3Q.10Q.2012
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, 2012
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) 0-20625 (Duke Realty Limited Partnership)
DUKE REALTY CORPORATION
DUKE REALTY LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)
Indiana (Duke Realty Corporation)
 
35-1740409 (Duke Realty Corporation)
Indiana (Duke Realty Limited Partnership)
 
35-1898425 (Duke Realty Limited Partnership)
(State or Other Jurisdiction
of Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
600 East 96thStreet, Suite 100
Indianapolis, Indiana
 
46240
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (317) 808-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Duke Realty Corporation
Yes x
 No   ¨
 
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).
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:
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
Duke Realty Limited Partnership:
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  x
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Duke Realty Corporation
Yes  ¨ 
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:
Class
 
Outstanding Common Shares of Duke Realty Corporation at November 2, 2012
Common Stock, $.01 par value per share
 
275,025,508



EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 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 98.4% of the common partnership interests of the Partnership (“General Partner Units”) as of September 30, 2012. The remaining 1.6% 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:
•
enhances investors' understanding of the General Partner and the Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
•
eliminates duplicative disclosure and provides a more streamlined and readable presentation of information since a substantial portion of the Company's disclosure applies to both the General Partner and the Partnership; and
•
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
 
We believe it is important to understand the few differences between the General Partner and the Partnership in the context of how we operate as an interrelated consolidated company. The General Partner's only material asset is its ownership of partnership interests in the Partnership. As a result, the General Partner does not conduct business itself, other than acting as the sole general partner of the Partnership and issuing public equity from time to time. The General Partner does not issue any indebtedness, but does guarantee the unsecured debt of the Partnership. The Partnership holds substantially all the assets of the business, directly or indirectly, and holds the ownership interests related to certain of the Company's investments. The Partnership conducts the operations of the business and has no publicly traded equity. Except for net proceeds from equity issuances by the General Partner, which are contributed to the Partnership in exchange for General Partner Units or Preferred Units, the Partnership generates the capital required by the business through its operations, its incurrence of indebtedness and the issuance of Limited Partner Units to third parties.
Noncontrolling interests, shareholders' equity and partners' capital are the main areas of difference between the consolidated financial statements of the General Partner and those of the Partnership. The noncontrolling interests in the Partnership's financial statements include the interests in consolidated investees not wholly owned by the Partnership. The noncontrolling interests in the General Partner's financial statements include the same noncontrolling interests at the Partnership level, as well as the common limited partnership interests in the Partnership, which are accounted for as partners' capital by the Partnership.
In order to highlight the differences between the General Partner and the Partnership, there are separate sections in this report, as applicable, that separately discuss the General Partner and the Partnership including separate financial statements, and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the General Partner and the Partnership, this report refers to actions or holdings as being actions or holdings of the collective Company.



DUKE REALTY CORPORATION/DUKE REALTY LIMITED PARTNERSHIP
INDEX
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
Duke Realty Corporation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Duke Realty Limited Partnership:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Duke Realty Corporation and Duke Realty Limited Partnership:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
 
September 30,
2012
 
December 31,
2011
 
(Unaudited)
 
 
 
 
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
1,239,276

 
$
1,202,872

Buildings and tenant improvements
5,016,464

 
4,766,793

Construction in progress
219,931

 
44,259

Investments in and advances to unconsolidated companies
367,221

 
364,859

Undeveloped land
613,183

 
622,635

 
7,456,075

 
7,001,418

Accumulated depreciation
(1,246,853
)
 
(1,108,650
)
Net real estate investments
6,209,222

 
5,892,768

 
 
 
 
Real estate investments and other assets held-for-sale
—

 
55,580

 
 
 
 
Cash and cash equivalents
113,152

 
213,809

Accounts receivable, net of allowance of $3,080 and $3,597
29,737

 
22,255

Straight-line rent receivable, net of allowance of $5,274 and $7,447
117,016

 
105,900

Receivables on construction contracts, including retentions
36,413

 
40,247

Deferred financing costs, net of accumulated amortization of $45,233 and $59,109
42,095

 
42,268

Deferred leasing and other costs, net of accumulated amortization of $356,776 and $292,334
465,588

 
460,881

Escrow deposits and other assets
176,894

 
170,729

 
$
7,190,117

 
$
7,004,437

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
Secured debt
$
1,096,455

 
$
1,173,233

Unsecured notes
3,043,690

 
2,616,063

Unsecured lines of credit
—

 
20,293

 
4,140,145

 
3,809,589

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

 
975

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
80,934

 
55,775

Accrued real estate taxes
102,646

 
69,272

Accrued interest
36,666

 
58,904

Other accrued expenses
41,661

 
60,174

Other liabilities
122,776

 
131,735

Tenant security deposits and prepaid rents
40,248

 
38,355

Total liabilities
4,565,076

 
4,224,779

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; 273,519 and 252,927 shares issued and outstanding
2,735

 
2,529

Additional paid-in capital
3,871,155

 
3,594,588

Accumulated other comprehensive income
2,177

 
987

Distributions in excess of net income
(1,912,802
)
 
(1,677,328
)
Total shareholders’ equity
2,588,903

 
2,714,686

Noncontrolling interests
36,138

 
64,972

Total equity
2,625,041

 
2,779,658

 
$
7,190,117

 
$
7,004,437

See accompanying Notes to Consolidated Financial Statements

3

DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three and nine months ended September 30,
(in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
208,957

 
$
184,581

 
$
616,451

 
$
554,752

General contractor and service fee revenue
93,932

 
127,708

 
226,507

 
409,617

 
302,889

 
312,289

 
842,958

 
964,369

Expenses:
 
 
 
 
 
 
 
Rental expenses
39,659

 
35,105

 
111,477

 
108,224

Real estate taxes
28,676

 
26,355

 
85,255

 
79,866

General contractor and other services expenses
87,719

 
120,547

 
209,519

 
379,180

Depreciation and amortization
95,117

 
81,068

 
279,136

 
242,043

 
251,171

 
263,075

 
685,387

 
809,313

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings of unconsolidated companies
2,280

 
3,104

 
4,056

 
5,890

Gain on sale of properties
403

 
(1,437
)
 
245

 
66,910

Undeveloped land carrying costs
(2,140
)
 
(2,259
)
 
(6,606
)
 
(7,021
)
Other operating expenses
(130
)
 
(60
)
 
(591
)
 
(171
)
General and administrative expenses
(8,934
)
 
(9,493
)
 
(32,367
)
 
(29,231
)
 
(8,521
)
 
(10,145
)
 
(35,263
)
 
36,377

Operating income
43,197

 
39,069

 
122,308

 
191,433

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
150

 
172

 
394

 
543

Interest expense
(61,539
)
 
(54,528
)
 
(183,623
)
 
(161,765
)
Acquisition-related activity
(954
)
 
(342
)
 
(2,563
)
 
(1,525
)
Income (loss) from continuing operations before income taxes
(19,146
)
 
(15,629
)
 
(63,484
)
 
28,686

Income tax benefit
103

 
194

 
103

 
194

Income (loss) from continuing operations
(19,043
)
 
(15,435
)
 
(63,381
)
 
28,880

Discontinued operations:
 
 
 
 
 
 
 
Loss before gain on sales
(114
)
 
(1,522
)
 
(1,185
)
 
(9,223
)
Gain on sale of depreciable properties
1,608

 
2,088

 
11,179

 
16,405

Income from discontinued operations
1,494

 
566

 
9,994

 
7,182

Net income (loss)
(17,549
)
 
(14,869
)
 
(53,387
)
 
36,062

Dividends on preferred shares
(11,081
)
 
(14,399
)
 
(35,356
)
 
(46,347
)
Adjustments for redemption/repurchase of preferred shares
—

 
(3,633
)
 
(5,730
)
 
(3,796
)
Net loss attributable to noncontrolling interests
400

 
825

 
1,371

 
532

Net loss attributable to common shareholders
$
(28,230
)
 
$
(32,076
)
 
$
(93,102
)
 
$
(13,549
)
Basic net income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
(0.11
)
 
$
(0.13
)
 
$
(0.40
)
 
$
(0.09
)
Discontinued operations attributable to common shareholders
—

 
—

 
0.04

 
0.03

Total
$
(0.11
)
 
$
(0.13
)
 
$
(0.36
)
 
$
(0.06
)
Diluted net income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
(0.11
)
 
$
(0.13
)
 
$
(0.40
)
 
$
(0.09
)
Discontinued operations attributable to common shareholders
—

 
—

 
0.04

 
0.03

Total
$
(0.11
)
 
$
(0.13
)
 
$
(0.36
)
 
$
(0.06
)
Weighted average number of common shares outstanding
270,289

 
252,802

 
265,153

 
252,618

Weighted average number of common shares and potential dilutive securities
270,289

 
252,802

 
265,153

 
252,618

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
(17,549
)
 
$
(14,869
)
 
$
(53,387
)
 
$
36,062

Other comprehensive income:
 
 
 
 
 
 
 
Derivative instrument activity
410

 
437

 
1,190

 
1,925

Other comprehensive income
410

 
437

 
1,190

 
1,925

Comprehensive income (loss)
$
(17,139
)
 
$
(14,432
)
 
$
(52,197
)
 
$
37,987

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)
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(53,387
)
 
$
36,062

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
193,479

 
204,134

Amortization of deferred leasing and other costs
86,859

 
88,295

Amortization of deferred financing costs
9,878

 
11,070

Straight-line rent adjustment
(15,725
)
 
(19,012
)
Earnings from land and depreciated property sales
(11,424
)
 
(83,315
)
Third-party construction contracts, net
(4,295
)
 
(18,417
)
Other accrued revenues and expenses, net
(14,621
)
 
14,586

Operating distributions received in excess of equity in earnings from unconsolidated companies
10,772

 
11,681

Net cash provided by operating activities
201,536

 
245,084

Cash flows from investing activities:
 
 
 
Development of real estate investments
(176,340
)
 
(125,676
)
Acquisition of real estate investments and related intangible assets
(321,099
)
 
(179,047
)
Acquisition of undeveloped land
(37,166
)
 
(3,825
)
Second generation tenant improvements, leasing costs and building improvements
(46,682
)
 
(71,732
)
Other deferred leasing costs
(22,727
)
 
(20,950
)
Other assets
674

 
(4,500
)
Proceeds from land and depreciated property sales, net
112,559

 
504,688

Capital distributions from unconsolidated companies
4,890

 
54,730

Capital contributions and advances to unconsolidated companies, net
(19,262
)
 
(28,362
)
Net cash provided by (used for) investing activities
(505,153
)
 
125,326

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common shares, net
236,301

 
—

Payments for redemption/repurchase of preferred shares
(168,272
)
 
(110,726
)
Proceeds from unsecured debt issuance
600,000

 
—

Payments on and repurchases of unsecured debt
(172,374
)
 
(166,346
)
Proceeds from secured debt financings
13,305

 
—

Payments on secured indebtedness including principal amortization
(107,240
)
 
(24,841
)
Borrowings (payments) on lines of credit, net
(20,293
)
 
111,247

Distributions to common shareholders
(135,083
)
 
(128,817
)
Distributions to preferred shareholders
(31,630
)
 
(46,347
)
Contributions from (distributions to) noncontrolling interests, net
2,788

 
(3,952
)
Buyout of noncontrolling interests
(6,208
)
 
—

Deferred financing costs
(8,334
)
 
(2,830
)
Net cash provided by (used for) financing activities
202,960

 
(372,612
)
Net decrease in cash and cash equivalents
(100,657
)
 
(2,202
)
Cash and cash equivalents at beginning of period
213,809

 
18,384

Cash and cash equivalents at end of period
$
113,152

 
$
16,182

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Assumption of indebtedness and other liabilities in real estate acquisitions
$
19,992

 
$
150,042

Contribution of properties to unconsolidated companies
$
—

 
$
53,245

Investments and advances related to acquisition of previously unconsolidated companies
$
—

 
$
5,987

Conversion of Limited Partner Units to common shares
$
29,002

 
$
3,052

Issuance of Limited Partner Units for acquisition
$
—

 
$
28,357

Preferred distributions declared but not paid
$
3,726

 
$
—

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, 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
—

 
—

 
—

 
—

 
(52,016
)
 
(1,371
)
 
(53,387
)
Other comprehensive income
—

 
—

 
—

 
1,190

 
—

 
—

 
1,190

Issuance of common shares
—

 
169

 
235,660

 
—

 
—

 
—

 
235,829

Stock based compensation plan activity
—

 
13

 
6,199

 
—

 
(2,330
)
 
—

 
3,882

Conversion of Limited Partner Units
—

 
24

 
28,978

 
—

 
—

 
(29,002
)
 
—

Distributions to preferred shareholders
—

 
—

 
—

 
—

 
(35,356
)
 
—

 
(35,356
)
Redemption of preferred shares
(168,272
)
 
—

 
5,730

 
—

 
(5,730
)
 
—

 
(168,272
)
Distributions to common shareholders ($0.51 per share)
—

 
—

 
—

 
—

 
(135,083
)
 
—

 
(135,083
)
Contributions from noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
2,788

 
2,788

Buyout of noncontrolling interests
—

 
—

 
—

 
—

 
(4,959
)
 
(1,249
)
 
(6,208
)
Balance at September 30, 2012
$
625,638

 
$
2,735

 
$
3,871,155

 
$
2,177

 
$
(1,912,802
)
 
$
36,138

 
$
2,625,041

See accompanying Notes to Consolidated Financial Statements



6

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

 
September 30, 2012
 
December 31, 2011
 
(Unaudited)
 
 
 
 
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
     Land and improvements
$
1,239,276

 
$
1,202,872

     Buildings and tenant improvements
5,016,464

 
4,766,793

     Construction in progress
219,931

 
44,259

     Investments in and advances to unconsolidated companies
367,221

 
364,859

     Undeveloped land
613,183

 
622,635

 
7,456,075

 
7,001,418

     Accumulated depreciation
(1,246,853
)
 
(1,108,650
)
              Net real estate investments
6,209,222

 
5,892,768

 
 
 
 
Real estate investments and other assets held-for-sale
—

 
55,580

 
 
 
 
Cash and cash equivalents
113,152

 
213,826

Accounts receivable, net of allowance of $3,080 and $3,597
29,737

 
22,255

Straight-line rent receivable, net of allowance of $5,274 and $7,447
117,016

 
105,900

Receivables on construction contracts, including retentions
36,413

 
40,247

Deferred financing costs, net of accumulated amortization of $45,233 and $59,109
42,095

 
42,268

Deferred leasing and other costs, net of accumulated amortization of $356,776 and $292,334
465,588

 
460,881

Escrow deposits and other assets
176,894

 
170,257

 
$
7,190,117

 
$
7,003,982

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
     Secured debt
$
1,096,455

 
$
1,173,233

     Unsecured notes
3,043,690

 
2,616,063

     Unsecured lines of credit
—

 
20,293

 
4,140,145

 
3,809,589

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

 
975

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
80,934

 
55,775

Accrued real estate taxes
102,646

 
69,272

Accrued interest
36,666

 
58,904

Other accrued expenses
41,768

 
59,795

Other liabilities
122,776

 
131,735

Tenant security deposits and prepaid rents
40,248

 
38,355

     Total liabilities
4,565,183

 
4,224,400

Partners’ equity:
 
 
 
  General Partner:
 
 
 
     Common equity (273,519 and 252,927 General Partner Units issued and outstanding)
1,965,154

 
1,923,886

     Preferred equity (2,503 and 3,176 Preferred Units issued and outstanding)
625,638

 
793,910

 
2,590,792

 
2,717,796

     Limited Partners' common equity (4,511 and 6,945 Limited Partner Units issued and outstanding)
22,993

 
56,254

     Accumulated other comprehensive income
2,177

 
987

            Total partners’ equity
2,615,962

 
2,775,037

Noncontrolling interests
8,972

 
4,545

     Total equity
2,624,934

 
2,779,582

 
$
7,190,117

 
$
7,003,982

See accompanying Notes to Consolidated Financial Statements

7

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three and nine months ended September 30,
(in thousands, except per unit amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
     Rental and related revenue
$
208,957

 
$
184,581

 
$
616,451

 
$
554,752

     General contractor and service fee revenue
93,932

 
127,708

 
226,507

 
409,617

 
302,889

 
312,289

 
842,958

 
964,369

Expenses:
 
 
 
 
 
 
 
     Rental expenses
39,659

 
35,105

 
111,477

 
108,224

     Real estate taxes
28,676

 
26,355

 
85,255

 
79,866

     General contractor and other services expenses
87,719

 
120,547

 
209,519

 
379,180

     Depreciation and amortization
95,117

 
81,068

 
279,136

 
242,043

 
251,171

 
263,075

 
685,387

 
809,313

Other operating activities:
 
 
 
 
 
 
 
     Equity in earnings of unconsolidated companies
2,280

 
3,104

 
4,056

 
5,890

     Gain on sale of properties
403

 
(1,437
)
 
245

 
66,910

     Undeveloped land carrying costs
(2,140
)
 
(2,259
)
 
(6,606
)
 
(7,021
)
     Other operating expenses
(130
)
 
(60
)
 
(591
)
 
(171
)
     General and administrative expense
(8,934
)
 
(9,493
)
 
(32,367
)
 
(29,231
)
 
(8,521
)
 
(10,145
)
 
(35,263
)
 
36,377

     Operating income
43,197

 
39,069

 
122,308

 
191,433

Other income (expenses):
 
 
 
 
 
 
 
     Interest and other income, net
150

 
172

 
394

 
543

     Interest expense
(61,539
)
 
(54,528
)
 
(183,623
)
 
(161,765
)
     Acquisition-related activity
(954
)
 
(342
)
 
(2,563
)
 
(1,525
)
Income (loss) from continuing operations before income taxes
(19,146
)
 
(15,629
)
 
(63,484
)
 
28,686

Income tax benefit
103

 
194

 
103

 
194

Income (loss) from continuing operations
(19,043
)
 
(15,435
)
 
(63,381
)
 
28,880

Discontinued operations:
 
 
 
 
 
 
 
     Loss before gain on sales
(114
)
 
(1,522
)
 
(1,185
)
 
(9,223
)
     Gain on sale of depreciable properties
1,608

 
2,088

 
11,179

 
16,405

           Income from discontinued operations
1,494

 
566

 
9,994

 
7,182

Net income (loss)
(17,549
)
 
(14,869
)
 
(53,387
)
 
36,062

Distributions on Preferred Units
(11,081
)
 
(14,399
)
 
(35,356
)
 
(46,347
)
Adjustments for redemption/repurchase of Preferred Units
—

 
(3,633
)
 
(5,730
)
 
(3,796
)
Net (income) loss attributable to noncontrolling interests
(59
)
 
(43
)
 
(365
)
 
163

     Net loss attributable to common unitholders
$
(28,689
)
 
$
(32,944
)
 
$
(94,838
)
 
$
(13,918
)
Basic net income (loss) per Common Unit:
 
 
 
 
 
 
 
     Continuing operations attributable to common unitholders
$
(0.11
)
 
$
(0.13
)
 
$
(0.40
)
 
$
(0.09
)
     Discontinued operations attributable to common unitholders
—

 
—

 
0.04

 
0.03

           Total
$
(0.11
)
 
$
(0.13
)
 
$
(0.36
)
 
$
(0.06
)
Diluted net income (loss) per Common Unit:
 
 
 
 
 
 
 
     Continuing operations attributable to common unitholders
$
(0.11
)
 
$
(0.13
)
 
$
(0.40
)
 
$
(0.09
)
     Discontinued operations attributable to common unitholders
—

 
—

 
0.04

 
0.03

           Total
$
(0.11
)
 
$
(0.13
)
 
$
(0.36
)
 
$
(0.06
)
Weighted average number of Common Units outstanding
274,800

 
259,866

 
270,095

 
259,505

Weighted average number of Common Units and potential dilutive securities
274,800

 
259,866

 
270,095

 
259,505

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
   Net income (loss)
$
(17,549
)
 
$
(14,869
)
 
$
(53,387
)
 
$
36,062

   Other comprehensive income:
 
 
 
 
 
 
 
     Derivative instrument activity
410

 
437

 
1,190

 
1,925

           Other comprehensive income
410

 
437

 
1,190

 
1,925

Comprehensive income (loss)
$
(17,139
)
 
$
(14,432
)
 
$
(52,197
)
 
$
37,987

See accompanying Notes to Consolidated Financial Statements

8

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30,
(in thousands)
(Unaudited)
 
2012
 
2011
Cash flows from operating activities:
 
 
 
       Net income (loss)
$
(53,387
)
 
$
36,062

       Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
            Depreciation of buildings and tenant improvements
193,479

 
204,134

            Amortization of deferred leasing and other costs
86,859

 
88,295

            Amortization of deferred financing costs
9,878

 
11,070

            Straight-line rent adjustment
(15,725
)
 
(19,012
)
            Earnings from land and depreciated property sales
(11,424
)
 
(83,315
)
            Third-party construction contracts, net
(4,295
)
 
(18,417
)
            Other accrued revenues and expenses, net
(14,582
)
 
14,588

            Operating distributions received in excess of equity in earnings from unconsolidated companies
10,772

 
11,681

                 Net cash provided by operating activities
201,575

 
245,086

Cash flows from investing activities:
 
 
 
       Development of real estate investments
(176,340
)
 
(125,676
)
       Acquisition of real estate investments and related intangible assets
(321,099
)
 
(179,047
)
       Acquisition of undeveloped land
(37,166
)
 
(3,825
)
       Second generation tenant improvements, leasing costs and building improvements
(46,682
)
 
(71,732
)
       Other deferred leasing costs
(22,727
)
 
(20,950
)
       Other assets
674

 
(4,500
)
       Proceeds from land and depreciated property sales, net
112,559

 
504,688

       Capital distributions from unconsolidated companies
4,890

 
54,730

       Capital contributions and advances to unconsolidated companies, net
(19,262
)
 
(28,362
)
                 Net cash provided by (used for) investing activities
(505,153
)
 
125,326

Cash flows from financing activities:
 
 
 
       Contributions from the General Partner
236,301

 
—

       Payments for redemption/repurchase of Preferred Units
(168,272
)
 
(110,726
)
       Proceeds from unsecured debt issuance
600,000

 
—

       Payments on and repurchases of unsecured debt
(172,374
)
 
(166,346
)
       Proceeds from secured debt financings
13,305

 
—

       Payments on secured indebtedness including principal amortization
(107,240
)
 
(24,841
)
       Borrowings (payments) on lines of credit, net
(20,293
)
 
111,247

       Distributions to common unitholders
(137,662
)
 
(132,423
)
       Distributions to preferred unitholders
(31,630
)
 
(46,347
)
       Contributions from (distributions to) noncontrolling interests, net
5,311

 
(408
)
       Buyout of noncontrolling interests
(6,208
)
 
—

       Deferred financing costs
(8,334
)
 
(2,830
)
                 Net cash provided by (used for) financing activities
202,904

 
(372,674
)
                 Net decrease in cash and cash equivalents
(100,674
)
 
(2,262
)
Cash and cash equivalents at beginning of period
213,826

 
18,419

Cash and cash equivalents at end of period
$
113,152

 
$
16,157

 
 
 
 
Non-cash investing and financing activities:
 
 
 
       Assumption of indebtedness and other liabilities in real estate acquisitions
$
19,992

 
$
150,042

       Contribution of properties to unconsolidated companies
$
—

 
$
53,245

       Investments and advances related to acquisition of previously unconsolidated companies
$
—

 
$
5,987

       Conversion of Limited Partner Units to common shares of the General Partner
$
29,002

 
$
3,052

       Issuance of Limited Partner Units for acquisition
$
—

 
$
28,357

       Preferred distributions declared but not paid
$
3,726

 
$
—

See accompanying Notes to Consolidated Financial Statements


9


DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the nine months ended September 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
(87,372
)
 
35,356

 
(1,736
)
 
—

 
(53,752
)
 
365

 
(53,387
)
Other comprehensive income
—

 
—

 
—

 
1,190

 
1,190

 
—

 
1,190

Capital contribution from the General Partner
235,829

 
—

 
—

 
—

 
235,829

 
—

 
235,829

Stock based compensation plan activity
3,907

 
—

 
—

 
—

 
3,907

 
—

 
3,907

Conversion of Limited Partner Units to common shares of the General Partner
29,002

 
—

 
(29,002
)
 
—

 
—

 
—

 
—

Distributions to Preferred Unitholders
—

 
(35,356
)
 
—

 
—

 
(35,356
)
 
—

 
(35,356
)
Redemption of Preferred Units
—

 
(168,272
)
 
—

 
—

 
(168,272
)
 
—

 
(168,272
)
Distributions to Partners ($0.51 per Common Unit)
(135,139
)
 
—

 
(2,523
)
 
—

 
(137,662
)
 
—

 
(137,662
)
Contributions from noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
5,311

 
5,311

Buyout of noncontrolling interests
(4,959
)
 
—

 
—

 
—

 
(4,959
)
 
(1,249
)
 
(6,208
)
Balance at September 30, 2012
$
1,965,154

 
$
625,638

 
$
22,993

 
$
2,177

 
$
2,615,962

 
$
8,972

 
$
2,624,934


See accompanying Notes to Consolidated Financial Statements










10


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    General Basis of Presentation
The interim consolidated financial statements included herein have been prepared by Duke Realty Corporation (the “General Partner”) and Duke Realty Limited Partnership (the “Partnership”). In this Report, unless the context indicates otherwise, the terms “Company,” “we,” “us” and “our” refer to the General Partner and the Partnership, collectively, and those entities owned or controlled by the General Partner and/or the Partnership. The 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 98.4% of the common partnership interests of the Partnership (“General Partner Units”) at September 30, 2012. The remaining 1.6% 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”).



11

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 third quarter of 2012, an unconsolidated venture that was previously determined to be a VIE sold its sole property, retired its outstanding debt and distributed substantially all of its remaining assets.
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 events, there are three unconsolidated joint ventures at September 30, 2012 that we have determined meet the criteria to be considered 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 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 three unconsolidated subsidiaries that we have determined to be VIEs as of September 30, 2012 (in millions):
 
Carrying Value
 
Maximum Loss Exposure
Investment in Unconsolidated Companies
$
55.1

 
$
55.1

Guarantee Obligations (1)
$
(24.3
)
 
$
(145.8
)
 
(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.




12

4.    Acquisitions and Dispositions
2012 Acquisitions
We acquired 18 operating properties during the nine months ended September 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 twelve medical office properties in various markets. 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
$
292,754

Lease related intangible assets
50,468

Other assets
2,829

Total acquired assets
346,051

Secured debt
18,741

Other liabilities
1,251

Total assumed liabilities
19,992

Fair value of acquired net assets
$
326,059


On September 28, 2012 we acquired a seven-building medical office portfolio for $90.1 million. The initial accounting for this acquisition is incomplete as of September 30, 2012 and the summary above includes a provisional allocation of $69.2 million to real estate assets and $20.9 million to lease related intangible assets. The measurement period adjustments required to finalize the accounting for this acquisition will have little or no impact related to the three or nine months ended September 30, 2012 on the Consolidated Statement of Operations, when considering the timing of the acquisition.
The leases in the acquired properties had a weighted average remaining life at acquisition of approximately 11.1 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 nine months ended September 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 nine months ended September 30, 2012 and 2011 consists of transaction costs related to completed acquisitions, which are expensed as incurred.


13

Dispositions
We disposed of income-producing real estate assets and undeveloped land and received net cash proceeds of $112.6 million and $504.7 million during the nine months ended September 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 nine months ended September 30, 2012 (in thousands):
 
Book Value
at 12/31/11
 
Book Value
at 9/30/12
 
Fair Value
at 12/31/11
 
Issuances and
Assumptions
 
Payments/Payoffs
 
Adjustments
to Fair Value
 
Fair Value
at 9/30/12
Fixed rate secured debt
$
1,167,188

 
$
1,077,991

 
$
1,256,331

 
$
18,741

 
$
(106,355
)
 
$
6,147

 
$
1,174,864

Variable rate secured debt
6,045

 
18,464

 
6,045

 
13,305

 
(885
)
 
499

 
18,964

Unsecured notes
2,616,063

 
3,043,690

 
2,834,610

 
600,000

 
(172,374
)
 
150,385

 
3,412,621

Unsecured lines of credit
20,293

 
—

 
20,244

 
—

 
(20,293
)
 
49

 
—

Total
$
3,809,589

 
$
4,140,145

 
$
4,117,230

 
$
632,046

 
$
(299,907
)
 
$
157,080

 
$
4,606,449


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 3.10% to 5.30%, 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 2.73% for outstanding borrowings as of September 30, 2012) and maturing June 29, 2017.
During the nine months ended September 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. In September 2012, we issued an additional $300.0 million of unsecured notes that bear interest at 3.875%, have an effective rate of 3.93%, and mature on October 15, 2022.
In July 2012, one of our consolidated subsidiaries repaid $21.0 million of variable rate unsecured debt, which bore interest at a rate of LIBOR plus 0.85%, at its scheduled maturity date. In August 2012, we repaid $150.0 million of senior unsecured notes, which had an effective interest rate of 6.01%, at their scheduled maturity date.



14

At September 30, 2012, all 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 132.00% 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, 2012.
Unsecured Line of Credit
Our unsecured line of credit as of September 30, 2012 is described as follows (in thousands):
Description
Maximum
Capacity
 
Maturity Date
 
Outstanding
Balance at
September 30, 2012
Unsecured Line of Credit - Partnership
$
850,000

 
December 2015
 
$
—


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 September 30, 2012, we were in compliance with all covenants under this line of credit.
Through July 2012, a consolidated subsidiary had an unsecured line of credit that allowed for borrowings up to $30.0 million and bore interest at a rate of LIBOR plus 0.85%. This unsecured line of credit was used to fund development activities within the consolidated subsidiary and the outstanding balance of $20.3 million 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 line of credit. The net present value of the difference between future contractual interest payments and future interest payments based on our estimate of a current market rate represents the difference between the book value and the fair value. Our estimate of a current market rate is based upon the rate, considering current market conditions and our specific credit profile, at which we estimate we could obtain similar borrowings.
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.

15

In the first nine months of 2012, we issued 16.9 million shares of common stock pursuant to our at the market offerings, generating gross proceeds of approximately $241.5 million and, after considering commissions and other costs, net proceeds of approximately $236.3 million. We paid $4.8 million in commissions related to the sale of these common shares. The proceeds from these offerings 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, prior to elimination, for the three and nine months ended September 30, 2012 and 2011, respectively (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Management fees
$
2,796

 
$
2,770

 
$
8,251

 
$
7,393

Leasing fees
622

 
826

 
2,856

 
3,627

Construction and development fees
1,860

 
1,786

 
3,615

 
4,182


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 nine months ended September 30, 2012 and 2011, respectively (in thousands): 

16

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
General Partner
 
 
 
 
 
 
 
Net loss attributable to common shareholders
$
(28,230
)
 
$
(32,076
)
 
$
(93,102
)
 
$
(13,549
)
Less: Dividends on participating securities
(680
)
 
(811
)
 
(2,388
)
 
(2,416
)
Basic net loss attributable to common shareholders
(28,910
)
 
(32,887
)
 
(95,490
)
 
(15,965
)
Noncontrolling interest in earnings of common unitholders
—

 
—

 
—

 
—

Diluted net loss attributable to common shareholders
$
(28,910
)
 
$
(32,887
)
 
$
(95,490
)
 
$
(15,965
)
Weighted average number of common shares outstanding
270,289

 
252,802

 
265,153

 
252,618

Weighted average Limited Partner Units outstanding
—

 
—

 
—

 
—

Other potential dilutive shares
—

 
—

 
—

 
—

Weighted average number of common shares and potential dilutive securities
270,289

 
252,802

 
265,153

 
252,618

 
 
 
 
 
 
 
 
Partnership
 
 
 
 
 
 
 
Net loss attributable to common unitholders
$
(28,689
)
 
$
(32,944
)
 
$
(94,838
)
 
$
(13,918
)
Less: Distributions on participating securities
(680
)
 
(811
)
 
(2,388
)
 
(2,416
)
Basic and diluted net loss attributable to common unitholders
$
(29,369
)
 
$
(33,755
)
 
$
(97,226
)
 
$
(16,334
)
Weighted average number of Common Units outstanding
274,800

 
259,866

 
270,095

 
259,505

Other potential dilutive units
—

 
—

 
—

 
—

Weighted average number of Common Units and potential dilutive securities
274,800

 
259,866

 
270,095

 
259,505

The Limited Partner Units are anti-dilutive to the General Partner for the three and nine months ended September 30, 2012 and 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 nine months ended September 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 September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
General Partner
 
 
 
 
 
 
 
Noncontrolling interest in loss of common unitholders
$
(459
)
 
$
(868
)
 
$
(1,736
)
 
$
(369
)
Weighted average Limited Partner Units outstanding
4,511

 
7,064

 
4,942

 
6,887

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
1,763

 
1,677

 
1,763

 
1,677

Anti-dilutive potential shares or units under the Exchangeable Notes
—

 
3,432

 
—

 
3,432

Outstanding participating securities
4,045

 
4,840

 
4,045

 
4,840

9.    Segment Reporting
We have four reportable operating segments at September 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.

17

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 nine months ended September 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 nine months ended September 30, 2012 and 2011, respectively (in thousands): 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
 
Rental Operations:
 
 
 
 
 
 
 
 
Industrial
 
$
109,400

 
$
95,676

 
$
327,713

 
$
281,083

Office
 
67,701

 
66,157

 
201,606

 
207,387

Medical Office
 
23,007

 
14,292

 
64,669

 
41,280

Non-reportable Rental Operations
 
4,695

 
5,485

 
16,067

 
16,783

General contractor and service fee revenue (“Service Operations”)
 
93,932

 
127,708

 
226,507

 
409,617

Total Segment Revenues
 
298,735

 
309,318

 
836,562

 
956,150


18

Other Revenue
 
4,154

 
2,971

 
6,396

 
8,219

Consolidated Revenue from continuing operations
 
302,889

 
312,289

 
842,958

 
964,369

Discontinued Operations
 
143

 
50,315

 
2,987

 
151,373

Consolidated Revenue
 
$
303,032

 
$
362,604

 
$
845,945

 
$
1,115,742

Reconciliation of Funds From Operations