Q3 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 September 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 October 31, 2014
Common Stock, $.01 par value per share
 
341,714,410



EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 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 September 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:
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2014 and 2013
 
 
 
 
 
 
 
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,
2014
 
December 31,
2013
 
(Unaudited)
 
 
 
 
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
1,477,680

 
$
1,438,007

Buildings and tenant improvements
5,640,103

 
5,531,726

Construction in progress
384,807

 
256,895

Investments in and advances to unconsolidated companies
316,015

 
342,947

Undeveloped land
542,490

 
590,052

 
8,361,095

 
8,159,627

Accumulated depreciation
(1,464,968
)
 
(1,368,406
)
Net real estate investments
6,896,127

 
6,791,221

 
 
 
 
Real estate investments and other assets held-for-sale
35,414

 
57,466

 
 
 
 
Cash and cash equivalents
66,132

 
19,275

Accounts receivable, net of allowance of $2,586 and $1,576
32,416

 
26,173

Straight-line rent receivable, net of allowance of $7,074 and $9,350
131,209

 
118,251

Receivables on construction contracts, including retentions
30,446

 
19,209

Deferred financing costs, net of accumulated amortization of $44,370 and $37,016
28,425

 
36,250

Deferred leasing and other costs, net of accumulated amortization of $266,276 and $394,049
441,338

 
466,979

Escrow deposits and other assets
222,688

 
217,790

 
$
7,884,195

 
$
7,752,614

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
Secured debt
$
1,003,851

 
$
1,100,124

Unsecured debt
3,064,696

 
3,066,252

Unsecured line of credit
140,000

 
88,000

 
4,208,547

 
4,254,376

 
 
 
 
Liabilities related to real estate investments held-for-sale
705

 
2,075

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
93,080

 
69,380

Accrued real estate taxes
103,573

 
74,696

Accrued interest
34,086

 
52,824

Other accrued expenses
45,353

 
67,495

Other liabilities
121,249

 
142,589

Tenant security deposits and prepaid rents
48,392

 
44,550

Total liabilities
4,654,985

 
4,707,985

Shareholders' equity:
 
 
 
Preferred shares ($.01 par value); 5,000 shares authorized; 1,331 and 1,791 shares issued and outstanding
332,794

 
447,683

Common shares ($.01 par value); 600,000 and 400,000 shares authorized; 341,710 and 326,399 shares issued and outstanding
3,417

 
3,264

Additional paid-in capital
4,891,763

 
4,620,964

Accumulated other comprehensive income
3,313

 
4,119

Distributions in excess of net income
(2,029,080
)
 
(2,062,787
)
Total shareholders' equity
3,202,207

 
3,013,243

Noncontrolling interests
27,003

 
31,386

Total equity
3,229,210

 
3,044,629

 
$
7,884,195

 
$
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 nine months ended September 30,
(in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
231,322

 
$
221,655

 
$
702,190

 
$
646,842

General contractor and service fee revenue
59,739

 
62,807

 
185,072

 
161,004

 
291,061

 
284,462

 
887,262

 
807,846

Expenses:
 
 
 
 
 
 
 
Rental expenses
38,317

 
41,159

 
128,522

 
117,450

Real estate taxes
32,861

 
29,433

 
97,292

 
88,042

General contractor and other services expenses
52,528

 
59,392

 
163,657

 
142,925

Depreciation and amortization
95,000

 
101,191

 
290,700

 
289,508

 
218,706

 
231,175

 
680,171

 
637,925

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings (loss) of unconsolidated companies
19,178

 
(27
)
 
82,325

 
50,442

Gain on sale of properties
47,143

 
—

 
133,617

 
1,108

Gain on land sales
3,167

 
3,365

 
7,208

 
3,365

Undeveloped land carrying costs
(1,773
)
 
(2,108
)
 
(5,755
)
 
(6,837
)
Impairment charges
(6,368
)
 
—

 
(8,891
)
 
(3,777
)
Other operating expenses
(56
)
 
(47
)
 
(277
)
 
(150
)
General and administrative expenses
(10,573
)
 
(10,373
)
 
(35,632
)
 
(33,225
)
 
50,718

 
(9,190
)
 
172,595

 
10,926

Operating income
123,073

 
44,097

 
379,686

 
180,847

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
356

 
145

 
936

 
1,219

Interest expense
(53,343
)
 
(56,618
)
 
(163,479
)
 
(171,365
)
Loss on debt extinguishment
—

 
—

 
(139
)
 
—

Acquisition-related activity
(110
)
 
(726
)
 
(871
)
 
(2,506
)
Income (loss) from continuing operations before income taxes
69,976

 
(13,102
)
 
216,133

 
8,195

Income tax benefit (expense)
442

 
4,500

 
(2,595
)
 
4,500

Income (loss) from continuing operations
70,418

 
(8,602
)
 
213,538

 
12,695

Discontinued operations:
 
 
 
 
 
 
 
Income before gain on sales
20

 
1,498

 
222

 
1,545

Gain on sale of depreciable properties, net of tax
1,119

 
8,441

 
19,895

 
101,052

Income from discontinued operations
1,139

 
9,939

 
20,117

 
102,597

Net income
71,557

 
1,337

 
233,655

 
115,292

Dividends on preferred shares
(6,072
)
 
(7,356
)
 
(20,155
)
 
(24,261
)
Adjustments for redemption/repurchase of preferred shares
(3,196
)
 
—

 
(2,713
)
 
(5,932
)
Net income attributable to noncontrolling interests
(756
)
 
(48
)
 
(2,883
)
 
(1,629
)
Net income (loss) attributable to common shareholders
$
61,533

 
$
(6,067
)
 
$
207,904

 
$
83,470

Basic net income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.18

 
$
(0.05
)
 
$
0.56

 
$
(0.06
)
Discontinued operations attributable to common shareholders
—

 
0.03

 
0.06

 
0.31

Total
$
0.18

 
$
(0.02
)
 
$
0.62

 
$
0.25

Diluted net income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.18

 
$
(0.05
)
 
$
0.56

 
$
(0.06
)
Discontinued operations attributable to common shareholders
—

 
0.03

 
0.06

 
0.31

Total
$
0.18

 
$
(0.02
)
 
$
0.62

 
$
0.25

Weighted average number of common shares outstanding
341,165

 
324,895

 
333,393

 
320,810

Weighted average number of common shares and potential dilutive securities
345,826

 
324,895

 
338,057

 
325,380

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
71,557

 
$
1,337

 
$
233,655

 
$
115,292

Other comprehensive income (loss):
 
 
 
 
 
 
 
Amortization of interest contracts
(287
)
 
(116
)
 
(861
)
 
567

Other
—

 
(54
)
 
55

 
522

Total other comprehensive income (loss)
(287
)
 
(170
)
 
(806
)
 
1,089

Comprehensive income
$
71,270

 
$
1,167

 
$
232,849

 
$
116,381

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)
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
233,655

 
$
115,292

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
216,963

 
214,118

Amortization of deferred leasing and other costs
73,942

 
89,359

Amortization of deferred financing costs
7,423

 
9,913

Straight-line rental income and expense, net
(16,419
)
 
(12,421
)
Impairment charges
8,891

 
3,777

Gain on acquisitions
—

 
(962
)
Gains on land and depreciated property sales
(163,689
)
 
(105,525
)
Third-party construction contracts, net
(4,397
)
 
27,117

Other accrued revenues and expenses, net
18,059

 
11,367

Operating distributions received less than equity in earnings from unconsolidated companies
(53,429
)
 
(34,411
)
Net cash provided by operating activities
320,999

 
317,624

Cash flows from investing activities:
 
 
 
Development of real estate investments
(385,088
)
 
(320,698
)
Acquisition of real estate investments and related intangible assets
(94,032
)
 
(372,934
)
Acquisition of undeveloped land
(37,579
)
 
(30,101
)
Second generation tenant improvements, leasing costs and building improvements
(69,475
)
 
(60,052
)
Other deferred leasing costs
(24,948
)
 
(26,647
)
Other assets
514

 
(14,725
)
Proceeds from land and depreciated property sales, net
386,215

 
330,740

Capital distributions from unconsolidated companies
70,054

 
106,306

Capital contributions and advances to unconsolidated companies
(5,874
)
 
(38,959
)
Net cash used for investing activities
(160,213
)
 
(427,070
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common shares, net
255,962

 
632,531

Payments for redemption/repurchase of preferred shares
(113,797
)
 
(177,955
)
Proceeds from unsecured debt
—

 
500,000

Payments on unsecured debt
(1,556
)
 
(426,462
)
Proceeds from secured debt financings
—

 
1,933

Payments on secured indebtedness including principal amortization
(93,036
)
 
(112,097
)
Borrowings (payments) on line of credit, net
52,000

 
(75,000
)
Distributions to common shareholders
(169,917
)
 
(164,811
)
Distributions to preferred shareholders
(20,789
)
 
(24,261
)
Distributions to noncontrolling interests, net
(2,044
)
 
(2,692
)
Buyout of noncontrolling interests
(7,803
)
 
—

Change in book overdrafts
(12,450
)
 
(44,225
)
Deferred financing costs
(499
)
 
(7,292
)
Net cash provided by (used for) financing activities
(113,929
)
 
99,669

Net increase (decrease) in cash and cash equivalents
46,857

 
(9,777
)
Cash and cash equivalents at beginning of period
19,275

 
33,889

Cash and cash equivalents at end of period
$
66,132

 
$
24,112

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

 
$
106,555

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 nine months ended September 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
—

 
—

 
—

 
—

 
230,772

 
2,883

 
233,655

Other comprehensive income (loss)
—

 
—

 
—

 
(806
)
 
—

 
—

 
(806
)
Issuance of common shares
—

 
146

 
255,816

 
—

 
—

 
—

 
255,962

Stock-based compensation plan activity
—

 
7

 
11,122

 
—

 
(1,643
)
 
—

 
9,486

Conversion of Limited Partner Units
—

 
—

 
56

 
—

 
—

 
(56
)
 
—

Distributions to preferred shareholders
—

 
—

 
—

 
—

 
(20,155
)
 
—

 
(20,155
)
Redemption/repurchase of preferred shares
(114,889
)
 
—

 
3,805

 
—

 
(2,713
)
 
—

 
(113,797
)
Distributions to common shareholders ($0.51 per share)
—

 
—

 
—

 
—

 
(169,917
)
 
—

 
(169,917
)
Distributions to noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
(2,044
)
 
(2,044
)
Buyout of noncontrolling interests
—

 
—

 
—

 
—

 
(2,637
)
 
(5,166
)
 
(7,803
)
Balance at September 30, 2014
$
332,794

 
$
3,417

 
$
4,891,763

 
$
3,313

 
$
(2,029,080
)
 
$
27,003

 
$
3,229,210

See accompanying Notes to Consolidated Financial Statements



6

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

 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
 
 
 
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
     Land and improvements
$
1,477,680

 
$
1,438,007

     Buildings and tenant improvements
5,640,103

 
5,531,726

     Construction in progress
384,807

 
256,895

     Investments in and advances to unconsolidated companies
316,015

 
342,947

     Undeveloped land
542,490

 
590,052

 
8,361,095

 
8,159,627

     Accumulated depreciation
(1,464,968
)
 
(1,368,406
)
              Net real estate investments
6,896,127

 
6,791,221

 
 
 
 
Real estate investments and other assets held-for-sale
35,414

 
57,466

 
 
 
 
Cash and cash equivalents
66,132

 
19,275

Accounts receivable, net of allowance of $2,586 and $1,576
32,416

 
26,173

Straight-line rent receivable, net of allowance of $7,074 and $9,350
131,209

 
118,251

Receivables on construction contracts, including retentions
30,446

 
19,209

Deferred financing costs, net of accumulated amortization of $44,370 and $37,016
28,425

 
36,250

Deferred leasing and other costs, net of accumulated amortization of $266,276 and $394,049
441,338

 
466,979

Escrow deposits and other assets
222,688

 
217,790

 
$
7,884,195

 
$
7,752,614

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
     Secured debt
$
1,003,851

 
$
1,100,124

     Unsecured debt
3,064,696

 
3,066,252

     Unsecured line of credit
140,000

 
88,000

 
4,208,547

 
4,254,376

 
 
 
 
Liabilities related to real estate investments held-for-sale
705

 
2,075

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
93,080

 
69,380

Accrued real estate taxes
103,573

 
74,696

Accrued interest
34,086

 
52,824

Other accrued expenses
45,597

 
67,739

Other liabilities
121,249

 
142,589

Tenant security deposits and prepaid rents
48,392

 
44,550

     Total liabilities
4,655,229

 
4,708,229

Partners' equity:
 
 
 
  General Partner:
 
 
 
     Common equity (341,710 and 326,399 General Partner Units issued and outstanding)
2,870,038

 
2,565,370

     Preferred equity (1,331 and 1,791 Preferred Units issued and outstanding)
332,785

 
447,683

 
3,202,823

 
3,013,053

     Limited Partners' common equity (4,377 and 4,387 Limited Partner Units issued and outstanding)
20,625

 
20,158

     Accumulated other comprehensive income
3,313

 
4,119

            Total partners' equity
3,226,761

 
3,037,330

Noncontrolling interests
2,205

 
7,055

     Total equity
3,228,966

 
3,044,385

 
$
7,884,195

 
$
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 nine months ended September 30,
(in thousands, except per unit amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
231,322

 
$
221,655

 
$
702,190

 
$
646,842

General contractor and service fee revenue
59,739

 
62,807

 
185,072

 
161,004

 
291,061

 
284,462

 
887,262

 
807,846

Expenses:
 
 
 
 
 
 
 
Rental expenses
38,317

 
41,159

 
128,522

 
117,450

Real estate taxes
32,861

 
29,433

 
97,292

 
88,042

General contractor and other services expenses
52,528

 
59,392

 
163,657

 
142,925

Depreciation and amortization
95,000

 
101,191

 
290,700

 
289,508

 
218,706

 
231,175

 
680,171

 
637,925

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings (loss) of unconsolidated companies
19,178

 
(27
)
 
82,325

 
50,442

Gain on sale of properties
47,143

 
—

 
133,617

 
1,108

Gain on land sales
3,167

 
3,365

 
7,208

 
3,365

Undeveloped land carrying costs
(1,773
)
 
(2,108
)
 
(5,755
)
 
(6,837
)
Impairment charges
(6,368
)
 
—

 
(8,891
)
 
(3,777
)
Other operating expenses
(56
)
 
(47
)
 
(277
)
 
(150
)
General and administrative expenses
(10,573
)
 
(10,373
)
 
(35,632
)
 
(33,225
)
 
50,718

 
(9,190
)
 
172,595

 
10,926

Operating income
123,073

 
44,097

 
379,686

 
180,847

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
356

 
145

 
936

 
1,219

Interest expense
(53,343
)
 
(56,618
)
 
(163,479
)
 
(171,365
)
Loss on debt extinguishment
—

 
—

 
(139
)
 
—

Acquisition-related activity
(110
)
 
(726
)
 
(871
)
 
(2,506
)
Income (loss) from continuing operations before income taxes
69,976

 
(13,102
)
 
216,133

 
8,195

Income tax benefit (expense)
442

 
4,500

 
(2,595
)
 
4,500

Income (loss) from continuing operations
70,418

 
(8,602
)
 
213,538

 
12,695

Discontinued operations:
 
 
 
 
 
 
 
Income before gain on sales
20

 
1,498

 
222

 
1,545

Gain on sale of depreciable properties, net of tax
1,119

 
8,441

 
19,895

 
101,052

           Income from discontinued operations
1,139

 
9,939

 
20,117

 
102,597

Net income
71,557

 
1,337

 
233,655

 
115,292

Distributions on Preferred Units
(6,072
)
 
(7,356
)
 
(20,155
)
 
(24,261
)
Adjustments for redemption/repurchase of Preferred Units
(3,196
)
 
—

 
(2,713
)
 
(5,932
)
Net (income) loss attributable to noncontrolling interests
39

 
(140
)
 
(145
)
 
(487
)
Net income (loss) attributable to common unitholders
$
62,328

 
$
(6,159
)
 
$
210,642

 
$
84,612

Basic net income (loss) per Common Unit:
 
 
 
 
 
 
 
Continuing operations attributable to common unitholders
$
0.18

 
$
(0.05
)
 
$
0.56

 
$
(0.06
)
Discontinued operations attributable to common unitholders
—

 
0.03

 
0.06

 
0.31

Total
$
0.18

 
$
(0.02
)
 
$
0.62

 
$
0.25

Diluted net income (loss) per Common Unit:
 
 
 
 
 
 
 
Continuing operations attributable to common unitholders
$
0.18

 
$
(0.05
)
 
$
0.56

 
$
(0.06
)
Discontinued operations attributable to common unitholders
—

 
0.03

 
0.06

 
0.31

Total
$
0.18

 
$
(0.02
)
 
$
0.62

 
$
0.25

Weighted average number of Common Units outstanding
345,545

 
329,283

 
337,777

 
325,203

Weighted average number of Common Units and potential dilutive securities
345,826

 
329,283

 
338,057

 
325,380

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
71,557

 
$
1,337

 
$
233,655

 
$
115,292

Other comprehensive income (loss):
 
 
 
 
 
 
 
Amortization of interest contracts
(287
)
 
(116
)
 
(861
)
 
567

Other
—

 
(54
)
 
55

 
522

Total other comprehensive income (loss)
(287
)
 
(170
)
 
(806
)
 
1,089

Comprehensive income
$
71,270

 
$
1,167

 
$
232,849

 
$
116,381

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)
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
233,655

 
$
115,292

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
216,963

 
214,118

Amortization of deferred leasing and other costs
73,942

 
89,359

Amortization of deferred financing costs
7,423

 
9,913

Straight-line rental income and expense, net
(16,419
)
 
(12,421
)
Impairment charges
8,891

 
3,777

Gain on acquisitions
—

 
(962
)
Gains on land and depreciated property sales
(163,689
)
 
(105,525
)
Third-party construction contracts, net
(4,397
)
 
27,117

Other accrued revenues and expenses, net
18,059

 
11,405

Operating distributions received less than equity in earnings from unconsolidated companies
(53,429
)
 
(34,411
)
Net cash provided by operating activities
320,999

 
317,662

Cash flows from investing activities:
 
 
 
Development of real estate investments
(385,088
)
 
(320,698
)
Acquisition of real estate investments and related intangible assets
(94,032
)
 
(372,934
)
Acquisition of undeveloped land
(37,579
)
 
(30,101
)
Second generation tenant improvements, leasing costs and building improvements
(69,475
)
 
(60,052
)
Other deferred leasing costs
(24,948
)
 
(26,647
)
Other assets
514

 
(14,725
)
Proceeds from land and depreciated property sales, net
386,215

 
330,740

Capital distributions from unconsolidated companies
70,054

 
106,306

Capital contributions and advances to unconsolidated companies
(5,874
)
 
(38,959
)
Net cash used for investing activities
(160,213
)
 
(427,070
)
Cash flows from financing activities:
 
 
 
Contributions from the General Partner
255,962

 
632,531

Payments for redemption/repurchase of Preferred Units
(113,797
)
 
(177,955
)
Proceeds from unsecured debt
—

 
500,000

Payments on unsecured debt
(1,556
)
 
(426,462
)
Proceeds from secured debt financings
—

 
1,933

Payments on secured indebtedness including principal amortization
(93,036
)
 
(112,097
)
Borrowings (payments) on line of credit, net
52,000

 
(75,000
)
Distributions to common unitholders
(172,153
)
 
(167,092
)
Distributions to preferred unitholders
(20,789
)
 
(24,261
)
Contributions from (distributions to) noncontrolling interests, net
192

 
(449
)
Buyout of noncontrolling interests
(7,803
)
 
—

Change in book overdrafts
(12,450
)
 
(44,225
)
Deferred financing costs
(499
)
 
(7,292
)
Net cash provided by (used for) financing activities
(113,929
)
 
99,631

Net increase (decrease) in cash and cash equivalents
46,857

 
(9,777
)
Cash and cash equivalents at beginning of period
19,275

 
33,889

Cash and cash equivalents at end of period
$
66,132

 
$
24,112

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

 
$
106,555

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 nine months ended September 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
210,617

 
20,155

 
2,738

 
—

 
233,510

 
145

 
233,655

Other comprehensive income (loss)
—

 
—

 
—

 
(806
)
 
(806
)
 
—

 
(806
)
Capital contribution from the General Partner
255,962

 
—

 
—

 
—

 
255,962

 
—

 
255,962

Stock-based compensation plan activity
9,486

 
—

 
—

 
—

 
9,486

 
—

 
9,486

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

 
—

 
(56
)
 
—

 
—

 
—

 
—

Distributions to Preferred Unitholders
—

 
(20,155
)
 
—

 
—

 
(20,155
)
 
—

 
(20,155
)
Redemption/repurchase of Preferred Units
1,101

 
(114,898
)
 
—

 
—

 
(113,797
)
 
—

 
(113,797
)
Distributions to Partners ($0.51 per Common Unit)
(169,917
)
 
—

 
(2,236
)
 
—

 
(172,153
)
 
—

 
(172,153
)
Contributions from noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
192

 
192

Buyout of noncontrolling interests
(2,637
)
 
—

 
21

 
—

 
(2,616
)
 
(5,187
)
 
(7,803
)
Balance at September 30, 2014
$
2,870,038

 
$
332,785

 
$
20,625

 
$
3,313

 
$
3,226,761

 
$
2,205

 
$
3,228,966


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 September 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"), as amended, 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 September 30, 2014, there was

12

one 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 of debt, for the one unconsolidated subsidiary that we have determined to be a VIE at September 30, 2014 (in millions):
 
Carrying Value
 
Maximum Loss Exposure
Investment in unconsolidated companies
$
6.0

 
$
6.0

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 $235.1 million at September 30, 2014.
5.    Acquisitions and Dispositions

2014 Acquisitions

We acquired three industrial properties, a building in Atlanta, Georgia, a building in the Lehigh Valley region of Pennsylvania, and a building in Phoenix, Arizona during the nine months ended September 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
$
86,988

Lease related intangible assets
12,450

Total acquired assets
99,438

Other liabilities
54

Total assumed liabilities
54

Fair value of acquired net assets
$
99,384

The leases in the acquired properties had an average remaining life at acquisition of approximately 8.7 years.

We have included $3.2 million in rental revenues and $45,000 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.

13

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, 2014 were as follows:
 
Low

 
High

Discount rate
7.38
%
 
9.96
%
Exit capitalization rate
5.98
%
 
8.36
%
Lease-up period (months)
12

 
12

Net rental rate per square foot – Industrial
$2.75
 
$9.36

Acquisition-Related Activity

The acquisition-related activity in our Consolidated Statements of Operations and Comprehensive Income for the nine months ended September 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 $871,000 and $3.5 million, respectively, for acquisition-related transaction costs incurred in the nine months ended September 30, 2014 and 2013. During the nine months ended September 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 23 consolidated income-producing real estate assets and 159 acres of undeveloped land during the nine months ended September 30, 2014. We received net cash proceeds from property and land dispositions of $386.2 million and $330.7 million during the nine months ended September 30, 2014 and 2013, respectively.
Income tax expense from continuing operations of $2.6 million was the result of the sale of a property, prior to the adoption of ASU 2014-08, which was partially owned by our taxable REIT subsidiary. Due to continuing involvement in managing the property, it was not classified as a discontinued operation. Income tax expense included in discontinued operations of $3.0 million was also the result of the sale of a property, also prior to the adoption of ASU 2014-08, that was partially owned by our taxable REIT subsidiary where we have no continuing involvement.
During the nine months ended September 30, 2014, five office properties and 11 industrial properties were sold by four of our unconsolidated joint ventures, for which our capital distributions totaled $70.1 million and our share of gains, which are included in equity in earnings, totaled $75.5 million. These five office properties included a 436,000 square foot office tower in Atlanta, Georgia and a three-building portfolio sale in central Florida totaling 415,000 square feet. The industrial disposition activity related to a sale from an unconsolidated joint venture, in which we did not hold a significant ownership interest, totaling 2.1 million square feet.
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 nine months ended September 30, 2014 (in thousands):

14

 
Book Value
at 12/31/13
 
Book Value
at 9/30/14
 
Fair Value
at 12/31/13
 
Issuances and
Assumptions
 
Payments/Payoffs
 
Adjustments
to Fair Value
 
Fair Value
at 9/30/14
Fixed rate secured debt
$
1,081,035

 
$
1,000,451

 
$
1,145,717

 
$
—

 
$
(77,347
)
 
$
22,044

 
$
1,090,414

Variable rate secured debt
19,089

 
3,400

 
19,089

 
—

 
(15,689
)
 
—

 
3,400

Unsecured debt
3,066,252

 
3,064,696

 
3,250,518

 
—

 
(1,556
)
 
57,476

 
3,306,438

Unsecured line of credit
88,000

 
140,000

 
88,383

 
52,000

 
—

 
96

 
140,479

Total
$
4,254,376

 
$
4,208,547

 
$
4,503,707

 
$
52,000

 
$
(94,592
)
 
$
79,616

 
$
4,540,731


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 4.40%, depending on the attributes of the specific loans. The current market rates we utilized were internally estimated; therefore, we have concluded that our determination of fair value for our fixed rate secured debt was primarily based upon Level 3 inputs.
During the nine months ended September 30, 2014, we repaid seven secured loans, totaling $82.8 million. These loans had a weighted average stated interest rate of 5.55%.
Unsecured Debt
At September 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 125.00% 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 September 30, 2014.
Unsecured Line of Credit
Our unsecured line of credit at September 30, 2014 is described as follows (in thousands):
Description
Maximum
Capacity
 
Maturity Date
 
Outstanding
Balance at
September 30, 2014
Unsecured Line of Credit - Partnership
$
850,000

 
December 2015
 
$
140,000


15


The Partnership's unsecured line of credit has an interest rate on borrowings of LIBOR plus 1.25% (equal to 1.41% for outstanding borrowings at September 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.
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, 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 nine 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.
In August 2014, the General Partner redeemed all 384,530 shares of its outstanding 6.625% Series J Cumulative Redeemable Preferred Shares ("Series J Shares"). The cash redemption price for the Series J Shares was $96.1 million, or $250.00 per share, plus dividends accrued through the date of redemption. Original offering costs of $3.2 million were included as a reduction to net income attributable to common shareholders in conjunction with the redemption of these shares.
During the nine months ended September 30, 2014, the General Partner issued 14.6 million common shares pursuant to its at the market equity program, generating gross proceeds of approximately $258.6 million and, after deducting commissions and other costs, net proceeds of approximately $256.0 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.


16

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 nine months ended September 30, 2014 and 2013, respectively (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Management fees
$
2,233

 
$
2,246

 
$
6,569

 
$
6,872

Leasing fees
572

 
310

 
3,085

 
1,432

Construction and development fees
1,529

 
681

 
4,911

 
3,258

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 nine months ended September 30, 2014 and 2013, respectively (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
General Partner
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders
$
61,533

 
$
(6,067
)
 
$
207,904

 
$
83,470

Less: Dividends on participating securities
(651
)
 
(650
)
 
(1,941
)
 
(2,024
)
Basic net income (loss) attributable to common shareholders
60,882

 
(6,717
)
 
205,963

 
81,446

Noncontrolling interest in earnings of common unitholders
795

 
—

 
2,738

 
1,142

Diluted net income (loss) attributable to common shareholders
$
61,677

 
$
(6,717
)
 
$
208,701

 
$
82,588

Weighted average number of common shares outstanding
341,165

 
324,895

 
333,393

 
320,810

Weighted average Limited Partner Units outstanding
4,380

 
—

 
4,384

 
4,393

Other potential dilutive shares
281

 
—

 
280

 
177

Weighted average number of common shares and potential dilutive securities
345,826

 
324,895

 
338,057

 
325,380

 
 
 
 
 
 
 
 
Partnership
 
 
 
 
 
 
 
Net income (loss) attributable to common unitholders
$
62,328

 
$
(6,159
)
 
$
210,642

 
$
84,612

Less: Distributions on participating securities
(651
)
 
(650
)
 
(1,941
)
 
(2,024
)
Basic and diluted net income (loss) attributable to common unitholders
$
61,677

 
$
(6,809
)
 
$
208,701

 
$
82,588

Weighted average number of Common Units outstanding
345,545

 
329,283

 
337,777

 
325,203

Other potential dilutive units
281

 
—

 
280

 
177

Weighted average number of Common Units and potential dilutive securities
345,826

 
329,283

 
338,057

 
325,380


17

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): 
 
Three Months Ended September 30,
 
Nine Months Ended September 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
3,867

 
3,866

 
3,867

 
3,866

10.    Segment Reporting
Reportable Segments
We have four reportable operating segments at September 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 nine months ended September 30, 2014 and 2013, respectively (in thousands): 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
 
Rental Operations:
 
 
 
 
 
 
 
 
Industrial
 
$
131,212

 
$
122,643

 
$
394,209

 
$
354,468

Office
 
60,672

 
63,120

 
194,236

 
187,973

Medical Office
 
36,715

 
32,542

 
104,979

 
94,571

Non-reportable Rental Operations
 
1,698

 
1,765

 
5,414

 
5,807

Service Operations
 
59,739

 
62,807

 
185,072

 
161,004

Total segment revenues
 
290,036

 
282,877

 
883,910

 
803,823

Other revenue
 
1,025

 
1,585

 
3,352

 
4,023

Consolidated revenue from continuing operations
 
291,061

 
284,462

 
887,262

 
807,846

Discontinued operations
 
454

 
11,140

 
2,415

 
39,807

Consolidated revenue
 
$
291,515

 
$
295,602

 
$
889,677

 
$
847,653

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

18

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 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 nine months ended September 30, 2014 and 2013, respectively (in thousands and excluding discontinued operations): 
 
 
Three Months Ended September 30,