Q1 DOC 2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Duke Realty Corporation
Yes x
No  ¨
 
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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Duke Realty Corporation:
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
Duke Realty Limited Partnership:
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  x
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Duke Realty Corporation
Yes  ¨ 
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 May 3, 2013
Common Stock, $.01 par value per share
 
321,669,024



EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2013 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 98.7% of the common partnership interests of the Partnership ("General Partner Units") as of March 31, 2013. The remaining 1.3% 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)
 
March 31,
2013
 
December 31,
2012
 
(Unaudited)
 
 
 
 
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
1,278,428

 
$
1,284,081

Buildings and tenant improvements
5,326,997

 
5,398,886

Construction in progress
303,383

 
234,918

Investments in and advances to unconsolidated companies
331,041

 
372,256

Undeveloped land
607,283

 
614,208

 
7,847,132

 
7,904,349

Accumulated depreciation
(1,319,056
)
 
(1,296,396
)
Net real estate investments
6,528,076

 
6,607,953

 
 
 
 
Real estate investments and other assets held-for-sale
105,505

 
30,937

 
 
 
 
Cash and cash equivalents
307,167

 
33,889

Accounts receivable, net of allowance of $3,616 and $3,374
21,175

 
22,283

Straight-line rent receivable, net of allowance of $6,107 and $6,091
121,457

 
120,303

Receivables on construction contracts, including retentions
27,465

 
39,754

Deferred financing costs, net of accumulated amortization of $50,582 and $48,218
41,097

 
40,083

Deferred leasing and other costs, net of accumulated amortization of $381,325 and $372,047
480,458

 
497,827

Escrow deposits and other assets
169,699

 
167,072

 
$
7,802,099

 
$
7,560,101

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
Secured debt
$
1,151,660

 
$
1,167,953

Unsecured notes
3,242,737

 
2,993,217

Unsecured line of credit
—

 
285,000

 
4,394,397

 
4,446,170

 
 
 
 
Liabilities related to real estate investments held-for-sale
1,973

 
807

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
81,044

 
84,679

Accrued real estate taxes
78,524

 
74,565

Accrued interest
41,626

 
59,215

Other accrued expenses
33,056

 
57,881

Other liabilities
123,233

 
167,935

Tenant security deposits and prepaid rents
43,665

 
42,731

Total liabilities
4,797,518

 
4,933,983

Shareholders' equity:
 
 
 
Preferred shares ($.01 par value); 5,000 shares authorized; 1,791 and 2,503 shares issued and outstanding
447,683

 
625,638

Common shares ($.01 par value); 400,000 shares authorized; 321,667 and 279,423 shares issued and outstanding
3,217

 
2,794

Additional paid-in capital
4,536,904

 
3,953,497

Accumulated other comprehensive income
3,228

 
2,691

Distributions in excess of net income
(2,020,455
)
 
(1,993,206
)
Total shareholders' equity
2,970,577

 
2,591,414

Noncontrolling interests
34,004

 
34,704

Total equity
3,004,581

 
2,626,118

 
$
7,802,099

 
$
7,560,101

See accompanying Notes to Consolidated Financial Statements

3

DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three months ended March 31,
(in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
2013
 
2012
Revenues:
 
 
 
Rental and related revenue
$
221,264

 
$
196,693

General contractor and service fee revenue
47,404

 
68,968

 
268,668

 
265,661

Expenses:
 
 
 
Rental expenses
41,713

 
35,758

Real estate taxes
30,487

 
27,849

General contractor and other services expenses
38,341

 
63,921

Depreciation and amortization
97,115

 
88,090

 
207,656

 
215,618

Other operating activities:
 
 
 
Equity in earnings of unconsolidated companies
49,378

 
1,509

Gain on sale of properties
168

 
(277
)
Undeveloped land carrying costs
(2,198
)
 
(2,298
)
Other operating expenses
(68
)
 
(265
)
General and administrative expenses
(13,145
)
 
(11,839
)
 
34,135

 
(13,170
)
Operating income
95,147

 
36,873

Other income (expenses):
 
 
 
Interest and other income, net
153

 
146

Interest expense
(60,075
)
 
(59,299
)
Acquisition-related activity
643

 
(580
)
Income (loss) from continuing operations
35,868

 
(22,860
)
Discontinued operations:
 
 
 
Loss before gain on sales
(699
)
 
(1,726
)
Gain on sale of depreciable properties
8,954

 
6,476

Income from discontinued operations
8,255

 
4,750

Net income (loss)
44,123

 
(18,110
)
Dividends on preferred shares
(9,550
)
 
(13,193
)
Adjustments for redemption of preferred shares
(5,932
)
 
(5,730
)
Net (income) loss attributable to noncontrolling interests
(598
)
 
643

Net income (loss) attributable to common shareholders
$
28,043

 
$
(36,390
)
Basic net income (loss) per common share:
 
 
 
Continuing operations attributable to common shareholders
$
0.06

 
$
(0.16
)
Discontinued operations attributable to common shareholders
0.03

 
0.02

Total
$
0.09

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

 
$
(0.16
)
Discontinued operations attributable to common shareholders
0.03

 
0.02

Total
$
0.09

 
$
(0.14
)
Weighted average number of common shares outstanding
314,936

 
258,365

Weighted average number of common shares and potential dilutive securities
319,571

 
258,365

 
 
 
 
Comprehensive income (loss):
 
 
 
Net income (loss)
$
44,123

 
$
(18,110
)
Other comprehensive income:
 
 
 
Amortization of interest contracts
457

 
457

Other
80

 
62

Total other comprehensive income

537

 
519

Comprehensive income (loss)
$
44,660

 
$
(17,591
)
See accompanying Notes to Consolidated Financial Statements

4

DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31,
(in thousands)
(Unaudited)
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income (loss)
$
44,123

 
$
(18,110
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
70,548

 
63,860

Amortization of deferred leasing and other costs
29,232

 
28,396

Amortization of deferred financing costs
3,507

 
3,246

Straight-line rent adjustment
(4,839
)
 
(5,852
)
Gain on acquisitions
(962
)
 
—

Gains on land and depreciated property sales
(9,122
)
 
(6,199
)
Third-party construction contracts, net
11,138

 
(1,877
)
Other accrued revenues and expenses, net
(26,261
)
 
(43,116
)
Operating distributions received in excess of (less than) equity in earnings from unconsolidated companies
(43,930
)
 
4,995

Net cash provided by operating activities
73,434

 
25,343

Cash flows from investing activities:
 
 
 
Development of real estate investments
(103,684
)
 
(29,639
)
Acquisition of real estate investments and related intangible assets
(35,495
)
 
(131,515
)
Acquisition of undeveloped land
(5,149
)
 
(12,180
)
Second generation tenant improvements, leasing costs and building improvements
(17,119
)
 
(15,361
)
Other deferred leasing costs
(11,079
)
 
(9,142
)
Other assets
(5,124
)
 
502

Proceeds from land and depreciated property sales, net
61,931

 
63,281

Capital distributions from unconsolidated companies
89,237

 
—

Capital contributions and advances to unconsolidated companies
(4,846
)
 
(3,521
)
Net cash used for investing activities
(31,328
)
 
(137,575
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common shares, net
574,685

 
146,969

Payments for redemption of preferred shares
(177,955
)
 
(168,272
)
Proceeds from unsecured debt issuance
250,000

 
—

Payments on unsecured debt
(480
)
 
(451
)
Proceeds from secured debt financings
1,933

 
—

Payments on secured indebtedness including principal amortization
(17,486
)
 
(10,455
)
Payments on line of credit, net
(285,000
)
 
—

Distributions to common shareholders
(54,678
)
 
(43,922
)
Distributions to preferred shareholders
(9,550
)
 
(9,467
)
Distributions to noncontrolling interests
(961
)
 
(1,033
)
Change in book overdrafts
(45,272
)
 
—

Deferred financing costs
(4,064
)
 
(206
)
Net cash provided by (used for) financing activities
231,172

 
(86,837
)
Net increase (decrease) in cash and cash equivalents
273,278

 
(199,069
)
Cash and cash equivalents at beginning of period
33,889

 
213,809

Cash and cash equivalents at end of period
$
307,167

 
$
14,740

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Assumption of indebtedness and other liabilities in real estate acquisitions
$
50

 
$
19,626

Carrying amount of pre-existing ownership interest in acquired property

$
630

 
$
—

Conversion of Limited Partner Units to common shares
$
337

 
$
29,460

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 three months ended March 31, 2013
(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, 2012
$
625,638

 
$
2,794

 
$
3,953,497

 
$
2,691

 
$
(1,993,206
)
 
$
34,704

 
$
2,626,118

Net income
—

 
—

 
—

 
—

 
43,525

 
598

 
44,123

Other comprehensive income
—

 
—

 
—

 
537

 
—

 
—

 
537

Issuance of common shares
—

 
416

 
574,269

 
—

 
—

 
—

 
574,685

Stock based compensation plan activity
—

 
6

 
2,870

 
—

 
(614
)
 
—

 
2,262

Conversion of Limited Partner Units
—

 
1

 
336

 
—

 
—

 
(337
)
 
—

Distributions to preferred shareholders
—

 
—

 
—

 
—

 
(9,550
)
 
—

 
(9,550
)
Redemption of preferred shares
(177,955
)
 
—

 
5,932

 
—

 
(5,932
)
 
—

 
(177,955
)
Distributions to common shareholders ($0.17 per share)
—

 
—

 
—

 
—

 
(54,678
)
 
—

 
(54,678
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(961
)
 
(961
)
Balance at March 31, 2013
$
447,683

 
$
3,217

 
$
4,536,904

 
$
3,228

 
$
(2,020,455
)
 
$
34,004

 
$
3,004,581

See accompanying Notes to Consolidated Financial Statements



6

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

 
March 31, 2013
 
December 31, 2012
 
(Unaudited)
 
 
 
 
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
     Land and improvements
$
1,278,428

 
$
1,284,081

     Buildings and tenant improvements
5,326,997

 
5,398,886

     Construction in progress
303,383

 
234,918

     Investments in and advances to unconsolidated companies
331,041

 
372,256

     Undeveloped land
607,283

 
614,208

 
7,847,132

 
7,904,349

     Accumulated depreciation
(1,319,056
)
 
(1,296,396
)
              Net real estate investments
6,528,076

 
6,607,953

 
 
 
 
Real estate investments and other assets held-for-sale
105,505

 
30,937

 
 
 
 
Cash and cash equivalents
307,167

 
33,889

Accounts receivable, net of allowance of $3,616 and $3,374
21,175

 
22,283

Straight-line rent receivable, net of allowance of $6,107 and $6,091
121,457

 
120,303

Receivables on construction contracts, including retentions
27,465

 
39,754

Deferred financing costs, net of accumulated amortization of $50,582 and $48,218
41,097

 
40,083

Deferred leasing and other costs, net of accumulated amortization of $381,325 and $372,047
480,458

 
497,827

Escrow deposits and other assets
169,699

 
167,072

 
$
7,802,099

 
$
7,560,101

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
     Secured debt
$
1,151,660

 
$
1,167,953

     Unsecured notes
3,242,737

 
2,993,217

     Unsecured line of credit
—

 
285,000

 
4,394,397

 
4,446,170

 
 
 
 
Liabilities related to real estate investments held-for-sale
1,973

 
807

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
81,044

 
84,679

Accrued real estate taxes
78,524

 
74,565

Accrued interest
41,626

 
59,215

Other accrued expenses
33,252

 
58,048

Other liabilities
123,233

 
167,935

Tenant security deposits and prepaid rents
43,665

 
42,731

     Total liabilities
4,797,714

 
4,934,150

Partners' equity:
 
 
 
  General Partner:
 
 
 
     Common equity (321,667 and 279,423 General Partner Units issued and outstanding)
2,523,643

 
1,967,091

     Preferred equity (1,791 and 2,503 Preferred Units issued and outstanding)
447,683

 
625,638

 
2,971,326

 
2,592,729

     Limited Partners' common equity (4,388 and 4,419 Limited Partner Units issued and outstanding)
20,687

 
21,383

     Accumulated other comprehensive income
3,228

 
2,691

            Total partners' equity
2,995,241

 
2,616,803

Noncontrolling interests
9,144

 
9,148

     Total equity
3,004,385

 
2,625,951

 
$
7,802,099

 
$
7,560,101

See accompanying Notes to Consolidated Financial Statements

7

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three months ended March 31,
(in thousands, except per unit amounts)
(Unaudited)
 
Three Months Ended
 
2013
 
2012
Revenues:
 
 
 
     Rental and related revenue
$
221,264

 
$
196,693

     General contractor and service fee revenue
47,404

 
68,968

 
268,668

 
265,661

Expenses:
 
 
 
     Rental expenses
41,713

 
35,758

     Real estate taxes
30,487

 
27,849

     General contractor and other services expenses
38,341

 
63,921

     Depreciation and amortization
97,115

 
88,090

 
207,656

 
215,618

Other operating activities:
 
 
 
     Equity in earnings of unconsolidated companies
49,378

 
1,509

     Gain on sale of properties
168

 
(277
)
     Undeveloped land carrying costs
(2,198
)
 
(2,298
)
     Other operating expenses
(68
)
 
(265
)
     General and administrative expenses
(13,145
)
 
(11,839
)
 
34,135

 
(13,170
)
     Operating income
95,147

 
36,873

Other income (expenses):
 
 
 
     Interest and other income, net
153

 
146

     Interest expense
(60,075
)
 
(59,299
)
     Acquisition-related activity
643

 
(580
)
Income (loss) from continuing operations
35,868

 
(22,860
)
Discontinued operations:
 
 
 
     Loss before gain on sales
(699
)
 
(1,726
)
     Gain on sale of depreciable properties
8,954

 
6,476

           Income from discontinued operations
8,255

 
4,750

Net income (loss)
44,123

 
(18,110
)
Distributions on Preferred Units
(9,550
)
 
(13,193
)
Adjustments for redemption of Preferred Units
(5,932
)
 
(5,730
)
Net income attributable to noncontrolling interests
(206
)
 
(168
)
     Net income (loss) attributable to common unitholders
$
28,435

 
$
(37,201
)
Basic net income (loss) per Common Unit:
 
 
 
     Continuing operations attributable to common unitholders
$
0.06

 
$
(0.16
)
     Discontinued operations attributable to common unitholders
0.03

 
0.02

           Total
$
0.09

 
$
(0.14
)
Diluted net income (loss) per Common Unit:
 
 
 
     Continuing operations attributable to common unitholders
$
0.06

 
$
(0.16
)
     Discontinued operations attributable to common unitholders
0.03

 
0.02

           Total
$
0.09

 
$
(0.14
)
Weighted average number of Common Units outstanding
319,341

 
264,114

Weighted average number of Common Units and potential dilutive securities
319,571

 
264,114

 
 
 
 
Comprehensive income (loss):
 
 
 
   Net income (loss)
$
44,123

 
$
(18,110
)
   Other comprehensive income:
 
 
 
Amortization of interest contracts
457

 
457

Other
80

 
62

Total other comprehensive income

537

 
519

Comprehensive income (loss)
$
44,660

 
$
(17,591
)
See accompanying Notes to Consolidated Financial Statements

8

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31,
(in thousands)
(Unaudited)
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income (loss)
$
44,123

 
$
(18,110
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
70,548

 
63,860

Amortization of deferred leasing and other costs
29,232

 
28,396

Amortization of deferred financing costs
3,507

 
3,246

Straight-line rent adjustment
(4,839
)
 
(5,852
)
Gain on acquisitions
(962
)
 
—

Gains on land and depreciated property sales
(9,122
)
 
(6,199
)
Third-party construction contracts, net
11,138

 
(1,877
)
Other accrued revenues and expenses, net
(26,232
)
 
(43,109
)
Operating distributions received in excess of (less than) equity in earnings from unconsolidated companies
(43,930
)
 
4,995

Net cash provided by operating activities
73,463

 
25,350

Cash flows from investing activities:
 
 
 
Development of real estate investments
(103,684
)
 
(29,639
)
Acquisition of real estate investments and related intangible assets
(35,495
)
 
(131,515
)
Acquisition of undeveloped land
(5,149
)
 
(12,180
)
Second generation tenant improvements, leasing costs and building improvements
(17,119
)
 
(15,361
)
Other deferred leasing costs
(11,079
)
 
(9,142
)
Other assets
(5,124
)
 
502

Proceeds from land and depreciated property sales, net
61,931

 
63,281

Capital distributions from unconsolidated companies
89,237

 
—

Capital contributions and advances to unconsolidated companies
(4,846
)
 
(3,521
)
Net cash used for investing activities
(31,328
)
 
(137,575
)
Cash flows from financing activities:
 
 
 
Contributions from the General Partner
574,685

 
146,969

Payments for redemption of Preferred Units
(177,955
)
 
(168,272
)
Proceeds from unsecured debt issuance
250,000

 
—

Payments on unsecured debt
(480
)
 
(451
)
Proceeds from secured debt financings
1,933

 
—

Payments on secured indebtedness including principal amortization
(17,486
)
 
(10,455
)
Payments on line of credit, net
(285,000
)
 
—

Distributions to common unitholders
(55,458
)
 
(44,902
)
Distributions to preferred unitholders
(9,550
)
 
(9,467
)
Distributions to noncontrolling interests
(210
)
 
(77
)
Change in book overdrafts
(45,272
)
 
—

Deferred financing costs
(4,064
)
 
(206
)
Net cash provided by (used for) financing activities
231,143

 
(86,861
)
Net increase (decrease) in cash and cash equivalents
273,278

 
(199,086
)
Cash and cash equivalents at beginning of period
33,889

 
213,826

Cash and cash equivalents at end of period
$
307,167

 
$
14,740

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Assumption of indebtedness and other liabilities in real estate acquisitions
$
50

 
$
19,626

Carrying amount of pre-existing ownership interest in acquired property

$
630

 
$
—

Conversion of Limited Partner Units to common shares of the General Partner
$
337

 
$
29,460

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 three months ended March 31, 2013
(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, 2012
$
1,967,091

 
$
625,638

 
$
21,383

 
$
2,691

 
$
2,616,803

 
$
9,148

 
$
2,625,951

Net income
33,975

 
9,550

 
392

 
—

 
43,917

 
206

 
44,123

Other comprehensive income
—

 
—

 
—

 
537

 
537

 
—

 
537

Capital contribution from the General Partner
574,685

 
—

 
—

 
—

 
574,685

 
—

 
574,685

Stock based compensation plan activity
2,262

 
—

 
—

 
—

 
2,262

 
—

 
2,262

Conversion of Limited Partner Units to common shares of the General Partner
337

 
—

 
(337
)
 
—

 
—

 
—

 
—

Distributions to Preferred Unitholders
—

 
(9,550
)
 
—

 
—

 
(9,550
)
 
—

 
(9,550
)
Redemption of Preferred Units
—

 
(177,955
)
 
—

 
—

 
(177,955
)
 
—

 
(177,955
)
Distributions to Partners ($0.17 per Common Unit)
(54,707
)
 
—

 
(751
)
 
—

 
(55,458
)
 
—

 
(55,458
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(210
)
 
(210
)
Balance at March 31, 2013
$
2,523,643

 
$
447,683

 
$
20,687

 
$
3,228

 
$
2,995,241

 
$
9,144

 
$
3,004,385


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 2012 year-end consolidated balance sheet data included in this Quarterly Report on Form 10-Q (this "Report") was derived from the audited financial statements in the combined Annual Report on Form 10-K of the General Partner and the Partnership for the year ended December 31, 2012, but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). The financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenue and expenses during the reporting period. Our actual results could differ from those estimates and assumptions. These financial statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included herein and the consolidated financial statements and notes thereto included in the combined Annual Report on Form 10-K of the General Partner and the Partnership for the year ended December 31, 2012.
The General Partner was formed in 1985 and we believe that it qualifies as a real estate investment trust ("REIT") under the provisions of the Internal Revenue Code of 1986, as amended (the "Code"). The Partnership was formed on October 4, 1993, when the General Partner contributed all of its properties and related assets and liabilities, together with the net proceeds from an offering of additional shares of its common stock, to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest whose operations began in 1972.
The General Partner is the sole general partner of the Partnership, owning approximately 98.7% of the common partnership interests of the Partnership ("General Partner Units") at March 31, 2013. The remaining 1.3% 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 10) are conducted through the Partnership. We conduct our Service Operations (see Note 10) through Duke Realty Services, LLC, Duke Realty Services Limited Partnership and Duke Construction Limited Partnership ("DCLP"), which are consolidated entities that are 100% owned by a combination of the General Partner and the Partnership. DCLP is owned through a taxable REIT subsidiary. The consolidated financial statements include our accounts and the accounts of our majority-owned or controlled subsidiaries.  
2.    Reclassifications
Certain amounts in the accompanying consolidated financial statements for 2012 have been reclassified to conform to the 2013 consolidated financial statement presentation.
3.    Other Comprehensive Income
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02, Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), which is effective for us beginning with the three months ended March 31, 2013. ASU 2013-02 requires presentation of significant amounts reclassified out of accumulated other comprehensive income. Activity within other comprehensive income or loss includes changes in the fair values of currently outstanding interest rate swaps that we have designated as cash flow hedges, as well as the amortization to interest expense, over the lives of previously hedged loans, of the values of interest rate swaps that have been settled. Activity within other comprehensive income is not material for each type of activity, or all activities in the aggregate, for all periods presented in this Report.
4.    Variable Interest Entities
At March 31, 2013, there are three unconsolidated joint ventures that we have determined meet the criteria to be considered variable interest entities ("VIEs"). These three unconsolidated joint ventures were formed with the sole purpose of developing, constructing, leasing, marketing and selling or operating properties. The business activities of these unconsolidated joint ventures have been financed through a combination of equity contributions, partner/member loans, and third-party debt that is guaranteed by 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 March 31, 2013 (in millions):
 
Carrying Value
 
Maximum Loss Exposure
Investment in Unconsolidated Companies
$
52.4

 
$
52.4

Guarantee Obligations (1)
$
(23.0
)
 
$
(144.5
)
 
(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

5.    Acquisitions and Dispositions
2013 Acquisitions
We acquired two operating properties during the three months ended March 31, 2013. These acquisitions consisted of one industrial property near Indianapolis, Indiana and one medical office property in Central Florida. 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
$
29,780

Lease related intangible assets
6,370

Total acquired assets
36,150

Other liabilities
50

Total assumed liabilities
50

Fair value of acquired net assets
$
36,100


The leases in the acquired properties had a weighted average remaining life at acquisition of approximately 8.6 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 three months ended March 31, 2013 were as follows: 
 
Low

High

Discount rate
8.06
%
9.67
%
Exit capitalization rate
6.96
%
7.67
%
Lease-up period (months)
12

24

Net rental rate per square foot – Industrial
$2.95
$2.95
Net rental rate per square foot – Medical Office
$18.00
$18.00
Acquisition-Related Activity
The acquisition-related activity in our consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 consists of transaction costs related to completed acquisitions, which are expensed as incurred, as well as gains or losses related to acquisitions where we had a pre-existing ownership interest. We recognized a gain of $962,000 on the pre-existing ownership interest that we held in the industrial property we acquired and expenses of $319,000 for transaction costs during the three months ended March 31, 2013.
Activity during the three months ended March 31, 2012 consists of transaction costs related to acquisitions, which were expensed as incurred.
Dispositions
We disposed of certain consolidated income-producing real estate assets and undeveloped land and received net cash proceeds of $61.9 million and $63.3 million during the three months ended March 31, 2013 and 2012, respectively.

13

During the three months ended March 31, 2013, 17 office properties and one industrial property were sold from certain of our unconsolidated joint ventures for which our capital distributions totaled $89.2 million and our share of gains totaled $48.8 million, which is included in equity in earnings.
6.    Indebtedness
All debt is held directly or indirectly by the Partnership. The General Partner does not have any indebtedness, but does guarantee all of the unsecured debt of the Partnership.
The following table summarizes the book value and changes in the fair value of our debt for the three months ended March 31, 2013 (in thousands):
 
Book Value
at 12/31/12
 
Book Value
at 3/31/13
 
Fair Value
at 12/31/12
 
Issuances and
Assumptions
 
Payments/Payoffs
 
Adjustments
to Fair Value
 
Fair Value
at 3/31/13
Fixed rate secured debt
$
1,149,541

 
$
1,131,398

 
$
1,251,477

 
$
—

 
$
(17,486
)
 
$
20,784

 
$
1,254,775

Variable rate secured debt
18,412

 
20,262

 
18,386

 
1,933

 
—

 
(83
)
 
20,236

Unsecured notes
2,993,217

 
3,242,737

 
3,336,386

 
250,000

 
(480
)
 
8,638

 
3,594,544

Unsecured line of credit
285,000

 
—

 
285,632

 
—

 
(285,000
)
 
(632
)
 
—

Total
$
4,446,170

 
$
4,394,397

 
$
4,891,881

 
$
251,933

 
$
(302,966
)
 
$
28,707

 
$
4,869,555


Secured Debt
Because our fixed rate secured debt is not actively traded in any marketplace, we utilized a discounted cash flow methodology to determine its fair value. Accordingly, we calculated fair value by applying an estimate of the current market rate to discount the debt's remaining contractual cash flows. Our estimate of a current market rate, which is the most significant input in the discounted cash flow calculation, is intended to replicate debt of similar maturity and loan-to-value relationship. The estimated rates ranged from 2.80% to 4.30%, 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.
As of March 31, 2013, we have repaid two secured loans at their maturity dates totaling $13.7 million. These loans had a weighted average stated interest rate of 6.20%.
Unsecured Notes
At March 31, 2013, 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 130.00% of face value.
In March 2013, we issued $250.0 million of unsecured notes that bear interest at 3.625%, have an effective rate of 3.72%, and mature on April 15, 2023.
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 March 31, 2013.


14

Unsecured Line of Credit
Our unsecured line of credit as of March 31, 2013 is described as follows (in thousands):
Description
Maximum
Capacity
 
Maturity Date
 
Outstanding
Balance at
March 31, 2013
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 March 31, 2013, we were in compliance with all covenants under this line of credit.
To the extent that there are outstanding borrowings, we utilize a discounted cash flow methodology in order to estimate the fair value of our unsecured line of credit. The net present value of the difference between future contractual interest payments and future interest payments based on our estimate of a current market rate represents the difference between the book value and the fair value. Our estimate of a current market rate is based upon the rate, considering current market conditions and our specific credit profile, at which we estimate we could obtain similar borrowings. When such fair value estimates are made for outstanding borrowings, they are primarily based on Level 3 inputs as defined.
7.    Shareholders' Equity of the General Partner and Partners' Capital of the Partnership
General Partner
In January 2013, the General Partner completed a public offering of 41.4 million common shares at an issue price of $14.25 per share, resulting in gross proceeds of $590.0 million and, after underwriting fees and estimated offering costs, net proceeds of approximately $571.9 million. A portion of the net proceeds from this offering were used to repay all of the outstanding borrowings under the Partnership's existing revolving credit facility, which had an outstanding balance of $285.0 million as of December 31, 2012, and the remaining proceeds were used to redeem all of the General Partner's outstanding 8.375% Series O Cumulative Redeemable Preferred Shares ("Series O Shares") and for general corporate purposes.
In February 2013, the General Partner redeemed all of the outstanding shares of its Series O Shares at their liquidation amount of $178.0 million. Original offering costs of $5.9 million were included as a reduction to net income attributable to common shareholders in conjunction with the redemption of these shares.
In the first three months of 2013, the General Partner issued 213,333 shares of common stock pursuant to its at the market equity program, generating gross proceeds of approximately $3.0 million and, after considering commissions and other costs, net proceeds of approximately $2.8 million. The General Partner paid approximately $60,000 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

15

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.
8.    Related Party Transactions
We provide property management, asset management, leasing, construction and other tenant related services to unconsolidated companies in which we have equity interests. We recorded the corresponding fees based on contractual terms that approximate market rates for these types of services and 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 months ended March 31, 2013 and 2012, respectively (in thousands): 
 
Three Months Ended
 
March 31,
 
2013
 
2012
Management fees
$
2,456

 
$
2,731

Leasing fees
555

 
1,294

Construction and development fees
1,067

 
843

9.    Net Income (Loss) Per Common Share or Common Unit
Basic net income (loss) per common share or Common Unit is computed by dividing net income (loss) attributable to common shareholders or common unitholders, less dividends or distributions on share-based awards expected to 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 months ended March 31, 2013 and 2012, respectively (in thousands): 

16

 
Three Months Ended March 31,
 
2013
 
2012
General Partner
 
 
 
Net income (loss) attributable to common shareholders
$
28,043

 
$
(36,390
)
Less: Dividends on participating securities
(688
)
 
(852
)
Basic net income (loss) attributable to common shareholders
27,355

 
(37,242
)
Noncontrolling interest in earnings of common unitholders
392

 
—

Diluted net income (loss) attributable to common shareholders
$
27,747

 
$
(37,242
)
Weighted average number of common shares outstanding
314,936

 
258,365

Weighted average Limited Partner Units outstanding
4,405

 
—

Other potential dilutive shares
230

 
—

Weighted average number of common shares and potential dilutive securities
319,571

 
258,365

 
 
 
 
Partnership
 
 
 
Net income (loss) attributable to common unitholders
$
28,435

 
$
(37,201
)
Less: Distributions on participating securities
(688
)
 
(852
)
Basic and diluted net income (loss) attributable to common unitholders
$
27,747

 
$
(38,053
)
Weighted average number of Common Units outstanding
319,341

 
264,114

Other potential dilutive units
230

 
—

Weighted average number of Common Units and potential dilutive securities
319,571

 
264,114

The Limited Partner Units are anti-dilutive to the General Partner for the three months ended March 31, 2012 as a result of the net loss for that period. In addition, substantially all potential shares related to our stock-based compensation plans are anti-dilutive for all periods presented. The following table summarizes the data that is excluded from the computation of net income (loss) per common share or Common Unit as a result of being anti-dilutive (in thousands): 
 
Three Months Ended March 31,
 
2013
 
2012
General Partner
 
 
 
Noncontrolling interest in loss of common unitholders
$
—

 
$
(811
)
Weighted average Limited Partner Units outstanding
—

 
5,749

General Partner and Partnership
 
 
 
Other potential dilutive shares or units:
 
 
 
Anti-dilutive outstanding potential shares or units under fixed stock option and other stock-based compensation plans
1,378

 
1,733

Outstanding participating securities
4,078

 
5,051

10.    Segment Reporting
We have four reportable operating segments at March 31, 2013, 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.
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.

17

We assess and measure the overall operating results of the General Partner and the Partnership based upon Funds From Operations ("FFO"), which is an industry performance measure that management believes is a useful indicator of 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 REIT's 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 months ended March 31, 2013 and 2012, respectively (in thousands): 
 
 
Three Months Ended March 31,
 
 
2013
 
2012
Revenues
 
 
 
 
Rental Operations:
 
 
 
 
Industrial
 
$
115,876

 
$
106,153

Office
 
66,708

 
66,378

Medical Office
 
35,181

 
21,011

Non-reportable Rental Operations
 
2,302

 
2,022

Service Operations
 
47,404

 
68,968

Total Segment Revenues
 
267,471

 
264,532

Other Revenue
 
1,197

 
1,129

Consolidated Revenue from continuing operations
 
268,668

 
265,661

Discontinued Operations
 
5,019

 
7,973

Consolidated Revenue
 
$
273,687

 
$
273,634

Reconciliation of Funds From Operations
 
 
 
 
Net earnings excluding depreciation and Non-Segment Items
 
 
 
 
Industrial
 
$
84,807

 
$
78,504


18

Office
 
38,386

 
38,848

Medical Office
 
23,949

 
13,935

Non-reportable Rental Operations
 
1,611

 
1,447

Service Operations
 
9,063

 
5,047

 
 
157,816

 
137,781

Non-Segment Items:
 
 
 
 
Interest expense
 
(60,075
)
 
(59,299
)
Interest and other income
 
153

 
146

Other operating expenses
 
(68
)
 
(265
)
General and administrative expenses
 
(13,145
)
 
(11,839
)
Undeveloped land carrying costs
 
(2,198
)
 
(2,298
)
Acquisition-related activity
 
643

 
(580
)
Other non-segment income
 
311

 
352

Net income attributable to noncontrolling interests - consolidated entities not wholly owned by the Partnership
 
(206
)
 
(168
)
Joint venture items
 
8,193

 
10,095

Dividends on preferred shares/Preferred Units
 
(9,550
)
 
(13,193
)
Adjustments for redemption of preferred shares/Preferred Units
 
(5,932
)
 
(5,730
)
Discontinued operations
 
1,966

 
2,440

FFO attributable to common unitholders of the Partnership
 
77,908

 
57,442

Net (income) loss attributable to noncontrolling interests - common limited partnership interests in the Partnership
 
(392
)
 
811

Noncontrolling interest share of FFO adjustments
 
(682
)
 
(2,060
)
FFO attributable to common shareholders of the General Partner
 
76,834

 
56,193

Depreciation and amortization on continuing operations
 
(97,115
)
 
(88,090
)
Depreciation and amortization on discontinued operations
 
(2,665
)
 
(4,166
)
Company's share of joint venture adjustments
 
(7,629
)
 
(8,586
)
Gains on depreciated property sales on continuing operations
 
168

 
(277
)
Gains on depreciated property sales on discontinued operations
 
8,954

 
6,476

Gains on depreciated property sales - share of joint venture
 
48,814

 
—

Noncontrolling interest share of FFO adjustments
 
682

 
2,060

Net income (loss) attributable to common shareholders of the General Partner
 
$
28,043

 
$
(36,390
)
Add back: Net income (loss) attributable to noncontrolling interests - common limited partnership interests in the Partnership
 
392

 
(811
)
Net income (loss) attributable to common unitholders of the Partnership
 
$
28,435

 
$
(37,201
)

The assets for each of the reportable segments as of March 31, 2013 and December 31, 2012 are as follows (in thousands): 
 
March 31,
2013
 
December 31,
2012
Assets
 
 
 
Rental Operations:
 
 
 
Industrial
$
3,835,245

 
$
3,836,721

Office
1,673,827

 
1,683,314

Medical Office
1,233,126

 
1,202,929

Non-reportable Rental Operations
170,248

 
175,197

Service Operations
155,055

 
162,219

Total Segment Assets
7,067,501

 
7,060,380

Non-Segment Assets
734,598

 
499,721

Consolidated Assets
$
7,802,099

 
$
7,560,101



19

11.    Discontinued Operations and Assets Held for Sale
The following table illustrates the number of properties in discontinued operations:
 
 
Held for Sale at March 31, 2013
 
Sold in 2013
 
Sold in 2012
 
Total
 
 
 
 
 
 
 
 
Office
0
 
1
 
10
 
11
Industrial
1
 
3
 
17
 
21
Medical Office
0
 
2
 
0
 
2
Retail
1
 
0
 
1
 
2
 
2
 
6
 
28
 
36
We allocate interest expense to discontinued operations and have included such interest expense in computing income from discontinued operations. Interest expense allocable to discontinued operations includes interest on any secured debt for properties included in discontinued operations and an allocable share of our consolidated unsecured interest expense for unencumbered properties. The allocation of unsecured interest expense to discontinued operations was based upon the gross book value of the unencumbered real estate assets included in discontinued operations as it related to the total gross book value of our unencumbered real estate assets.
The following table illustrates the operations of the buildings reflected in discontinued operations for the three months ended March 31, 2013 and 2012, respectively (in thousands):  
 
Three Months Ended March 31,
 
2013
 
2012
Revenues
$
5,019

 
$
7,973

Operating expenses
(1,687
)
 
(3,221
)
Depreciation and amortization
(2,665
)
 
(4,166
)
Operating income
667

 
586

Interest expense
(1,366
)
 
(2,312
)
Loss before gain on sales
(699
)
 
(1,726
)
Gain on sale of depreciable properties
8,954

 
6,476

Income from discontinued operations
$
8,255

 
$
4,750

Dividends or distributions on preferred shares or Preferred Units and adjustments for the redemption or repurchase of preferred shares or Preferred Units are allocated entirely to continuing operations for both the General Partner and the Partnership.
Allocation of Noncontrolling Interests - General Partner
The following table illustrates the General Partner's share of the income (loss) attributable to common shareholders from continuing operations and discontinued operations, reduced by the allocation of income or loss between continuing and discontinued operations to the Limited Partner Units, for the three months ended March 31, 2013 and 2012, respectively (in thousands):

20

 
Three Months Ended March 31,
 
2013
 
2012
Income (loss) from continuing operations attributable to common shareholders
$
19,902

 
$
(41,037
)
Income from discontinued operations attributable to common shareholders
8,141

 
4,647

Net income (loss) attributable to common shareholders
$
28,043

 
$
(36,390
)
Allocation of Noncontrolling Interests - Partnership
The income from discontinued operations for all periods presented in the Partnership's Consolidated Statements of Operations and Comprehensive Income is entirely attributable to the common unitholders.
Properties Held for Sale
At March 31, 2013, we classified two in-service properties as held-for-sale, which were included in discontinued operations, due to our intention and ability to sell the properties in the second quarter of 2013. The following table illustrates aggregate balance sheet information of these properties included in discontinued operations at March 31, 2013 (in thousands):
 
March 31, 2013
Real estate investment, net
$
94,260

Other assets
11,245

Total assets held-for-sale
$
105,505

 
 
Accrued expenses
$
537

Other liabilities
1,436

Total liabilities held-for-sale
$
1,973

12.    Subsequent Events
Declaration of Dividends/Distributions
The General Partner's board of directors declared the following dividends/distributions at its regularly scheduled board meeting held on April 24, 2013:
 
Class of stock/units
Quarterly Amount per Share or Unit
 
Record Date
 
Payment Date
Common
$0.17
 
May 16, 2013
 
May 31, 2013
Preferred (per depositary share or unit):

 

 

Series J
$0.414063
 
May 16, 2013
 
May 31, 2013
Series K
$0.406250
 
May 16, 2013
 
May 31, 2013
Series L
$0.412500
 
May 16, 2013
 
May 31, 2013

Sale of Retail Property
On May 1, 2013, we closed on the sale of an approximately 391,000 rentable square foot retail lifestyle center in Pembroke Pines, Florida. We received net proceeds of $184.5 million and we estimate the gain on sale to be approximately $80.0 million.

21

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand our operations and our present business environment. Management's Discussion and Analysis is provided as a supplement to and should be read in conjunction with our consolidated financial statements and the notes thereto, contained in Part I, Item I of this Quarterly Report on Form 10-Q (this "Report") and the consolidated financial statements and notes thereto, contained in Part IV, Item 15 of our combined Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission (the "SEC") on February 22, 2013 for Duke Realty Corporation (the "General Partner") and Duke Realty Limited Partnership (the "Partnership"). As used herein, the terms the "Company," "we," "us" and "our" refer to the General Partner and the Partnership, collectively, and those entities owned or controlled by the General Partner and/or the Partnership.
Cautionary Notice Regarding Forward-Looking Statements
Certain statements contained in or incorporated by reference into this Report, including, without limitation, those related to our future operations, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "believe," "estimate," "expect," "anticipate," "intend," "plan," "seek," "may," and similar expressions or statements regarding future periods are intended to identify forward-looking statements.
These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any predictions of future results, performance or achievements that we express or imply in this Report. Some of the risks, uncertainties and other important factors that may affect future results include, among others:
•
Changes in general economic and business conditions, including the financial condition of our tenants and the value of our real estate assets;
•
The General Partner's continued qualification as a real estate investment trust ("REIT") for U.S. federal income tax purposes;
•
Heightened competition for tenants and potential decreases in property occupancy;
•
Potential changes in the financial markets and interest rates;
•
Volatility in the General Partner's stock price and trading volume;
•
Our continuing ability to raise funds on favorable terms;
•
Our ability to successfully identify, acquire, develop and/or manage properties on terms that are favorable to us;
•
Potential increases in real estate construction costs;
•
Our ability to successfully dispose of properties on terms that are favorable to us, including, without limitation, through one or more transactions that are consistent with our previously disclosed strategic plans;
•
Our ability to retain our current credit ratings;
•
Inherent risks in the real estate business, including, but not limited to, tenant defaults, potential liability relating to environmental matters and liquidity of real estate investments; and
•
Other risks and uncertainties described herein, as well as those risks and uncertainties discussed from time to time in our other reports and other public filings with the SEC.
Although we presently believe that the plans, expectations and results expressed in or suggested by the forward-looking statements are reasonable, all forward-looking statements are inherently subjective, uncertain and subject to change, as they involve substantial risks and uncertainties beyond our control. New factors emerge from time to time, and it is not possible for us to predict the nature, or assess the potential impact, of each new factor on our business. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any of our forward-looking statements for events or circumstances that arise after the statement is made, except as otherwise may be required by law.


22

This list of risks and uncertainties, however, is only a summary of some of the most important factors and is not intended to be exhaustive. Additional information regarding risk factors that may affect us is included under the caption "Risk Factors" in Part II, Item 1A of this Report, and in our combined Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which we filed with the SEC on February 22, 2013 for the General Partner and the Partnership. The risk factors contained in our Annual Report are updated by us from time to time in Quarterly Reports on Form 10-Q and other public filings. 
Business Overview
The General Partner is a self-administered and self-managed REIT that began operations in 1986 and is the sole general partner of the Partnership. The Partnership is a limited partnership formed in 1993, at which time all of the properties and related assets and liabilities of the General Partner, as well as proceeds from a secondary offering of the General Partner's common shares, were contributed to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest whose operations began in 1972. We operate the General Partner and the Partnership as one enterprise, and therefore, our discussion and analysis refers to the General Partner and its consolidated subsidiaries, including the Partnership, collectively. A more complete description of our business, and of management's philosophy and priorities, is included in our 2012 Annual Report on Form 10-K.
As of March 31, 2013, we:
•
Owned or jointly controlled 757 industrial, office, medical office and other properties, of which 734 properties with more than 137.8 million square feet are in service and 23 properties with more than 5.1 million square feet are under development. The 734 in-service properties are comprised of 627 consolidated properties with approximately 116.2 million square feet and 107 jointly controlled unconsolidated properties with more than 21.6 million square feet. The 23 properties under development consist of 21 consolidated properties with more than 4.2 million square feet and two jointly controlled unconsolidated properties with approximately 874,000 square feet.
•
Owned, including through ownership interests in unconsolidated joint ventures, more than 4,500 acres of land and controlled more than 1,600 acres through purchase options.
A key component of our overall strategy is to increase our investment in quality industrial properties in both existing and select new markets, expand our medical office portfolio nationally to take advantage of demographic trends and to reduce our investment in suburban office properties and other non-strategic assets.
We have four reportable operating segments at March 31, 2013, 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 contractor and construction management to third-party property owners and joint ventures, and is collectively referred to as "Service Operations." Our reportable segments offer different products or services and are managed separately because each segment requires different operating strategies and management expertise.
Key Performance Indicators
Our operating results depend primarily upon rental income from our Rental Operations. The following discussion highlights the areas of Rental Operations that we consider critical drivers of future revenues.
Occupancy Analysis
Our ability to maintain high occupancy rates is a principal driver of maintaining and increasing rental revenue. The following table sets forth percent leased and average net effective rent information regarding our in-service portfolio

23

of consolidated rental properties, including properties classified within both continuing and discontinued operations, as of March 31, 2013 and 2012, respectively (in thousands, except percentage data):
 
 
Total Square Feet
 
Percent of
Total Square Feet
 
Percent Leased*
 
Average Annual Net Effective Rent**
Type
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Industrial
94,859

 
91,449

 
81.7
%
 
82.2
%
 
93.1
%
 
93.7
%
 
$3.85
 
$3.84
Office
15,574

 
15,789

 
13.4
%
 
14.2
%
 
84.2
%
 
83.8
%
 
$13.32
 
$13.26
Medical Office
5,011

 
3,156

 
4.3
%
 
2.8
%
 
90.6
%
 
90.4
%
 
$21.70
 
$20.84
Other
739

 
823

 
0.6
%
 
0.8
%
 
85.8
%
 
89.2
%
 
$24.12
 
$23.60
Total
116,183

 
111,217

 
100.0
%
 
100.0
%
 
91.8
%
 
92.1
%
 
$5.90
 
$5.67
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 *Represents the percentage of total square feet leased based on executed leases and without regard to whether the leases have commenced.
**Represents average annual base rental payments per leased square foot, on a straight-line basis for the term of each lease, from space leased to tenants at the end of the most recent reporting period. This amount excludes additional amounts paid by tenants as reimbursement for operating expenses.

The expiration of certain larger industrial spaces, as well as placing a speculative industrial property into service during the three months ended March 31, 2013, drove the slight decrease in our total percent leased from March 31, 2012.
Total Leasing Activity
The initial leasing of newly completed or vacant space in acquired properties is referred to as first generation lease activity. The leasing of space that had been previously under lease is referred to as second generation lease activity. The total leasing activity for our consolidated rental properties, expressed in square feet of leases signed during the period, is as follows for the three months ended March 31, 2013 and 2012, respectively (in thousands):
 
Three Months Ended March 31,
 
2013
 
2012
New Leasing Activity - First Generation
1,359
 
1,676
New Leasing Activity - Second Generation
2,266
 
2,225
Renewal Leasing Activity
1,992
 
2,565
Total Leasing Activity
5,617
 
6,466
New Second Generation Leases
The following table sets forth the estimated costs of tenant improvements and leasing commissions, on a per square foot basis, that we are obligated to fulfill under the new second generation leases signed for our consolidated rental properties during the three months ended March 31, 2013 and 2012, respectively (square feet data in thousands):
 
Square Feet of New Second Generation Leases
 
Average Term in Years
 
Estimated Tenant Improvement Cost per Square Foot
 
Leasing Commissions per Square Foot
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Three Months
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrial
2,066
 
2,017
 
5.7

 
7.7

 
$2.56
 
$1.61
 
$1.55
 
$1.32
Office
177
 
191
 
5.6

 
5.8

 
$10.39
 
$16.00
 
$5.74
 
$6.07
Medical Office
23
 
17
 
4.4

 
7.9

 
$5.74
 
$12.73
 
$0.56
 
$5.33
Total
2,266
 
2,225
 
5.7

 
7.5

 
$3.21
 
$2.93
 
$1.86
 
$1.76


24

Lease Renewals
The following table summarizes our lease renewal activity within our consolidated rental properties for the three months ended March 31, 2013 and 2012, respectively (square feet data in thousands):
 
Square Feet of Leases Renewed
 
Percent of Expiring Leases Renewed
 
Average Term in Years
 
Growth (Decline) in Net Effective Rents*
 
Estimated Tenant Improvement Cost per Square Foot
 
Leasing Commissions per Square Foot
 
2013