other comprehensive loss
(287
)
 
(287
)
Comprehensive income
$
65,682

 
$
25,284

See accompanying Notes to Consolidated Financial Statements

8


DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31,
(in thousands)
(Unaudited)
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
65,969

 
$
25,571

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
66,835

 
71,393

Amortization of deferred leasing and other costs
18,585

 
26,871

Amortization of deferred financing costs
2,130

 
2,499

Straight-line rental income and expense, net
(8,819
)
 
(5,974
)
Gains on land and depreciated property sales
(47,284
)
 
(30,106
)
Third-party construction contracts, net
(1,240
)
 
411

Other accrued revenues and expenses, net
(52,036
)
 
(33,911
)
Operating distributions received in excess of (less than) equity in earnings from unconsolidated companies
(1,465
)
 
2,383

Net cash provided by operating activities
42,675

 
59,137

Cash flows from investing activities:
 
 
 
Development of real estate investments
(66,754
)
 
(105,413
)
Acquisition of real estate investments and related intangible assets
(890
)
 
(17,224
)
Acquisition of undeveloped land

 
(2,270
)
Second generation tenant improvements, leasing costs and building improvements
(17,496
)
 
(19,631
)
Other deferred leasing costs
(13,122
)
 
(8,706
)
Other assets
13,283

 
5,539

Proceeds from land and depreciated property sales, net
109,892

 
70,673

Capital distributions from unconsolidated companies
2,164

 
2,546

Capital contributions and advances to unconsolidated companies
(49,689
)
 
(420
)
Net cash used for investing activities
(22,612
)
 
(74,906
)
Cash flows from financing activities:
 
 
 
Contributions from the General Partner
4,885

 
23,783

Payments for redemption/repurchase of Preferred Units

 
(17,656
)
Payments on unsecured debt
(250,544
)
 
(511
)
Payments on secured indebtedness including principal amortization
(63,151
)
 
(21,471
)
Borrowings on line of credit, net
347,000

 
92,000

Distributions to common unitholders
(59,239
)
 
(56,342
)
Distributions to preferred unitholders

 
(7,140
)
Contributions from (distributions to) noncontrolling interests, net
(74
)
 
(24
)
Change in book overdrafts
1,054

 
3,629

Deferred financing costs
(110
)
 
(300
)
Net cash provided by (used for) financing activities
(20,179
)
 
15,968

Net increase (decrease) in cash and cash equivalents
(116
)
 
199

Cash and cash equivalents at beginning of period
17,922

 
19,275

Cash and cash equivalents at end of period
$
17,806

 
$
19,474

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Assumption of indebtedness and other liabilities in real estate acquisitions
$

 
$
76

Conversion of Limited Partner Units to common shares of the General Partner
$
350

 
$

See accompanying Notes to Consolidated Financial Statements

9


DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the three months ended March 31, 2015
(in thousands, except per unit data)
(Unaudited)
 
Common Unitholders
 
 
 
 
 
General
 
Limited
 
Accumulated
 
 
 
 
 
 
 
 Partner's
 
Partners'
 
Other
 
Total
 
 
 
 
 
Common Equity
 
Common Equity
 
Comprehensive
Income
 
Partners' Equity
 
Noncontrolling
Interests
 
Total Equity
Balance at December 31, 2014
$
2,857,119

 
$
17,289

 
$
3,026

 
$
2,877,434

 
$
2,266

 
$
2,879,700

Net income
65,244

 
699

 

 
65,943

 
26

 
65,969

Other comprehensive income loss

 

 
(287
)
 
(287
)
 

 
(287
)
Capital contribution from the General Partner
4,885

 

 

 
4,885

 

 
4,885

Stock-based compensation plan activity
1,791

 
1,261

 

 
3,052

 

 
3,052

Conversion of Limited Partner Units to common shares of the General Partner
350

 
(350
)
 

 

 

 

Distributions to Partners ($0.17 per Common Unit)
(58,607
)
 
(632
)
 

 
(59,239
)
 

 
(59,239
)
Distributions to noncontrolling interests, net

 
(12
)
 

 
(12
)
 
(62
)
 
(74
)
Balance at March 31, 2015
$
2,870,782

 
$
18,255

 
$
2,739

 
$
2,891,776

 
$
2,230

 
$
2,894,006


See accompanying Notes to Consolidated Financial Statements

10


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    General Basis of Presentation
The interim consolidated financial statements included herein have been prepared by Duke Realty Corporation (the "General Partner") and Duke Realty Limited Partnership (the "Partnership"). In this Report, unless the context indicates otherwise, the terms "Company," "we," "us" and "our" refer to the General Partner and the Partnership, collectively, and those entities owned or controlled by the General Partner and/or the Partnership. The 2014 year-end consolidated balance sheet data included in this Quarterly Report on Form 10-Q (this "Report") was derived from the audited financial statements in the combined Annual Report on Form 10-K of the General Partner and the Partnership for the year ended December 31, 2014, but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). The financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP 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. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenue and expenses during the reporting period. Our actual results could differ from those estimates and assumptions. These financial statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included herein and the consolidated financial statements and notes thereto included in the combined Annual Report on Form 10-K of the General Partner and the Partnership for the year ended December 31, 2014.
The General Partner was formed in 1985, and we believe that it qualifies as a real estate investment trust ("REIT") under the provisions of the Internal Revenue Code of 1986, as amended (the "Code"). The Partnership was formed on October 4, 1993, when the General Partner contributed all of its properties and related assets and liabilities, together with the net proceeds from an offering of additional shares of its common stock, to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest whose operations began in 1972.
The General Partner is the sole general partner of the Partnership, owning approximately 98.9% of the common partnership interests of the Partnership ("General Partner Units") at March 31, 2015. The remaining 1.1% of the common partnership interests ("Limited Partner Units" and, together with the General Partner Units, the "Common Units") are owned by limited partners. As the sole general partner of the Partnership, the General Partner has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Partnership. The General Partner and the Partnership are operated as one enterprise. The management of the General Partner consists of the same members as the management of the Partnership. As the sole general partner with control of the Partnership, the General Partner consolidates the Partnership for financial reporting purposes, and the General Partner does not have any significant assets other than its investment in the Partnership. Therefore, the assets and liabilities of the General Partner and the Partnership are substantially the same.
Limited Partners have the right to redeem their Limited Partner Units, subject to certain restrictions. Pursuant to the Fifth Amended and Restated Agreement of Limited Partnership, as amended (the "Partnership Agreement"), the General Partner is obligated to redeem the Limited Partner Units in shares of its common stock, unless it determines in its reasonable discretion that the issuance of shares of its common stock could cause it to fail to qualify as a REIT. Each Limited Partner Unit shall be redeemed for one share of the General Partner's common stock, or, in the event that the issuance of shares could cause the General Partner to fail to qualify as a REIT, cash equal to the fair market value of one share of the General Partner's common stock at the time of redemption, in each case, subject to certain adjustments described in the Partnership Agreement. The Limited Partner Units are not required, per the terms of the Partnership Agreement, to be redeemed in registered shares of the General Partner. The General Partner also owns preferred partnership interests in the Partnership ("Preferred Units"), to the extent the Partnership has issued Preferred Units.

11


As of March 31, 2015, we owned and operated a portfolio primarily consisting of industrial, office and medical office properties and provide real estate services to third-party owners. Substantially all of our Rental Operations (see Note 10) are conducted through the Partnership. We conduct our Service Operations (see Note 10) through Duke Realty Services, LLC, Duke Realty Services Limited Partnership and Duke Construction Limited Partnership ("DCLP"), which are consolidated entities that are 100% owned by a combination of the General Partner and the Partnership. DCLP is owned through a taxable REIT subsidiary. The consolidated financial statements include our accounts and the accounts of our majority-owned or controlled subsidiaries.  
2.    New Accounting Pronouncements
Discontinued Operations
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"). Under ASU 2014-08, only disposals representing a strategic shift in operations (for example, a disposal of a major geographic area or a major line of business) are presented as discontinued operations, while significant continuing involvement with such dispositions are no longer precluded from discontinued operations classification. As the prior accounting rules generally required companies that sell a single investment property to report the sale as a discontinued operation, the implementation of ASU 2014-08 resulted in us reporting only sales that represent strategic shifts in operations as discontinued operations. ASU 2014-08 also requires additional disclosures for discontinued operations as well as for material property dispositions that do not meet the new criteria for discontinued operation classification.
ASU 2014-08 is effective for fiscal years beginning on or after December 15, 2014, with early adoption permitted only for disposals or classifications as held-for-sale that have not been reported in financial statements previously issued or available for issuance. We adopted ASU 2014-08 early and have applied it with respect to such items since April 1, 2014.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing GAAP revenue recognition guidance as well as impact the existing GAAP guidance governing the sale of nonfinancial assets. The standard’s core principle is that a company will recognize revenue when it satisfies performance obligations, by transferring promised goods or services to customers, in an amount that reflects the consideration to which the company expects to be entitled in exchange for fulfilling those performance obligations. In doing so, companies will need to exercise more judgment and make more estimates than under existing GAAP guidance.
ASU 2014-09 will be effective for public entities for annual and interim reporting periods beginning after December 15, 2016 and early adoption is not permitted. An exposure draft has been issued by the FASB which proposes delaying the effective date for one year. In addition to the deferral of the effective date, early adoption would be permitted under the exposure draft in periods ending after December 15, 2016. The changes to the effective date and early adoption are still subject to final approval. ASU 2014-09 allows for either recognizing the cumulative effect of application (i) at the start of the earliest comparative period presented (with the option to use any or all of three practical expedients) or (ii) at the date of initial application, with no restatement of comparative periods presented.
We have not yet selected a transition method nor have we determined the effect of ASU 2014-09 on our ongoing financial reporting.
Consolidation
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 makes targeted amendments to the current consolidation guidance and ends the deferral granted to investment companies from applying the existing variable interest entity guidance. ASU 2015-02 will be effective for public entities for annual and interim reporting periods beginning after December 15, 2015 with early adoption

12


allowed in any interim period. We have not yet selected a transition method nor have we determined the effect of ASU 2015-02 on our ongoing financial reporting.
Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). ASU 2015-03 will require that debt issuance costs related to a recognized debt liability, which are currently presented as deferred charges (assets), be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 will be effective for financial statements issued for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years.
3.    Reclassifications
Certain amounts in the accompanying consolidated financial statements for 2014 have been reclassified to conform to the 2015 consolidated financial statement presentation.
4.    Variable Interest Entities

We have equity interests in unconsolidated joint ventures that primarily own and operate rental properties or hold land for development. We consolidate those joint ventures that are considered to be variable interest entities ("VIE"s) where we are the primary beneficiary. We analyze our investments in joint ventures to determine if the joint venture is considered a VIE and would require consolidation. We (i) evaluate the sufficiency of the total equity investment at risk, (ii) review the voting rights and decision-making authority of the equity investment holders as a group and whether there are any guaranteed returns, protection against losses, or capping of residual returns within the group and (iii) establish whether activities within the venture are on behalf of an investor with disproportionately few voting rights in making this VIE determination.
To the extent that we own interests in a VIE and we (i) are the sole entity that has the power to direct the activities of the VIE and (ii) have the obligation or rights to absorb the VIE's losses or receive its benefits, then we would be determined to be the primary beneficiary and would consolidate the VIE. To the extent we own interest in a VIE, then at each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary beneficiary.
There were no consolidated or unconsolidated joint ventures at March 31, 2015 that met the criteria to be considered VIEs.
Our maximum loss exposure for guarantees of joint venture indebtedness, for guarantees of the debt of joint ventures that are not VIEs, totaled $71.7 million at March 31, 2015.
5.    Dispositions
Dispositions of buildings (see Note 11 for the number of buildings sold as well as for their classification between continuing and discontinued operations) and undeveloped land generated net cash proceeds of $109.9 million and $70.7 million during the three months ended March 31, 2015 and 2014, respectively.
6.    Indebtedness
All debt is held directly or indirectly by the Partnership. The General Partner does not have any indebtedness, but does guarantee some of the unsecured debt of the Partnership. The following table summarizes the book value and changes in the fair value, of our debt for the three months ended March 31, 2015 (in thousands):


13


 
Book Value at 12/31/2014
 
Book Value at 3/31/2015
 
Fair Value at 12/31/2014
 
Issuances and
Assumptions
 
Payments/Payoffs
 
Adjustments
to Fair Value
 
Fair Value at 3/31/2015
Fixed rate secured debt
$
979,842

 
$
916,048

 
$
1,065,301

 
$

 
$
(63,151
)
 
$
(2,206
)
 
$
999,944

Variable rate secured debt
3,400

 
3,400

 
3,400

 

 

 

 
3,400

Unsecured debt
3,364,161

 
3,113,617

 
3,603,475

 

 
(250,544
)
 
25,551

 
3,378,482

Unsecured line of credit
106,000

 
453,000

 
106,000

 
347,000

 

 

 
453,000

Total
$
4,453,403

 
$
4,486,065

 
$
4,778,176

 
$
347,000

 
$
(313,695
)
 
$
23,345

 
$
4,834,826

Less secured debt related to real estate assets held-for-sale
40,764

 
41,697

 
 
 
 
 
 
 
 
 
 
Total indebtedness as reported on consolidated balance sheets
$
4,412,639

 
$
4,444,368

 
 
 
 
 
 
 
 
 
 
Secured Debt
Because our fixed rate secured debt is not actively traded in any marketplace, we utilized a discounted cash flow methodology to determine its fair value. Accordingly, we calculated fair value by applying an estimate of the current market rate to discount the debt's remaining contractual cash flows. Our estimate of a current market rate, which is the most significant input in the discounted cash flow calculation, is intended to replicate debt of similar maturity and loan-to-value relationship. The estimated rates ranged from 2.20% to 3.20%, depending on the attributes of the specific loans. The current market rates we utilized were internally estimated; therefore, we have concluded that our determination of fair value for our fixed rate secured debt was primarily based upon Level 3 inputs.
During the three months ended March 31, 2015, we repaid eight secured loans, totaling $60.2 million. These loans had a weighted average stated interest rate of 5.30%.
Unsecured Debt
At March 31, 2015, with the exception of one variable rate term note, all of our unsecured debt bore interest at fixed rates and primarily consisted of unsecured notes that are publicly traded. We utilized broker estimates in estimating the fair value of our fixed rate unsecured debt. Our unsecured notes are thinly traded and, in certain cases, the broker estimates were not based upon comparable transactions. The broker estimates took into account any recent trades within the same series of our fixed rate unsecured debt, comparisons to recent trades of other series of our fixed rate unsecured debt, trades of fixed rate unsecured debt from companies with profiles similar to ours, as well as overall economic conditions. We reviewed these broker estimates for reasonableness and accuracy, considering whether the estimates were based upon market participant assumptions within the principal and most advantageous market and whether any other observable inputs would be more accurate indicators of fair value than the broker estimates. We concluded that the broker estimates were representative of fair value. We have determined that our estimation of the fair value of our fixed rate unsecured debt was primarily based upon Level 3 inputs. The estimated trading values of our fixed rate unsecured debt, depending on the maturity and coupon rates, ranged from 102.00% to 131.00% of face value.
In February 2015, we repaid a $250.0 million senior unsecured note at its maturity date. This loan had a stated interest rate of 7.38% and an effective rate of 7.50%.
We utilize a discounted cash flow methodology in order to estimate the fair value of our $250.0 million variable rate term loan. The net present value of the difference between future contractual interest payments and future interest payments based on our estimate of a current market rate represents the difference between the book value and the fair value. Our estimate of a current market rate was based on estimated market spreads and the quoted yields on federal government treasury securities with similar maturity dates. Our estimate of the current market rate for our variable rate term loan was 1.33% and was based primarily upon Level 3 inputs.

14


The indentures (and related supplemental indentures) governing our outstanding series of notes also require us to comply with financial ratios and other covenants regarding our operations. We were in compliance with all such covenants at March 31, 2015.
Unsecured Line of Credit
Our unsecured line of credit at March 31, 2015 is described as follows (in thousands):
Description
Maximum
Capacity
 
Maturity Date
 
Outstanding Balance at March 31, 2015
Unsecured Line of Credit - Partnership
$
1,200,000

 
January 2019
 
$
453,000


The Partnership's unsecured line of credit has an interest rate on borrowings of LIBOR plus 1.05% (equal to 1.23% for outstanding borrowings at March 31, 2015) and a maturity date of January 2019. Subject to certain conditions, the terms also include an option to increase the facility by up to an additional $400.0 million, for a total of up to $1.6 billion. This line of credit provides us with an option to obtain borrowings from financial institutions that participate in the line at rates that may be lower than the stated interest rate, subject to certain restrictions.
This line of credit contains financial covenants that require us to meet certain financial ratios and defined levels of performance, including those related to fixed charge coverage, unsecured interest expense coverage and debt-to-asset value (with asset value being defined in the Partnership's unsecured line of credit agreement). At March 31, 2015, we were in compliance with all covenants under this line of credit.
To the extent that there are outstanding borrowings, we utilize a discounted cash flow methodology in order to estimate the fair value of our unsecured line of credit. The net present value of the difference between future contractual interest payments and future interest payments based on our estimate of a current market rate represents the difference between the book value and the fair value. Our estimate of a current market rate is based upon the rate, considering current market conditions and our specific credit profile, at which we estimate we could obtain similar borrowings. The current market rate of 1.43% that we utilized was internally estimated; therefore, we have concluded that our determination of fair value for our unsecured line of credit was primarily based upon a Level 3 input.
7.    Shareholders' Equity of the General Partner and Partners' Capital of the Partnership
General Partner
During the three months ended March 31, 2015, the General Partner issued 233,000 common shares pursuant to its at the market equity program, generating gross proceeds of approximately $5.0 million and, after deducting commissions and other costs, net proceeds of approximately $4.9 million. The proceeds from these offerings were used for general corporate purposes.
Partnership
For each common share or preferred share that the General Partner issues, the Partnership issues a corresponding General Partner Unit or Preferred Unit, as applicable, to the General Partner in exchange for the contribution of the proceeds from the stock issuance. Similarly, when the General Partner redeems or repurchases common shares or preferred shares, the Partnership redeems the corresponding Common Units or Preferred Units held by the General Partner at the same price.
8.    Related Party Transactions
We provide property management, asset management, leasing, construction and other tenant-related services to unconsolidated companies in which we have equity interests. We recorded the corresponding fees based on contractual terms that approximate market rates for these types of services and have eliminated our ownership percentage of these fees in the consolidated financial statements. The following table summarizes the fees earned from these companies, prior to the elimination of our ownership percentage, for the three months ended March 31, 2015 and 2014, respectively (in thousands): 
 
Three Months Ended
 
March 31,
 
2015
 
2014
Management fees
$
1,801

 
$
2,219

Leasing fees
633

 
344

Construction and development fees
405

 
965

9.    Net Income (Loss) Per Common Share or Common Unit
Basic net income (loss) per common share or Common Unit is computed by dividing net income (loss) attributable to common shareholders or common unitholders, less dividends or distributions on share-based awards expected to

15


vest (referred to as "participating securities" and primarily composed of unvested restricted stock units), by the weighted average number of common shares or Common Units outstanding for the period.
Diluted net income (loss) per common share is computed by dividing the sum of basic net income (loss) attributable to common shareholders and the noncontrolling interest in earnings allocable to Limited Partner Units (to the extent the Limited Partner Units are dilutive) by the sum of the weighted average number of common shares outstanding and, to the extent they are dilutive, Units outstanding and any potential dilutive securities for the period. Diluted net income (loss) per Common Unit is computed by dividing the basic net income (loss) attributable to common unitholders by the sum of the weighted average number of Common Units outstanding and any potential dilutive securities for the period. The following table reconciles the components of basic and diluted net income per common share or Common Unit for the three months ended March 31, 2015 and 2014, respectively (in thousands):
 
 
Three Months Ended March 31,
 
2015
 
2014
General Partner
 
 
 
Net income attributable to common shareholders
$
65,244

 
$
18,683

Less: Dividends on participating securities
(620
)
 
(645
)
Basic net income attributable to common shareholders
64,624

 
18,038

Noncontrolling interest in earnings of common unitholders
699

 
250

Diluted net income attributable to common shareholders
$
65,323

 
$
18,288

Weighted average number of common shares outstanding
344,597

 
327,106

Weighted average Limited Partner Units outstanding
3,695

 
4,387

Other potential dilutive shares
361

 
223

Weighted average number of common shares and potential dilutive securities
348,653

 
331,716

 
 
 
 
Partnership
 
 
 
Net income attributable to common unitholders
$
65,943

 
$
18,933

Less: Distributions on participating securities
(620
)
 
(645
)
Basic and diluted net income attributable to common unitholders
$
65,323

 
$
18,288

Weighted average number of Common Units outstanding
348,292

 
331,493

Other potential dilutive units
361

 
223

Weighted average number of Common Units and potential dilutive securities
348,653

 
331,716

Substantially all potential shares related to our stock-based compensation plans are anti-dilutive for all periods presented. The following table summarizes the data that is excluded from the computation of net income per common share or Common Unit as a result of being anti-dilutive (in thousands): 
 
Three Months Ended March 31,
 
2015
 
2014
General Partner and Partnership
 
 
 
Potential dilutive shares or units:
 
 
 
Anti-dilutive outstanding potential shares or units under fixed stock option and other stock-based compensation plans
1,030

 
1,215

Outstanding participating securities
3,593

 
3,841

10.    Segment Reporting
Reportable Segments
We have four reportable operating segments at March 31, 2015, the first three of which consist of the ownership and rental of (i) industrial, (ii) office and (iii) medical office real estate investments. The operations of our industrial, office and medical office properties, along with our retail properties, are collectively referred to as "Rental Operations." Properties not included in our reportable segments, which do not by themselves meet the quantitative thresholds for separate presentation as a reportable segment, are referred to as non-reportable Rental Operations. The fourth reportable segment consists of various real estate services such as property management, asset

16


management, maintenance, leasing, development, general contracting and construction management to third-party property owners and joint ventures, and is collectively referred to as "Service Operations." Our reportable segments offer different products or services and are managed separately because each segment requires different operating strategies and management expertise.
Revenues by Reportable Segment
The following table shows the revenues for each of the reportable segments, as well as a reconciliation to consolidated revenues, for the three months ended March 31, 2015 and 2014, respectively (in thousands): 
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Revenues
 
 
 
 
Rental Operations:
 
 
 
 
Industrial
 
$
147,227

 
$
133,291

Office
 
25,135

 
38,978

Medical Office
 
40,028

 
33,310

Non-reportable Rental Operations
 
401

 
2,088

Service Operations
 
52,820

 
55,820

Total segment revenues
 
265,611

 
263,487

Other revenue
 
1,824

 
979

Consolidated revenue from continuing operations
 
267,435

 
264,466

Discontinued operations
 
32,115

 
30,072

Consolidated revenue
 
$
299,550

 
$
294,538

Supplemental Performance Measure
Property level net operating income on a cash basis ("PNOI") is the non-GAAP supplemental performance measure that we use to evaluate the performance of, and to allocate resources among, the real estate investments in the reportable and operating segments that comprise our Rental Operations. PNOI for our Rental Operations segments is comprised of rental revenues from continuing operations less rental expenses and real estate taxes from continuing operations, along with certain other adjusting items (collectively referred to as "Rental Operations revenues and expenses excluded from PNOI," as shown in the following table). Additionally, we do not allocate interest expense, depreciation expense and certain other non-property specific revenues and expenses (collectively referred to as "Non-Segment Items," as shown in the following table) to our individual operating segments.
We evaluate the performance of our Service Operations reportable segment using net income or loss, as allocated to that segment ("Earnings from Service Operations").
The following table shows a reconciliation of our segment-level measures of profitability to consolidated income from continuing operations before income taxes for the three months ended March 31, 2015 and 2014, respectively (in thousands and excluding discontinued operations): 

17


 
 
Three Months Ended March 31,
 
 
2015
 
2014
PNOI
 
 
 
 
Industrial
 
$
96,684

 
$
85,691

Office
 
14,842

 
15,206

Medical Office
 
25,232

 
20,805

Non-reportable Rental Operations
 

 
253

PNOI, excluding all sold/held for sale properties

 
136,758

 
121,955

PNOI from sold/held-for-sale properties included in continuing operations
 
6,239

 
12,423

PNOI, continuing operations

 
142,997

 
134,378

 
 
 
 
 
Earnings from Service Operations
 
5,797

 
8,549

 
 

 

Rental Operations revenues and expenses excluded from PNOI:
Straight-line rental income and expense, net
 
6,697

 
4,769

Revenues related to lease buyouts
 
864

 
2,695

Amortization of lease concessions and above and below market rents
 
(1,713
)
 
(2,211
)
Intercompany rents and other adjusting items
 
(731
)
 
(1,537
)
Non-Segment Items:
 
 
 
 
Equity in earnings of unconsolidated companies
 
6,246

 
2,321

Interest expense
 
(49,610
)
 
(49,261
)
Depreciation expense
 
(81,903
)
 
(88,298
)
Gain on sale of properties
 
23,484

 
15,853

Interest and other income, net
 
338

 
351

General and administrative expenses
 
(17,004
)
 
(14,694
)
Gain on land sales
 
5,425

 
152

Other operating expenses

 
(1,557
)
 
(2,216
)
Acquisition-related activity
 
(28
)
 
(14
)
Other non-segment revenues and expenses, net
 
(402
)
 
(692
)
Income from continuing operations before income taxes
 
$
38,900

 
$
10,145

The most comparable GAAP measure to PNOI is income from continuing operations before income taxes. PNOI excludes expenses that materially impact our overall results of operations and, therefore, should not be considered as a substitute for income from continuing operations before income taxes or any other measures derived in accordance with GAAP. Furthermore, PNOI may not be comparable to other similarly titled measures of other companies.
 
















18


Assets by Reportable Segment

The assets for each of the reportable segments at March 31, 2015 and December 31, 2014 were as follows (in thousands): 
 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
Rental Operations:
 
 
 
Industrial
$
4,672,992

 
$
4,677,047

Office
1,212,796

 
1,252,627

Medical Office
1,210,170

 
1,229,632

Non-reportable Rental Operations
22,909

 
71,741

Service Operations
155,370

 
158,762

Total segment assets
7,274,237

 
7,389,809

Non-segment assets
456,267

 
365,030

Consolidated assets
$
7,730,504

 
$
7,754,839


The assets shown above include the amounts designated as held for sale, as of March 31, 2015, in connection with the Suburban Office Portfolio and Midwest Industrial Portfolio sales described in Note 12.

11.    Discontinued Operations and Assets Held-for-Sale
Discontinued Operations
Beginning with our adoption of ASU 2014-08 on April 1, 2014, discontinued operations presentation applies only to disposals representing a strategic shift that has (or will have) a major effect on an entity’s operations and financial results (e.g., a disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity).
On April 1, 2015, we completed the sale of a portfolio of primarily suburban office properties and undeveloped land (the "Suburban Office Portfolio Sale", as defined in Note 12) that had been under agreement for sale since late January 2015. This portfolio was classified as held-for-sale at March 31, 2015. Because of the size of this disposition, and the fact that it represented our exit from the office product type in four geographic markets, we determined that the disposition represented a strategic shift that will have a major effect on our operations and financial results. As such, the in-service properties in this portfolio met the criteria to be classified within discontinued operations. As the result of its classification within discontinued operations, the in-service assets and liabilities of this portfolio are required to be presented as held-for-sale for all prior periods presented in our Consolidated Balance Sheets.
The following table illustrates the number of sold or held-for-sale properties included in, or excluded from, discontinued operations:
 
 
Held-for-Sale at March 31, 2015
 
Sold through March 31, 2015
 
Sold in 2014
 
Total
 
 
 
 
 
 
 
 
Industrial
5
 
0
 
11
 
16
Office
56
 
0
 
0
 
56
Medical Office
0
 
1
 
1
 
2
Total properties included in discontinued operations
61
 
1
 
12
 
74
Properties excluded from discontinued operations
52
 
11
 
17
 
80
Total properties sold or classified as held-for-sale
113
 
12
 
29
 
154
    

19


For the properties that were classified in discontinued operations, we allocated interest expense to discontinued operations and have included such interest expense in computing income from discontinued operations. Interest expense allocable to discontinued operations includes interest on any secured debt for properties included in discontinued operations and an allocable share of our consolidated unsecured interest expense for unencumbered properties. The allocation of unsecured interest expense to discontinued operations was based upon the gross book value of the unencumbered real estate assets included in discontinued operations as it related to the total gross book value of our unencumbered real estate assets.
The following table illustrates the operational results of the buildings reflected in discontinued operations for the three months ended March 31, 2015 and 2014, respectively (in thousands):  
 
Three Months Ended March 31,
 
2015
 
2014
Revenues
$
32,115

 
$
30,072

Operating expenses
(12,386
)
 
(12,403
)
Depreciation and amortization
(3,517
)
 
(9,966
)
Operating income
16,212

 
7,703

Interest expense
(6,034
)
 
(6,378
)
Income before gain on sales
10,178

 
1,325

Gain on sale of depreciable properties
18,375

 
19,752

Income from discontinued operations before income taxes
28,553

 
21,077

Income tax expense

 
(2,977
)
Income from discontinued operations
$
28,553

 
$
18,100

There was one medical office property that sold during the three months ended March 31, 2015, which had been classified as held for sale and included in discontinued operations prior to the adoption of ASU 2014-08, for which we recognized a gain on sale of $1.3 million. The majority of the remaining amount of gains on sale of depreciable properties recognized in discontinued operations during the period was the result of recognizing previously deferred gains on prior period sales, which had met the criteria for classification within discontinued operations prior to the adoption of ASU 2014-08, due to either receiving additional cash or resolving post-sale obligations.
Capital expenditures on a cash basis for the three months ended March 31, 2015 and 2014 were $8.6 million and $3.8 million, respectively, related to properties classified within discontinued operations.
Allocation of Noncontrolling Interests - General Partner
The following table illustrates the General Partner's share of the income attributable to common shareholders from continuing operations and discontinued operations, reduced by the allocation of income between continuing and discontinued operations to the Limited Partner Units, for the three months ended March 31, 2015 and 2014, respectively (in thousands):
 
Three Months Ended March 31,
 
2015
 
2014
Income from continuing operations attributable to common shareholders
$
36,994

 
$
823

Income from discontinued operations attributable to common shareholders
28,250

 
17,860

Net income attributable to common shareholders
$
65,244

 
$
18,683

Allocation of Noncontrolling Interests - Partnership
Substantially all of the income from discontinued operations for all periods presented in the Partnership's Consolidated Statements of Operations and Comprehensive Income is attributable to the common unitholders.


20


Properties Held-for-Sale
At March 31, 2015, the 61 in-service properties included in the Suburban Office Portfolio Sale were classified as held-for-sale and included in discontinued operations and 52 in-service properties were classified as held-for-sale but did not meet the criteria to be classified within discontinued operations (including the "Midwest Industrial Portfolio Sale", as defined in Note 12). The following table illustrates aggregate balance sheet information at March 31, 2015 and December 31, 2014 (in thousands):
 
March 31, 2015
 
December 31, 2014
 
Properties Included in Continuing Operations
 
Properties Included in Discontinued Operations
 
Total
Held-For-Sale Properties
 
Properties Included in Continuing Operations
 
Properties Included in Discontinued Operations
 
Total
 Held-For-Sale Properties
Land and improvements
$
36,236

 
$
121,149

 
$
157,385

 
$
21,347

 
$
126,921

 
$
148,268

Buildings and tenant improvements
168,893

 
702,820

 
871,713

 
36,925

 
721,398

 
758,323

Undeveloped land
13,736

 

 
13,736

 
12,443

 

 
12,443

Accumulated depreciation
(51,217
)
 
(234,132
)
 
(285,349
)
 
(23,071
)
 
(247,269
)
 
(270,340
)
Deferred leasing and other costs, net
6,626

 
42,152

 
48,778

 
3,480

 
44,840

 
48,320

Other assets
5,896

 
27,859

 
33,755

 
562

 
27,475

 
28,037

Total assets held-for-sale
$
180,170

 
$
659,848

 
$
840,018

 
$
51,686

 
$
673,365

 
$
725,051

 
 
 
 
 
 
 
 
 
 
 
 
Secured debt
$
1,097

 
$
40,600

 
$
41,697

 
$

 
$
40,764

 
$
40,764

Accrued expenses
4,685

 
6,934

 
11,619

 
233

 
5,180

 
5,413

Other liabilities
2,228

 
9,561

 
11,789

 
434

 
12,481

 
12,915

Total liabilities held-for-sale
$
8,010

 
$
57,095

 
$
65,105

 
$
667

 
$
58,425

 
$
59,092


12.    Subsequent Events
Declaration of Dividends/Distributions
The General Partner's board of directors declared the following dividends/distributions at its regularly scheduled board meeting held on April 29, 2015:
Class of stock/units
Quarterly Amount per Share or Unit
 
Record Date
 
Payment Date
Common
$0.17
 
May 14, 2015
 
May 29, 2015
Suburban Office Portfolio Sale
On April 1, 2015, we completed the previously announced suburban office portfolio sale (the "Suburban Office Portfolio Sale") to a joint venture with affiliates of Starwood Capital Group, Vanderbilt Partners and Trinity Capital Advisors for approximately $1.1 billion.
The Suburban Office Portfolio Sale includes all of the company’s wholly-owned, in-service suburban office properties located in Nashville, Raleigh, South Florida and St. Louis. The portfolio includes approximately 6.7 million square feet across 61 buildings and 57 acres of undeveloped land. One additional office asset currently under construction in Raleigh is expected to be sold upon completion in late 2015.
Midwest Industrial Portfolio Sale
On April 8, 2015, we completed the sale of 51 non-strategic industrial properties for $270.0 million. These properties totaled 5.2 million square feet and were located in primarily Midwest markets.
Tender Offer
In March 2015, the Partnership commenced a tender offer (the "Tender Offer") to purchase for a combined aggregate purchase price (exclusive of accrued and unpaid interest) of up to $500.0 million among certain of its outstanding

21


series of unsecured notes. A portion of the proceeds from the Suburban Office Portfolio Sale were used to fund this Tender Offer, which resulted in the repurchase of notes having a face value of $424.9 million, for a cash payment of $500.0 million. The repurchase was completed on April 3, 2015.




22


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand our operations and our present business environment. Management's Discussion and Analysis is provided as a supplement to and should be read in conjunction with our consolidated financial statements and the notes thereto, contained in Part I, Item I of this Quarterly Report on Form 10-Q (this "Report") and the consolidated financial statements and notes thereto, contained in Part IV, Item 15 of our combined Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission (the "SEC") on February 20, 2015 for Duke Realty Corporation (the "General Partner") and Duke Realty Limited Partnership (the "Partnership"). As used herein, the terms the "Company," "we," "us" and "our" refer to the General Partner and the Partnership, collectively, and those entities owned or controlled by the General Partner and/or the Partnership.
Cautionary Notice Regarding Forward-Looking Statements
Certain statements contained in or incorporated by reference into this Report, including, without limitation, those related to our 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. The words "believe," "estimate," "expect," "anticipate," "intend," "plan," "seek," "may," "could" and similar expressions or statements regarding future periods are intended to identify forward-looking statements, although not all forward-looking statements contain such words.
These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any predictions of future results, performance or achievements that we express or imply in this Report. Some of the risks, uncertainties and other important factors that may affect future results include, among others:
Changes in general economic and business conditions, including the financial condition of our tenants and the value of our real estate assets;
The General Partner's continued qualification as a real estate investment trust ("REIT") for U.S. federal income tax purposes;
Heightened competition for tenants and potential decreases in property occupancy;
Potential changes in the financial markets and interest rates;
Volatility in the General Partner's stock price and trading volume;
Our continuing ability to raise funds on favorable terms;
Our ability to successfully identify, acquire, develop and/or manage properties on terms that are favorable to us;
Potential increases in real estate construction costs;
Our ability to successfully dispose of properties on terms that are favorable to us, including, without limitation, through one or more transactions that are consistent with our previously disclosed strategic plans;
Our ability to retain our current credit ratings;
Inherent risks in the real estate business, including, but not limited to, tenant defaults, potential liability relating to environmental matters and liquidity of real estate investments; and
Other risks and uncertainties described herein, as well as those risks and uncertainties discussed from time to time in our other reports and other public filings with the SEC.
Although we presently believe that the plans, expectations and results expressed in or suggested by the forward-looking statements are reasonable, all forward-looking statements are inherently subjective, uncertain and subject to change, as they involve substantial risks and uncertainties, including those beyond our control. New factors emerge from time to time, and it is not possible for us to predict the nature, or assess the potential impact, of each new factor on our business. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any of our forward-looking statements for events or circumstances that arise after the statement is made, except as otherwise may be required by law.


23


The above list of risks and uncertainties is only a summary of some of the most important factors and is not intended to be exhaustive. Additional information regarding risk factors that may affect us is included in our combined Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which we filed with the SEC on February 20, 2015. The risk factors contained in our Annual Report are updated by us from time to time in Quarterly Reports on Form 10-Q and other public filings. 
Business Overview
The General Partner is a self-administered and self-managed REIT that began operations in 1986 and is the sole general partner of the Partnership. The Partnership is a limited partnership formed in 1993, at which time all of the properties and related assets and liabilities of the General Partner, as well as proceeds from a secondary offering of the General Partner's common shares, were contributed to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest whose operations began in 1972. We operate the General Partner and the Partnership as one enterprise, and therefore, our discussion and analysis refers to the General Partner and its consolidated subsidiaries, including the Partnership, collectively. A more complete description of our business, and of management's philosophy and priorities, is included in our 2014 Annual Report on Form 10-K.
At March 31, 2015, we:
Owned or jointly controlled 720 industrial, office and medical office properties, of which 700 properties with approximately 147.5 million square feet were in service and 20 properties with approximately 5.4 million square feet were under development. The 700 in-service properties were comprised of 615 consolidated properties with approximately 127.5 million square feet and 85 jointly controlled unconsolidated properties with more than 20.0 million square feet. The 20 properties under development consisted of 17 consolidated properties with approximately 3.9 million square feet and three jointly controlled unconsolidated properties with approximately 1.5 million square feet.
Owned directly, or through ownership interests in unconsolidated joint ventures (with acreage not adjusted for our percentage ownership interest), approximately 3,600 acres of land and controlled more than 1,500 acres through purchase options.
A key component of our overall strategy is to increase our investment in quality industrial and medical office properties in both existing and select new markets and to reduce our investment in suburban office properties and other non-strategic assets.
We have four reportable operating segments at March 31, 2015, the first three of which consist of the ownership and rental of (i) industrial, (ii) office and (iii) medical office real estate investments. The operations of our industrial, office and medical office properties, along with our retail properties, are collectively referred to as "Rental Operations." The fourth reportable segment consists of various real estate services such as property management, asset management, maintenance, leasing, development, general contractor and construction management to third-party property owners and joint ventures, and is collectively referred to as "Service Operations." Our reportable segments offer different products or services and are managed separately because each segment requires different operating strategies and management expertise. Our Service Operations segment also includes our taxable REIT subsidiary, a legal entity through which certain of the segment's operations are conducted.
Key Performance Indicators
Our operating results depend primarily upon rental income from our Rental Operations. The following discussion highlights the areas of Rental Operations that we consider critical drivers of future revenues.
Occupancy Analysis
Our ability to maintain high occupancy rates is a principal driver of maintaining and increasing rental revenue. The following table sets forth percent leased and average net effective rent information regarding our in-service portfolio

24


of rental properties, including properties classified within both continuing and discontinued operations, at March 31, 2015 and 2014, respectively:
 
Total Square Feet
(in thousands)
 
Percent of
Total Square Feet
 
Percent Leased*
 
Average Annual Net Effective Rent**
Type
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Industrial
110,110

 
104,590

 
86.4
%
 
84.2
%
 
96.4
%
 
94.9
%
 
$4.05
 
$3.93
Office
12,181

 
14,428

 
9.5
%
 
11.6
%
 
89.2
%
 
87.8
%
 
$10.81
 
$13.38
Medical Office
5,170

 
4,780

 
4.1
%
 
3.9
%
 
93.8
%
 
93.4
%
 
$23.10
 
$22.70
Other

 
348

 
%
 
0.3
%
 
%
 
85.7
%
 
$0.00
 
$19.75
Total Consolidated
127,461

 
124,146

 
100.0
%
 
100.0
%
 
95.6
%
 
94.0
%
 
$5.41
 
$5.72
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unconsolidated Joint Ventures
20,023

 
22,413

 
 
 
 
 
96.0
%
 
94.1
%
 
$5.84
 
$8.15
Total Including Unconsolidated Joint Ventures
147,484

 
146,559

 
 
 
 
 
95.7
%
 
94.0
%
 
$5.43
 
$5.85
 *Represents the percentage of total square feet leased based on executed leases and without regard to whether the leases have commenced.
**Represents average annual base rental payments per leased square foot, on a straight-line basis for the term of each lease, from space leased to tenants at the end of the most recent reporting period. This amount excludes additional amounts paid by tenants as reimbursement for operating expenses.
The total percent leased of our in-service properties, including unconsolidated joint ventures, would have been 96.0% if the Suburban Office Portfolio and Midwest Industrial Portfolio sales (as defined in Note 12 to the Consolidated Financial Statements) that took place in early April 2015 had closed on March 31, 2015.
Vacancy Activity
The following table sets forth vacancy activity, shown in square feet, regarding our in-service rental properties, including properties classified within both continuing and discontinued operations, at March 31, 2015, (in thousands):

 
Consolidated Properties
 
Unconsolidated Joint Venture Properties
 
Total Including Unconsolidated Joint Venture Properties
Vacant square feet at December 31, 2014
6,041

 
797

 
6,838

  Completed Development
147

 

 
147

  Dispositions
(181
)
 

 
(181
)
  Expirations
1,707

 
86

 
1,793

  Early lease terminations
152

 
103

 
255

  Property structural changes/other
2

 

 
2

  Leasing of previously vacant space
(2,292
)
 
(195
)
 
(2,487
)
Vacant square feet at March 31, 2015
5,576

 
791

 
6,367


Of the vacant square footage shown in the table above, approximately 833,000 square feet was in the properties that were sold in the Suburban Office Portfolio and Midwest Industrial Portfolio sales (see Note 12 to the Consolidated Financial Statements).

Total Leasing Activity


25


The initial leasing of development projects or vacant space in acquired properties is referred to as first generation lease activity. The leasing of such space that we have previously held under lease is referred to as second generation lease activity. The total leasing activity for our consolidated rental properties, expressed in square feet of leases signed during the period, is as follows for the three months ended March 31, 2015 and 2014, respectively (in thousands):
 
Three Months Ended March 31,
 
2015
 
2014
New Leasing Activity - First Generation
1,745
 
1,439
New Leasing Activity - Second Generation
914