Q3 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 September 30, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 1-9044 (Duke Realty Corporation) 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   o
 
Duke Realty Limited Partnership
Yes x
 No   o
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  o
 
Duke Realty Limited Partnership
Yes x
No  o
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 the 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  o 
No  x
 
Duke Realty Limited Partnership
Yes  o
No  x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Class
 
Outstanding Common Shares of Duke Realty Corporation at November 1, 2013
Common Stock, $.01 par value per share
 
325,790,455



EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 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 September 30, 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)
 
September 30,
2013
 
December 31,
2012
 
(Unaudited)
 
 
 
 
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
1,443,643

 
$
1,284,081

Buildings and tenant improvements
5,720,356

 
5,398,886

Construction in progress
197,472

 
234,918

Investments in and advances to unconsolidated companies
328,660

 
372,256

Undeveloped land
580,052

 
614,208

 
8,270,183

 
7,904,349

Accumulated depreciation
(1,384,219
)
 
(1,296,396
)
Net real estate investments
6,885,964

 
6,607,953

 
 
 
 
Real estate investments and other assets held-for-sale
57,790

 
30,937

 
 
 
 
Cash and cash equivalents
24,112

 
33,889

Accounts receivable, net of allowance of $3,818 and $3,374
20,073

 
22,283

Straight-line rent receivable, net of allowance of $7,472 and $6,091
124,574

 
120,303

Receivables on construction contracts, including retentions
28,650

 
39,754

Deferred financing costs, net of accumulated amortization of $52,370 and $48,218
38,029

 
40,083

Deferred leasing and other costs, net of accumulated amortization of $413,227 and $372,047
498,025

 
497,827

Escrow deposits and other assets
209,622

 
167,072

 
$
7,886,839

 
$
7,560,101

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
Secured debt
$
1,158,456

 
$
1,167,953

Unsecured debt
3,066,755

 
2,993,217

Unsecured line of credit
210,000

 
285,000

 
4,435,211

 
4,446,170

 
 
 
 
Liabilities related to real estate investments held-for-sale
2,919

 
807

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
78,376

 
84,679

Accrued real estate taxes
104,144

 
74,565

Accrued interest
36,439

 
59,215

Other accrued expenses
40,567

 
104,719

Other liabilities
130,537

 
121,097

Tenant security deposits and prepaid rents
45,702

 
42,731

Total liabilities
4,873,895

 
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; 325,319 and 279,423 shares issued and outstanding
3,253

 
2,794

Additional paid-in capital
4,601,224

 
3,953,497

Accumulated other comprehensive income
3,780

 
2,691

Distributions in excess of net income
(2,076,299
)
 
(1,993,206
)
Total shareholders' equity
2,979,641

 
2,591,414

Noncontrolling interests
33,303

 
34,704

Total equity
3,012,944

 
2,626,118

 
$
7,886,839

 
$
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 and nine months ended September 30,
(in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
228,883

 
$
199,326

 
$
668,230

 
$
586,570

General contractor and service fee revenue
62,807

 
93,932

 
161,004

 
226,507

 
291,690

 
293,258

 
829,234

 
813,077

Expenses:
 
 
 
 
 
 
 
Rental expenses
42,888

 
37,187

 
122,753

 
104,430

Real estate taxes
30,450

 
27,303

 
90,729

 
81,505

General contractor and other services expenses
59,392

 
87,719

 
142,925

 
209,519

Depreciation and amortization
103,594

 
90,202

 
296,791

 
264,435

 
236,324

 
242,411

 
653,198

 
659,889

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings (loss) of unconsolidated companies
(27
)
 
2,280

 
50,442

 
4,056

Gain on sale of properties
—

 
403

 
1,108

 
245

Gain on land sales
3,365

 
—

 
3,365

 
—

Undeveloped land carrying costs
(2,108
)
 
(2,140
)
 
(6,837
)
 
(6,606
)
Impairment charges
—

 
—

 
(3,777
)
 
—

Other operating expenses
(47
)
 
(130
)
 
(150
)
 
(591
)
General and administrative expenses
(10,373
)
 
(8,934
)
 
(33,225
)
 
(32,367
)
 
(9,190
)
 
(8,521
)
 
10,926

 
(35,263
)
Operating income
46,176

 
42,326

 
186,962

 
117,925

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
145

 
150

 
1,219

 
394

Interest expense
(58,100
)
 
(58,812
)
 
(176,005
)
 
(175,726
)
Acquisition-related activity
(726
)
 
(954
)
 
(2,506
)
 
(2,563
)
Income (loss) from continuing operations before income taxes
(12,505
)
 
(17,290
)
 
9,670

 
(59,970
)
Income tax benefit
4,500

 
103

 
4,500

 
103

Income (loss) from continuing operations
(8,005
)
 
(17,187
)
 
14,170

 
(59,867
)
Discontinued operations:
 
 
 
 
 
 
 
Income (loss) before gain on sales
901

 
(1,970
)
 
70

 
(4,699
)
Gain on sale of depreciable properties
8,441

 
1,608

 
101,052

 
11,179

Income (loss) from discontinued operations
9,342

 
(362
)
 
101,122

 
6,480

Net income (loss)
1,337

 
(17,549
)
 
115,292

 
(53,387
)
Dividends on preferred shares
(7,356
)
 
(11,081
)
 
(24,261
)
 
(35,356
)
Adjustments for redemption of preferred shares
—

 
—

 
(5,932
)
 
(5,730
)
Net (income) loss attributable to noncontrolling interests
(48
)
 
400

 
(1,629
)
 
1,371

Net income (loss) attributable to common shareholders
$
(6,067
)
 
$
(28,230
)
 
$
83,470

 
$
(93,102
)
Basic net income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
(0.05
)
 
$
(0.11
)
 
$
(0.06
)
 
$
(0.38
)
Discontinued operations attributable to common shareholders
0.03

 
—

 
0.31

 
0.02

Total
$
(0.02
)
 
$
(0.11
)
 
$
0.25

 
$
(0.36
)
Diluted net income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
(0.05
)
 
$
(0.11
)
 
$
(0.06
)
 
$
(0.38
)
Discontinued operations attributable to common shareholders
0.03

 
—

 
0.31

 
0.02

Total
$
(0.02
)
 
$
(0.11
)
 
$
0.25

 
$
(0.36
)
Weighted average number of common shares outstanding
324,895

 
270,289

 
320,810

 
265,153

Weighted average number of common shares and potential dilutive securities
324,895

 
270,289

 
325,380

 
265,153

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
1,337

 
$
(17,549
)
 
$
115,292

 
$
(53,387
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Amortization of interest contracts
(116
)
 
457

 
567

 
1,371

Other
(54
)
 
(47
)
 
522

 
(181
)
Total other comprehensive income (loss)
(170
)
 
410

 
1,089

 
1,190

Comprehensive income (loss)
$
1,167

 
$
(17,139
)
 
$
116,381

 
$
(52,197
)
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)
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income (loss)
$
115,292

 
$
(53,387
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
214,118

 
193,479

Amortization of deferred leasing and other costs
89,359

 
86,859

Amortization of deferred financing costs
9,913

 
9,878

Straight-line rent adjustment
(12,421
)
 
(15,725
)
Impairment charges
3,777

 
—

Gain on acquisitions
(962
)
 
—

Gains on land and depreciated property sales
(105,525
)
 
(11,424
)
Third-party construction contracts, net
27,117

 
(4,295
)
Other accrued revenues and expenses, net
11,367

 
(14,621
)
Operating distributions received in excess of (less than) equity in earnings from unconsolidated companies
(34,411
)
 
10,772

Net cash provided by operating activities
317,624

 
201,536

Cash flows from investing activities:
 
 
 
Development of real estate investments
(320,698
)
 
(176,340
)
Acquisition of real estate investments and related intangible assets
(372,934
)
 
(321,099
)
Acquisition of undeveloped land
(30,101
)
 
(37,166
)
Second generation tenant improvements, leasing costs and building improvements
(60,052
)
 
(46,682
)
Other deferred leasing costs
(26,647
)
 
(22,727
)
Other assets
(14,725
)
 
674

Proceeds from land and depreciated property sales, net
330,740

 
112,559

Capital distributions from unconsolidated companies
106,306

 
4,890

Capital contributions and advances to unconsolidated companies
(38,959
)
 
(19,262
)
Net cash used for investing activities
(427,070
)
 
(505,153
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common shares, net
632,531

 
236,301

Payments for redemption of preferred shares
(177,955
)
 
(168,272
)
Proceeds from unsecured debt
500,000

 
600,000

Payments on unsecured debt
(426,462
)
 
(172,374
)
Proceeds from secured debt financings
1,933

 
13,305

Payments on secured indebtedness including principal amortization
(112,097
)
 
(107,240
)
Payments on lines of credit, net
(75,000
)
 
(20,293
)
Distributions to common shareholders
(164,811
)
 
(135,083
)
Distributions to preferred shareholders
(24,261
)
 
(31,630
)
Contributions from (distributions to) noncontrolling interests
(2,692
)
 
2,788

Buyout of noncontrolling interests
—

 
(6,208
)
Change in book overdrafts
(44,225
)
 
—

Deferred financing costs
(7,292
)
 
(8,334
)
Net cash provided by financing activities
99,669

 
202,960

Net decrease in cash and cash equivalents
(9,777
)
 
(100,657
)
Cash and cash equivalents at beginning of period
33,889

 
213,809

Cash and cash equivalents at end of period
$
24,112

 
$
113,152

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Assumption of indebtedness and other liabilities in real estate acquisitions
$
106,555

 
$
19,992

Carrying amount of pre-existing ownership interest in acquired property
$
630

 
$
—

Conversion of Limited Partner Units to common shares
$
338

 
$
29,002

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, 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
—

 
—

 
—

 
—

 
113,663

 
1,629

 
115,292

Other comprehensive income
—

 
—

 
—

 
1,089

 
—

 
—

 
1,089

Issuance of common shares
—

 
451

 
632,080

 
—

 
—

 
—

 
632,531

Stock-based compensation plan activity
—

 
7

 
9,378

 
—

 
(1,752
)
 
—

 
7,633

Conversion of Limited Partner Units
—

 
1

 
337

 
—

 
—

 
(338
)
 
—

Distributions to preferred shareholders
—

 
—

 
—

 
—

 
(24,261
)
 
—

 
(24,261
)
Redemption of preferred shares
(177,955
)
 
—

 
5,932

 
—

 
(5,932
)
 
—

 
(177,955
)
Distributions to common shareholders ($0.51 per share)
—

 
—

 
—

 
—

 
(164,811
)
 
—

 
(164,811
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(2,692
)
 
(2,692
)
Balance at September 30, 2013
$
447,683

 
$
3,253

 
$
4,601,224

 
$
3,780

 
$
(2,076,299
)
 
$
33,303

 
$
3,012,944

See accompanying Notes to Consolidated Financial Statements



6

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

 
September 30, 2013
 
December 31, 2012
 
(Unaudited)
 
 
 
 
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
     Land and improvements
$
1,443,643

 
$
1,284,081

     Buildings and tenant improvements
5,720,356

 
5,398,886

     Construction in progress
197,472

 
234,918

     Investments in and advances to unconsolidated companies
328,660

 
372,256

     Undeveloped land
580,052

 
614,208

 
8,270,183

 
7,904,349

     Accumulated depreciation
(1,384,219
)
 
(1,296,396
)
              Net real estate investments
6,885,964

 
6,607,953

 
 
 
 
Real estate investments and other assets held-for-sale
57,790

 
30,937

 
 
 
 
Cash and cash equivalents
24,112

 
33,889

Accounts receivable, net of allowance of $3,818 and $3,374
20,073

 
22,283

Straight-line rent receivable, net of allowance of $7,472 and $6,091
124,574

 
120,303

Receivables on construction contracts, including retentions
28,650

 
39,754

Deferred financing costs, net of accumulated amortization of $52,370 and $48,218
38,029

 
40,083

Deferred leasing and other costs, net of accumulated amortization of $413,227 and $372,047
498,025

 
497,827

Escrow deposits and other assets
209,622

 
167,072

 
$
7,886,839

 
$
7,560,101

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
     Secured debt
$
1,158,456

 
$
1,167,953

     Unsecured debt
3,066,755

 
2,993,217

     Unsecured line of credit
210,000

 
285,000

 
4,435,211

 
4,446,170

 
 
 
 
Liabilities related to real estate investments held-for-sale
2,919

 
807

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
78,376

 
84,679

Accrued real estate taxes
104,144

 
74,565

Accrued interest
36,439

 
59,215

Other accrued expenses
40,772

 
104,886

Other liabilities
130,537

 
121,097

Tenant security deposits and prepaid rents
45,702

 
42,731

     Total liabilities
4,874,100

 
4,934,150

Partners' equity:
 
 
 
  General Partner:
 
 
 
     Common equity (325,319 and 279,423 General Partner Units issued and outstanding)
2,532,146

 
1,967,091

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

 
625,638

 
2,979,829

 
2,592,729

     Limited Partners' common equity (4,388 and 4,419 Limited Partner Units issued and outstanding)
19,944

 
21,383

     Accumulated other comprehensive income
3,780

 
2,691

            Total partners' equity
3,003,553

 
2,616,803

Noncontrolling interests
9,186

 
9,148

     Total equity
3,012,739

 
2,625,951

 
$
7,886,839

 
$
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 and nine months ended September 30,
(in thousands, except per unit amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
     Rental and related revenue
$
228,883

 
$
199,326

 
$
668,230

 
$
586,570

     General contractor and service fee revenue
62,807

 
93,932

 
161,004

 
226,507

 
291,690

 
293,258

 
829,234

 
813,077

Expenses:
 
 
 
 
 
 
 
     Rental expenses
42,888

 
37,187

 
122,753

 
104,430

     Real estate taxes
30,450

 
27,303

 
90,729

 
81,505

     General contractor and other services expenses
59,392

 
87,719

 
142,925

 
209,519

     Depreciation and amortization
103,594

 
90,202

 
296,791

 
264,435

 
236,324

 
242,411

 
653,198

 
659,889

Other operating activities:
 
 
 
 
 
 
 
     Equity in earnings (loss) of unconsolidated companies
(27
)
 
2,280

 
50,442

 
4,056

     Gain on sale of properties
—

 
403

 
1,108

 
245

Gain on land sales
3,365

 
—

 
3,365

 
—

     Undeveloped land carrying costs
(2,108
)
 
(2,140
)
 
(6,837
)
 
(6,606
)
Impairment charges
—

 
—

 
(3,777
)
 
—

     Other operating expenses
(47
)
 
(130
)
 
(150
)
 
(591
)
     General and administrative expenses
(10,373
)
 
(8,934
)
 
(33,225
)
 
(32,367
)
 
(9,190
)
 
(8,521
)
 
10,926

 
(35,263
)
     Operating income
46,176

 
42,326

 
186,962

 
117,925

Other income (expenses):
 
 
 
 
 
 
 
     Interest and other income, net
145

 
150

 
1,219

 
394

     Interest expense
(58,100
)
 
(58,812
)
 
(176,005
)
 
(175,726
)
     Acquisition-related activity
(726
)
 
(954
)
 
(2,506
)
 
(2,563
)
Income (loss) from continuing operations before income taxes
(12,505
)
 
(17,290
)
 
9,670

 
(59,970
)
Income tax benefit
4,500

 
103

 
4,500

 
103

Income (loss) from continuing operations
(8,005
)
 
(17,187
)
 
14,170

 
(59,867
)
Discontinued operations:
 
 
 
 
 
 
 
Income (loss) before gain on sales
901

 
(1,970
)
 
70

 
(4,699
)
Gain on sale of depreciable properties
8,441

 
1,608

 
101,052

 
11,179

           Income (loss) from discontinued operations
9,342

 
(362
)
 
101,122

 
6,480

Net income (loss)
1,337

 
(17,549
)
 
115,292

 
(53,387
)
Distributions on Preferred Units
(7,356
)
 
(11,081
)
 
(24,261
)
 
(35,356
)
Adjustments for redemption of Preferred Units
—

 
—

 
(5,932
)
 
(5,730
)
Net income attributable to noncontrolling interests
(140
)
 
(59
)
 
(487
)
 
(365
)
     Net income (loss) attributable to common unitholders
$
(6,159
)
 
$
(28,689
)
 
$
84,612

 
$
(94,838
)
Basic net income (loss) per Common Unit:
 
 
 
 
 
 
 
     Continuing operations attributable to common unitholders
$
(0.05
)
 
$
(0.11
)
 
$
(0.06
)
 
$
(0.38
)
     Discontinued operations attributable to common unitholders
0.03

 
—

 
0.31

 
0.02

           Total
$
(0.02
)
 
$
(0.11
)
 
$
0.25

 
$
(0.36
)
Diluted net income (loss) per Common Unit:
 
 
 
 
 
 
 
     Continuing operations attributable to common unitholders
$
(0.05
)
 
$
(0.11
)
 
$
(0.06
)
 
$
(0.38
)
     Discontinued operations attributable to common unitholders
0.03

 
—

 
0.31

 
0.02

           Total
$
(0.02
)
 
$
(0.11
)
 
$
0.25

 
$
(0.36
)
Weighted average number of Common Units outstanding
329,283

 
274,800

 
325,203

 
270,095

Weighted average number of Common Units and potential dilutive securities
329,283

 
274,800

 
325,380

 
270,095

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
   Net income (loss)
$
1,337

 
$
(17,549
)
 
$
115,292

 
$
(53,387
)
   Other comprehensive income (loss):
 
 
 
 
 
 
 
Amortization of interest contracts
(116
)
 
457

 
567

 
1,371

Other
(54
)
 
(47
)
 
522

 
(181
)
Total other comprehensive income (loss)
(170
)
 
410

 
1,089

 
1,190

Comprehensive income (loss)
$
1,167

 
$
(17,139
)
 
$
116,381

 
$
(52,197
)
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)
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income (loss)
$
115,292

 
$
(53,387
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
214,118

 
193,479

Amortization of deferred leasing and other costs
89,359

 
86,859

Amortization of deferred financing costs
9,913

 
9,878

Straight-line rent adjustment
(12,421
)
 
(15,725
)
Impairment charges
3,777

 
—

Gain on acquisitions
(962
)
 
—

Gains on land and depreciated property sales
(105,525
)
 
(11,424
)
Third-party construction contracts, net
27,117

 
(4,295
)
Other accrued revenues and expenses, net
11,405

 
(14,582
)
Operating distributions received in excess of (less than) equity in earnings from unconsolidated companies
(34,411
)
 
10,772

Net cash provided by operating activities
317,662

 
201,575

Cash flows from investing activities:
 
 
 
Development of real estate investments
(320,698
)
 
(176,340
)
Acquisition of real estate investments and related intangible assets
(372,934
)
 
(321,099
)
Acquisition of undeveloped land
(30,101
)
 
(37,166
)
Second generation tenant improvements, leasing costs and building improvements
(60,052
)
 
(46,682
)
Other deferred leasing costs
(26,647
)
 
(22,727
)
Other assets
(14,725
)
 
674

Proceeds from land and depreciated property sales, net
330,740

 
112,559

Capital distributions from unconsolidated companies
106,306

 
4,890

Capital contributions and advances to unconsolidated companies
(38,959
)
 
(19,262
)
Net cash used for investing activities
(427,070
)
 
(505,153
)
Cash flows from financing activities:
 
 
 
Contributions from the General Partner
632,531

 
236,301

Payments for redemption of Preferred Units
(177,955
)
 
(168,272
)
Proceeds from unsecured debt
500,000

 
600,000

Payments on unsecured debt
(426,462
)
 
(172,374
)
Proceeds from secured debt financings
1,933

 
13,305

Payments on secured indebtedness including principal amortization
(112,097
)
 
(107,240
)
Payments on lines of credit, net
(75,000
)
 
(20,293
)
Distributions to common unitholders
(167,092
)
 
(137,662
)
Distributions to preferred unitholders
(24,261
)
 
(31,630
)
Contributions from (distributions to) noncontrolling interests
(449
)
 
5,311

Buyout of noncontrolling interests
—

 
(6,208
)
Change in book overdrafts
(44,225
)
 
—

Deferred financing costs
(7,292
)
 
(8,334
)
Net cash provided by financing activities
99,631

 
202,904

Net decrease in cash and cash equivalents
(9,777
)
 
(100,674
)
Cash and cash equivalents at beginning of period
33,889

 
213,826

Cash and cash equivalents at end of period
$
24,112

 
$
113,152

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Assumption of indebtedness and other liabilities in real estate acquisitions
$
106,555

 
$
19,992

Carrying amount of pre-existing ownership interest in acquired property
$
630

 
$
—

Conversion of Limited Partner Units to common shares of the General Partner
$
338

 
$
29,002

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, 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
89,402

 
24,261

 
1,142

 
—

 
114,805

 
487

 
115,292

Other comprehensive income
—

 
—

 
—

 
1,089

 
1,089

 
—

 
1,089

Capital contribution from the General Partner
632,531

 
—

 
—

 
—

 
632,531

 
—

 
632,531

Stock-based compensation plan activity
7,633

 
—

 
—

 
—

 
7,633

 
—

 
7,633

Conversion of Limited Partner Units to common shares of the General Partner
338

 
—

 
(338
)
 
—

 
—

 
—

 
—

Distributions to Preferred Unitholders
—

 
(24,261
)
 
—

 
—

 
(24,261
)
 
—

 
(24,261
)
Redemption of Preferred Units
—

 
(177,955
)
 
—

 
—

 
(177,955
)
 
—

 
(177,955
)
Distributions to Partners ($0.51 per Common Unit)
(164,849
)
 
—

 
(2,243
)
 
—

 
(167,092
)
 
—

 
(167,092
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(449
)
 
(449
)
Balance at September 30, 2013
$
2,532,146

 
$
447,683

 
$
19,944

 
$
3,780

 
$
3,003,553

 
$
9,186

 
$
3,012,739


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 September 30, 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 was 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 the amortization to interest expense, over the lives of previously hedged loans, of the values of interest rate swaps that have been settled, as well as changes in the fair values of currently outstanding interest rate swaps that we have designated as cash flow hedges. Activity within other comprehensive income is not material for any individual type of activity, as well as for all activities in the aggregate, for all periods presented in this Report.
4.    Variable Interest Entities
At September 30, 2013, there were three unconsolidated joint ventures that met 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 at September 30, 2013 (in millions):
 
Carrying Value
 
Maximum Loss Exposure
Investment in unconsolidated companies
$
44.6

 
$
44.6

Guarantee obligations (1)
$
(20.3
)
 
$
(141.9
)
 
(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 15 operating properties during the nine months ended September 30, 2013. These acquisitions consisted of three industrial properties in Central and Southern New Jersey, three industrial properties in Southern California, two industrial properties in Central California, one industrial property in Houston, Texas, one industrial property near Kansas City, Missouri, one industrial property near St. Louis, Missouri, two industrial properties in Northeast and Central Pennsylvania, one industrial property near Indianapolis, Indiana and one medical office property in Central Florida. The following table summarizes the fair value of amounts recognized for each major class of asset and liability (in thousands) for these acquisitions:
Real estate assets
$
422,538

Lease related intangible assets
58,826

Total acquired assets
481,364

Secured debt
103,638

Below market lease liability
1,469

Other liabilities
1,448

Total assumed liabilities
106,555

Fair value of acquired net assets
$
374,809


The leases in the acquired properties had a weighted average remaining life at acquisition of approximately 7.6 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 nine months ended September 30, 2013 were as follows: 
 
Low

 
High

Discount rate
6.60
%
 
9.67
%
Exit capitalization rate
5.10
%
 
7.67
%
Lease-up period (months)
12

 
24

Net rental rate per square foot – Industrial
$2.95
 
$8.28
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 and Comprehensive Income for the nine months ended September 30, 2013 and 2012 consisted 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 non-controlling ownership interest. We recognized a gain of $962,000 on the pre-existing ownership interest that we held in one of the industrial properties we acquired and expenses of $3.5 million for transaction costs during the nine months ended September 30, 2013.
Activity during the nine months ended September 30, 2012 consisted of transaction costs related to acquisitions, which were expensed as incurred.

13

Dispositions
We disposed of certain consolidated income-producing real estate assets and undeveloped land and received net cash proceeds of $330.7 million and $112.6 million during the nine months ended September 30, 2013 and 2012, respectively.
During the nine months ended September 30, 2013, 17 office properties and one industrial property were sold from certain of our unconsolidated joint ventures for which our capital distributions totaled $89.5 million. Our share of gains from joint venture property sales, which are included in equity in earnings, related almost entirely to these sales and totaled $49.0 million.
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 nine months ended September 30, 2013 (in thousands):
 
Book Value
at 12/31/12
 
Book Value
at 9/30/13
 
Fair Value
at 12/31/12
 
Issuances and
Assumptions
 
Payments/Payoffs
 
Adjustments
to Fair Value
 
Fair Value
at 9/30/13
Fixed rate secured debt
$
1,149,541

 
$
1,139,262

 
$
1,251,477

 
$
103,638

 
$
(110,946
)
 
$
(23,801
)
 
$
1,220,368

Variable rate secured debt
18,412

 
19,194

 
18,386

 
1,933

 
(1,151
)
 
27

 
19,195

Unsecured debt
2,993,217

 
3,066,755

 
3,336,386

 
500,000

 
(426,462
)
 
(135,936
)
 
3,273,988

Unsecured line of credit
285,000

 
210,000

 
285,632

 
—

 
(75,000
)
 
403

 
211,035

Total
$
4,446,170

 
$
4,435,211

 
$
4,891,881

 
$
605,571

 
$
(613,559
)
 
$
(159,307
)
 
$
4,724,586


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 3.50% to 4.90%, 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.
During the nine months ended September 30, 2013, we repaid nine secured loans, at their maturity dates, totaling $100.1 million. These loans had a weighted average stated interest rate of 5.66%.
During the nine months ended September 30, 2013, we assumed three secured loans, in conjunction with our acquisition activity, with a total face value of $99.3 million and a fair value of $103.6 million. These assumed loans had a weighted average remaining term at acquisition of 1.8 years and carry a weighted average stated interest rate of 5.59%. We used an estimated market interest rate of 3.00% in determining the fair value of these loans. Between the date of acquisition and the end of the most recent reporting period, interest rates increased, resulting in our estimated market interest rate for these loans increasing to 3.50%.
Unsecured Debt
At September 30, 2013, with the exception of the $250.0 million variable rate term note described below, all of our unsecured debt bore interest at fixed rates and primarily consisted of unsecured notes that are publicly traded. 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

14

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. The estimated trading values of our fixed rate unsecured debt, depending on the maturity and coupon rates, ranged from 93.00% to 124.00% 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.
In May 2013, we issued and fully drew down on a term loan with an aggregate commitment of $250.0 million that bears interest at a variable rate of LIBOR plus 1.35% (equal to 1.54% for outstanding borrowings at September 30, 2013) and matures May 14, 2018.
During the nine months ended September 30, 2013, we repaid two unsecured notes at their maturity dates totaling $425.0 million. These notes had a weighted average effective rate of 6.40% and a weighted average stated rate of 5.68%.
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 at September 30, 2013.
Unsecured Line of Credit
Our unsecured line of credit at September 30, 2013 is described as follows (in thousands):
Description
Maximum
Capacity
 
Maturity Date
 
Outstanding
Balance at
September 30, 2013
Unsecured Line of Credit - Partnership
$
850,000

 
December 2015
 
$
210,000


The Partnership's unsecured line of credit has an interest rate on borrowings of LIBOR plus 1.25% (equal to 1.43% for outstanding borrowings at September 30, 2013) 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). At September 30, 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. The current market rate of 1.48% that we utilized was internally estimated; therefore, we have concluded that our determination of fair value for our unsecured line of credit was primarily based upon a Level 3 input.





15

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 deducting 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 at 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 nine months of 2013, the General Partner issued 3.7 million common shares pursuant to its at the market equity program, generating gross proceeds of approximately $61.9 million and, after deducting commissions and other costs, net proceeds of approximately $60.7 million. The General Partner paid approximately $897,000 in commissions related to the sale of these common shares. The proceeds from these offerings were used for general corporate purposes, which include the funding of development costs.
Partnership
For each common share or preferred share 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 common shares or preferred shares, 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 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, 2013 and 2012, respectively (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Management fees
$
2,246

 
$
2,796

 
$
6,872

 
$
8,251

Leasing fees
310

 
622

 
1,432

 
2,856

Construction and development fees
681

 
1,860

 
3,258

 
3,615

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

16

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, 2013 and 2012, respectively (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
General Partner
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders
$
(6,067
)
 
$
(28,230
)
 
$
83,470

 
$
(93,102
)
Less: Dividends on participating securities
(650
)
 
(680
)
 
(2,024
)
 
(2,388
)
Basic net income (loss) attributable to common shareholders
(6,717
)
 
(28,910
)
 
81,446

 
(95,490
)
Noncontrolling interest in earnings of common unitholders
—

 
—

 
1,142

 
—

Diluted net income (loss) attributable to common shareholders
$
(6,717
)
 
$
(28,910
)
 
$
82,588

 
$
(95,490
)
Weighted average number of common shares outstanding
324,895

 
270,289

 
320,810

 
265,153

Weighted average Limited Partner Units outstanding
—

 
—

 
4,393

 
—

Other potential dilutive shares
—

 
—

 
177

 
—

Weighted average number of common shares and potential dilutive securities
324,895

 
270,289

 
325,380

 
265,153

 
 
 
 
 
 
 
 
Partnership
 
 
 
 
 
 
 
Net income (loss) attributable to common unitholders
$
(6,159
)
 
$
(28,689
)
 
$
84,612

 
$
(94,838
)
Less: Distributions on participating securities
(650
)
 
(680
)
 
(2,024
)
 
(2,388
)
Basic and diluted net income (loss) attributable to common unitholders
$
(6,809
)
 
$
(29,369
)
 
$
82,588

 
$
(97,226
)
Weighted average number of Common Units outstanding
329,283

 
274,800

 
325,203

 
270,095

Other potential dilutive units
—

 
—

 
177

 
—

Weighted average number of Common Units and potential dilutive securities
329,283

 
274,800

 
325,380

 
270,095

The Limited Partner Units are anti-dilutive to the General Partner for the three months ended September 30, 2013 and the three and nine months ended September 30, 2012 as a result of the net loss for those periods. 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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
General Partner
 
 
 
 
 
 
 
Noncontrolling interest in loss of common unitholders
$
(92
)
 
$
(459
)
 
$
—

 
$
(1,736
)
Weighted average Limited Partner Units outstanding
4,388

 
4,511

 
—

 
4,942

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
1,373

 
1,763

 
1,373

 
1,763

Outstanding participating securities
3,866

 
4,045

 
3,866

 
4,045

10.    Segment Reporting
We have four reportable operating segments at September 30, 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,

17

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.
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.
Other revenue consists of other operating revenues not identified with one of our operating segments. We do not allocate interest expense and certain other non-property specific revenues and expenses ("Non-Segment Items," as shown in the table below) to our individual operating segments in determining our performance measure. 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, 2013 and 2012, respectively (in thousands): 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
 
Rental Operations:
 
 
 
 
 
 
 
 
Industrial
 
$
123,749

 
$
107,345

 
$
357,777

 
$
321,524

Office
 
66,691

 
65,290

 
198,890

 
194,038

Medical Office
 
35,093

 
21,108

 
101,733

 
59,336

Non-reportable Rental Operations
 
1,765

 
1,429

 
5,807

 
5,276

Service Operations
 
62,807

 
93,932

 
161,004

 
226,507

Total segment revenues
 
290,105

 
289,104

 
825,211

 
806,681

Other revenue
 
1,585

 
4,154

 
4,023

 
6,396

Consolidated revenue from continuing operations
 
291,690

 
293,258

 
829,234

 
813,077

Discontinued operations
 
3,912

 
9,774

 
18,419

 
32,868

Consolidated revenue
 
$
295,602