DRE.3Q.10Q.2011
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, 2011
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 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 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.
Yes x    No   ¨
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x    No  ¨
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 definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
Accelerated filer  o
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    YES  ¨    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 4, 2011
Common Stock, $.01 par value per share
 
252,921,718
DUKE REALTY CORPORATION
INDEX
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
 
September 30,
2011
 
December 31,
2010
 
(Unaudited)
 
 
 
 
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
1,307,608

 
$
1,166,409

Buildings and tenant improvements
5,601,866

 
5,396,339

Construction in progress
41,490

 
61,205

Investments in and advances to unconsolidated companies
368,671

 
367,445

Undeveloped land
622,254

 
625,353

 
7,941,889

 
7,616,751

Accumulated depreciation
(1,413,804
)
 
(1,290,417
)
Net real estate investments
6,528,085

 
6,326,334

 
 
 
 
Real estate investments and other assets held-for-sale
21,992

 
394,287

 
 
 
 
Cash and cash equivalents
16,182

 
18,384

Accounts receivable, net of allowance of $2,854 and $2,945
21,685

 
22,588

Straight-line rent receivable, net of allowance of $7,502 and $7,260
140,732

 
125,185

Receivables on construction contracts, including retentions
44,425

 
7,408

Deferred financing costs, net of accumulated amortization of $56,105 and $46,407
39,449

 
46,320

Deferred leasing and other costs, net of accumulated amortization of $329,325 and $269,000
497,594

 
517,934

Escrow deposits and other assets
194,517

 
185,836

 
$
7,504,661

 
$
7,644,276

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
Secured debt
$
1,184,268

 
$
1,065,628

Unsecured notes
2,783,762

 
2,948,405

Unsecured lines of credit
304,293

 
193,046

 
4,272,323

 
4,207,079

 
 
 
 
Liabilities related to real estate investments held-for-sale
957

 
14,732

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
66,786

 
44,782

Accrued real estate taxes
123,524

 
83,615

Accrued interest
35,725

 
62,407

Other accrued expenses
42,729

 
61,448

Other liabilities
128,123

 
129,860

Tenant security deposits and prepaid rents
59,551

 
50,450

Total liabilities
4,729,718

 
4,654,373

Shareholders’ equity:
 
 
 
Preferred shares ($.01 par value); 5,000 shares authorized; 3,176 and 3,618 shares issued and outstanding
793,910

 
904,540

Common shares ($.01 par value); 400,000 shares authorized; 252,918 and 252,195 shares issued and outstanding
2,529

 
2,522

Additional paid-in capital
3,591,381

 
3,573,720

Accumulated other comprehensive income (loss)
493

 
(1,432
)
Distributions in excess of net income
(1,678,484
)
 
(1,533,740
)
Total shareholders’ equity
2,709,829

 
2,945,610

Noncontrolling interests
65,114

 
44,293

Total equity
2,774,943

 
2,989,903

 
$
7,504,661

 
$
7,644,276

See accompanying Notes to Consolidated Financial Statements

3
DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the three and nine months ended September 30,
(in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
2011
 
2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
233,555

 
$
228,299

 
$
698,619

 
$
642,489

General contractor and service fee revenue
127,708

 
132,351

 
409,617

 
414,391

 
361,263

 
360,650

 
1,108,236

 
1,056,880

Expenses:
 
 
 
 
 
 
 
Rental expenses
49,947

 
47,628

 
153,002

 
143,133

Real estate taxes
33,785

 
32,659

 
101,936

 
88,394

General contractor and other services expenses
120,547

 
124,653

 
379,180

 
392,433

Depreciation and amortization
96,909

 
94,487

 
290,751

 
253,209

 
301,188

 
299,427

 
924,869

 
877,169

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings of unconsolidated companies
3,104

 
580

 
5,890

 
7,525

Gain on sale of properties
(1,437
)
 
(125
)
 
66,910

 
6,917

Undeveloped land carrying costs
(2,259
)
 
(2,359
)
 
(7,021
)
 
(7,152
)
Impairment charges
—

 
(1,860
)
 
—

 
(9,834
)
Other operating expenses
(60
)
 
(580
)
 
(171
)
 
(1,002
)
General and administrative expenses
(9,493
)
 
(8,476
)
 
(29,231
)
 
(31,171
)
 
(10,145
)
 
(12,820
)
 
36,377

 
(34,717
)
Operating income
49,930

 
48,403

 
219,744

 
144,994

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
172

 
149

 
543

 
504

Interest expense
(66,875
)
 
(61,491
)
 
(199,269
)
 
(175,076
)
Loss on debt transactions
—

 
(167
)
 
—

 
(16,294
)
Acquisition-related activity
(342
)
 
57,513

 
(1,525
)
 
57,513

Income (loss) from continuing operations before income taxes
(17,115
)
 
44,407

 
19,493

 
11,641

Income tax benefit
194

 
1,126

 
194

 
1,126

Income (loss) from continuing operations
(16,921
)
 
45,533

 
19,687

 
12,767

Discontinued operations:
 
 
 
 
 
 
 
Income (loss) before gain on sales
(36
)
 
375

 
(30
)
 
2,293

Gain on sale of depreciable properties
2,088

 
11,527

 
16,405

 
24,383

Income from discontinued operations
2,052

 
11,902

 
16,375

 
26,676

Net income (loss)
(14,869
)
 
57,435

 
36,062

 
39,443

Dividends on preferred shares
(14,399
)
 
(16,726
)
 
(46,347
)
 
(53,452
)
Adjustments for redemption/repurchase of preferred shares
(3,633
)
 
(5,652
)
 
(3,796
)
 
(10,144
)
Net (income) loss attributable to noncontrolling interests
825

 
(993
)
 
532

 
562

Net income (loss) attributable to common shareholders
$
(32,076
)
 
$
34,064

 
$
(13,549
)
 
$
(23,591
)
Basic net income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
(0.14
)
 
$
0.08

 
$
(0.13
)
 
$
(0.22
)
Discontinued operations attributable to common shareholders
0.01

 
0.05

 
0.07

 
0.11

Total
$
(0.13
)
 
$
0.13

 
$
(0.06
)
 
$
(0.11
)
Diluted net income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
(0.14
)
 
$
0.08

 
$
(0.13
)
 
$
(0.22
)
Discontinued operations attributable to common shareholders
0.01

 
0.05

 
0.07

 
0.11

Total
$
(0.13
)
 
$
0.13

 
$
(0.06
)
 
$
(0.11
)
Weighted average number of common shares outstanding
252,802

 
251,866

 
252,618

 
234,468

Weighted average number of common shares and potential dilutive securities
252,802

 
257,383

 
252,618

 
234,468

See accompanying Notes to Consolidated Financial Statements

4
DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30,
(in thousands)
(Unaudited)
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net income
$
36,062

 
$
39,443

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
204,134

 
201,352

Amortization of deferred leasing and other costs
88,295

 
62,734

Amortization of deferred financing costs
11,070

 
10,492

Straight-line rent adjustment
(19,012
)
 
(12,252
)
Impairment charges
—

 
9,834

Loss on debt extinguishment
—

 
16,294

Gain on acquisitions, net
—

 
(57,815
)
Earnings from land and depreciated property sales
(83,315
)
 
(31,300
)
Third-party construction contracts, net
(18,417
)
 
(16,872
)
Other accrued revenues and expenses, net
14,586

 
13,293

Operating distributions received in excess of equity in earnings from unconsolidated companies
11,681

 
7,649

Net cash provided by operating activities
245,084

 
242,852

Cash flows from investing activities:
 
 
 
Development of real estate investments
(125,676
)
 
(82,372
)
Acquisition of real estate investments and related intangible assets, net of cash acquired
(179,047
)
 
(260,877
)
Acquisition of undeveloped land
(3,825
)
 
(13,384
)
Second generation tenant improvements, leasing costs and building improvements
(71,732
)
 
(63,361
)
Other deferred leasing costs
(20,950
)
 
(26,060
)
Other assets
(4,500
)
 
(16,847
)
Proceeds from land and depreciated property sales, net
504,688

 
200,445

Capital distributions from unconsolidated companies
54,730

 
3,897

Capital contributions and advances to unconsolidated companies, net
(28,362
)
 
(48,410
)
Net cash provided by (used for) investing activities
125,326

 
(306,969
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common shares, net
—

 
297,896

Payments for redemption/repurchase of preferred shares
(110,726
)
 
(115,849
)
Proceeds from unsecured debt issuance
—

 
250,000

Payments on and repurchases of unsecured debt
(166,346
)
 
(392,181
)
Proceeds from secured debt financings
—

 
3,987

Payments on secured indebtedness including principal amortization
(24,841
)
 
(8,814
)
Borrowings on lines of credit, net
111,247

 
82,210

Distributions to common shareholders
(128,817
)
 
(119,116
)
Distributions to preferred shareholders
(46,347
)
 
(53,452
)
Distributions to noncontrolling interests
(3,952
)
 
(4,844
)
Deferred financing costs
(2,830
)
 
(2,193
)
Net cash used for financing activities
(372,612
)
 
(62,356
)
Net decrease in cash and cash equivalents
(2,202
)
 
(126,473
)
Cash and cash equivalents at beginning of period
18,384

 
147,322

Cash and cash equivalents at end of period
$
16,182

 
$
20,849

Non-cash investing and financing activities:
 
 
 
Assumption of indebtedness and other liabilities in real estate acquisitions
$
150,042

 
$
332,982

Contribution of properties to unconsolidated companies
$
53,245

 
$
7,002

Investment and advances related to acquisition of previously unconsolidated companies
$
5,987

 
$
134,026

Conversion of Limited Partner Units to common shares
$
3,052

 
$
(7,829
)
Issuance of Limited Partner Units for acquisition
$
28,357

 
$
—

See accompanying Notes to Consolidated Financial Statements


5
DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the nine months ended September 30, 2011
(in thousands, except per share data)
(Unaudited)
 
 
Common Shareholders
 
 
 
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Distributions
in Excess of
Net Income
 
Non-
Controlling
Interests
 
Total
Balance at December 31, 2010
$
904,540

 
$
2,522

 
$
3,573,720

 
$
(1,432
)
 
$
(1,533,740
)
 
$
44,293

 
$
2,989,903

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
—

 
36,594

 
(532
)
 
36,062

Derivative instrument activity
—

 
—

 
—

 
1,925

 
—

 
—

 
1,925

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
37,987

Issuance of Limited Partner Units for acquisition
—

 
—

 
—

 
—

 
—

 
28,357

 
28,357

Stock based compensation plan activity
—

 
4

 
10,912

 
—

 
(2,378
)
 
—

 
8,538

Conversion of Limited Partner Units
—

 
3

 
3,049

 
—

 
—

 
(3,052
)
 
—

Distributions to preferred shareholders
—

 
—

 
—

 
—

 
(46,347
)
 
—

 
(46,347
)
Redemption/repurchase of preferred shares
(110,630
)
 
—

 
3,700

 
—

 
(3,796
)
 
—

 
(110,726
)
Distributions to common shareholders ($0.51 per share)
—

 
—

 
—

 
—

 
(128,817
)
 
—

 
(128,817
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(3,952
)
 
(3,952
)
Balance at September 30, 2011
$
793,910

 
$
2,529

 
$
3,591,381

 
$
493

 
$
(1,678,484
)
 
$
65,114

 
$
2,774,943

See accompanying Notes to Consolidated Financial Statements


6
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”). The 2010 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 our Annual Report on Form 10-K for the year ended December 31, 2010, 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 our Annual Report on Form 10-K for the year ended December 31, 2010.
We believe that we qualify as a real estate investment trust (“REIT”) under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”). Substantially all of our Rental Operations (see Note 9) are conducted through Duke Realty Limited Partnership (“DRLP”). We owned approximately 97.3% of the common partnership interests of DRLP (“Units”) at September 30, 2011. At the option of the holders, and subject to certain restrictions, the remaining Units are redeemable for shares of our common stock on a one-to-one basis and earn dividends at the same rate as shares of our common stock. If it is determined to be necessary in order to continue to qualify as a REIT, we may elect to purchase the Units for an equivalent amount of cash rather than issuing shares of common stock upon redemption. We conduct our Service Operations (see Note 9) through Duke Realty Services, LLC, Duke Realty Services Limited Partnership and Duke Construction Limited Partnership (“DCLP”). 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. In 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 amounts in the accompanying consolidated financial statements for 2010 have been reclassified to conform to the 2011 consolidated financial statement presentation.

3.    Variable Interest Entities
At September 30, 2011, there are three unconsolidated joint ventures that we have determined meet the criteria to be considered variable interest entities (“VIEs”). These three unconsolidated joint ventures were formed with the sole purpose of developing, constructing, leasing, marketing and selling or operating properties. The business activities of these unconsolidated joint ventures have been financed through a combination of equity contributions, partner/member loans, and third-party debt that is guaranteed by both us and the other partner/member of each entity. All significant decisions for these unconsolidated joint ventures, including those decisions that most significantly impact each venture’s economic performance, require unanimous approval of each joint venture’s partners or members. In certain cases, these decisions also require lender approval. Unanimous approval requirements for these unconsolidated joint ventures include entering into new leases, setting annual operating budgets, selling underlying properties, and incurring additional indebtedness. Because no single entity exercises control over the decisions that most significantly affect each joint venture’s economic performance, we determined that the equity method of accounting is appropriate.

The following is a summary of the carrying value in our consolidated balance sheet, as well as our maximum loss exposure under guarantees for the three unconsolidated subsidiaries that we have determined to be VIEs as of September 30, 2011 (in millions):

 
Carrying Value
Maximum Loss Exposure
Investment in Unconsolidated Company
$
33.2

$
33.2

Guarantee Obligations (1)
$
(18.9
)
$
(58.3
)
 

7
(1)
We are party to guarantees of the third-party debt of these joint ventures and our maximum loss exposure is equal to the maximum monetary obligation pursuant to the guarantee agreements. In 2009, we recorded a liability for our probable future obligation under a guarantee to the lender of one of these ventures. Pursuant to an agreement with the lender, we may make partner loans to this joint venture that will reduce our maximum guarantee obligation on a dollar-for-dollar basis. The carrying value of our recorded guarantee obligations is included in other liabilities in our Consolidated Balance Sheets.

4.    Acquisitions and Dispositions
Acquisition of Premier Portfolio
We purchased twelve industrial and four office buildings, as well as other real estate assets, during the nine months ended September 30, 2011. These purchases completed our acquisition of a portfolio of buildings in South Florida (the “Premier Portfolio”), which was placed under contract in 2010, and resulted in cash payments to the sellers of $27.4 million, the assumption of secured loans with a face value of $124.4 million and the issuance to the sellers of 2.1 million Units with a fair value at issuance of $28.4 million (Note 6). These units are not convertible until early 2012.
On December 30, 2010, we purchased 38 industrial buildings, one office building and other real estate assets within the Premier Portfolio. The allocation of the fair value of the amounts recognized from this acquisition to buildings and other related assets was preliminary at December 31, 2010. The following table summarizes our allocation of the fair value of amounts recognized for each major class of assets and liabilities related to the 55 properties and other real estate assets from the Premier Portfolio that have been purchased through September 30, 2011 (in thousands):
 
 
Acquired During Year ended December 31, 2010

 
Acquired During Nine months ended September 30, 2011

 
Total

Real estate assets
$
249,960

 
$
153,656

 
$
403,616

Lease-related intangible assets
31,091

 
25,445

 
56,536

Other assets
1,801

 
2,571

 
4,372

Total acquired assets
282,852

 
181,672

 
464,524

Secured debt
158,238

 
125,003

 
283,241

Other liabilities
4,075

 
4,284

 
8,359

Total assumed liabilities
162,313

 
129,287

 
291,600

Fair value of acquired net assets
$
120,539

 
$
52,385

 
$
172,924


The leases in the acquired properties had a weighted average remaining life at acquisition of approximately 3.5 years.

Other 2011 Acquisitions

We also acquired 14 additional properties during the nine months ended September 30, 2011. These acquisitions consisted of five bulk industrial properties in Raleigh, North Carolina, two bulk industrial properties in Chicago, Illinois, one bulk industrial property in Dallas, Texas, one bulk industrial property in Southern California, one bulk industrial property in Phoenix, Arizona, one bulk industrial property in Savannah, Georgia, one office property in Raleigh, North Carolina, one office property in Indianapolis, Indiana and one office property in Atlanta, Georgia. Our acquisition accounting is preliminary for seven of the acquired buildings, which were acquired in September 2011. The following table summarizes our allocation of the fair value of amounts recognized for each major class of assets and liabilities (in thousands) for these acquisitions:
 
 
Real estate assets
$
161,825

Lease related intangible assets
22,879

Other assets
338

Total acquired assets
185,042

Secured debt
20,138

Other liabilities
1,588

Total assumed liabilities
21,726

Fair value of acquired net assets
$
163,316


The leases in the acquired properties had a weighted average remaining life at acquisition of approximately 6.8 years.

8
Fair Value Measurements

The fair value estimates used in allocating the aggregate purchase price of each acquisition among the individual components of real estate assets and liabilities were determined primarily through calculating the “as-if vacant” value of each building, using the income approach, and relied significantly upon internally determined assumptions. As a result, we have, thus, determined these estimates to have been primarily based upon Level 3 inputs, which are unobservable inputs based on our own assumptions. The range of most significant assumptions utilized in making the lease-up and future disposition estimates used in calculating the “as-if vacant” value of each building acquired during the nine months ended September 30, 2011 were as follows:
 
 
Low

High

Discount rate
6.40
%
10.10
%
Exit capitalization rate
4.80
%
9.00
%
Lease-up period (months)
12

36

Net rental rate per square foot – Industrial
$2.75
$6.50
Net rental rate per square foot – Office
$8.61
$16.00

Dispositions

We disposed of income-producing real estate assets and undeveloped land and received net proceeds of $504.7 million during the nine months ended September 30, 2011. Included in the building dispositions in the nine months ended September 30, 2011 is the sale, in March 2011, of 13 suburban office buildings, totaling approximately 2.0 million square feet, to an existing 20% owned unconsolidated joint venture. These buildings were sold to the unconsolidated joint venture for $342.8 million and our share of net proceeds totaled $273.7 million.

5.    Indebtedness
The following table summarizes the book value and changes in the fair value of our debt for the nine months ended September 30, 2011 (in thousands):
 
Book Value
at 12/31/10
 
Book Value
at 9/30/11
 
Fair Value
at 12/31/10
 
Issuances and
Assumptions
 
Payoffs
 
Adjustments
to Fair Value
 
Fair Value
at 9/30/11
Fixed rate secured debt
$
1,042,722

 
$
1,162,147

 
$
1,069,562

 
$
143,732

 
$
(24,056
)
 
$
75,065

 
$
1,264,303

Variable rate secured debt
22,906

 
22,121

 
22,906

 
—

 
(785
)
 
—

 
22,121

Unsecured notes
2,948,405

 
2,783,762

 
3,164,651

 
—

 
(166,345
)
 
(63,773
)
 
2,934,533

Unsecured lines of credit
193,046

 
304,293

 
193,224

 
111,248

 
—

 
4,815

 
309,287

Total
$
4,207,079

 
$
4,272,323

 
$
4,450,343

 
$
254,980

 
$
(191,186
)
 
$
16,107

 
$
4,530,244


Fixed Rate 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 2.70% to 6.20%, 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.

We assumed eleven secured loans, in conjunction with our acquisition activity, in the first nine months of 2011. These acquired secured loans had a total face value of $143.7 million and fair value of $145.1 million. The assumed loans carry a weighted average stated interest rate of 5.75% and a weighted remaining term upon acquisition of 5.2 years. We used estimated market rates ranging between 4.40% and 5.81% in determining the fair value of the loans.

Unsecured Notes

In March 2011, we repaid $42.5 million of senior unsecured notes, which had an effective interest rate of 6.96%, at their scheduled maturity date. In August 2011, we repaid $122.5 million of senior unsecured notes, which had an effective interest

9
rate of 5.69%, at their scheduled maturity date.

All but $21.0 million of our unsecured notes bear interest at fixed rates. 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, as defined. The estimated trading values of our fixed rate unsecured debt, depending on the maturity and coupon rates, ranged from 100.00% to 115.00% of face value.

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 as of September 30, 2011.

Unsecured Lines of Credit

Our unsecured lines of credit as of September 30, 2011 are described as follows (in thousands):
Description
Maximum
Capacity
 
Maturity Date
 
Outstanding
Balance at
September 30, 2011
Unsecured Line of Credit - DRLP
$
850,000

 
February 2013
 
$
284,000

Unsecured Line of Credit - Consolidated Subsidiary
$
30,000

 
July 2012
 
$
20,293


The DRLP unsecured line of credit has an interest rate on borrowings of LIBOR plus 2.75% (equal to 2.98% for borrowings as of September 30, 2011), and a maturity date of February 2013. Subject to certain conditions, the terms also include an option to increase the facility by up to an additional $200.0 million, for a total of up to $1.05 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 and debt-to-asset value (with asset value being defined in the DRLP unsecured line of credit agreement). As of September 30, 2011, we were in compliance with all covenants under this line of credit.

The consolidated subsidiary’s unsecured line of credit allows for borrowings up to $30.0 million at a rate of LIBOR plus 0.85% (equal to 1.09% for outstanding borrowings as of September 30, 2011). This unsecured line of credit is used to fund development activities within the consolidated subsidiary and matures in July 2012.

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 lines 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 1.74% that we utilized was internally estimated; therefore, we have concluded that our determination of fair value for our unsecured lines of credit was primarily based upon Level 3 inputs.

6.    Shareholders' Equity
In the first nine months of 2011, we repurchased 80,000 shares of our 8.375% Series O Cumulative Redeemable Preferred Shares (“Series O Shares”). The Series O Shares that we repurchased had a total redemption value of $2.0 million and were repurchased for $2.1 million. An adjustment of approximately $163,000, which included a ratable portion of original issuance costs, was included as a reduction to net income attributable to common shareholders.
In conjunction with the acquisition of the Premier Portfolio (Note 4), we issued 2.1 million Units with a fair value at issuance

10
of $28.4 million, which are included in noncontrolling interests.
In July 2011, we redeemed all of the outstanding shares of our 7.25% Series N Cumulative Redeemable Preferred Shares at a liquidation amount of $108.6 million. Offering costs of $3.6 million were charged against net income attributable to common shareholders in conjunction with the redemption of these shares.

7.    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 we have eliminated our ownership percentage of these fees in the consolidated financial statements. The following table summarizes the fees earned from these companies for the nine months ended September 30, 2011 and 2010, respectively (in thousands): 
                                         
 
Nine Months Ended September 30,
 
2011
 
2010
Management fees
$
7,393

 
$
5,850

Leasing fees
3,627

 
2,143

Construction and development fees
4,182

 
6,716


8.    Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common shareholders, less dividends on share-based awards expected to vest (referred to as “participating securities” and primarily composed of unvested restricted stock units), by the weighted average number of common shares 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 Units not owned by us (to the extent the Units are dilutive) by the sum of the weighted average number of common shares outstanding and, to the extent they are dilutive, Units outstanding, as well as any potential dilutive securities for the period.
The following table reconciles the components of basic and diluted net income (loss) per common share for the three and nine months ended September 30, 2011 and 2010, respectively (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Net income (loss) attributable to common shareholders
$
(32,076
)
 
$
34,064

 
$
(13,549
)
 
$
(23,591
)
Less: Dividends on participating securities
(811
)
 
(694
)
 
(2,416
)
 
(1,699
)
Basic net income (loss) attributable to common shareholders
(32,887
)
 
33,370

 
(15,965
)
 
(25,290
)
Noncontrolling interest in earnings of common unitholders
—

 
1,041

 
—

 
—

Diluted net income (loss) attributable to common shareholders
$
(32,887
)
 
$
34,411

 
$
(15,965
)
 
$
(25,290
)
Weighted average number of common shares outstanding
252,802

 
251,866

 
252,618

 
234,468

Weighted average partnership Units outstanding
—

 
5,517

 
—

 
—

Other potential dilutive shares
—

 
—

 
—

 
—

Weighted average number of common shares and potential dilutive securities
252,802

 
257,383

 
252,618

 
234,468


The partnership Units are anti-dilutive for the three and nine months ended September 30, 2011 and the nine months ended September 30, 2010 as a result of the net loss for these periods. In addition, potential shares related to our stock-based compensation plans as well as our 3.75% Exchangeable Senior Notes (“Exchangeable Notes”) are anti-dilutive for all periods presented. The following table summarizes the data that is excluded from the computation of net income (loss) per common share as a result of being anti-dilutive (in thousands):
 

11
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Noncontrolling interest in earnings of common unitholders
$
(868
)
 
$
—

 
$
(369
)
 
$
(620
)
Weighted average partnership Units outstanding
7,064

 
—

 
6,887

 
6,172

Other potential dilutive shares:
 
 
 
 
 
 
 
Anti-dilutive outstanding potential shares under fixed stock option plans
1,677

 
1,779

 
1,677

 
1,779

Anti-dilutive potential shares under the Exchangeable Notes
3,432

 
4,045

 
3,432

 
4,045

Outstanding participating securities
4,840

 
4,137

 
4,840

 
4,137


9.    Segment Reporting
We have three reportable operating segments, the first two of which consist of the ownership and rental of (i) office and (ii) industrial real estate investments. The operations of our office and industrial properties, along with our medical office and retail properties, are collectively referred to as “Rental Operations.” Our medical office and retail properties do not by themselves meet the quantitative thresholds for separate presentation as reportable segments. The third reportable segment consists of various real estate services such as property management, asset management, maintenance, leasing, development 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.
Other revenue consists of other operating revenues not identified with one of our operating segments. 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 our overall operating results based upon an industry performance measure referred to as Funds From Operations (“FFO”), which management believes is a useful indicator of our consolidated operating performance. FFO is used by industry analysts and investors as a supplemental operating performance measure of a REIT. The National Association of Real Estate Investment Trusts (“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. The most comparable GAAP measure is net income (loss) attributable to common shareholders. FFO attributable to common shareholders should not be considered as a substitute for net income (loss) attributable to common shareholders or any other measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other companies. FFO is calculated in accordance with the definition that was adopted by the Board of Governors of NAREIT. We do not allocate certain income and expenses (“Non-Segment Items”, as shown in the table below) to our operating segments. Thus, the operational performance measure presented here on a segment-level basis represents net earnings, excluding depreciation expense and the Non-Segment Items not allocated, and is not meant to present FFO as defined by NAREIT.
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 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 attributable to common shareholders, combined with net income (which remains the primary measure of performance), improves the understanding of operating results of REITs among the investing public and makes comparisons of REIT operating results more meaningful. Management believes that excluding gains or losses related to sales of previously depreciated real estate assets and excluding real estate asset depreciation and amortization enables investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assist them in comparing these operating results between periods or between different companies.

The following table shows (i) the revenues for each of the reportable segments and (ii) a reconciliation of FFO attributable to common shareholders to net income (loss) attributable to common shareholders for the three and nine months ended September 30, 2011 and 2010, respectively (in thousands):
 

12
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Revenues
 
 
 
 
 
 
 
Rental Operations:
 
 
 
 
 
 
 
Office
$
111,376

 
$
124,397

 
$
340,483

 
$
371,206

Industrial
98,874

 
84,249

 
290,219

 
212,832

Non-reportable Rental Operations segments
20,334

 
16,495

 
59,698

 
49,453

General contractor and service fee revenue (“Service Operations”)
127,708

 
132,351

 
409,617

 
414,391

Total Segment Revenues
358,292

 
357,492

 
1,100,017

 
1,047,882

Other Revenue
2,971

 
3,158

 
8,219

 
8,998

Consolidated Revenue from continuing operations
361,263

 
360,650

 
1,108,236

 
1,056,880

Discontinued Operations
1,341

 
11,385

 
7,506

 
38,276

Consolidated Revenue
$
362,604

 
$
372,035

 
$
1,115,742

 
$
1,095,156

Reconciliation of Funds From Operations
 
 
 
 
 
 
 
Net earnings excluding depreciation and Non-Segment Items
 
 
 
 
 
 
 
Office
$
62,768

 
$
72,015

 
$
191,787

 
$
213,409

Industrial
72,006

 
62,716

 
208,925

 
158,395

Non-reportable Rental Operations segments
13,115

 
10,729

 
38,513

 
32,884

Service Operations
7,161

 
7,698

 
30,437

 
21,958

 
155,050

 
153,158

 
469,662

 
426,646

Non-Segment Items:
 
 
 
 
 
 
 
Interest expense
(66,875
)
 
(61,491
)
 
(199,269
)
 
(175,076
)
Impairment charges
—

 
(1,860
)
 
—

 
(9,834
)
Interest and other income
172

 
149

 
543

 
504

Other operating expenses
(60
)
 
(580
)
 
(171
)
 
(1,002
)
General and administrative expenses
(9,493
)
 
(8,476
)
 
(29,231
)
 
(31,171
)
Undeveloped land carrying costs
(2,259
)
 
(2,359
)
 
(7,021
)
 
(7,152
)
Loss on debt transactions
—

 
(167
)
 
—

 
(16,294
)
Acquisition-related activity
(342
)
 
57,513

 
(1,525
)
 
57,513

Income tax benefit
194

 
1,126

 
194

 
1,126

Other non-segment income
1,934

 
2,552

 
4,456

 
6,274

Net (income) loss attributable to noncontrolling interests
825

 
(993
)
 
532

 
562

Noncontrolling interest share of FFO adjustments
(2,835
)
 
(2,018
)
 
(6,206
)
 
(6,611
)
Joint venture items
11,635

 
7,916

 
30,597

 
32,488

Dividends on preferred shares
(14,399
)
 
(16,726
)
 
(46,347
)
 
(53,452
)
Adjustments for redemption/repurchase of preferred shares
(3,633
)
 
(5,652
)
 
(3,796
)
 
(10,144
)
Discontinued operations
390

 
3,801

 
1,648

 
13,170

FFO attributable to common shareholders
70,304

 
125,893

 
214,066

 
227,547

Depreciation and amortization on continuing operations
(96,909
)
 
(94,487
)
 
(290,751
)
 
(253,209
)
Depreciation and amortization on discontinued operations
(426
)
 
(3,426
)
 
(1,678
)
 
(10,877
)
Company’s share of joint venture adjustments
(8,531
)
 
(7,336
)
 
(24,798
)
 
(27,271
)
Earnings from depreciated property sales on continuing operations
(1,437
)
 
(125
)
 
66,910

 
6,917

Earnings from depreciated property sales on discontinued operations
2,088

 
11,527

 
16,405

 
24,383

Earnings from depreciated property sales—share of joint venture
—

 
—

 
91

 
2,308

Noncontrolling interest share of FFO adjustments
2,835

 
2,018

 
6,206

 
6,611

Net income (loss) attributable to common shareholders
$
(32,076
)
 
$
34,064

 
$
(13,549
)
 
$
(23,591
)




13
The assets for each of the reportable segments as of September 30, 2011 and December 31, 2010 are as follows (in thousands):
 
 
September 30,
2011
 
December 31,
2010
Assets
 
 
 
Rental Operations:
 
 
 
Office
$
2,759,739

 
$
3,122,565

Industrial
3,388,125

 
3,210,566

Non-reportable Rental Operations segments
640,885

 
627,491

Service Operations
175,839

 
231,662

Total Segment Assets
6,964,588

 
7,192,284

Non-Segment Assets
540,073

 
451,992

Consolidated Assets
$
7,504,661

 
$
7,644,276


10.    Discontinued Operations and Assets Held for Sale
The following table illustrates the number of properties in discontinued operations:
 
 
Held for Sale at September 30, 2011
 
Sold in 2011
 
Sold in 2010
 
Total
 
 
 
 
 
 
 
 
Office
3
 
11
 
11
 
25
Industrial
0
 
3
 
6
 
9
Retail
0
 
0
 
2
 
2
 
3
 
14
 
19
 
36
We allocate 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 operations of the buildings reflected in discontinued operations for the three and nine months ended September 30, 2011 and 2010, respectively (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Revenues
$
1,341

 
$
11,385

 
$
7,506

 
$
38,276

Operating expenses
(640
)
 
(4,675
)
 
(3,751
)
 
(15,226
)
Depreciation and amortization
(426
)
 
(3,426
)
 
(1,678
)
 
(10,877
)
Operating income
275

 
3,284

 
2,077

 
12,173

Interest expense
(311
)
 
(2,909
)
 
(2,107
)
 
(9,880
)
Income (loss) before gain on sales
(36
)
 
375

 
(30
)
 
2,293

Gain on sale of depreciable properties
2,088

 
11,527

 
16,405

 
24,383

Income from discontinued operations
$
2,052

 
$
11,902

 
$
16,375

 
$
26,676


Dividends on preferred shares and adjustments for the redemption or repurchase of preferred shares are allocated entirely to continuing operations. The following table illustrates the allocation of the income (loss) attributable to common shareholders between continuing operations and discontinued operations, reflecting an allocation of income or loss attributable to noncontrolling interests between continuing and discontinued operations, for the three and nine months ended September 30, 2011 and 2010, respectively (in thousands):

14
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Income (loss) from continuing operations attributable to common shareholders
$
(34,072
)
 
$
22,417

 
$
(29,490
)
 
$
(49,583
)
Income from discontinued operations attributable to common shareholders
1,996

 
11,647

 
15,941

 
25,992

Net income (loss) attributable to common shareholders
$
(32,076
)
 
$
34,064

 
$
(13,549
)
 
$
(23,591
)

At September 30, 2011, we classified three in-service properties as held-for-sale, which were included in discontinued operations, due to our present intention to sell the properties in October 2011. The following table illustrates aggregate balance sheet information of the aforementioned three properties included in discontinued operations at September 30, 2011 (in thousands):
 
 
Real estate investment, net
$
18,466

Other assets
3,526

    Total assets held-for-sale
$
21,992

 
 
Accrued expenses
$
666

Other liabilities
291

    Total liabilities held-for-sale
$
957


11.    Subsequent Events
Declaration of Dividends
Our board of directors declared the following dividends at its regularly scheduled board meeting held on October 26, 2011:
 
Class
Quarterly
Amount/Share
 
Record Date
 
Payment Date
Common
$0.17
 
November 16, 2011
 
November 30, 2011
Preferred (per depositary share):

 

 

Series J
$0.414063
 
November 16, 2011
 
November 30, 2011
Series K
$0.406250
 
November 16, 2011
 
November 30, 2011
Series L
$0.412500
 
November 16, 2011
 
November 30, 2011
Series M
$0.434375
 
December 16, 2011
 
December 31, 2011
Series O
$0.523438
 
December 16, 2011
 
December 31, 2011

Portfolio Disposition Agreement
On October 20, 2011, we entered into a Purchase and Sale Agreement (the "Purchase Agreement"), pursuant to which we will sell a real estate portfolio consisting of 82 buildings that have an aggregate of 10.1 million square feet and comprise nearly all of our wholly owned office properties located in Atlanta, Chicago, Columbus, Dallas, Minneapolis, Orlando and Tampa. The purchase price, which was determined through arm's length negotiations between us and the buyer, will be $1.08 billion and we expect to recognize a net gain on sale. As of October 20, 2011, the Buyer had paid a nonrefundable earnest money deposit of $40.0 million. The closing of the transactions contemplated by the Purchase Agreement is subject to the satisfaction of certain customary closing conditions. Although there are no assurances that the conditions will be met or that the transaction will be consummated, the parties to the Purchase Agreement anticipate that the closing will occur on or about December 1, 2011.

15
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 Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2011. As used herein, the terms “we”, “us” and “our” refer to Duke Realty Corporation (the “Company”) and those entities owned or controlled by the Company.
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,” 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, without limitation, the continuing impact of the economic down-turn, which is having and may continue to have a negative effect on the fundamentals of our business, the financial condition of our tenants, and the value of our real estate assets;
•
Our 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 our 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, climate change 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 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.
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 Part II, Item 1A of this Report, and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which we filed with the SEC on February 25, 2011. 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
We are a self-administered and self-managed REIT that began operations through a related entity in 1972. A more complete description of our business, and of management’s philosophy and priorities, is included in our 2010 Annual Report on Form 10-K.


16
As of September 30, 2011, we:

•
Owned or jointly controlled 807 industrial, office, medical office and other properties, of which 799 properties with approximately 141.3 million square feet are in service and eight properties with more than 1.3 million square feet are under development. The 799 in-service properties are comprised of 672 consolidated properties with approximately 115.8 million square feet and 127 jointly controlled unconsolidated properties with approximately 25.5 million square feet. The eight properties under development consist of six consolidated properties with approximately 666,000 square feet and two jointly controlled unconsolidated properties with approximately 679,000 square feet.
•
Owned, including through ownership interests in unconsolidated joint ventures, more than 4,750 acres of land and controlled an additional 1,650 acres through purchase options.
We have three reportable operating segments, the first two of which consist of the ownership and rental of (i) office and (ii) industrial real estate investments. The operations of our office and industrial properties, along with our medical office and retail properties, are collectively referred to as “Rental Operations.” Our medical office and retail properties do not by themselves meet the quantitative thresholds for separate presentation as reportable segments. The third reportable segment consists of various real estate services such as property management, asset management, maintenance, leasing, development 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.
A key component of our overall strategy is to increase our investment in quality industrial properties in both existing and select new markets, expand our medical office portfolio nationally to take advantage of demographic trends and to reduce our investment in suburban office properties and other non-strategic assets.
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 for future revenues.

Occupancy Analysis
Our ability to maintain high occupancy rates is a principal driver of maintaining and increasing rental revenue from continuing operations. The following table sets forth occupancy information regarding our in-service portfolio of consolidated rental properties as of September 30, 2011 and 2010, respectively (in thousands, except percentage data):
 
 
Total Square Feet
 
Percent of
Total Square Feet
 
Percent Occupied
Type
2011
 
2010
 
2011
 
2010
 
2011
 
2010
Industrial
86,746

 
77,495

 
74.9
%
 
69.8
%
 
92.9
%
 
91.2
%
Office
26,059

 
30,734

 
22.5
%
 
27.7
%
 
84.6
%
 
85.8
%
Other (Medical Office and Retail)
2,986

 
2,725

 
2.6
%
 
2.5
%
 
86.3
%
 
83.8
%
Total
115,791

 
110,954

 
100.0
%
 
100.0
%
 
90.9
%
 
89.5
%

Lease Expiration and Renewals
Our ability to maintain and improve occupancy rates primarily depends upon our continuing ability to re-lease expiring space. The following table reflects our consolidated in-service portfolio lease expiration schedule by property type as of September 30, 2011. The table indicates square footage and annualized net effective rents (based on September 30, 2011 rental revenue) under expiring leases (in thousands, except percentage data):
 

17
 
Total Consolidated Portfolio
 
Industrial
 
Office
 
Other
Year of
Expiration
Square
Feet
 
Ann. Rent
Revenue
 
% of
Revenue
 
Square
Feet
 
Ann. Rent
Revenue
 
Square
Feet
 
Ann. Rent
Revenue
 
Square
Feet
 
Ann.  Rent Revenue
Remainder of 2011
3,623

 
$
20,942

 
3
%
 
2,820

 
$
11,587

 
790

 
$
9,214

 
13

 
$
141

2012
7,825

 
55,166

 
8
%
 
5,276

 
22,387

 
2,492

 
31,782

 
57

 
997

2013
16,498

 
100,582

 
15
%
 
13,004

 
51,731

 
3,445

 
47,928

 
49

 
923

2014
12,706

 
74,340

 
11
%
 
9,922

 
37,753

 
2,638

 
33,918

 
146

 
2,669

2015
13,370

 
77,006

 
12
%
 
10,497

 
40,674

 
2,843

 
35,709

 
30

 
623

2016
12,496

 
67,315

 
10
%
 
10,190

 
37,083

 
2,200

 
27,984

 
106

 
2,248

2017
9,079

 
55,763

 
8
%
 
7,079

 
27,649

 
1,693

 
21,651

 
307

 
6,463

2018
6,129

 
51,962

 
8
%
 
3,824

 
15,445

 
1,761

 
23,979

 
544

 
12,538

2019
4,163

 
39,582

 
6
%
 
2,301

 
10,242

 
1,595

 
22,794

 
267

 
6,546

2020
6,658

 
43,512

 
7
%
 
5,286

 
19,901

 
1,000

 
15,904

 
372

 
7,707

2021 and Thereafter
12,685

 
77,597

 
12
%
 
10,404

 
40,059

 
1,595

 
21,367

 
686

 
16,171

Total Leased
105,232

 
$
663,767

 
100
%
 
80,603

 
$
314,511

 
22,052

 
$
292,230

 
2,577

 
$
57,026

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Portfolio Square Feet
115,791

 
 
 
 
 
86,746

 
 
 
26,059

 
 
 
2,986

 
 
Percent Occupied
90.9
%
 
 
 
 
 
92.9
%
 
 
 
84.6
%
 
 
 
86.3
%
 
 
Within our consolidated properties, we renewed 74.4% and 64.1% of our leases up for renewal in the three and nine months ended September 30, 2011, totaling approximately 2.2 million and 7.2 million square feet, respectively. This compares to renewals of 75.8% and 80.5% for the three and nine months ended September 30, 2010, which totaled approximately 2.7 million and 7.5 million square feet, respectively. Although our lease renewal percentage declined from the same periods in 2010, new leasing activity enabled us to improve occupancy within our consolidated properties. There was a 1.8% increase and a 4.2% decline in average contractual rents on these renewals in the three and nine months ended September 30, 2011, respectively.
The average term of renewals for the three and nine months ended September 30, 2011 was 3.5 and 4.1 years, compared to 5.4 and 6.0 years for the three and nine months ended September 30, 2010, respectively.

Acquisition and Disposition Activity

For the nine months ended September 30, 2011, we acquired 30 properties and other real estate-related assets, for $366.7 million, with 16 of these properties representing the completion of our acquisition of a portfolio of buildings in South Florida (the “Premier Portfolio”). The initial 39 properties from the Premier Portfolio were acquired on December 30, 2010. These acquisitions represent further advancement of our strategy to increase our concentration in industrial properties.

On July 1, 2010, we acquired our joint venture partner's 50% interest in Dugan Realty, L.L.C. ("Dugan"), a real estate joint venture that we had previously accounted for using the equity method, for a payment of $166.3 million. Dugan held $28.1 million of cash at the time of acquisition, which resulted in a net cash outlay of $138.2 million. At the date of acquisition, Dugan owned 106 industrial buildings totaling 20.8 million square feet and 62.6 net acres of undeveloped land located in Midwest and Southeast markets. The total acquisition date fair value of Dugan's assets was $638.2 million and we also assumed liabilities, including secured debt, having a total fair value of $305.7 million.

Additionally, in the nine months ended September 30, 2010, we also acquired six properties for a total purchase price of $185.5 million. These acquisitions consisted of two suburban office properties and two bulk industrial properties in South Florida, one bulk industrial property in Phoenix, Arizona, and one bulk industrial property in Columbus, Ohio. Also, in the first nine months of 2010, one of our unconsolidated joint ventures, in which we have a 20% equity interest, acquired two properties for $42.3 million. We contributed $8.6 million to the joint venture for our share of these acquisitions.

Net cash proceeds related to the dispositions of wholly owned undeveloped land and buildings totaled $504.7 million and $200.4 million for the nine months ended September 30, 2011 and 2010, respectively. Included in the wholly owned building dispositions in the nine months ended September 30, 2011 is the sale of 13 suburban office properties for net proceeds of $273.7 million, totaling approximately 2.0 million square feet, to a joint venture in which we own 20%.

Our share of proceeds from sales of properties within unconsolidated joint ventures in which we have less than a 100% interest totaled $4.7 million for the nine months ended September 30, 2010. There were no such dispositions in the same period in

18
2011.

We regularly work to identify, consider and pursue opportunities to acquire and dispose of properties on an opportunistic basis and on a basis that is generally consistent with our strategic plans.
Development
At September 30, 2011, we had 1.3 million square feet of property under development with total estimated costs upon completion of $237.4 million compared to 3.5 million square feet with total costs upon completion of $356.1 million at September 30, 2010. We have continued to limit our development projects to build-to-suit or partially pre-leased properties and select medical office developments. The square footage and estimated costs include both consolidated and joint venture development activity at 100%.
The following table summarizes our properties under development as of September 30, 2011 (in thousands, except percentage data):
 
Ownership Type
Square
Feet
 
Percent
Leased
 
Total
Estimated
Project
Costs

 
Total
Incurred
to Date

 
Amount
Remaining
to be Spent

Consolidated properties
666
 
86%
 
$
128,525

 
$
25,808

 
$
102,717

Joint venture properties
679
 
100%
 
108,880

 
18,959

 
89,921

Total
1,345
 
94%
 
$
237,405

 
$
44,767

 
$
192,638


Funds From Operations
Funds From Operations (“FFO”) is used by industry analysts and investors as a supplemental operating performance measure of a REIT. The National Association of Real Estate Investment Trusts (“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 accounting principles generally accepted in the United States of America (“GAAP”). FFO is a non-GAAP financial measure. The most comparable GAAP measure is net income (loss) attributable to common shareholders. FFO attributable to common shareholders should not be considered as a substitute for net income (loss) attributable to common shareholders or any other measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other companies. FFO is calculated in accordance with the definition that was adopted by the Board of Governors of NAREIT.
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 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 attributable to common shareholders, combined with net income (which remains the primary measure of performance), improves the understanding of operating results of REITs among the investing public and makes comparisons of REIT operating results more meaningful. Management believes that excluding gains or losses related to sales of previously depreciated real estate assets and excluding real estate asset depreciation and amortization enables investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assist them in comparing these operating results between periods or between different companies.
The following table shows a reconciliation of net income (loss) attributable to common shareholders to the calculation of FFO attributable to common shareholders for the three and nine months ended September 30, 2011 and 2010, respectively (in thousands):

19
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Net income (loss) attributable to common shareholders
$
(32,076
)
 
$
34,064

 
$
(13,549
)
 
$
(23,591
)
Adjustments:
 
 
 
 
 
 
 
Depreciation and amortization
97,335

 
97,913

 
292,429

 
264,086

Company share of joint venture depreciation and amortization
8,531

 
7,336

 
24,798

 
27,271

Earnings from depreciable property sales—wholly owned
(651
)
 
(11,402
)
 
(83,315
)
 
(31,300
)
Earnings from depreciable property sales—share of joint venture
—

 
—

 
(91
)
 
(2,308
)
Noncontrolling interest share of adjustments
(2,835
)
 
(2,018
)
 
(6,206
)
 
(6,611
)
Funds From Operations attributable to common shareholders
$
70,304

 
$
125,893

 
$
214,066

 
$
227,547


Results of Operations
A summary of our operating results and property statistics for the three and nine months ended September 30, 2011 and 2010, respectively, is as follows (in thousands, except number of properties and per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Rental and related revenue
$
233,555

 
$
228,299

 
$
698,619

 
$
642,489

General contractor and service fee revenue
127,708

 
132,351

 
409,617

 
414,391

Operating income
49,930

 
48,403

 
219,744

 
144,994

Net income (loss) attributable to common shareholders
(32,076
)
 
34,064

 
(13,549
)
 
(23,591
)
Weighted average common shares outstanding
252,802

 
251,866

 
252,618

 
234,468

Weighted average common shares and potential dilutive securities
252,802

 
257,383

 
252,618

 
234,468

Basic income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
(0.14
)
 
$
0.08

 
$
(0.13
)
 
$
(0.22
)
Discontinued operations
$
0.01

 
$
0.05

 
$
0.07

 
$
0.11

Diluted income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
(0.14
)
 
$
0.08

 
$
(0.13
)
 
$
(0.22
)
Discontinued operations
$
0.01

 
$
0.05

 
$
0.07

 
$
0.11

Number of in-service consolidated properties at end of period
672

 
633

 
672

 
633

In-service consolidated square footage at end of period
115,791

 
110,954

 
115,791

 
110,954

Number of in-service joint venture properties at end of period
127

 
108