Edgar Filing: DUKE REALTY CORP

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, 2007

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

(Exact Name of Registrant as Specified in Its Charter)

Indiana		35-1740409
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

600 East 96^th Street, 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.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

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 at November 1, 2007
Common Stock, $.01 par value per share		145,598,641 shares

DUKE REALTY CORPORATION

INDEX

			Page
Part I - Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2007 (Unaudited) and December 31, 2006		2

	Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2007 and 2006		3

	Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2007 and 2006		4

	Consolidated Statement of Shareholders’ Equity (Unaudited) for the nine months ended September 30, 2007		5

	Notes to Consolidated Financial Statements (Unaudited)		6-13

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30

Item 4.	Controls and Procedures		30

Part II - Other Information

	Item 1.	Legal Proceedings	31
	Item 1A.	Risk Factors	31
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31-32
	Item 3.	Defaults Upon Senior Securities	32
	Item 4.	Submission of Matters to a Vote of Security Holders	32
	Item 5.	Other Information	32
	Item 6.	Exhibits	33-34

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

	September 30,			December 31,
	2007			2006
	(Unaudited)
ASSETS
Real estate investments:
Land and improvements	$	822,436		$	844,091
Buildings and tenant improvements	4,493,009			4,211,602
Construction in progress	441,560			359,765
Investments in and advances to unconsolidated companies	551,193			628,323
Land held for development	800,737			737,752
	7,108,935			6,781,533
Accumulated depreciation	(928,024		)	(867,079		)

Net real estate investments	6,180,911			5,914,454

Real estate investments and other assets held for sale	351,259			512,925

Cash and cash equivalents	18,424			68,483
Accounts receivable, net of allowance of $2,260 and $1,088	22,483			24,118
Straight-line rent receivable, net of allowance of $1,800 and $1,915	110,544			105,319
Receivables on construction contracts, including retentions	60,190			64,768
Deferred financing costs, net of accumulated amortization of $27,543 and $19,492	57,579			62,277
Deferred leasing and other costs, net of accumulated amortization of $146,472 and $127,155	367,729			311,553
Escrow deposits and other assets	247,723			174,698
	$	7,416,842		$	7,238,595

LIABILITIES AND SHAREHOLDERS’ EQUITY

Indebtedness:
Secured debt	$	492,538		$	515,192
Unsecured notes	3,368,920			3,129,653
Unsecured lines of credit	304,224			317,000
	4,165,682			3,961,845

Liabilities of properties held for sale	37,926			155,185

Construction payables and amounts due subcontractors, including retentions	140,679			136,508
Accrued expenses:
Real estate taxes	88,182			59,276
Interest	37,603			52,106
Other	46,790			63,217
Other liabilities	134,126			118,901
Tenant security deposits and prepaid rents	28,251			31,121
Total liabilities	4,679,239			4,578,159

Minority interest	90,524			156,853

Shareholders’ equity:
Preferred shares ($.01 par value); 5,000 shares authorized; 3,241 shares issued and outstanding	876,250			876,250
Common shares ($.01 par value); 250,000 shares authorized; 138,570 and 133,921 shares issued and outstanding	1,386			1,339
Additional paid-in capital	2,378,590			2,196,388
Accumulated other comprehensive income	6,053			5,435
Distributions in excess of net income	(615,200		)	(575,829		)
Total shareholders’ equity	2,647,079			2,503,583

	$	7,416,842		$	7,238,595

See accompanying Notes to Consolidated Financial Statements.

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

For the three and nine months ended September 30,

(in thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	2007			2006			2007			2006
RENTAL OPERATIONS:
Revenues:
Rental income from continuing operations	$	201,376		$	192,568		$	588,564		$	553,006
Equity in earnings of unconsolidated companies	1,838			3,492			17,478			21,447
	203,214			196,060			606,042			574,453
Operating expenses:
Rental expenses	44,833			41,993			133,417			124,256
Real estate taxes	24,750			21,321			73,223			64,128
Interest expense	42,390			46,825			124,924			124,757
Depreciation and amortization	71,981			59,432			202,854			173,623
	183,954			169,571			534,418			486,764
Earnings from continuing rental operations	19,260			26,489			71,624			87,689
SERVICE OPERATIONS
Revenues:
General contractor gross revenue	77,996			100,314			195,714			223,924
General contractor costs	(66,696		)	(93,555		)	(171,374		)	(206,561		)
Net general contractor revenue	11,300			6,759			24,340			17,363
Service fee revenue	7,857			7,866			21,909			16,714
Gain on sale of service operations properties	1,116			7,849			10,793			8,121
Total revenue	20,273			22,474			57,042			42,198
Operating expenses	12,972			11,923			30,789			23,721
Earnings from service operations	7,301			10,551			26,253			18,477
General and administrative expense	(3,847		)	(6,760		)	(27,912		)	(27,642		)
Operating income	22,714			30,280			69,965			78,524
OTHER INCOME (EXPENSE)
Interest and other income, net	6,292			4,381			11,276			8,313
Earnings from sale of land, net of impairment adjustment	1,799			2,982			18,207			5,427
Other minority interest in earnings of subsidiaries	(38		)	(126		)	(89		)	(301		)
Minority interest in earnings of common unitholders	(1,078		)	(2,126		)	(3,634		)	(4,754		)
Income from continuing operations	29,689			35,391			95,725			87,209
Discontinued operations:
Net income from discontinued operations, net of minority interest	1,735			1,773			4,513			9,896
Gain on sale of properties, net of minority interest	37,190			39,796			104,467			41,620
Income from discontinued operations	38,925			41,569			108,980			51,516
Net income	68,614			76,960			204,705			138,725
Dividends on preferred shares	(15,227		)	(15,226		)	(45,679		)	(41,193		)
Adjustments for redemption of preferred shares	—			—			—			(2,633		)
Net income available for common shareholders	$	53,387		$	61,734		$	159,026		$	94,899

Basic net income per common share:
Continuing operations	$	.11		$	.15		$	.36		$	.32
Discontinued operations	.28			.31			.80			.38
Total	$	.39		$	.46		$	1.16		$	.70
Diluted net income per common share:
Continuing operations	$	.11		$	.15		$	.36		$	.32
Discontinued operations	.28			.30			.79			.38
Total	$	.39		$	.45		$	1.15		$	.70
Weighted average number of common shares outstanding	137,576			135,117			137,110			134,957
Weighted average number of common shares and potential dilutive common equivalents	147,651			150,947			147,986			149,472

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the nine months ended September 30,

(in thousands)

(Unaudited)

	2007			2006
Cash flows from operating activities:
Net income	$	204,705		$	138,725
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of buildings and tenant improvements	160,987			155,156
Amortization of deferred leasing and other costs	47,235			34,956
Amortization of deferred financing costs	8,518			6,093
Minority interest in earnings	11,323			10,153
Straight-line rent adjustment	(13,643		)	(15,263		)
Earnings from land and depreciated property sales	(129,958		)	(46,734		)
Build-for-sale operations, net	(167,640		)	(163,106		)
Construction contracts, net	720			(208		)
Other accrued revenues and expenses, net	8,901			(6,304		)
Operating distributions received in excess of (less than) equity in earnings from unconsolidated companies	4,166			(4,990		)
Net cash provided by operating activities	135,314			108,478

Cash flows from investing activities:
Development of real estate investments	(324,317		)	(274,672		)
Acquisition of real estate investments and related intangible assets	(80,954		)	(735,294		)
Acquisition of land held for development	(155,556		)	(367,517		)
Recurring tenant improvements	(32,987		)	(36,300		)
Recurring leasing costs	(22,771		)	(12,338		)
Recurring building improvements	(4,894		)	(5,490		)
Other deferred leasing costs	(20,562		)	(30,918		)
Other deferred costs and other assets	(11,301		)	718
Proceeds from land and depreciated property sales, net	405,094			140,273
Capital distributions from unconsolidated companies	207,545			21,238
Repayments from (advances to) unconsolidated companies	(104,461		)	4,865
Net cash used for investing activities	(145,164		)	(1,295,435		)

Cash flows from financing activities:
Proceeds from issuance of common shares	2,186			—
Payments for repurchases of common shares	—			(11,883		)
Proceeds from exercise of stock options	703			6,336
Proceeds from issuance of preferred shares, net	—			283,994
Payments for redemption of preferred shares	—			(75,010		)
Proceeds from unsecured debt issuance	339,424			850,000
Payments on unsecured debt	(100,000		)	(100,000		)
Proceeds from issuance of secured debt	—			710,450
Payments on secured indebtedness including principal amortization	(22,617		)	(722,777		)
Borrowings (repayments) on lines of credit, net	(12,776		)	521,000
Distributions to common shareholders	(195,799		)	(191,256		)
Distributions to preferred shareholders	(45,679		)	(41,193		)
Distributions to minority interest, net	(11,637		)	(17,238		)
Cash settlement of interest rate swaps	10,746			732
Deferred financing costs	(4,760		)	(27,930		)
Net cash provided by (used for) financing activities	(40,209		)	1,185,225
Net decrease in cash and cash equivalents	(50,059		)	(1,732		)

Cash and cash equivalents at beginning of period	68,483			26,732
Cash and cash equivalents at end of period	$	18,424		$	25,000
Other non-cash items:
Assumption of secured debt for real estate acquisitions	$	—		$	217,520
Conversion of Limited Partner Units to common shares	$	168,671		$	6,616
Contribution of real estate investments to, net of debt assumed by, unconsolidated companies	$	125,353		$	77,412
Issuance of Limited Partner Units for acquisition	$	11,020		$	—

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statement of Shareholders’ Equity

For the nine months ended September 30, 2007

(in thousands, except per share data)

(Unaudited)

							Accumulated
					Additional		Other		Distributions
	Preferred		Common		Paid-in		Comprehensive		in Excess of
	Stock		Stock		Capital		Income		Net Income			Total

Balance at December 31, 2006	$	876,250	$	1,339	$	2,196,388	$	5,435	$	(575,829	)	$	2,503,583

Effect of implementing new accounting principle	—		—		—		—		(1,717		)	(1,717		)

Balance at January 1, 2007	$	876,250	$	1,339	$	2,196,388	$	5,435	$	(577,546	)	$	2,501,866

Comprehensive Income:

Net income	—		—		—		—		204,705			204,705

Gains on derivative instruments	—		—		—		618		—			618

Comprehensive income												$	205,323

Issuance of common shares	—		1		2,185		—		—			2,186

Stock based compensation plan activity	—		2		11,390		—		(881		)	10,511

Acquisition of minority interest	—		44		168,627		—		—			168,671

Distributions to preferred shareholders	—		—		—		—		(45,679		)	(45,679		)

Distributions to common shareholders ($1.43 per share)	—		—		—		—		(195,799		)	(195,799		)

Balance at September 30, 2007	$	876,250	$	1,386	$	2,378,590	$	6,053	$	(615,200	)	$	2,647,079

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY CORPORATION

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 “Company”) without audit (except for the Balance Sheet as of December 31, 2006). The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“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 our Annual Report on Form 10-K for the year ended December 31, 2006.

Our Rental Operations (see Note 7) are conducted through Duke Realty Limited Partnership (“DRLP”). Approximately 94.4% of the common partnership interests of DRLP (“Units”) were owned by us at September 30, 2007. The remaining Units are redeemable for shares of our common stock on a one-to-one basis. We conduct our Service Operations (see Note 7) through Duke Realty Services LLC and Duke Realty Services Limited Partnership, and we are the sole general partner of both of those entities. We also conduct Service Operations through Duke Construction Limited Partnership, which is effectively 100% owned by DRLP. The consolidated financial statements include our accounts and our majority-owned or controlled subsidiaries. In this Quarterly Report on Form 10-Q (this “Report”), unless the context indicates otherwise, the terms “we,” “us” and “our” refer to the Company and those entities owned or controlled by the Company.

2. Reclassifications

Certain 2006 balances have been reclassified to conform to the 2007 presentation.

3. Acquisitions

In February 2007, we completed the acquisition of Bremner Healthcare Real Estate (“Bremner”), a national health care development and management firm. The primary reason for the acquisition was to expand our development capabilities within the health care real estate market.

The initial consideration paid to the sellers totaled $47.1 million, and the sellers may be eligible for further contingent payments over the next three years.

Approximately $39.1 million of the total purchase price was allocated to goodwill, which is attributable to the value of Bremner’s overall development capabilities and its in-place workforce. The results of operations for Bremner since the date of acquisition have been included in continuing operations in our consolidated financial statements.

4. Indebtedness

We had one unsecured line of credit available as of September 30, 2007. Additionally, in July 2007, one of our consolidated majority owned subsidiaries entered into a lending agreement that included an additional unsecured line of credit. Our unsecured lines of credit as of September 30, 2007 are described as follows (dollars in thousands):

	Borrowing		Maturity	Outstanding Balance
Description	Capacity		Date	at September 30, 2007
Unsecured Line of Credit	$	1,000,000	January 2010	$	302,000
Unsecured Line of Credit – Consolidated Subsidiary	$	30,000	July 2011	$	2,224

We use our line of credit to fund development activities, acquire additional rental properties and provide working capital. This line of credit provides us with an option to obtain borrowings from financial institutions that participate in the line, at rates lower than the stated interest rate, subject to certain restrictions. Interest rates on the amounts outstanding on the unsecured line of credit as of September 30, 2007 range from LIBOR +.16% to LIBOR +.525% (equal to 5.29% and 5.655% as of September 30, 2007). Our line of credit also contains financial covenants that require us to meet financial ratios and defined levels of performance, including those related to variable rate indebtedness, consolidated net worth and debt-to-market capitalization. As of September 30, 2007, we were in compliance with all covenants under our line of credit.

The consolidated subsidiary’s unsecured line of credit allows for borrowings up to $30.0 million at a rate of LIBOR + .85%. (equal to 6.04% as of September 30, 2007). The unsecured line of credit is used to fund development activities within the consolidated subsidiary. The consolidated subsidiary’s unsecured line of credit matures on July 27, 2011 with a 12-month extension option.

In August 2007, we repaid $100.0 million of 7.375% senior unsecured notes on their scheduled maturity date.

In September 2007, we issued $300.0 million of 6.50% senior unsecured notes due in January 2018. This issuance was hedged with an interest rate swap (Note 9) that reduced the effective interest rate to 6.16%. The net proceeds from that issuance were used to partially pay down the outstanding balance on our $1.0 billion unsecured line of credit.

5. Related Party Transactions

We provide property management, leasing, construction and other tenant related services to unconsolidated companies in which we have equity interests. For the nine months ended September 30, 2007 and 2006, we received management fees of $5.1 million and $3.3 million, leasing fees of $2.7 million and $2.2 million and construction and development fees of $9.0 million and $16.8 million, respectively, from these companies. These fees approximate market rates for these types of services, and we have eliminated our ownership percentage of these fees in the consolidated financial statements.

6. Net Income Per Common Share

Basic net income per common share is computed by dividing net income available for common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing the sum of net income available for common shareholders and the minority interest in earnings allocable to Units not owned by us, by the sum of the weighted average number of common shares outstanding and minority Units outstanding, including any potential dilutive common equivalents for the period.

The following table reconciles the components of basic and diluted net income per common share for the three and nine months ended September 30, 2007 and 2006, respectively (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Basic net income available for common shareholders	$	53,387	$	61,734	$	159,026	$	94,899
Joint venture partner convertible ownership net income (2)	—		378		—		—
Minority interest in earnings of common unitholders	3,573		6,083		11,101		9,396
Diluted net income available for common shareholders	$	56,960	$	68,195	$	170,127	$	104,295

Weighted average number of common shares outstanding	137,576		135,117		137,110		134,957
Weighted average partnership Units outstanding	9,176		13,211		9,560		13,302
Joint venture partner convertible ownership common share equivalents (2)	—		1,357		—		—
Dilutive shares for stock-based compensation plans (1)	899		1,262		1,316		1,213
Weighted average number of common shares and potential dilutive common equivalents	147,651		150,947		147,986		149,472

(1) Excludes the effect of outstanding stock options, as well as Exchangeable Senior Notes (“Exchangeable Notes”) issued in 2006, that have an anti-dilutive effect on earnings per share for the three and nine-month periods ended September 30, 2007 and 2006.

(2) One of our joint venture partners in one of our unconsolidated companies has the option to convert a portion of its ownership in the joint venture to common shares. The effect of this option on earnings per share is dilutive for the third quarter 2006; therefore, conversion to common shares is included in weighted average potential dilutive common equivalents for the quarter.

7. Segment Reporting

We are engaged in three reportable operating segments, the first two of which consist of the ownership and rental of office and industrial real estate investments (collectively, “Rental Operations”). The third reportable segment consists of our build-to-suit for sale operations and providing of various real estate services such as property management, maintenance, leasing, development and construction management to third-party property owners and joint ventures (“Service Operations”). Our reportable segments offer different products or services and are managed separately because each segment requires different operating strategies and management expertise.

The assets of the Service Operations business segment generally include properties under development. During the period between the completion of development, rehabilitation or repositioning of a Service Operations property and the date the property is contributed to a property fund or sold to a third party, the property and its associated rental income and rental expenses are included in the applicable Rental Operations segment because the primary activity associated with the Service Operations property during that period is rental activities. Upon contribution or sale, the resulting gain or loss is part of the income of the Service Operations business segment.

Non-segment revenue consists mainly of equity in earnings of unconsolidated companies and other insignificant rental operations such as retail and medical office properties. Segment FFO information (FFO is defined below) is calculated by subtracting operating expenses attributable to the applicable segment from segment revenues. Non-segment assets consist of corporate assets, including cash, deferred financing costs and investments in unconsolidated companies. Interest expense and other non-property specific revenues and expenses are not allocated to individual segments in determining our performance measure.

We assess and measure segment operating results based upon an industry performance measure referred to as Funds From Operations (“FFO”), which management believes is a useful indicator of our operating performance. FFO is used by industry analysts and investors as a supplemental operating performance measure of an equity real estate investment trust (“REIT”) like Duke. FFO is calculated in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from net income determined in accordance with GAAP. FFO is a non-GAAP financial measure developed by NAREIT to compare the operating performance of REITs. The most comparable GAAP measure is net income (loss). FFO should not be considered as a substitute for net income or any other measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other companies.

Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry analysts and investors have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. FFO, as defined by NAREIT, represents GAAP net income (loss), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after similar adjustments for unconsolidated partnerships and joint ventures.

Management believes that the use of FFO, combined with the required primary GAAP presentations, improves the understanding of operating results of REITs among the investing public and makes comparisons of REIT operating results more meaningful. Management believes FFO is a useful measure for reviewing comparative operating and financial performance (although FFO should be reviewed in conjunction with net income which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO provides a useful comparison of the operating performance of our real estate between periods or as compared to different companies.

The following table shows (i) the revenues and FFO for each of the reportable segments and (ii) a reconciliation of net income available for common shareholders to the calculation of FFO for the three and nine months ended September 30, 2007 and 2006, respectively (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenues
Rental Operations:
Office	$	140,858		$	139,260		$	409,886		$	399,938
Industrial	52,741			50,755			160,761			144,113
Service Operations	20,273			22,474			57,042			42,198
Total Segment Revenues	213,872			212,489			627,689			586,249
Non-Segment Revenue	9,615			6,045			35,395			30,402
Consolidated Revenue from continuing operations	$	223,487		$	218,534		$	663,084		$	616,651
Discontinued Operations	7,088			17,482			32,949			59,964
Consolidated Revenue	$	230,575		$	236,016		$	696,033		$	676,615
Funds From Operations
Rental Operations:
Office	$	87,742		$	88,494		$	251,862		$	249,786
Industrial	40,645			40,357			123,528			111,079
Services Operations	7,301			10,551			26,253			18,477
Total Segment FFO	135,688			139,402			401,643			379,342
Non-Segment FFO:
Interest expense	(42,390		)	(46,825		)	(124,924		)	(124,757		)
Interest and other income, net	6,292			4,381			11,276			8,313
General and administrative expense	(3,847		)	(6,760		)	(27,912		)	(27,642		)
Gain on land sales, net of impairment	1,799			2,982			18,207			5,427
Other non-segment income	3,407			169			6,535			3,492
Minority interest	(1,116		)	(2,252		)	(3,723		)	(5,055		)
Minority interest share of FFO adjustments	(2,697		)	(2,621		)	(7,539		)	(13,831		)
Joint venture FFO	12,414			8,341			36,801			27,060
Dividends on preferred shares	(15,227		)	(15,226		)	(45,679		)	(41,193		)
Adjustment for redemption of preferred shares	—			—			—			(2,633		)
Discontinued operations, net of minority interest	(650		)	7,196			2,597			26,697
Consolidated basic FFO	$	93,673		$	88,787		$	267,282		$	235,220
Depreciation and amortization on continuing operations	(71,981		)	(59,432		)	(202,854		)	(173,623		)
Depreciation and amortization on discontinued operations	(95		)	(4,931		)	(5,368		)	(16,489		)
Company’s share of joint venture adjustments	(10,574		)	(4,568		)	(21,152		)	(13,695		)
Earnings from depreciated property sales on discontinued operations	39,670			39,537			111,751			41,573
Earnings from depreciated property sales-share of joint venture	(3		)	(280		)	1,828			8,082
Minority interest share of FFO adjustments	2,697			2,621			7,539			13,831
Net income available for common shareholders	$	53,387		$	61,734		$	159,026		$	94,899

The assets for each of the reportable segments as of September 30, 2007 and December 31, 2006, respectively, are as follows (in thousands):

	September 30,		December 31,
	2007		2006
Assets
Rental Operations:
Office	$	3,890,873	$	4,061,806
Industrial	2,099,009		1,942,992
Service Operations	349,163		301,886
Total Segment Assets	6,339,045		6,306,684
Non-Segment Assets	1,077,797		931,911
Consolidated Assets	$	7,416,842	$	7,238,595

In addition to revenues and FFO, we also review our recurring capital expenditures in measuring the performance of our individual Rental Operations segments. These recurring capital expenditures consist of tenant improvements, leasing commissions and building improvements. We review these expenditures to determine the costs associated with re-leasing vacant space and maintaining the condition of our properties. Our recurring capital expenditures by segment are summarized as follows for the nine months ended September 30, 2007 and 2006, respectively (in thousands):

	Nine Months Ended
	September 30,
	2007		2006
Recurring Capital Expenditures
Office	$	50,079	$	42,035
Industrial	10,383		9,672
Non-segment	190		347
Total	$	60,652	$	52,054

8. Discontinued Operations

We classified the operations of 67 buildings as discontinued operations as of September 30, 2007. These 67 buildings consist of 32 industrial and 35 office properties. Of these properties, 30 were sold during the first nine months of 2007, 21 were sold during 2006 and 16 operating properties are classified as held-for-sale at September 30, 2007.

The following table illustrates the operations of the buildings reflected in discontinued operations for the three and nine months ended September 30, 2007 and 2006, respectively (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Statement of Operations:
Revenues	$	7,088		$	17,482		$	32,949		$	59,964
Expenses:
Operating	3,080			6,780			14,022			21,645
Interest	2,045			3,776			8,690			10,858
Depreciation and Amortization	95			4,931			5,368			16,489
General and Administrative	17			46			41			97
Operating Income	1,851			1,949			4,828			10,875
Minority interest expense	(116		)	(176		)	(315		)	(979		)
Income from discontinued operations, before gain on sales	1,735			1,773			4,513			9,896
Gain on sale of property	39,670			43,735			111,751			45,739
Minority interest expense – gain on sales	(2,480		)	(3,939		)	(7,284		)	(4,119		)
Gain on sale of property, net of minority interest	37,190			39,796			104,467			41,620
Income from discontinued operations	$	38,925		$	41,569		$	108,980		$	51,516

At September 30, 2007, we classified 16 properties as held-for-sale and included in discontinued operations. Additionally, we have classified 13 in-service properties as held-for-sale, but have included the results of operations of these properties in continuing operations, either based on our present intention to sell the majority of our ownership interest in the properties to entities in which we will retain a minority equity ownership interest or because the results of operations for the properties are immaterial. The following table illustrates the aggregate balance sheet of the aforementioned properties included in discontinued operations, as well as the 13 held-for-sale properties whose results are included in continuing operations, at September 30, 2007 (in thousands):

	Properties		Properties
	Included in		Included in		Total
	Discontinued		Continuing		Held-for-Sale
	Operations		Operations		Properties

Balance Sheet:
Real estate investments, net	$	133,895	$	193,064	$	326,959
Other assets	9,810		14,490		24,300
Total assets	$	143,705	$	207,554	$	351,259

Accrued expenses	$	2,762	$	633	$	3,395
Other liabilities	1,021		7,759		8,780
Secured debt	—		25,751		25,751
Total liabilities held-for-sale	$	3,783	$	34,143	$	37,926

We allocate interest expense to discontinued operations and have included such interest expense in computing net income from discontinued operations. Interest expense allocable to discontinued operations includes interest on any debt on secured 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 discontinued operations unencumbered population as it related to our entire unencumbered population.

9. Financial Instruments

We are exposed to capital market risk, such as changes in interest rates. In order to reduce the volatility relating to interest rate risk, we may enter into interest rate hedging arrangements from time to time. We do not utilize derivative financial instruments for trading or speculative purposes.

In August 2005, we entered into $300.0 million of cash flow hedges through forward-starting interest rate swaps to hedge interest rates on $300.0 million of estimated debt offerings in 2007. The swaps qualified for hedge accounting, with any change in fair value recorded in Accumulated Other Comprehensive Income (“OCI”). In conjunction with the September 2007 issuance of $300.0 million of senior unsecured notes (Note 4), we terminated these cash flow hedges as designated. The settlement amount received of $10.7 million will be recognized to earnings through interest expense over the term of the hedged cash flows. The ineffective portion of the hedge was insignificant.

In July 2007, we entered into a $21.0 million cash flow hedge through an interest rate swap to fix the rate on $21.0 million of floating rate term debt, issued by one of our consolidated majority owned subsidiaries, which matures in July 2011. The swap qualifies for hedge accounting, with any changes in fair value recorded in OCI. At September 30, 2007 the fair value of this swap was approximately $585,000 in a liability position.

The effectiveness of our hedges will be evaluated throughout their lives using the hypothetical derivative method under which the change in fair value of the actual swap designated as the hedging instrument is compared to the change in fair value of a hypothetical swap.

10. Recent Accounting Pronouncements

We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”), on January 1, 2007. The adoption of FIN 48 resulted in an additional tax exposure of approximately $1.7 million recorded as an adjustment to the opening balance of Distributions in Excess of Net Income. Our uncertain tax positions are immaterial both individually and in the aggregate primarily due to our tax status as a REIT.

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact of adopting this statement.

In January 2007, the FASB issued SFAS No. 159, The Fair Value Options for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 provides a “Fair Value Option” under which a company may irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. This Fair Value Option will be available on a contract-by-contract basis with changes in fair value recognized in earnings as those changes occur. The effective date for SFAS 159 is the beginning of each reporting entity’s first fiscal year end that begins after November 15, 2007. We do not expect to elect the Fair Value Option for any of our financial assets or liabilities.

11. Subsequent Events

Declaration of Dividends

The Company’s board of directors declared the following dividends at its October 31, 2007, regularly scheduled board meeting:

	Quarterly
Class	Amount/Share		Record Date	Payment Date
Common	$	0.48	November 14, 2007	November 30, 2007
Preferred (per depositary share):
Series J	$	0.414063	November 16, 2007	November 30, 2007
Series K	$	0.406250	November 16, 2007	November 30, 2007
Series L	$	0.412500	November 16, 2007	November 30, 2007
Series M	$	0.434375	December 17, 2007	December 31, 2007
Series N	$	0.453125	December 17, 2007	December 31, 2007

Issuance of Common Stock

In October 2007, we issued 7.0 million shares of our common stock for net proceeds of $232.7 million. The net proceeds of the offering were used to partially pay down our $1.0 billion unsecured line of credit.

Redemption of Series B Cumulative Redeemable Preferred Shares

In October 2007, we redeemed all of the outstanding shares of our 7.990% Series B Cumulative Redeemable Preferred Stock at a liquidation amount of $132.3 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward Looking Statements

Certain statements contained in 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,” and similar expressions or statements regarding future periods are intended to identify forward-looking statements. 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 performance of financial markets;

• Our continued qualification as a real estate investment trust, or “REIT”, for U.S. federal income tax purposes;

• Heightened competition for tenants and potential decreases in property occupancy;

• Potential increases in real estate construction costs;

• Potential changes in the financial markets and interest rates;

• Our continuing ability to raise funds on favorable terms through the issuance of debt and equity in the capital markets;

• Our ability to successfully identify, acquire, develop and/or manage properties on terms that are favorable to us;

• Our ability to successfully dispose of properties on terms that are favorable to us;

• 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 filings with the Securities and Exchange Commission (“SEC”).

This list of risks and uncertainties, however, 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 under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, which we filed with the SEC on March 1, 2007, and is updated by us from time to time in Quarterly Reports on Form 10-Q and other public filings.

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 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.

Business Overview

We are a self-administered and self-managed REIT that began operations through a related entity in 1972. As of September 30, 2007, we:

• Owned or jointly controlled 723 industrial, office and retail properties (including properties under development), consisting of approximately 119.8 million square feet; and

• Owned or jointly controlled more than 7,600 acres of land with an estimated future development potential of more than 112 million square feet of industrial, office and retail properties.

We provide the following services for our properties and for certain properties owned by third parties and joint ventures:

• Property leasing;

• Property management;

• Construction;

• Development; and

• Other tenant-related services.

Acquisitions

The initial consideration paid to the sellers totaled $47.1 million, and the sellers may be eligible for further contingent payments over the next three years.

Approximately $39.1 million of the total purchase price is allocated to goodwill, which is attributable to the value of Bremner’s overall development capabilities and its in-place workforce.

Key Performance Indicators

Our operating results depend primarily upon rental income from our office and industrial properties (“Rental Operations”). The following highlights the areas of Rental Operations that we consider critical for future revenue growth. All square footage totals and occupancy percentages reflect both wholly owned properties and properties in joint ventures.

Occupancy Analysis: Our ability to maintain favorable occupancy rates is a principal driver of our results of operations. The following table sets forth occupancy information regarding our in-service portfolio of rental properties (excluding in-service properties developed or acquired with the intent to sell – “Service Operations Buildings”) as of September 30, 2007 and 2006, respectively (in thousands, except percentage data):

	Total		Percent of
	Square Feet		Total Square Feet				Percent Occupied
Type	2007	2006	2007		2006		2007		2006
Industrial	75,225	73,248	69.5	%	69.0	%	94.6	%	93.2	%
Office	31,688	32,170	29.2	%	30.3	%	91.0	%	91.0	%
Other	1,378	745	1.3	%	0.7	%	90.7	%	96.9	%
Total	108,291	106,163	100.0	%	100.0	%	93.5	%	92.5	%

Lease Expiration and Renewal: Our ability to maintain and grow occupancy rates primarily depends upon our continuing ability to re-lease expiring space. The following table reflects our in-service lease expiration schedule by property type as of September 30, 2007. The table indicates square footage and annualized net effective rents (based on September 2007 rental revenue) under expiring leases (in thousands, except percentage data):

	Total
	Portfolio						Industrial				Office				Other
Year of	Square		Ann. Rent		% of		Square		Ann. Rent		Square		Ann. Rent		Square		Ann. Rent
Expiration	Feet		Revenue		Revenue		Feet		Revenue		Feet		Revenue		Feet		Revenue
2007	2,580		$	13,597	2	%	2,130		$	8,075	405		$	4,953	45		$	569
2008	12,358		69,195		9	%	9,606		35,501		2,724		33,295		28		399
2009	11,524		74,835		11	%	8,287		33,313		3,177		40,931		60		591
2010	12,938		98,818		14	%	8,660		38,755		4,263		59,876		15		187
2011	13,538		85,246		12	%	10,107		38,743		3,364		45,442		67		1,061
2012	10,589		74,873		11	%	7,159		28,149		3,386		45,868		44		856
2013	8,589		74,965		11	%	4,752		20,335		3,785		53,812		52		818
2014	6,380		37,698		5	%	4,914		18,089		1,431		19,071		35		538
2015	7,353		55,841		8	%	5,165		19,811		2,188		36,030		—		—
2016	3,949		26,890		4	%	2,847		10,427		887		13,964		215		2,499
2017 and Thereafter	11,447		88,150		13	%	7,531		31,081		3,227		47,501		689		9,568
Total Leased	101,245		$	700,108	100	%	71,158		$	282,279	28,837		$	400,743	1,250		$	17,086
Total Portfolio Square Feet	108,291						75,225				31,688				1,378

Percent Occupied	93.5	%					94.6	%			91.0	%			90.7	%

Note: Excludes Service Operations Buildings.

We renewed 80.8% and 81.9% of our leases up for renewal in the three and nine months ended September 30, 2007, totaling approximately 2.9 million and 8.5 million square feet, respectively. This compares to renewals of 79.6% and 78.9% for the three and nine months ended September 30, 2006, totaling approximately 1.9 million and 5.7 million square feet, respectively. We attained 7.6% and 5.3% growth in net effective rents on these renewals in the three and nine months ended September 30, 2007, respectively.

The average term of renewals for the three and nine months ended September 30, 2007 was 3.0 and 3.9 years, respectively, compared to an average term of 4.7 and 3.9 years for the three and nine months ended September 30, 2006, respectively.

Future Development: Another source of growth in earnings is the development of additional properties. These properties should provide future earnings through income upon sale or from Rental Operations growth as they are placed in service. We had 16.6 million square feet of property under development with total estimated costs of $1.3 billion at September 30, 2007, compared to 11.4 million square feet with total estimated costs of $1.1 billion at September 30, 2006.

The following table summarizes our properties under development as of September 30, 2007 (in thousands, except percentage data):

			Total
Anticipated			Estimated		Anticipated
In-Service	Square	Percent	Project		Stabilized
Date	Feet	Leased	Costs		Return
Held-for-Rental Buildings:
4^th Quarter 2007	3,917	16%	$	282,789	9.38%
1^st Quarter 2008	5,493	14%	282,511		8.99%
2^nd Quarter 2008	1,391	46%	97,798		8.93%
Thereafter	660	61%	109,714		9.44%
	11,461	21%	$	772,812	9.19%
Service Operations Buildings:
4^th Quarter 2007	1,469	49%	$	223,352	8.27%
1^st Quarter 2008	585	31%	30,651		8.77%
2^nd Quarter 2008	1,044	88%	86,925		8.08%
Thereafter	2,047	79%	209,502		8.51%
	5,145	67%	$	550,430	8.36%
Total	16,606	35%	$	1,323,242	8.85%

Acquisition and Disposition Activity: We continued to selectively dispose of non-strategic properties during the nine months ended September 30, 2007. Gross sales proceeds related to the dispositions of wholly owned held-for-rental properties were $317.4 million for the nine months ended September 30, 2007, which included the disposition of a portfolio of eight office properties in the Cleveland market and a portfolio of twelve industrial properties in the St. Louis market. Our share of proceeds from sales of properties within unconsolidated joint ventures, in which we have a less than 100% interest, totaled $13.4 million for the nine months ended September 30, 2007. For the nine months ended September 30, 2006, proceeds totaled $126.5 million for the disposition of wholly owned held-for-rental properties and $72.6 million for our share of property sales from unconsolidated joint ventures. Dispositions of wholly owned properties developed for sale rather than rental resulted in $85.0 million in proceeds for the nine months ended September 30, 2007, compared to $39.0 million for the same period in 2006.

For the nine months ended September 30, 2007, in addition to the acquisition of Bremner, we acquired $47.4 million of income producing properties and also acquired $156.8 million of undeveloped land, compared to acquisitions of $963.9 million of income producing properties and $366.2 million of undeveloped land in the nine months ended September 30, 2006.

Funds From Operations

Funds From Operations (“FFO”) is used by industry analysts and investors as a supplemental operating performance measure of an equity REIT like Duke. FFO is calculated in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from net income determined in accordance with U.S. generally accepted accounting principles (“GAAP”). FFO is a non-GAAP financial measure developed by NAREIT to compare the operating performance of REITs. The most comparable GAAP measure is net income (loss). FFO should not be considered as a substitute for net income or any other measures derived in accordance with GAAP and may not be comparable to other similarly titled measure of other companies.

Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry analysts and investors have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. FFO, as defined by NAREIT, represents GAAP net income (loss), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate depreciation and amortization, and after similar adjustments for unconsolidated partnerships and joint ventures.

The following table shows a reconciliation of net income available for common shareholders to the calculation of FFO for the three and nine months ended September 30, 2007 and 2006, respectively (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Net income available for common shareholders	$	53,387		$	61,734		$	159,026		$	94,899
Adjustments:
Depreciation and amortization	72,076			64,363			208,222			190,112
Company share of joint venture depreciation and amortization	10,574			4,568			21,152			13,695
Earnings from depreciable property sales - wholly owned	(39,670		)	(39,537		)	(111,751		)	(41,573		)
Earnings from depreciable property sales - share of joint venture	3			280			(1,828		)	(8,082		)
Minority interest share of adjustments	(2,697		)	(2,621		)	(7,539		)	(13,831		)
Funds From Operations	$	93,673		$	88,787		$	267,282		$	235,220

Results of Operations

A summary of our operating results and property statistics for the three and nine months ended September 30, 2007 and 2006, respectively, is as follows (in thousands, except number of properties and per share data):

Three Months Ended

Nine Months Ended