Q2 D0C 2014

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 June 30, 2014
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 July 31, 2014
Common Stock, $.01 par value per share
 
341,162,059



EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2014 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 June 30, 2014. 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 all of the issued and outstanding 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 some of 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)
 
June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
 
 
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
1,460,568

 
$
1,438,007

Buildings and tenant improvements
5,610,890

 
5,531,726

Construction in progress
367,813

 
256,895

Investments in and advances to unconsolidated companies
334,473

 
342,947

Undeveloped land
541,227

 
590,052

 
8,314,971

 
8,159,627

Accumulated depreciation
(1,430,006
)
 
(1,368,406
)
Net real estate investments
6,884,965

 
6,791,221

 
 
 
 
Real estate investments and other assets held-for-sale
29,780

 
57,466

 
 
 
 
Cash and cash equivalents
21,225

 
19,275

Accounts receivable, net of allowance of $2,629 and $1,576
33,642

 
26,173

Straight-line rent receivable, net of allowance of $6,088 and $9,350
128,949

 
118,251

Receivables on construction contracts, including retentions
37,708

 
19,209

Deferred financing costs, net of accumulated amortization of $41,764 and $37,016
30,949

 
36,250

Deferred leasing and other costs, net of accumulated amortization of $305,870 and $394,049
451,515

 
466,979

Escrow deposits and other assets
243,771

 
217,790

 
$
7,862,504

 
$
7,752,614

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
Secured debt
$
1,008,662

 
$
1,100,124

Unsecured debt
3,065,223

 
3,066,252

Unsecured line of credit
60,000

 
88,000

 
4,133,885

 
4,254,376

 
 
 
 
Liabilities related to real estate investments held-for-sale
538

 
2,075

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
101,792

 
69,380

Accrued real estate taxes
84,634

 
74,696

Accrued interest
56,736

 
52,824

Other accrued expenses
61,836

 
67,495

Other liabilities
122,143

 
142,589

Tenant security deposits and prepaid rents
49,080

 
44,550

Total liabilities
4,610,644

 
4,707,985

Shareholders' equity:
 
 
 
Preferred shares ($.01 par value); 5,000 shares authorized; 1,716 and 1,791 shares issued and outstanding
428,926

 
447,683

Common shares ($.01 par value); 600,000 and 400,000 shares authorized; 338,093 and 326,399 shares issued and outstanding
3,381

 
3,264

Additional paid-in capital
4,820,944

 
4,620,964

Accumulated other comprehensive income
3,600

 
4,119

Distributions in excess of net income
(2,031,957
)
 
(2,062,787
)
Total shareholders' equity
3,224,894

 
3,013,243

Noncontrolling interests
26,966

 
31,386

Total equity
3,251,860

 
3,044,629

 
$
7,862,504

 
$
7,752,614

See accompanying Notes to Consolidated Financial Statements

3

DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three and six months ended June 30,
(in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
233,518

 
$
215,308

 
$
470,868

 
$
425,187

General contractor and service fee revenue
69,512

 
50,793

 
125,332

 
98,197

 
303,030

 
266,101

 
596,200

 
523,384

Expenses:
 
 
 
 
 
 
 
Rental expenses
39,938

 
37,431

 
90,205

 
76,291

Real estate taxes
31,964

 
29,569

 
64,431

 
58,609

General contractor and other services expenses
63,857

 
45,192

 
111,128

 
83,533

Depreciation and amortization
97,641

 
95,322

 
195,700

 
188,316

 
233,400

 
207,514

 
461,464

 
406,749

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings of unconsolidated companies
60,826

 
1,091

 
63,147

 
50,469

Gain on sale of properties
70,318

 
940

 
86,171

 
1,108

Gain on land sales
3,889

 
—

 
4,041

 
—

Undeveloped land carrying costs
(1,858
)
 
(2,531
)
 
(3,982
)
 
(4,729
)
Impairment charges
(2,523
)
 
(3,777
)
 
(2,523
)
 
(3,777
)
Other operating expenses
(129
)
 
(35
)
 
(221
)
 
(103
)
General and administrative expenses
(10,365
)
 
(9,707
)
 
(25,059
)
 
(22,852
)
 
120,158

 
(14,019
)
 
121,574

 
20,116

Operating income
189,788

 
44,568

 
256,310

 
136,751

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
229

 
921

 
580

 
1,074

Interest expense
(54,872
)
 
(57,019
)
 
(110,129
)
 
(114,343
)
Loss on debt extinguishment
(139
)
 
—

 
(139
)
 
—

Acquisition-related activity
(747
)
 
(2,423
)
 
(761
)
 
(1,780
)
Income (loss) from continuing operations before income taxes
134,259

 
(13,953
)
 
145,861

 
21,702

Income tax expense
(364
)
 
—

 
(3,038
)
 
—

Income (loss) from continuing operations
133,895

 
(13,953
)
 
142,823

 
21,702

Discontinued operations:
 
 
 
 
 
 
 
Income (loss) before gain on sales
327

 
128

 
195

 
(358
)
Gain on sale of depreciable properties, net of tax
2,305

 
83,657

 
19,080

 
92,611

Income from discontinued operations
2,632

 
83,785

 
19,275

 
92,253

Net income
136,527

 
69,832

 
162,098

 
113,955

Dividends on preferred shares
(7,046
)
 
(7,355
)
 
(14,083
)
 
(16,905
)
Adjustments for redemption/repurchase of preferred shares
—

 
—

 
483

 
(5,932
)
Net income attributable to noncontrolling interests
(1,793
)
 
(983
)
 
(2,127
)
 
(1,581
)
Net income attributable to common shareholders
$
127,688

 
$
61,494

 
$
146,371

 
$
89,537

Basic net income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.37

 
$
(0.07
)
 
$
0.38

 
$
(0.01
)
Discontinued operations attributable to common shareholders
0.01

 
0.26

 
0.06

 
0.29

Total
$
0.38

 
$
0.19

 
$
0.44

 
$
0.28

Diluted net income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.37

 
$
(0.07
)
 
$
0.38

 
$
(0.01
)
Discontinued operations attributable to common shareholders
0.01

 
0.26

 
0.06

 
0.29

Total
$
0.38

 
$
0.19

 
$
0.44

 
$
0.28

Weighted average number of common shares outstanding
331,753

 
322,489

 
329,442

 
318,733

Weighted average number of common shares and potential dilutive securities
336,414

 
327,098

 
334,102

 
323,350

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
136,527

 
$
69,832

 
$
162,098

 
$
113,955

Other comprehensive income (loss):
 
 
 
 
 
 
 
Amortization of interest contracts
(287
)
 
226

 
(574
)
 
683

Other
55

 
496

 
55

 
576

Total other comprehensive income (loss)
(232
)
 
722

 
(519
)
 
1,259

Comprehensive income
$
136,295

 
$
70,554

 
$
161,579

 
$
115,214

See accompanying Notes to Consolidated Financial Statements

4

DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30,
(in thousands)
(Unaudited)
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
162,098

 
$
113,955

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
144,618

 
141,353

Amortization of deferred leasing and other costs
51,287

 
57,686

Amortization of deferred financing costs
5,042

 
6,867

Straight-line rental income and expense, net
(10,892
)
 
(8,789
)
Impairment charges
2,523

 
3,777

Gain on acquisitions
—

 
(962
)
Gains on land and depreciated property sales, net of tax
(107,164
)
 
(93,719
)
Third-party construction contracts, net
(10,209
)
 
8,922

Other accrued revenues and expenses, net
11,181

 
9,564

Operating distributions received less than equity in earnings from unconsolidated companies
(44,454
)
 
(40,449
)
Net cash provided by operating activities
204,030

 
198,205

Cash flows from investing activities:
 
 
 
Development of real estate investments
(226,575
)
 
(224,202
)
Acquisition of real estate investments and related intangible assets
(85,182
)
 
(334,287
)
Acquisition of undeveloped land
(11,800
)
 
(23,234
)
Second generation tenant improvements, leasing costs and building improvements
(44,367
)
 
(37,133
)
Other deferred leasing costs
(14,980
)
 
(17,633
)
Other assets
3,954

 
(7,774
)
Proceeds from land and depreciated property sales, net
213,040

 
259,169

Capital distributions from unconsolidated companies
40,293

 
89,237

Capital contributions and advances to unconsolidated companies
(4,165
)
 
(13,260
)
Net cash used for investing activities
(129,782
)
 
(309,117
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common shares, net
191,107

 
601,927

Payments for redemption/repurchase of preferred shares
(17,656
)
 
(177,955
)
Proceeds from unsecured debt
—

 
500,000

Payments on unsecured debt
(1,029
)
 
(425,967
)
Proceeds from secured debt financings
—

 
1,933

Payments on secured indebtedness including principal amortization
(88,898
)
 
(30,349
)
Payments on line of credit, net
(28,000
)
 
(197,000
)
Distributions to common shareholders
(111,919
)
 
(109,554
)
Distributions to preferred shareholders
(14,186
)
 
(16,905
)
Distributions to noncontrolling interests, net
(1,304
)
 
(1,846
)
Buyout of noncontrolling interests
(7,717
)
 
—

Change in book overdrafts
7,659

 
(38,921
)
Deferred financing costs
(355
)
 
(6,938
)
Net cash provided by (used for) financing activities
(72,298
)
 
98,425

Net increase (decrease) in cash and cash equivalents
1,950

 
(12,487
)
Cash and cash equivalents at beginning of period
19,275

 
33,889

Cash and cash equivalents at end of period
$
21,225

 
$
21,402

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Assumption of indebtedness and other liabilities in real estate acquisitions
$
54

 
$
106,320

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

 
$
630

Conversion of Limited Partner Units to common shares
$
56

 
$
338

See accompanying Notes to Consolidated Financial Statements


5

DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the six months ended June 30, 2014
(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, 2013
$
447,683

 
$
3,264

 
$
4,620,964

 
$
4,119

 
$
(2,062,787
)
 
$
31,386

 
$
3,044,629

Net income
—

 
—

 
—

 
—

 
159,971

 
2,127

 
162,098

Other comprehensive income (loss)
—

 
—

 
—

 
(519
)
 
—

 
—

 
(519
)
Issuance of common shares
—

 
110

 
190,997

 
—

 
—

 
—

 
191,107

Stock-based compensation plan activity
—

 
7

 
8,309

 
—

 
(1,092
)
 
—

 
7,224

Conversion of Limited Partner Units
—

 
—

 
56

 
—

 
—

 
(56
)
 
—

Distributions to preferred shareholders
—

 
—

 
—

 
—

 
(14,083
)
 
—

 
(14,083
)
Repurchase of preferred shares
(18,757
)
 
—

 
618

 
—

 
483

 
—

 
(17,656
)
Distributions to common shareholders ($0.34 per share)
—

 
—

 
—

 
—

 
(111,919
)
 
—

 
(111,919
)
Distributions to noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
(1,304
)
 
(1,304
)
Buyout of noncontrolling interests
—

 
—

 
—

 
—

 
(2,530
)
 
(5,187
)
 
(7,717
)
Balance at June 30, 2014
$
428,926

 
$
3,381

 
$
4,820,944

 
$
3,600

 
$
(2,031,957
)
 
$
26,966

 
$
3,251,860

See accompanying Notes to Consolidated Financial Statements



6

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

 
June 30, 2014
 
December 31, 2013
 
(Unaudited)
 
 
 
 
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
     Land and improvements
$
1,460,568

 
$
1,438,007

     Buildings and tenant improvements
5,610,890

 
5,531,726

     Construction in progress
367,813

 
256,895

     Investments in and advances to unconsolidated companies
334,473

 
342,947

     Undeveloped land
541,227

 
590,052

 
8,314,971

 
8,159,627

     Accumulated depreciation
(1,430,006
)
 
(1,368,406
)
              Net real estate investments
6,884,965

 
6,791,221

 
 
 
 
Real estate investments and other assets held-for-sale
29,780

 
57,466

 
 
 
 
Cash and cash equivalents
21,225

 
19,275

Accounts receivable, net of allowance of $2,629 and $1,576
33,642

 
26,173

Straight-line rent receivable, net of allowance of $6,088 and $9,350
128,949

 
118,251

Receivables on construction contracts, including retentions
37,708

 
19,209

Deferred financing costs, net of accumulated amortization of $41,764 and $37,016
30,949

 
36,250

Deferred leasing and other costs, net of accumulated amortization of $305,870 and $394,049
451,515

 
466,979

Escrow deposits and other assets
243,771

 
217,790

 
$
7,862,504

 
$
7,752,614

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
     Secured debt
$
1,008,662

 
$
1,100,124

     Unsecured debt
3,065,223

 
3,066,252

     Unsecured line of credit
60,000

 
88,000

 
4,133,885

 
4,254,376

 
 
 
 
Liabilities related to real estate investments held-for-sale
538

 
2,075

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
101,792

 
69,380

Accrued real estate taxes
84,634

 
74,696

Accrued interest
56,736

 
52,824

Other accrued expenses
62,080

 
67,739

Other liabilities
122,143

 
142,589

Tenant security deposits and prepaid rents
49,080

 
44,550

     Total liabilities
4,610,888

 
4,708,229

Partners' equity:
 
 
 
  General Partner:
 
 
 
     Common equity (338,093 and 326,399 General Partner Units issued and outstanding)
2,796,297

 
2,565,370

     Preferred equity (1,716 and 1,791 Preferred Units issued and outstanding)
428,926

 
447,683

 
3,225,223

 
3,013,053

     Limited Partners' common equity (4,381 and 4,387 Limited Partner Units issued and outstanding)
20,554

 
20,158

     Accumulated other comprehensive income
3,600

 
4,119

            Total partners' equity
3,249,377

 
3,037,330

Noncontrolling interests
2,239

 
7,055

     Total equity
3,251,616

 
3,044,385

 
$
7,862,504

 
$
7,752,614

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 six months ended June 30,
(in thousands, except per unit amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
233,518

 
$
215,308

 
$
470,868

 
$
425,187

General contractor and service fee revenue
69,512

 
50,793

 
125,332

 
98,197

 
303,030

 
266,101

 
596,200

 
523,384

Expenses:
 
 
 
 
 
 
 
Rental expenses
39,938

 
37,431

 
90,205

 
76,291

Real estate taxes
31,964

 
29,569

 
64,431

 
58,609

General contractor and other services expenses
63,857

 
45,192

 
111,128

 
83,533

Depreciation and amortization
97,641

 
95,322

 
195,700

 
188,316

 
233,400

 
207,514

 
461,464

 
406,749

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings of unconsolidated companies
60,826

 
1,091

 
63,147

 
50,469

Gain on sale of properties
70,318

 
940

 
86,171

 
1,108

Gain on land sales
3,889

 
—

 
4,041

 
—

Undeveloped land carrying costs
(1,858
)
 
(2,531
)
 
(3,982
)
 
(4,729
)
Impairment charges
(2,523
)
 
(3,777
)
 
(2,523
)
 
(3,777
)
Other operating expenses
(129
)
 
(35
)
 
(221
)
 
(103
)
General and administrative expenses
(10,365
)
 
(9,707
)
 
(25,059
)
 
(22,852
)
 
120,158

 
(14,019
)
 
121,574

 
20,116

Operating income
189,788

 
44,568

 
256,310

 
136,751

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
229

 
921

 
580

 
1,074

Interest expense
(54,872
)
 
(57,019
)
 
(110,129
)
 
(114,343
)
Loss on debt extinguishment
(139
)
 
—

 
(139
)
 
—

Acquisition-related activity
(747
)
 
(2,423
)
 
(761
)
 
(1,780
)
Income (loss) from continuing operations before income taxes
134,259

 
(13,953
)
 
145,861

 
21,702

Income tax expense
(364
)
 
—

 
(3,038
)
 
—

Income (loss) from continuing operations
133,895

 
(13,953
)
 
142,823

 
21,702

Discontinued operations:
 
 
 
 
 
 
 
Income (loss) before gain on sales
327

 
128

 
195

 
(358
)
Gain on sale of depreciable properties, net of tax
2,305

 
83,657

 
19,080

 
92,611

           Income from discontinued operations
2,632

 
83,785

 
19,275

 
92,253

Net income
136,527

 
69,832

 
162,098

 
113,955

Distributions on Preferred Units
(7,046
)
 
(7,355
)
 
(14,083
)
 
(16,905
)
Adjustments for redemption/repurchase of Preferred Units
—

 
—

 
483

 
(5,932
)
Net income attributable to noncontrolling interests
(100
)
 
(141
)
 
(184
)
 
(347
)
Net income attributable to common unitholders
$
129,381

 
$
62,336

 
$
148,314

 
$
90,771

Basic net income (loss) per Common Unit:
 
 
 
 
 
 
 
Continuing operations attributable to common unitholders
$
0.37

 
$
(0.07
)
 
$
0.38

 
$
(0.01
)
Discontinued operations attributable to common unitholders
0.01

 
0.26

 
0.06

 
0.29

Total
$
0.38

 
$
0.19

 
$
0.44

 
$
0.28

Diluted net income (loss) per Common Unit:
 
 
 
 
 
 
 
Continuing operations attributable to common unitholders
$
0.37

 
$
(0.07
)
 
$
0.38

 
$
(0.01
)
Discontinued operations attributable to common unitholders
0.01

 
0.26

 
0.06

 
0.29

Total
$
0.38

 
$
0.19

 
$
0.44

 
$
0.28

Weighted average number of Common Units outstanding
336,139

 
326,877

 
333,828

 
323,130

Weighted average number of Common Units and potential dilutive securities
336,414

 
327,098

 
334,102

 
323,350

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
136,527

 
$
69,832

 
$
162,098

 
$
113,955

Other comprehensive income (loss):
 
 
 
 
 
 
 
Amortization of interest contracts
(287
)
 
226

 
(574
)
 
683

Other
55

 
496

 
55

 
576

Total other comprehensive income (loss)
(232
)
 
722

 
(519
)
 
1,259

Comprehensive income
$
136,295

 
$
70,554

 
$
161,579

 
$
115,214

See accompanying Notes to Consolidated Financial Statements

8

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30,
(in thousands)
(Unaudited)
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
162,098

 
$
113,955

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
144,618

 
141,353

Amortization of deferred leasing and other costs
51,287

 
57,686

Amortization of deferred financing costs
5,042

 
6,867

Straight-line rental income and expense, net
(10,892
)
 
(8,789
)
Impairment charges
2,523

 
3,777

Gain on acquisitions
—

 
(962
)
Gains on land and depreciated property sales, net of tax
(107,164
)
 
(93,719
)
Third-party construction contracts, net
(10,209
)
 
8,922

Other accrued revenues and expenses, net
11,181

 
9,601

Operating distributions received less than equity in earnings from unconsolidated companies
(44,454
)
 
(40,449
)
Net cash provided by operating activities
204,030

 
198,242

Cash flows from investing activities:
 
 
 
Development of real estate investments
(226,575
)
 
(224,202
)
Acquisition of real estate investments and related intangible assets
(85,182
)
 
(334,287
)
Acquisition of undeveloped land
(11,800
)
 
(23,234
)
Second generation tenant improvements, leasing costs and building improvements
(44,367
)
 
(37,133
)
Other deferred leasing costs
(14,980
)
 
(17,633
)
Other assets
3,954

 
(7,774
)
Proceeds from land and depreciated property sales, net
213,040

 
259,169

Capital distributions from unconsolidated companies
40,293

 
89,237

Capital contributions and advances to unconsolidated companies
(4,165
)
 
(13,260
)
Net cash used for investing activities
(129,782
)
 
(309,117
)
Cash flows from financing activities:
 
 
 
Contributions from the General Partner
191,107

 
601,927

Payments for redemption/repurchase of Preferred Units
(17,656
)
 
(177,955
)
Proceeds from unsecured debt
—

 
500,000

Payments on unsecured debt
(1,029
)
 
(425,967
)
Proceeds from secured debt financings
—

 
1,933

Payments on secured indebtedness including principal amortization
(88,898
)
 
(30,349
)
Payments on line of credit, net
(28,000
)
 
(197,000
)
Distributions to common unitholders
(113,410
)
 
(111,088
)
Distributions to preferred unitholders
(14,186
)
 
(16,905
)
Contributions from (distributions to) noncontrolling interests, net
187

 
(349
)
Buyout of noncontrolling interests
(7,717
)
 
—

Change in book overdrafts
7,659

 
(38,921
)
Deferred financing costs
(355
)
 
(6,938
)
Net cash provided by (used for) financing activities
(72,298
)
 
98,388

Net increase (decrease) in cash and cash equivalents
1,950

 
(12,487
)
Cash and cash equivalents at beginning of period
19,275

 
33,889

Cash and cash equivalents at end of period
$
21,225

 
$
21,402

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Assumption of indebtedness and other liabilities in real estate acquisitions
$
54

 
$
106,320

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

 
$
630

Conversion of Limited Partner Units to common shares of the General Partner
$
56

 
$
338

See accompanying Notes to Consolidated Financial Statements

9

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the six months ended June 30, 2014
(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, 2013
$
2,565,370

 
$
447,683

 
$
20,158

 
$
4,119

 
$
3,037,330

 
$
7,055

 
$
3,044,385

Net income
145,888

 
14,083

 
1,943

 
—

 
161,914

 
184

 
162,098

Other comprehensive income (loss)
—

 
—

 
—

 
(519
)
 
(519
)
 
—

 
(519
)
Capital contribution from the General Partner
191,107

 
—

 
—

 
—

 
191,107

 
—

 
191,107

Stock-based compensation plan activity
7,224

 
—

 
—

 
—

 
7,224

 
—

 
7,224

Conversion of Limited Partner Units to common shares of the General Partner
56

 
—

 
(56
)
 
—

 
—

 
—

 
—

Distributions to Preferred Unitholders
—

 
(14,083
)
 
—

 
—

 
(14,083
)
 
—

 
(14,083
)
Repurchase of Preferred Units
1,101

 
(18,757
)
 
—

 
—

 
(17,656
)
 
—

 
(17,656
)
Distributions to Partners ($0.34 per Common Unit)
(111,919
)
 
—

 
(1,491
)
 
—

 
(113,410
)
 
—

 
(113,410
)
Contributions from noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
187

 
187

Buyout of noncontrolling interests
(2,530
)
 
—

 
—

 
—

 
(2,530
)
 
(5,187
)
 
(7,717
)
Balance at June 30, 2014
$
2,796,297

 
$
428,926

 
$
20,554

 
$
3,600

 
$
3,249,377

 
$
2,239

 
$
3,251,616


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 2013 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, 2013, 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, 2013.
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 June 30, 2014. 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 Fifth Amended and Restated Agreement of Limited Partnership (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, office and medical 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.    New Accounting Pronouncements
Discontinued Operations
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"). Under ASU 2014-08, only disposals representing a strategic shift in operations (for example, a disposal of a major geographic area or a major line of business) will be presented as discontinued operations, while significant continuing involvement with such dispositions will no longer preclude discontinued operations classification. As current GAAP generally requires companies that sell a single investment property to report the sale as a discontinued operation, the implementation of ASU 2014-08 will result in us reporting only sales that represent strategic shifts in operations as discontinued operations. ASU 2014-08 will also require additional disclosures for discontinued operations as well as for material property dispositions that do not meet the new criteria for discontinued operation classification.
ASU 2014-08 is effective for fiscal years beginning on or after December 15, 2014, with early adoption permitted only for disposals or classifications as held for sale that have not been reported in financial statements previously issued or available for issuance. We adopted ASU 2014-08 early and have applied it with respect to such items since April 1, 2014.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing GAAP revenue recognition guidance as well as impact the existing GAAP guidance governing the sale of nonfinancial assets. The standard’s core principle is that a company will recognize revenue when it satisfies performance obligations, by transferring promised goods or services to customers, in an amount that reflects the consideration to which the company expects to be entitled in exchange for fulfilling those performance obligations. In doing so, companies will need to exercise more judgment and make more estimates than under existing GAAP guidance.
ASU 2014-09 will be effective for public entities for annual and interim reporting periods beginning after December 15, 2016 and early adoption is not permitted. ASU 2014-09 allows for either recognizing the cumulative effect of application (i) at the start of the earliest comparative period presented (with the option to use any or all of three practical expedients) or (ii) at the date of initial application, with no restatement of comparative periods presented.
We have not yet selected a transition method nor have we determined the effect of ASU 2014-09 on our ongoing financial reporting.
3.    Reclassifications
Certain amounts in the accompanying consolidated financial statements for 2013 have been reclassified to conform to the 2014 consolidated financial statement presentation.
4.    Variable Interest Entities

In June 2014, one of our unconsolidated joint ventures, which we had previously determined to be a variable interest entity ("VIE"), sold its sole property and repaid all of its third-party debt. The sale of this property caused the joint venture to no longer meet the criteria to be considered a VIE. As such, at June 30, 2014, there was one

12

remaining unconsolidated joint venture that met the criteria to be considered a VIE. This unconsolidated joint venture was formed with the sole purpose of developing, constructing, leasing, marketing and selling or operating properties. The business activities of this unconsolidated joint venture have been financed through a combination of equity contributions, partner/member loans, and third-party debt that we have guaranteed. All significant decisions for this unconsolidated joint venture, including those decisions that most significantly impact its economic performance, require unanimous approval of the joint venture's partners or members. In certain cases, these decisions also require lender approval. Unanimous approval requirements for this unconsolidated joint venture 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 this 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 table provides a summary of the carrying value in our consolidated balance sheet, as well as our maximum loss exposure under the guarantee for the one unconsolidated subsidiary that we have determined to be a VIE at June 30, 2014 (in millions):
 
Carrying Value
 
Maximum Loss Exposure
Investment in unconsolidated companies
$
6.2

 
$
6.2

Guarantee obligations (1)
$
(5.0
)
 
$
(99.4
)
 
(1)
We are party to a guarantee of the third-party debt of the joint venture that we have determined is a VIE, and our maximum loss exposure is equal to the outstanding borrowings on the joint venture's debt. The carrying value of our recorded guarantee obligation is included in other liabilities in our Consolidated Balance Sheets.
Our maximum loss exposure for guarantees of joint venture indebtedness, including guarantees of the debt of joint ventures that are not VIEs, totaled $212.9 million at June 30, 2014.
5.    Acquisitions and Dispositions

2014 Acquisitions

We acquired two industrial properties, a building in Atlanta, Georgia and a building in the Lehigh Valley region of Pennsylvania, during the six months ended June 30, 2014. 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
$
80,731

Lease related intangible assets
9,857

Total acquired assets
90,588

Other liabilities
54

Total assumed liabilities
54

Fair value of acquired net assets
$
90,534

The leases in the acquired properties had a remaining life at acquisition of approximately 9.2 years.

We have included $1.6 million in rental revenues and $5,000 in earnings from continuing operations during 2014 for these properties since their respective dates of acquisition.

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

13

inputs based on our own assumptions. The range of most significant assumptions utilized in making the lease-up and future disposition estimates used in calculating the "as-if vacant" value of each building acquired during the six months ended June 30, 2014 were as follows:
 
Low

 
High

Discount rate
7.38
%
 
7.68
%
Exit capitalization rate
5.98
%
 
6.38
%
Lease-up period (months)
12

 
12

Net rental rate per square foot – Industrial
$2.75
 
$4.46

Acquisition-Related Activity

The acquisition-related activity in our Consolidated Statements of Operations and Comprehensive Income for the six months ended June 30, 2014 and 2013 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 expensed $761,000 and $2.7 million, respectively, for acquisition-related transaction costs incurred in the six months ended June 30, 2014 and 2013. During the six months ended June 30, 2013, we also recognized a gain of $962,000 on the pre-existing ownership interest that we held in an industrial property we acquired in that period.
Dispositions
We disposed of 21 consolidated income-producing real estate assets and 86 acres of undeveloped land during the six months ended June 30, 2014. We received net cash proceeds from property and land dispositions of $213.0 million and $259.2 million during the six months ended June 30, 2014 and 2013, respectively.
Income tax expense from continuing operations of $3.0 million was the result of the sale of a property that was partially owned by our taxable REIT subsidiary but, due to continuing involvement in managing the property, was not classified as a discontinued operation. Income tax expense included in discontinued operations of $3.5 million was also the result of the sale of a property that was partially owned by our taxable REIT subsidiary where we have no continuing involvement.
During the six months ended June 30, 2014, two office properties were sold by two of our unconsolidated joint ventures, for which our capital distributions totaled $40.3 million and our share of gains, which are included in equity in earnings, totaled $58.3 million. These two office properties included a 436,000 square foot office tower in Atlanta, Georgia.
6.    Indebtedness
All debt is held directly or indirectly by the Partnership. The General Partner does not have any indebtedness, but does guarantee some 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 six months ended June 30, 2014 (in thousands):
 
Book Value
at 12/31/13
 
Book Value
at 6/30/14
 
Fair Value
at 12/31/13
 
Payments/Payoffs
 
Adjustments
to Fair Value
 
Fair Value
at 6/30/14
Fixed rate secured debt
$
1,081,035

 
$
1,004,327

 
$
1,145,717

 
$
(74,144
)
 
$
26,987

 
$
1,098,560

Variable rate secured debt
19,089

 
4,335

 
19,089

 
(14,754
)
 
—

 
4,335

Unsecured debt
3,066,252

 
3,065,223

 
3,250,518

 
(1,029
)
 
83,352

 
3,332,841

Unsecured line of credit
88,000

 
60,000

 
88,383

 
(28,000
)
 
(141
)
 
60,242

Total
$
4,254,376

 
$
4,133,885

 
$
4,503,707

 
$
(117,927
)
 
$
110,198

 
$
4,495,978




14

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 2.20% to 4.10%, 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 six months ended June 30, 2014, we repaid six secured loans, totaling $82.2 million. These loans had a weighted average stated interest rate of 5.59%.
Unsecured Debt
At June 30, 2014, with the exception of one variable rate term note, 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 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 99.00% to 126.00% of face value.
We utilize a discounted cash flow methodology in order to estimate the fair value of our $250.0 million variable rate term loan. 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 was based on estimated market spreads and the quoted yields on federal government treasury securities with similar maturity dates. Our estimate of the current market rate for our variable rate term loan was 1.31% and was based primarily upon Level 3 inputs.
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 June 30, 2014.
Unsecured Line of Credit
Our unsecured line of credit at June 30, 2014 is described as follows (in thousands):
Description
Maximum
Capacity
 
Maturity Date
 
Outstanding
Balance at
June 30, 2014
Unsecured Line of Credit - Partnership
$
850,000

 
December 2015
 
$
60,000


The Partnership's unsecured line of credit has an interest rate on borrowings of LIBOR plus 1.25% (equal to 1.40% for outstanding borrowings at June 30, 2014) 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.

15

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 June 30, 2014, 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 1.41% 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.
7.    Shareholders' Equity of the General Partner and Partners' Capital of the Partnership
General Partner
In the first six months of 2014, pursuant to the share repurchase plan approved by our board of directors, the General Partner repurchased 750,243 preferred shares from among our three outstanding series. The preferred shares repurchased had a total redemption value of approximately $18.8 million and were repurchased for $17.7 million. In conjunction with the repurchases, approximately $618,000 of initial issuance costs, the ratable portion of such costs associated with the repurchased shares, were charged against income attributable to common shareholders. As the result of these repurchases, an adjustment of approximately $483,000 was included as an increase to net income attributable to common shareholders.
During the six months ended June 30, 2014, the General Partner issued 11.0 million common shares pursuant to its at the market equity program, generating gross proceeds of approximately $193.1 million and, after deducting commissions and other costs, net proceeds of approximately $191.1 million. The proceeds from these offerings were used for general corporate purposes, which include the funding of development costs.
In April 2014, the General Partner's shareholders approved an increase in the number of authorized shares of the General Partner's common stock from 400 million to 600 million.
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 the elimination of our ownership percentage, for the three and six months ended June 30, 2014 and 2013, respectively (in thousands): 

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Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Management fees
$
2,117

 
$
2,170

 
$
4,336

 
$
4,626

Leasing fees
2,169

 
568

 
2,513

 
1,122

Construction and development fees
2,417

 
1,510

 
3,382

 
2,577

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 per common share or Common Unit for the three and six months ended June 30, 2014 and 2013, respectively (in thousands): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
General Partner
 
 
 
 
 
 
 
Net income attributable to common shareholders
$
127,688

 
$
61,494

 
$
146,371

 
$
89,537

Less: Dividends on participating securities
(646
)
 
(688
)
 
(1,289
)
 
(1,375
)
Basic net income attributable to common shareholders
127,042

 
60,806

 
145,082

 
88,162

Noncontrolling interest in earnings of common unitholders
1,693

 
842

 
1,943

 
1,234

Diluted net income attributable to common shareholders
$
128,735

 
$
61,648

 
$
147,025

 
$
89,396

Weighted average number of common shares outstanding
331,753

 
322,489

 
329,442

 
318,733

Weighted average Limited Partner Units outstanding
4,386

 
4,388

 
4,386

 
4,397

Other potential dilutive shares
275

 
221

 
274

 
220

Weighted average number of common shares and potential dilutive securities
336,414

 
327,098

 
334,102

 
323,350

 
 
 
 
 
 
 
 
Partnership
 
 
 
 
 
 
 
Net income attributable to common unitholders
$
129,381

 
$
62,336

 
$
148,314

 
$
90,771

Less: Distributions on participating securities
(646
)
 
(688
)
 
(1,289
)
 
(1,375
)
Basic and diluted net income attributable to common unitholders
$
128,735

 
$
61,648

 
$
147,025

 
$
89,396

Weighted average number of Common Units outstanding
336,139

 
326,877

 
333,828

 
323,130

Other potential dilutive units
275

 
221

 
274

 
220

Weighted average number of Common Units and potential dilutive securities
336,414

 
327,098

 
334,102

 
323,350

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 per common share or Common Unit as a result of being anti-dilutive (in thousands): 

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Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
General Partner and Partnership
 
 
 
 
 
 
 
Potential dilutive shares or units:
 
 
 
 
 
 
 
Anti-dilutive outstanding potential shares or units under fixed stock option and other stock-based compensation plans
1,215

 
1,373

 
1,215

 
1,373

Outstanding participating securities
3,830

 
3,949

 
3,830

 
3,949

10.    Segment Reporting
Reportable Segments
We have four reportable operating segments at June 30, 2014, 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 and are referred to as non-reportable Rental Operations. 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.
Revenues by Reportable Segment
The following table shows the revenues for each of the reportable segments, as well as a reconciliation to consolidated revenues, for the three and six months ended June 30, 2014 and 2013, respectively (in thousands): 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
 
Rental Operations:
 
 
 
 
 
 
 
 
Industrial
 
$
128,995

 
$
117,125

 
$
262,997

 
$
231,824

Office
 
66,592

 
63,657

 
133,564

 
124,853

Medical Office
 
34,954

 
31,546

 
68,264

 
62,030

Non-reportable Rental Operations
 
1,629

 
1,739

 
3,716

 
4,042

Service Operations
 
69,512

 
50,793

 
125,332

 
98,197

Total segment revenues
 
301,682

 
264,860

 
593,873

 
520,946

Other revenue
 
1,348

 
1,241

 
2,327

 
2,438

Consolidated revenue from continuing operations
 
303,030

 
266,101

 
596,200

 
523,384

Discontinued operations
 
593

 
12,263

 
1,961

 
28,667

Consolidated revenue
 
$
303,623

 
$
278,364

 
$
598,161

 
$
552,051

Supplemental Performance Measure
Prior to 2014, we evaluated the profitability of our reportable segments using net earnings excluding depreciation and other items that were not allocated to our operating segments. As the result of a shift in the focus of our executive management team on the metrics used to evaluate the performance of, and to allocate resources among, our reportable segments, we elected to change our segment measurement of profitability beginning with the period ended March 31, 2014. We have also revised prior period information in order to provide period-over-period comparability.
Property level net operating income, on a cash basis (“PNOI”) is the non-GAAP supplemental performance measure that we now use to evaluate the performance of, and to allocate resources among, the real estate investments in the

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reportable and operating segments that comprise our Rental Operations. PNOI for our Rental Operations segments is comprised of rental revenues from continuing operations less rental expenses and real estate taxes from continuing operations, along with certain other adjusting items (collectively referred to as "Rental Operations revenues and expenses excluded from PNOI," as shown in the table below). Additionally, we do not allocate interest expense, depreciation expense and certain other non-property specific revenues and expenses (collectively referred to as "Non-Segment Items," as shown in the table below) to our individual operating segments.
We evaluate the performance of our Service Operations reportable segment using net income or loss, as allocated to that segment ("Earnings from Service Operations").
The following table shows a reconciliation of our segment-level measures of profitability to consolidated income from continuing operations before income taxes for the three and six months ended June 30, 2014 and 2013, respectively (in thousands and excluding discontinued operations): 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
PNOI
 
 
 
 
 
 
 
 
Industrial
 
$
95,564

 
$
85,257

 
$
187,308

 
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