DRE/DRLP.2Q.10Q.2012
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2012
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-9044 (Duke Realty Corporation) 0-20625 (Duke Realty Limited Partnership)
DUKE REALTY CORPORATION
DUKE REALTY LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)
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Indiana (Duke Realty Corporation) | | 35-1740409 (Duke Realty Corporation) |
Indiana (Duke Realty Limited Partnership) | | 35-1898425 (Duke Realty Limited Partnership) |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
600 East 96thStreet, Suite 100 Indianapolis, Indiana | | 46240 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (317) 808-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
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Duke Realty Corporation | Yes x | No ¨ | | Duke Realty Limited Partnership | 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). |
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Duke Realty Corporation | Yes x | No ¨ | | Duke Realty Limited Partnership | 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.
Duke Realty Corporation: |
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Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Duke Realty Limited Partnership: |
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Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
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| | | | | | |
Duke Realty Corporation | Yes ¨ | No x | | Duke Realty Limited Partnership | 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:
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| | |
Class | | Outstanding at August 3, 2012 |
Common Stock, $.01 par value per share | | 269,694,573 |
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2012 of both Duke Realty Corporation and Duke Realty Limited Partnership. Unless stated otherwise or the context otherwise requires, references to “Duke Realty Corporation” or the “General Partner” mean Duke Realty Corporation and its consolidated subsidiaries; and references to the “Partnership” mean Duke Realty Limited Partnership and its consolidated subsidiaries. The terms the “Company,” “we,” “us” and “our” refer to the General Partner and the Partnership, collectively, and those entities owned or controlled by the General Partner and/or the Partnership.
Duke Realty Corporation is a self-administered and self-managed real estate investment trust (“REIT”) and is the sole general partner of the Partnership, owning 98.3% of the common partnership interests of the Partnership (“General Partner Units”) as of June 30, 2012. The remaining 1.7% of the common partnership interests (“Limited Partner Units” and, together with the General Partner Units, the “Common Units”) are owned by limited partners. As the sole general partner of the Partnership, the General Partner has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Partnership. The General Partner also owns preferred partnership interests in the Partnership (“Preferred Units”).
The General Partner and the Partnership are operated as one enterprise. The management of the General Partner consists of the same members as the management of the Partnership. As the sole general partner with control of the Partnership, the General Partner consolidates the Partnership for financial reporting purposes, and the General Partner does not have any significant assets other than its investment in the Partnership. Therefore, the assets and liabilities of the General Partner and the Partnership are substantially the same.
We believe combining the quarterly reports on Form 10-Q of the General Partner and the Partnership into this single report results in the following benefits:
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• | enhances investors' understanding of the General Partner and the Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business; |
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• | eliminates duplicative disclosure and provides a more streamlined and readable presentation of information since a substantial portion of the Company's disclosure applies to both the General Partner and the Partnership; and |
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• | creates time and cost efficiencies through the preparation of one combined report instead of two separate reports. |
We believe it is important to understand the few differences between the General Partner and the Partnership in the context of how we operate as an interrelated consolidated company. The General Partner's only material asset is its ownership of partnership interests in the Partnership. As a result, the General Partner does not conduct business itself, other than acting as the sole general partner of the Partnership and issuing public equity from time to time. The General Partner itself does not issue any indebtedness, but does guarantee the unsecured debt of the Partnership. The Partnership holds substantially all the assets of the business, directly or indirectly, and holds the ownership interests related to certain of the Company's investments. The Partnership conducts the operations of the business and has no publicly traded equity. Except for net proceeds from equity issuances by the General Partner, which are contributed to the Partnership in exchange for General Partner Units or Preferred Units, the Partnership generates the capital required by the business through its operations, its incurrence of indebtedness and the issuance of Limited Partnership Units to third parties.
Noncontrolling interests, shareholders' equity and partners' capital are the main areas of difference between the consolidated financial statements of the General Partner and those of the Partnership. The noncontrolling interests in the Partnership's financial statements include the interests in consolidated investees not wholly owned by the Partnership. The noncontrolling interests in the General Partner's financial statements include the same noncontrolling interests at the Partnership level, as well as the common limited partnership interests in the Partnership, which are accounted for as partners' capital by the Partnership.
In order to highlight the differences between the General Partner and the Partnership, there are separate sections in this report, as applicable, that separately discuss the General Partner and the Partnership including separate financial statements, and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the General Partner and the Partnership, this report refers to actions or holdings as being actions or holdings of the Company.
DUKE REALTY CORPORATION/DUKE REALTY LIMITED PARTNERSHIP
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| Duke Realty Corporation: | |
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| Duke Realty Limited Partnership: | |
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| Duke Realty Corporation and Duke Realty Limited Partnership: | |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
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| | | | | | | |
| June 30, 2012 | | December 31, 2011 |
| (Unaudited) | | |
| | | |
ASSETS | | | |
Real estate investments: | | | |
Land and improvements | $ | 1,234,013 |
| | $ | 1,202,872 |
|
Buildings and tenant improvements | 4,925,527 |
| | 4,766,793 |
|
Construction in progress | 165,893 |
| | 44,259 |
|
Investments in and advances to unconsolidated companies | 368,000 |
| | 364,859 |
|
Undeveloped land | 622,457 |
| | 622,635 |
|
| 7,315,890 |
| | 7,001,418 |
|
Accumulated depreciation | (1,199,073 | ) | | (1,108,650 | ) |
Net real estate investments | 6,116,817 |
| | 5,892,768 |
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| | | |
Real estate investments and other assets held-for-sale | 11,733 |
| | 55,580 |
|
| | | |
Cash and cash equivalents | 106,565 |
| | 213,809 |
|
Accounts receivable, net of allowance of $2,753 and $3,597 | 19,618 |
| | 22,255 |
|
Straight-line rent receivable, net of allowance of $6,565 and $7,447 | 112,255 |
| | 105,900 |
|
Receivables on construction contracts, including retentions | 32,969 |
| | 40,247 |
|
Deferred financing costs, net of accumulated amortization of $45,667 and $59,109 | 41,231 |
| | 42,268 |
|
Deferred leasing and other costs, net of accumulated amortization of $337,543 and $292,334 | 460,079 |
| | 460,881 |
|
Escrow deposits and other assets | 166,823 |
| | 170,729 |
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| $ | 7,068,090 |
| | $ | 7,004,437 |
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LIABILITIES AND EQUITY | | | |
Indebtedness: | | | |
Secured debt | $ | 1,101,195 |
| | $ | 1,173,233 |
|
Unsecured notes | 2,915,155 |
| | 2,616,063 |
|
Unsecured lines of credit | 20,293 |
| | 20,293 |
|
| 4,036,643 |
| | 3,809,589 |
|
| | | |
Liabilities related to real estate investments held-for-sale | 379 |
| | 975 |
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| | | |
Construction payables and amounts due subcontractors, including retentions | 60,931 |
| | 55,775 |
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Accrued real estate taxes | 85,779 |
| | 69,272 |
|
Accrued interest | 59,506 |
| | 58,904 |
|
Other accrued expenses | 37,506 |
| | 60,174 |
|
Other liabilities | 125,890 |
| | 131,735 |
|
Tenant security deposits and prepaid rents | 42,078 |
| | 38,355 |
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Total liabilities | 4,448,712 |
| | 4,224,779 |
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Shareholders’ equity: | | | |
Preferred shares ($.01 par value); 5,000 shares authorized; 2,503 and 3,176 shares issued and outstanding | 625,638 |
| | 793,910 |
|
Common shares ($.01 par value); 400,000 shares authorized; 267,523 and 252,927 shares issued and outstanding | 2,675 |
| | 2,529 |
|
Additional paid-in capital | 3,783,746 |
| | 3,594,588 |
|
Accumulated other comprehensive income | 1,767 |
| | 987 |
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Distributions in excess of net income | (1,833,088 | ) | | (1,677,328 | ) |
Total shareholders’ equity | 2,580,738 |
| | 2,714,686 |
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Noncontrolling interests | 38,640 |
| | 64,972 |
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Total equity | 2,619,378 |
| | 2,779,658 |
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| $ | 7,068,090 |
| | $ | 7,004,437 |
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See accompanying Notes to Consolidated Financial Statements
DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three and six months ended June 30,
(in thousands, except per share amounts)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenues: | | | | | | | |
Rental and related revenue | $ | 205,008 |
| | $ | 180,009 |
| | $ | 407,678 |
| | $ | 370,438 |
|
General contractor and service fee revenue | 63,607 |
| | 135,362 |
| | 132,575 |
| | 281,909 |
|
| 268,615 |
| | 315,371 |
| | 540,253 |
| | 652,347 |
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Expenses: | | | | | | | |
Rental expenses | 34,795 |
| | 32,712 |
| | 71,846 |
| | 73,136 |
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Real estate taxes | 28,071 |
| | 26,147 |
| | 56,608 |
| | 53,540 |
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General contractor and other services expenses | 57,879 |
| | 122,969 |
| | 121,800 |
| | 258,633 |
|
Depreciation and amortization | 92,721 |
| | 83,351 |
| | 184,084 |
| | 161,057 |
|
| 213,466 |
| | 265,179 |
| | 434,338 |
| | 546,366 |
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Other operating activities: | | | | | | | |
Equity in earnings of unconsolidated companies | 267 |
| | 1,713 |
| | 1,776 |
| | 2,786 |
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Gain on sale of properties | 119 |
| | 492 |
| | (158 | ) | | 68,348 |
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Undeveloped land carrying costs | (2,168 | ) | | (2,453 | ) | | (4,466 | ) | | (4,762 | ) |
Other operating expenses | (196 | ) | | (26 | ) | | (461 | ) | | (111 | ) |
General and administrative expenses | (11,594 | ) | | (8,541 | ) | | (23,433 | ) | | (19,738 | ) |
| (13,572 | ) | | (8,815 | ) | | (26,742 | ) | | 46,523 |
|
Operating income | 41,577 |
| | 41,377 |
| | 79,173 |
| | 152,504 |
|
Other income (expenses): | | | | | | | |
Interest and other income, net | 98 |
| | 284 |
| | 244 |
| | 371 |
|
Interest expense | (61,220 | ) | | (53,814 | ) | | (122,138 | ) | | (106,461 | ) |
Acquisition-related activity | (1,029 | ) | | (594 | ) | | (1,609 | ) | | (1,183 | ) |
Income (loss) from continuing operations | (20,574 | ) | | (12,747 | ) | | (44,330 | ) | | 45,231 |
|
Discontinued operations: | | | | | | | |
Loss before gain on sales | (249 | ) | | (3,824 | ) | | (1,079 | ) | | (8,616 | ) |
Gain on sale of depreciable properties | 3,095 |
| | 2,713 |
| | 9,571 |
| | 14,316 |
|
Income (loss) from discontinued operations | 2,846 |
| | (1,111 | ) | | 8,492 |
| | 5,700 |
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Net income (loss) | (17,728 | ) | | (13,858 | ) | | (35,838 | ) | | 50,931 |
|
Dividends on preferred shares | (11,082 | ) | | (15,974 | ) | | (24,275 | ) | | (31,948 | ) |
Adjustments for redemption/repurchase of preferred shares | — |
| | — |
| | (5,730 | ) | | (163 | ) |
Net (income) loss attributable to noncontrolling interests | 328 |
| | 790 |
| | 971 |
| | (293 | ) |
Net income (loss) attributable to common shareholders | $ | (28,482 | ) | | $ | (29,042 | ) | | $ | (64,872 | ) | | $ | 18,527 |
|
Basic net income (loss) per common share: | | | | | | | |
Continuing operations attributable to common shareholders | $ | (0.12 | ) | | $ | (0.11 | ) | | $ | (0.28 | ) | | $ | 0.05 |
|
Discontinued operations attributable to common shareholders | 0.01 |
| | (0.01 | ) | | 0.03 |
| | 0.02 |
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Total | $ | (0.11 | ) | | $ | (0.12 | ) | | $ | (0.25 | ) | | $ | 0.07 |
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Diluted net income (loss) per common share: | | | | | | | |
Continuing operations attributable to common shareholders | $ | (0.12 | ) | | $ | (0.11 | ) | | $ | (0.28 | ) | | $ | 0.05 |
|
Discontinued operations attributable to common shareholders | 0.01 |
| | (0.01 | ) | | 0.03 |
| | 0.02 |
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Total | $ | (0.11 | ) | | $ | (0.12 | ) | | $ | (0.25 | ) | | $ | 0.07 |
|
Weighted average number of common shares outstanding | 266,748 |
| | 252,640 |
| | 262,556 |
| | 252,524 |
|
Weighted average number of common shares and potential dilutive securities | 266,748 |
| | 252,640 |
| | 262,556 |
| | 259,390 |
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| | | | | | | |
Comprehensive income (loss): | | | | | | | |
Net income (loss) | $ | (17,728 | ) | | $ | (13,858 | ) | | $ | (35,838 | ) | | $ | 50,931 |
|
Other comprehensive income: | | | | | | | |
Derivative instrument activity | 261 |
| | 717 |
| | 780 |
| | 1,488 |
|
Other comprehensive income | 261 |
| | 717 |
| | 780 |
| | 1,488 |
|
Comprehensive income (loss) | $ | (17,467 | ) | | $ | (13,141 | ) | | $ | (35,058 | ) | | $ | 52,419 |
|
See accompanying Notes to Consolidated Financial Statements
DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30,
(in thousands)
(Unaudited)
|
| | | | | | | |
| 2012 | | 2011 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (35,838 | ) | | $ | 50,931 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation of buildings and tenant improvements | 127,482 |
| | 135,809 |
|
Amortization of deferred leasing and other costs | 57,717 |
| | 59,285 |
|
Amortization of deferred financing costs | 6,526 |
| | 7,351 |
|
Straight-line rent adjustment | (8,870 | ) | | (11,887 | ) |
Earnings from land and depreciated property sales | (9,413 | ) | | (82,664 | ) |
Third-party construction contracts, net | (4,371 | ) | | (25,658 | ) |
Other accrued revenues and expenses, net | (2,251 | ) | | 263 |
|
Operating distributions received in excess of equity in earnings from unconsolidated companies | 9,464 |
| | 10,862 |
|
Net cash provided by operating activities | 140,446 |
| | 144,292 |
|
Cash flows from investing activities: | | | |
Development of real estate investments | (95,192 | ) | | (78,645 | ) |
Acquisition of real estate investments and related intangible assets | (231,041 | ) | | (99,817 | ) |
Acquisition of undeveloped land | (33,371 | ) | | — |
|
Second generation tenant improvements, leasing costs and building improvements | (30,891 | ) | | (41,284 | ) |
Other deferred leasing costs | (16,453 | ) | | (13,807 | ) |
Other assets | 4,421 |
| | 3,149 |
|
Proceeds from land and depreciated property sales, net | 89,450 |
| | 498,249 |
|
Capital distributions from unconsolidated companies | — |
| | 54,730 |
|
Capital contributions and advances to unconsolidated companies, net | (16,431 | ) | | (16,917 | ) |
Net cash provided by (used for) investing activities | (329,508 | ) | | 305,658 |
|
Cash flows from financing activities: | | | |
Proceeds from issuance of common shares, net | 151,258 |
| | — |
|
Payments for redemption/repurchase of preferred shares | (168,272 | ) | | (2,096 | ) |
Proceeds from unsecured debt issuance | 300,000 |
| | — |
|
Payments on and repurchases of unsecured debt | (908 | ) | | (43,377 | ) |
Proceeds from secured debt financings | 13,305 |
| | — |
|
Payments on secured indebtedness including principal amortization | (102,869 | ) | | (7,968 | ) |
Payments on lines of credit, net | — |
| | (174,717 | ) |
Distributions to common shareholders | (89,219 | ) | | (85,843 | ) |
Distributions to preferred shareholders | (20,549 | ) | | (31,948 | ) |
Contributions from (distributions to) noncontrolling interests, net | 3,647 |
| | (2,398 | ) |
Deferred financing costs | (4,575 | ) | | (2,342 | ) |
Net cash provided by (used for) financing activities | 81,818 |
| | (350,689 | ) |
Net increase (decrease) in cash and cash equivalents | (107,244 | ) | | 99,261 |
|
Cash and cash equivalents at beginning of period | 213,809 |
| | 18,384 |
|
Cash and cash equivalents at end of period | $ | 106,565 |
| | $ | 117,645 |
|
Non-cash investing and financing activities: | | | |
Assumption of indebtedness and other liabilities in real estate acquisitions | $ | 20,064 |
| | $ | 130,474 |
|
Contribution of properties to unconsolidated companies | $ | — |
| | $ | 52,868 |
|
Conversion of Limited Partner Units to common shares | $ | 29,008 |
| | $ | 1,235 |
|
Issuance of Limited Partner Units for acquisition | $ | — |
| | $ | 28,357 |
|
Preferred distributions declared but not paid | $ | 3,726 |
| | $ | — |
|
See accompanying Notes to Consolidated Financial Statements
DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the six months ended June 30, 2012
(in thousands, except per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shareholders | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income | | Distributions in Excess of Net Income | | Non- Controlling Interests | | Total |
Balance at December 31, 2011 | $ | 793,910 |
| | $ | 2,529 |
| | $ | 3,594,588 |
| | $ | 987 |
| | $ | (1,677,328 | ) | | $ | 64,972 |
| | $ | 2,779,658 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (34,867 | ) | | (971 | ) | | (35,838 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | 780 |
| | — |
| | — |
| | 780 |
|
Issuance of common shares |
|
| | 111 |
| | 150,675 |
| |
|
| | — |
| |
|
| | 150,786 |
|
Stock based compensation plan activity | — |
| | 11 |
| | 3,769 |
| | — |
| | (1,669 | ) | | — |
| | 2,111 |
|
Conversion of Limited Partner Units | — |
| | 24 |
| | 28,984 |
| | — |
| | — |
| | (29,008 | ) | | — |
|
Distributions to preferred shareholders | — |
| | — |
| | — |
| | — |
| | (24,275 | ) | | — |
| | (24,275 | ) |
Redemption of preferred shares | (168,272 | ) | | — |
| | 5,730 |
| | — |
| | (5,730 | ) | | — |
| | (168,272 | ) |
Distributions to common shareholders ($0.34 per share) | — |
| | — |
| | — |
| | — |
| | (89,219 | ) | | — |
| | (89,219 | ) |
Contributions from noncontrolling interests, net | — |
| | — |
| | — |
| | — |
| | — |
| | 3,647 |
| | 3,647 |
|
Balance at June 30, 2012 | $ | 625,638 |
| | $ | 2,675 |
| | $ | 3,783,746 |
| | $ | 1,767 |
| | $ | (1,833,088 | ) | | $ | 38,640 |
| | $ | 2,619,378 |
|
See accompanying Notes to Consolidated Financial Statements
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
|
| | | | | | | |
| June 30, 2012 | | December 31, 2011 |
| (Unaudited) | | |
| | | |
ASSETS | | | |
Real estate investments: | | | |
Land and improvements | $ | 1,234,013 |
| | $ | 1,202,872 |
|
Buildings and tenant improvements | 4,925,527 |
| | 4,766,793 |
|
Construction in progress | 165,893 |
| | 44,259 |
|
Investments in and advances to unconsolidated companies | 368,000 |
| | 364,859 |
|
Undeveloped land | 622,457 |
| | 622,635 |
|
| 7,315,890 |
| | 7,001,418 |
|
Accumulated depreciation | (1,199,073 | ) | | (1,108,650 | ) |
Net real estate investments | 6,116,817 |
| | 5,892,768 |
|
| | | |
Real estate investments and other assets held-for-sale | 11,733 |
| | 55,580 |
|
| | | |
Cash and cash equivalents | 106,565 |
| | 213,826 |
|
Accounts receivable, net of allowance of $2,753 and $3,597 | 19,618 |
| | 22,255 |
|
Straight-line rent receivable, net of allowance of $6,565 and $7,447 | 112,255 |
| | 105,900 |
|
Receivables on construction contracts, including retentions | 32,969 |
| | 40,247 |
|
Deferred financing costs, net of accumulated amortization of $45,667 and $59,109 | 41,231 |
| | 42,268 |
|
Deferred leasing and other costs, net of accumulated amortization of $337,543 and $292,334 | 460,079 |
| | 460,881 |
|
Escrow deposits and other assets | 166,823 |
| | 170,257 |
|
| $ | 7,068,090 |
| | $ | 7,003,982 |
|
LIABILITIES AND EQUITY | | | |
Indebtedness: | | | |
Secured debt | $ | 1,101,195 |
| | $ | 1,173,233 |
|
Unsecured notes | 2,915,155 |
| | 2,616,063 |
|
Unsecured lines of credit | 20,293 |
| | 20,293 |
|
| 4,036,643 |
| | 3,809,589 |
|
| | | |
Liabilities related to real estate investments held-for-sale | 379 |
| | 975 |
|
| | | |
Construction payables and amounts due subcontractors, including retentions | 60,931 |
| | 55,775 |
|
Accrued real estate taxes | 85,779 |
| | 69,272 |
|
Accrued interest | 59,506 |
| | 58,904 |
|
Other accrued expenses | 37,598 |
| | 59,795 |
|
Other liabilities | 125,890 |
| | 131,735 |
|
Tenant security deposits and prepaid rents | 42,078 |
| | 38,355 |
|
Total liabilities | 4,448,804 |
| | 4,224,400 |
|
Partners’ equity: | | | |
General Partner: | | | |
Common equity (267,523 and 252,927 General Partner Units issued and outstanding) | 1,957,414 |
| | 1,923,886 |
|
Preferred equity (2,503 and 3,176 Preferred Units issued and outstanding) | 625,638 |
| | 793,910 |
|
| 2,583,052 |
| | 2,717,796 |
|
Limited Partners' common equity (4,511 and 6,945 Limited Partner Units issued and outstanding) | 24,213 |
| | 56,254 |
|
Accumulated other comprehensive income | 1,767 |
| | 987 |
|
Total partners’ equity | 2,609,032 |
| | 2,775,037 |
|
Noncontrolling interests | 10,254 |
| | 4,545 |
|
Total equity | 2,619,286 |
| | 2,779,582 |
|
| $ | 7,068,090 |
| | $ | 7,003,982 |
|
See accompanying Notes to Consolidated Financial Statements
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three and six months ended June 30,
(in thousands, except per unit amounts)
(Unaudited) |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenues: | | | | | | | |
Rental and related revenue | $ | 205,008 |
| | $ | 180,009 |
| | $ | 407,678 |
| | $ | 370,438 |
|
General contractor and service fee revenue | 63,607 |
| | 135,362 |
| | 132,575 |
| | 281,909 |
|
| 268,615 |
| | 315,371 |
| | 540,253 |
| | 652,347 |
|
Expenses: | | | | | | | |
Rental expenses | 34,795 |
| | 32,712 |
| | 71,846 |
| | 73,136 |
|
Real estate taxes | 28,071 |
| | 26,147 |
| | 56,608 |
| | 53,540 |
|
General contractor and other services expenses | 57,879 |
| | 122,969 |
| | 121,800 |
| | 258,633 |
|
Depreciation and amortization | 92,721 |
| | 83,351 |
| | 184,084 |
| | 161,057 |
|
| 213,466 |
| | 265,179 |
| | 434,338 |
| | 546,366 |
|
Other operating activities: | | | | | | | |
Equity in earnings of unconsolidated companies | 267 |
| | 1,713 |
| | 1,776 |
| | 2,786 |
|
Gain on sale of properties | 119 |
| | 492 |
| | (158 | ) | | 68,348 |
|
Undeveloped land carrying costs | (2,168 | ) | | (2,453 | ) | | (4,466 | ) | | (4,762 | ) |
Other operating expenses | (196 | ) | | (26 | ) | | (461 | ) | | (111 | ) |
General and administrative expense | (11,594 | ) | | (8,541 | ) | | (23,433 | ) | | (19,738 | ) |
| (13,572 | ) | | (8,815 | ) | | (26,742 | ) | | 46,523 |
|
Operating income | 41,577 |
| | 41,377 |
| | 79,173 |
| | 152,504 |
|
Other income (expenses): | | | | | | | |
Interest and other income, net | 98 |
| | 284 |
| | 244 |
| | 371 |
|
Interest expense | (61,220 | ) | | (53,814 | ) | | (122,138 | ) | | (106,461 | ) |
Acquisition-related activity | (1,029 | ) | | (594 | ) | | (1,609 | ) | | (1,183 | ) |
Income (loss) from continuing operations | (20,574 | ) | | (12,747 | ) | | (44,330 | ) | | 45,231 |
|
Discontinued operations: | | | | | | | |
Loss before gain on sales | (249 | ) | | (3,824 | ) | | (1,079 | ) | | (8,616 | ) |
Gain on sale of depreciable properties | 3,095 |
| | 2,713 |
| | 9,571 |
| | 14,316 |
|
Income (loss) from discontinued operations | 2,846 |
| | (1,111 | ) | | 8,492 |
| | 5,700 |
|
Net income (loss) | (17,728 | ) | | (13,858 | ) | | (35,838 | ) | | 50,931 |
|
Distributions on Preferred Units | (11,082 | ) | | (15,974 | ) | | (24,275 | ) | | (31,948 | ) |
Adjustments for redemption/repurchase of Preferred Units | — |
| | — |
| | (5,730 | ) | | (163 | ) |
Net (income) loss attributable to noncontrolling interests | (138 | ) | | 84 |
| | (306 | ) | | 206 |
|
Net income (loss) attributable to common unitholders | $ | (28,948 | ) | | $ | (29,748 | ) | | $ | (66,149 | ) | | $ | 19,026 |
|
Basic net income (loss) per Common Unit: | | | | | | | |
Continuing operations attributable to common unitholders | $ | (0.12 | ) | | $ | (0.11 | ) | | $ | (0.28 | ) | | $ | 0.05 |
|
Discontinued operations attributable to common unitholders | 0.01 |
| | (0.01 | ) | | 0.03 |
| | 0.02 |
|
Total | $ | (0.11 | ) | | $ | (0.12 | ) | | $ | (0.25 | ) | | $ | 0.07 |
|
Diluted net income (loss) per Common Unit: | | | | | | | |
Continuing operations attributable to common unitholders | $ | (0.12 | ) | | $ | (0.11 | ) | | $ | (0.28 | ) | | $ | 0.05 |
|
Discontinued operations attributable to common unitholders | 0.01 |
| | (0.01 | ) | | 0.03 |
| | 0.02 |
|
Total | $ | (0.11 | ) | | $ | (0.12 | ) | | $ | (0.25 | ) | | $ | 0.07 |
|
Weighted average number of Common Units outstanding | 271,317 |
| | 259,849 |
| | 267,716 |
| | 259,322 |
|
Weighted average number of Common Units and potential dilutive securities | 271,317 |
| | 259,849 |
| | 267,716 |
| | 259,390 |
|
| | | | | | | |
Comprehensive income (loss): | | | | | | | |
Net income (loss) | $ | (17,728 | ) | | $ | (13,858 | ) | | $ | (35,838 | ) | | $ | 50,931 |
|
Other comprehensive income: | | | | | | | |
Derivative instrument activity | 261 |
| | 717 |
| | 780 |
| | 1,488 |
|
Other comprehensive income | 261 |
| | 717 |
| | 780 |
| | 1,488 |
|
Comprehensive income (loss) | $ | (17,467 | ) | | $ | (13,141 | ) | | $ | (35,058 | ) | | $ | 52,419 |
|
See accompanying Notes to Consolidated Financial Statements
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30,
(in thousands)
(Unaudited)
|
| | | | | | | |
| 2012 | | 2011 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (35,838 | ) | | $ | 50,931 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation of buildings and tenant improvements | 127,482 |
| | 135,809 |
|
Amortization of deferred leasing and other costs | 57,717 |
| | 59,285 |
|
Amortization of deferred financing costs | 6,526 |
| | 7,351 |
|
Straight-line rent adjustment | (8,870 | ) | | (11,887 | ) |
Earnings from land and depreciated property sales | (9,413 | ) | | (82,664 | ) |
Third-party construction contracts, net | (4,371 | ) | | (25,658 | ) |
Other accrued revenues and expenses, net | (2,227 | ) | | 264 |
|
Operating distributions received in excess of equity in earnings from unconsolidated companies | 9,464 |
| | 10,862 |
|
Net cash provided by operating activities | 140,470 |
| | 144,293 |
|
Cash flows from investing activities: | | | |
Development of real estate investments | (95,192 | ) | | (78,645 | ) |
Acquisition of real estate investments and related intangible assets | (231,041 | ) | | (99,817 | ) |
Acquisition of undeveloped land | (33,371 | ) | | — |
|
Second generation tenant improvements, leasing costs and building improvements | (30,891 | ) | | (41,284 | ) |
Other deferred leasing costs | (16,453 | ) | | (13,807 | ) |
Other assets | 4,421 |
| | 3,149 |
|
Proceeds from land and depreciated property sales, net | 89,450 |
| | 498,249 |
|
Capital distributions from unconsolidated companies | — |
| | 54,730 |
|
Capital contributions and advances to unconsolidated companies, net | (16,431 | ) | | (16,917 | ) |
Net cash provided by (used for) investing activities | (329,508 | ) | | 305,658 |
|
Cash flows from financing activities: | | | |
Contributions from the General Partner | 151,258 |
| | — |
|
Payments for redemption/repurchase of Preferred Units | (168,272 | ) | | (2,096 | ) |
Proceeds from unsecured debt issuance | 300,000 |
| | — |
|
Payments on and repurchases of unsecured debt | (908 | ) | | (43,377 | ) |
Proceeds from secured debt financings | 13,305 |
| | — |
|
Payments on secured indebtedness including principal amortization | (102,869 | ) | | (7,968 | ) |
Payments on lines of credit, net | — |
| | (174,717 | ) |
Distributions to common unitholders | (91,016 | ) | | (88,219 | ) |
Distributions to preferred unitholders | (20,549 | ) | | (31,948 | ) |
Contributions from (distributions to) noncontrolling interests, net | 5,403 |
| | (58 | ) |
Deferred financing costs | (4,575 | ) | | (2,342 | ) |
Net cash provided by (used for) financing activities | 81,777 |
| | (350,725 | ) |
Net increase (decrease) in cash and cash equivalents | (107,261 | ) | | 99,226 |
|
Cash and cash equivalents at beginning of period | 213,826 |
| | 18,419 |
|
Cash and cash equivalents at end of period | $ | 106,565 |
| | $ | 117,645 |
|
| | | |
Non-cash investing and financing activities: | | | |
Assumption of indebtedness and other liabilities in real estate acquisitions | $ | 20,064 |
| | $ | 130,474 |
|
Contribution of properties to unconsolidated companies | $ | — |
| | $ | 52,868 |
|
Conversion of Limited Partner Units to common shares of the General Partner | $ | 29,008 |
| | $ | 1,235 |
|
Issuance of Limited Partner Units for acquisition | $ | — |
| | $ | 28,357 |
|
Preferred distributions declared but not paid | $ | 3,726 |
| | $ | — |
|
See accompanying Notes to Consolidated Financial Statements
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the six months ended June 30, 2012
(in thousands, except per unit data)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Unitholders | | | | |
| | | | | Limited | | Accumulated | | | | | | |
| General Partner | | Partners' | | Other | | Total | | | | |
| Common Equity | | Preferred Equity | | Common Equity | | Comprehensive Income | | Partners' Equity | | Noncontrolling Interests | | Total Equity |
Balance at December 31, 2011 | $ | 1,923,886 |
| | $ | 793,910 |
| | $ | 56,254 |
| | $ | 987 |
| | $ | 2,775,037 |
| | $ | 4,545 |
| | $ | 2,779,582 |
|
Net loss | (59,142 | ) | | 24,275 |
| | (1,277 | ) | | — |
| | (36,144 | ) | | 306 |
| | (35,838 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | 780 |
| | 780 |
| | — |
| | 780 |
|
Capital contribution from the General Partner | 150,786 |
| | — |
| | — |
| | — |
| | 150,786 |
| | — |
| | 150,786 |
|
Stock based compensation plan activity | 2,136 |
| | — |
| | — |
| | — |
| | 2,136 |
| | — |
| | 2,136 |
|
Conversion of Limited Partner Units to common shares of the General Partner | 29,008 |
| | — |
| | (29,008 | ) | | — |
| | — |
| | — |
| | — |
|
Distributions to Preferred Unitholders | — |
| | (24,275 | ) | | — |
| | — |
| | (24,275 | ) | | — |
| | (24,275 | ) |
Redemption of Preferred Units | — |
| | (168,272 | ) | | — |
| | — |
| | (168,272 | ) | | — |
| | (168,272 | ) |
Distributions to Partners ($0.34 per Common Unit) | (89,260 | ) | | — |
| | (1,756 | ) | | — |
| | (91,016 | ) | | — |
| | (91,016 | ) |
Contributions from noncontrolling interests, net | — |
| | — |
| | — |
| | — |
| | — |
| | 5,403 |
| | 5,403 |
|
Balance at June 30, 2012 | $ | 1,957,414 |
| | $ | 625,638 |
| | $ | 24,213 |
| | $ | 1,767 |
| | $ | 2,609,032 |
| | $ | 10,254 |
| | $ | 2,619,286 |
|
See accompanying Notes to Consolidated Financial Statements
DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General Basis of Presentation
The interim consolidated financial statements included herein have been prepared by Duke Realty Corporation (the “General Partner”) and Duke Realty Limited Partnership (the “Partnership”). In this Report, unless the context indicates otherwise, the terms “Company,” “we,” “us” and “our” refer to the General Partner and the Partnership, collectively, and those entities owned or controlled by the General Partner and/or the Partnership. The 2011 year-end consolidated balance sheet data included in this Quarterly Report on Form 10-Q (this “Report”) was derived from the audited financial statements in the Annual Reports on Form 10-K of the General Partner and the Partnership, respectively, for the year ended December 31, 2011, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenue and expenses during the reporting period. Our actual results could differ from those estimates and assumptions. These financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and the consolidated financial statements and notes thereto included in the Annual Reports on Form 10-K of the General Partner and the Partnership, respectively, for the year ended December 31, 2011.
The General Partner was formed in 1985 and we believe that it qualifies as a real estate investment trust (“REIT”) under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”). The Partnership was formed on October 4, 1993, when the General Partner contributed all of its properties and related assets and liabilities, together with the net proceeds from an offering of additional shares of its common stock, to the Partnership.
The General Partner is the sole general partner of the Partnership, owning approximately 98.3% of the common partnership interests of the Partnership (“General Partner Units”) at June 30, 2012. The remaining 1.7% of the common partnership interests (“Limited Partner Units” and, together with the General Partner Units, the “Common Units”) are owned by limited partners. As the sole general partner of the Partnership, the General Partner has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Partnership. The General Partner and the Partnership are operated as one enterprise. The management of the General Partner consists of the same members as the management of the Partnership. As the sole general partner with control of the Partnership, the General Partner consolidates the Partnership for financial reporting purposes, and the General Partner does not have any significant assets other than its investment in the Partnership. Therefore, the assets and liabilities of the General Partner and the Partnership are substantially the same.
Limited Partners have the right to redeem their Limited Partner Units, subject to certain restrictions. Pursuant to the Fourth Amended and Restated Agreement of Limited Partnership, as amended (the “Partnership Agreement”), the General Partner is obligated to redeem the Limited Partner Units in shares of its common stock, unless it determines in its reasonable discretion that the issuance of shares of its common stock could cause it to fail to qualify as a REIT. Each Limited Partner Unit shall be redeemed for one share of the General Partner's common stock, or, in the event that the issuance of shares could cause the General Partner to fail to qualify as a REIT, cash equal to the fair market value of one share of the General Partner's common stock at the time of redemption, in each case, subject to certain adjustments described in the Partnership Agreement. The Limited Partner Units are not required, per the terms of the Partnership Agreement, to be redeemed in registered shares of the General Partner. The General Partner also owns preferred partnership interests in the Partnership (“Preferred Units”).
We own and operate a portfolio primarily consisting of industrial and office properties and provide real estate services to third-party owners. Substantially all of our Rental Operations (see Note 9) are conducted through the Partnership. We conduct our Service Operations (see Note 9) through Duke Realty Services, LLC, Duke Realty Services Limited Partnership and Duke Construction Limited Partnership (“DCLP”), which are consolidated entities that are 100% owned by a combination of the General Partner and the Partnership. DCLP is owned through a taxable REIT subsidiary. The consolidated financial statements include our accounts and the accounts of our majority-owned or controlled subsidiaries.
2. Reclassifications
Certain amounts in the accompanying consolidated financial statements for 2011 have been reclassified to conform to the 2012 consolidated financial statement presentation.
3. Variable Interest Entities
During the second quarter of 2012, an event took place within one of our unconsolidated joint ventures that required us to re-evaluate our previous conclusions that this joint venture was not a variable interest entity (“VIE”). Upon such reconsideration, we determined that the fair value of the total equity investment at risk was not sufficient to meet the overall capital requirements of the joint venture, and we therefore concluded that this venture now meets the applicable criteria to be considered a VIE. However, for the reasons described below, we have determined there is no individual primary beneficiary for this joint venture.
After the aforementioned reconsideration event, there are four unconsolidated joint ventures at June 30, 2012 that we have determined meet the criteria to be considered VIEs. These four 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 a combination of 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 there to be no individual primary beneficiary and 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 four unconsolidated subsidiaries that we have determined to be VIEs as of June 30, 2012 (in millions):
|
| | | | | | | |
| Carrying Value | | Maximum Loss Exposure |
Investment in Unconsolidated Companies | $ | 59.2 |
| | $ | 59.2 |
|
Guarantee Obligations (1) | $ | (20.9 | ) | | $ | (146.7 | ) |
| |
(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. We have also recorded a liability for our probable future obligation under a guarantee to the lender of one of these ventures, which is included within the carrying value of our guarantee obligations. 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
2012 Acquisitions
We acquired eleven operating properties during the six months ended June 30, 2012. These acquisitions consisted of two industrial properties near Chicago, Illinois, two industrial properties in Columbus, Ohio, one industrial property in Southern California, one industrial property in Atlanta, Georgia and five medical office properties near Cincinnati, Ohio. The following table summarizes our allocation of the fair value of amounts recognized for each major class of asset and liability (in thousands) for these acquisitions:
|
| | | |
| |
Real estate assets | $ | 223,672 |
|
Lease related intangible assets | 29,564 |
|
Other assets | 2,829 |
|
Total acquired assets | 256,065 |
|
Secured debt | 18,741 |
|
Other liabilities | 1,323 |
|
Total assumed liabilities | 20,064 |
|
Fair value of acquired net assets | $ | 236,001 |
|
The leases in the acquired properties had a weighted average remaining life at acquisition of approximately 8.4 years.
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. We have 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 six months ended June 30, 2012 were as follows:
|
| | | | |
| Low |
| High |
|
Discount rate | 7.19 | % | 8.78 | % |
Exit capitalization rate | 5.75 | % | 7.40 | % |
Lease-up period (months) | 9 |
| 19 |
|
Net rental rate per square foot – Industrial | $2.75 | $7.62 |
Net rental rate per square foot – Medical Office | $16.00 | $26.14 |
Acquisition-Related Activity
The acquisition-related activity in our consolidated Statements of Operations for the six months ended June 30, 2012 and 2011 consists of transaction costs related to completed acquisitions, which are expensed as incurred.
Dispositions
We disposed of income-producing real estate assets and undeveloped land and received net cash proceeds of $89.5 million and $498.2 million during the six months ended June 30, 2012 and 2011, respectively.
5. Indebtedness
All debt is held directly or indirectly by the Partnership. The General Partner itself does not have any indebtedness, but does guarantee the unsecured debt of the Partnership.
The following table summarizes the book value and changes in the fair value of our debt for the six months ended June 30, 2012 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Book Value at 12/31/11 | | Book Value at 6/30/12 | | Fair Value at 12/31/11 | | Issuances and Assumptions | | Payments/Payoffs | | Adjustments to Fair Value | | Fair Value at 6/30/12 |
Fixed rate secured debt | $ | 1,167,188 |
| | $ | 1,081,845 |
| | $ | 1,256,331 |
| | $ | 18,741 |
| | $ | (102,869 | ) | | $ | 3,952 |
| | $ | 1,176,155 |
|
Variable rate secured debt | 6,045 |
| | 19,350 |
| | 6,045 |
| | 13,305 |
| | — |
| | 498 |
| | 19,848 |
|
Unsecured notes | 2,616,063 |
| | 2,915,155 |
| | 2,834,610 |
| | 300,000 |
| | (908 | ) | | 55,211 |
| | 3,188,913 |
|
Unsecured lines of credit | 20,293 |
| | 20,293 |
| | 20,244 |
| | — |
| | — |
| | 36 |
| | 20,280 |
|
Total | $ | 3,809,589 |
| | $ | 4,036,643 |
| | $ | 4,117,230 |
| | $ | 332,046 |
| | $ | (103,777 | ) | | $ | 59,697 |
| | $ | 4,405,196 |
|
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 3.30% to 5.40%, 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 one secured loan in conjunction with our acquisition activity in 2012. This assumed loan had a total face value of $18.1 million and fair value of $18.7 million. This assumed loan carries a stated interest rate of 5.14% and a remaining term upon acquisition of 2.2 years. We used an estimated market rate of 3.50% in determining the fair value of this loan.
In June 2012, a newly formed subsidiary, consolidated by both the General Partner and the Partnership, borrowed $13.3 million on a secured note bearing interest at a variable rate of LIBOR plus 2.50% (equal to 2.75% for outstanding borrowings as of June 30, 2012) and maturing June 29, 2017.
During the six months ended June 30, 2012, we repaid four secured loans at their maturity dates totaling $95.8 million. The loans had a weighted average stated interest rate of 6.02%.
Unsecured Notes
In June 2012, we issued $300.0 million of senior unsecured notes that bear interest at 4.375%, have an effective rate of 4.466% and mature on June 15, 2022.
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 101.00% to 126.00% 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 June 30, 2012.
Unsecured Lines of Credit
Our unsecured lines of credit as of June 30, 2012 are described as follows (in thousands):
|
| | | | | | | | | |
Description | Maximum Capacity | | Maturity Date | | Outstanding Balance at June 30, 2012 |
Unsecured Line of Credit - Partnership | $ | 850,000 |
| | December 2015 | | $ | — |
|
Unsecured Line of Credit - Consolidated Subsidiary | $ | 30,000 |
| | July 2012 | | $ | 20,293 |
|
The Partnership's unsecured line of credit has an interest rate on borrowings of LIBOR plus 1.25%, and a maturity date of December 2015. Subject to certain conditions, the terms also include an option to increase the facility by up to an additional $400.0 million, for a total of up to $1.25 billion.
This line of credit provides us with an option to obtain borrowings from financial institutions that participate in the line at rates that may be lower than the stated interest rate, subject to certain restrictions.
This line of credit contains financial covenants that require us to meet certain financial ratios and defined levels of performance, including those related to fixed charge coverage, unsecured interest expense coverage and debt-to-asset value (with asset value being defined in the Partnership's unsecured line of credit agreement). As of June 30, 2012, 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 June 30, 2012). This unsecured line of credit is used to fund development activities within the consolidated subsidiary and was repaid at its maturity 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 1.75% that we utilized was internally estimated; therefore, we have concluded that our determination of fair value for our consolidated subsidiary's unsecured line of credit was primarily based upon a Level 3 input.
6. Shareholders' Equity of the General Partner and Partners' Capital of the Partnership
General Partner
In March 2012, we redeemed all of the outstanding shares of our 6.95% Series M Cumulative Redeemable Preferred Shares at their liquidation amount of $168.3 million. Original offering costs of $5.7 million were included as a reduction to net loss attributable to common shareholders in conjunction with the redemption of these shares.
In the first six months of 2012, we issued 11.1 million shares of common stock pursuant to our at the market offerings, generating gross proceeds of approximately $154.5 million and, after considering commissions and other costs, net proceeds of approximately $151.3 million. We paid $3.1 million in commissions related to the sale of these common shares. The proceeds from this offering were used for acquisitions, general corporate purposes and redemption of preferred shares and fixed rate secured debt.
Partnership
For each share of common stock or preferred stock that the General Partner issues, the Partnership issues a corresponding General Partner Unit or Preferred Unit, as applicable, to the General Partner in exchange for the contribution of the proceeds from the stock issuance. Similarly, when the General Partner redeems or repurchases shares of its common stock or preferred stock, the Partnership redeems the corresponding Common Units or Preferred Units held by the General Partner at the same price.
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 three and six months ended June 30, 2012 and 2011, respectively (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Management fees | $ | 2,725 |
| | $ | 2,646 |
| | $ | 5,455 |
| | $ | 4,623 |
|
Leasing fees | 940 |
| | 997 |
| | 2,234 |
| | 2,801 |
|
Construction and development fees | 912 |
| | 814 |
| | 1,755 |
| | 2,396 |
|
8. Net Income (Loss) Per Common Share or Common Unit
Basic net income (loss) per common share or Common Unit is computed by dividing net income (loss) attributable to common shareholders or common unitholders, less dividends or distributions on share-based awards expected to vest (referred to as “participating securities” and primarily composed of unvested restricted stock units), by the weighted average number of common shares or Common Units outstanding for the period.
Diluted net income (loss) per common share is computed by dividing the sum of basic net income (loss) attributable to common shareholders and the noncontrolling interest in earnings allocable to Limited Partner Units (to the extent the Limited Partner Units are dilutive) by the sum of the weighted average number of common shares outstanding and, to the extent they are dilutive, Units outstanding and any potential dilutive securities for the period. Diluted net income (loss) per Common Unit is computed by dividing the basic net income (loss) attributable to common unitholders by the sum of the weighted average number of Common Units outstanding and any potential dilutive securities for the period.
The following table reconciles the components of basic and diluted net income (loss) per common share or Common Unit for the three and six months ended June 30, 2012 and 2011, respectively (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
General Partner | | | | | | | |
Net income (loss) attributable to common shareholders | $ | (28,482 | ) | | $ | (29,042 | ) | | $ | (64,872 | ) | | $ | 18,527 |
|
Less: Dividends on participating securities | (856 | ) | | (806 | ) | | (1,708 | ) | | (1,605 | ) |
Basic net income (loss) attributable to common shareholders | (29,338 | ) | | (29,848 | ) | | (66,580 | ) | | 16,922 |
|
Noncontrolling interest in earnings of common unitholders | — |
| | — |
| | — |
| | 499 |
|
Diluted net income (loss) attributable to common shareholders | $ | (29,338 | ) | | $ | (29,848 | ) | | $ | (66,580 | ) | | $ | 17,421 |
|
Weighted average number of common shares outstanding | 266,748 |
| | 252,640 |
| | 262,556 |
| | 252,524 |
|
Weighted average Limited Partner Units outstanding | — |
| | — |
| | — |
| | 6,798 |
|
Other potential dilutive shares | — |
| | — |
| | — |
| | 68 |
|
Weighted average number of common shares and potential dilutive securities | 266,748 |
| | 252,640 |
| | 262,556 |
| | 259,390 |
|
| | | | | | | |
Partnership | | | | | | | |
Net income (loss) attributable to common unitholders | $ | (28,948 | ) | | $ | (29,748 | ) | | $ | (66,149 | ) | | $ | 19,026 |
|
Less: Distributions on participating securities | (856 | ) | | (806 | ) | | (1,708 | ) | | (1,605 | ) |
Basic and diluted net income (loss) attributable to common unitholders | $ | (29,804 | ) | | $ | (30,554 | ) | | $ | (67,857 | ) | | $ | 17,421 |
|
Weighted average number of Common Units outstanding | 271,317 |
| | 259,849 |
| | 267,716 |
| | 259,322 |
|
Other potential dilutive units | — |
| | — |
| | — |
| | 68 |
|
Weighted average number of Common Units and potential dilutive securities | 271,317 |
| | 259,849 |
| | 267,716 |
| | 259,390 |
|
The Limited Partner Units are anti-dilutive to the General Partner for the three and six months ended June 30, 2012, as well as the three months ended June 30, 2011, as a result of the net loss for these periods. In addition, substantially all potential shares related to our stock-based compensation plans were anti-dilutive for all periods presented and potential shares related to our 3.75% Exchangeable Senior Notes (“Exchangeable Notes”), which were repaid in December 2011, were anti-dilutive for the three and six months ended June 30, 2011. The following table summarizes the data that is excluded from the computation of net income (loss) per common share or Common Unit as a result of being anti-dilutive (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
General Partner | | | | | | | |
Noncontrolling interest in loss of common unitholders | $ | (466 | ) | | $ | (706 | ) | | $ | (1,277 | ) | | $ | — |
|
Weighted average Limited Partner Units outstanding | 4,569 |
| | 7,209 |
| | 5,160 |
| | — |
|
General Partner and the Partnership | | | | | | | |
Other potential dilutive shares or units: | | | | | | | |
Anti-dilutive outstanding potential shares or units under fixed stock option and other stock-based compensation plans | 1,728 |
| | 1,677 |
| | 1,728 |
| | 1,677 |
|
Anti-dilutive potential shares or units under the Exchangeable Notes | — |
| | 3,432 |
| | — |
| | 3,432 |
|
Outstanding participating securities | 4,047 |
| | 4,816 |
| | 4,047 |
| | 4,816 |
|
9. Segment Reporting
We have four reportable operating segments at June 30, 2012, the first three of which consist of the ownership and rental of (i) industrial, (ii) office and (iii) medical office real estate investments. The operations of our industrial, office and medical office properties, along with our retail properties, are collectively referred to as “Rental Operations.” Our retail properties, as well as any other properties not included in our reportable segments, do not by themselves meet the quantitative thresholds for separate presentation as a reportable segment. The fourth reportable segment consists of various real estate services such as property management, asset management, maintenance, leasing, development, general contracting and construction management to third-party property owners and joint ventures, and is collectively referred to as “Service Operations.” Our reportable segments offer different products or services and are managed separately because each segment requires different operating strategies and management expertise.
During 2012, one of the quantitative thresholds was triggered, which required our medical office property operating segment to be presented as a separate reportable segment. As such, our medical office properties are presented as a separate reportable segment for the three and six months ended June 30, 2012, as well as for the comparative prior periods.
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 non-GAAP supplemental measure of REIT operating performance. FFO, as defined by NAREIT, represents GAAP net income (loss), excluding extraordinary items as defined under GAAP, gains or losses from sales of previously depreciated real estate assets, impairment charges related to depreciable 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. The most comparable GAAP measure is net income (loss) attributable to common shareholders or common unitholders. FFO attributable to common shareholders or common unitholders should not be considered as a substitute for net income (loss) attributable to common shareholders or common unitholders 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. Management believes that the use of FFO attributable to common shareholders or common unitholders, 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 the use of FFO as a performance measure enables investors and analysts to readily identify the operating results of the long-term assets that form the core of a REITs activity and assist them in comparing these operating results between periods or between different companies.
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.
The following table shows (i) the revenues for each of the reportable segments and (ii) a reconciliation of FFO attributable to common shareholders or common unitholders to net income (loss) attributable to common shareholders or common unitholders for the three and six months ended June 30, 2012 and 2011, respectively (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2012 | | 2011 | | 2012 | | 2011 |
Revenues | | | | | | | | |
Rental Operations: | | | | | | | | |
Industrial | | $ | 110,257 |
| | $ | 92,293 |
| | $ | 218,497 |
| | $ | 185,673 |
|
Office | | 67,003 |
| | 65,303 |
| | 133,905 |
| | 141,231 |
|
Medical Office | | 20,921 |
| | 13,503 |
| | 41,662 |
| | 26,987 |
|
Non-reportable Rental Operations | | 5,714 |
| | 5,645 |
| | 11,372 |
| | 11,299 |
|
General contractor and service fee revenue (“Service Operations”) | | 63,607 |
| | 135,362 |
| | 132,575 |
| | 281,909 |
|
Total Segment Revenues | | 267,502 |
| | 312,106 |
| | 538,011 |
| | 647,099 |
|
Other Revenue | | 1,113 |
| | 3,265 |
| | 2,242 |
| | 5,248 |
|
Consolidated Revenue from continuing operations | | 268,615 |
| | 315,371 |
| | 540,253 |
| | 652,347 |
|
Discontinued Operations | | 664 |
| | 48,064 |
| | 2,660 |
| | 100,791 |
|
Consolidated Revenue | | $ | 269,279 |
| | $ | 363,435 |
| | $ | 542,913 |
| | $ | 753,138 |
|
Reconciliation of Funds From Operations | | | | | | | | |
Net earnings excluding depreciation and Non-Segment Items | | | | | | | | |
Industrial | | $ | 83,796 |
| | $ | 67,524 |
| | $ | 163,614 |
| | $ | 133,862 |
|
Office | | 39,827 |
| | 39,442 |
| | 79,064 |
| | 82,727 |
|
Medical Office | | 13,826 |
| | 8,625 |
| | 27,493 |
| | 16,427 |
|
Non-reportable Rental Operations | | 4,204 |
| | 4,018 |
| | 8,212 |
| | 8,224 |
|
Service Operations | | 5,728 |
| | 12,393 |
| | 10,775 |
| | 23,276 |
|
| | 147,381 |
| | 132,002 |
| | 289,158 |
| | 264,516 |
|
Non-Segment Items: | | | | | | | | |
Interest expense | | (61,220 | ) | | (53,814 | ) | | (122,138 | ) | | (106,461 | ) |
Interest and other income | | 98 |
| | 284 |
| | 244 |
| | 371 |
|
Other operating expenses | | (196 | ) | | (26 | ) | | (461 | ) | | (111 | ) |
General and administrative expenses | | (11,594 | ) | | |