Document
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, 2016
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)
dukerealtylogostacka01a01a07.jpg
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 26, 2016
Common Stock, $.01 par value per share
 
354,693,496


EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2016 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 99.0% of the common partnership interests of the Partnership ("General Partner Units") as of September 30, 2016. The remaining 1.0% 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.
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)
 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
1,494,196

 
$
1,391,763

Buildings and tenant improvements
4,919,897

 
4,740,837

Construction in progress
290,647

 
321,062

Investments in and advances to unconsolidated companies
261,447

 
268,390

Undeveloped land
316,369

 
383,045

 
7,282,556

 
7,105,097

Accumulated depreciation
(1,282,033
)
 
(1,192,425
)
Net real estate investments
6,000,523

 
5,912,672

 
 
 
 
Real estate investments and other assets held-for-sale
18,184

 
45,801

 
 
 
 
Cash and cash equivalents
110,211

 
22,533

Accounts receivable, net of allowance of $1,185 and $1,113
26,180

 
18,846

Straight-line rent receivable, net of allowance of $6,664 and $6,155
118,594

 
116,781

Receivables on construction contracts, including retentions
8,528

 
16,459

Deferred leasing and other costs, net of accumulated amortization of $255,300 and $245,426
335,109

 
346,374

Escrow deposits and other assets
244,752

 
416,049

 
$
6,862,081

 
$
6,895,515

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
Secured debt, net of deferred financing costs of $1,062 and $1,552
$
385,763

 
$
738,444

Unsecured debt, net of deferred financing costs of $23,692 and $20,046
2,605,288

 
2,510,697

Unsecured line of credit
—

 
71,000

 
2,991,051

 
3,320,141

 
 
 
 
Liabilities related to real estate investments held-for-sale
238

 
972

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
51,339

 
54,921

Accrued real estate taxes
93,722

 
71,617

Accrued interest
30,601

 
34,447

Other accrued expenses
41,314

 
61,827

Other liabilities
103,602

 
106,283

Tenant security deposits and prepaid rents
41,292

 
40,506

Total liabilities
3,353,159

 
3,690,714

Shareholders' equity:
 
 
 
Common shares ($0.01 par value); 600,000 shares authorized; 354,616 and 345,285 shares issued and outstanding, respectively
3,546

 
3,453

Additional paid-in capital
5,187,374

 
4,961,923

Accumulated other comprehensive income
938

 
1,806

Distributions in excess of net income
(1,710,215
)
 
(1,785,250
)
Total shareholders' equity
3,481,643

 
3,181,932

Noncontrolling interests
27,279

 
22,869

Total equity
3,508,922

 
3,204,801

 
$
6,862,081

 
$
6,895,515

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
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
206,848

 
$
200,938

 
$
609,171

 
$
617,549

General contractor and service fee revenue
19,351

 
33,599

 
68,546

 
110,320

 
226,199

 
234,537

 
677,717

 
727,869

Expenses:
 
 
 
 
 
 
 
Rental expenses
26,084

 
30,137

 
81,092

 
96,355

Real estate taxes
31,313

 
27,702

 
90,888

 
86,228

General contractor and other services expenses
17,182

 
29,694

 
60,330

 
98,455

Depreciation and amortization
80,688

 
79,898

 
238,647

 
240,135

 
155,267

 
167,431

 
470,957

 
521,173

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings (loss) of unconsolidated companies
12,010

 
(5,088
)
 
37,404

 
16,281

Gain on dissolution of unconsolidated company
—

 
—

 
30,697

 
—

Promote income
2,212

 
—

 
26,299

 
—

Gain on sale of properties
82,698

 
71,259

 
137,589

 
202,153

Gain on land sales
1,601

 
1,659

 
2,438

 
24,096

Other operating expenses
(1,424
)
 
(1,467
)
 
(3,496
)
 
(4,579
)
Impairment charges
(3,042
)
 
(2,426
)
 
(15,098
)
 
(7,896
)
General and administrative expenses
(12,534
)
 
(11,340
)
 
(42,216
)
 
(47,582
)
 
81,521

 
52,597

 
173,617

 
182,473

Operating income
152,453

 
119,703

 
380,377

 
389,169

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
507

 
1,343

 
3,597

 
3,056

Interest expense
(34,606
)
 
(41,615
)
 
(109,520
)
 
(134,576
)
(Loss) gain on debt extinguishment
(6,243
)
 
64

 
(8,673
)
 
(82,589
)
Acquisition-related activity
(7
)
 
(5,660
)
 
(82
)
 
(6,993
)
Income from continuing operations before income taxes
112,104

 
73,835

 
265,699

 
168,067

Income tax benefit
359

 
3,305

 
173

 
4,109

Income from continuing operations
112,463

 
77,140

 
265,872

 
172,176

Discontinued operations:
 
 
 
 
 
 
 
Income (loss) before gain on sales
377

 
(43
)
 
741

 
10,546

Gain on sale of depreciable properties, net of tax
319

 
111

 
485

 
414,620

Income from discontinued operations
696

 
68

 
1,226

 
425,166

Net income
113,159

 
77,208

 
267,098

 
597,342

Net income attributable to noncontrolling interests
(1,145
)
 
(774
)
 
(2,710
)
 
(6,284
)
Net income attributable to common shareholders
$
112,014

 
$
76,434

 
$
264,388

 
$
591,058

Basic net income per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.32

 
$
0.22

 
$
0.75

 
$
0.49

Discontinued operations attributable to common shareholders
—

 
—

 
—

 
1.22

Total
$
0.32

 
$
0.22

 
$
0.75

 
$
1.71

Diluted net income per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.32

 
$
0.22

 
$
0.75

 
$
0.49

Discontinued operations attributable to common shareholders
—

 
—

 
—

 
1.21

Total
$
0.32

 
$
0.22

 
$
0.75

 
$
1.70

Weighted average number of common shares outstanding
351,856

 
345,256

 
348,341

 
344,986

Weighted average number of common shares and potential dilutive securities
358,981

 
352,150

 
355,405

 
352,013

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
113,159

 
$
77,208

 
$
267,098

 
$
597,342

Other comprehensive loss:
 
 
 
 
 
 
 
Amortization of interest contracts
(255
)
 
(274
)
 
(845
)
 
(837
)
Other
(23
)
 
—

 
(23
)
 
(123
)
Total other comprehensive loss
(278
)
 
(274
)
 
(868
)
 
(960
)
Comprehensive income
$
112,881

 
$
76,934

 
$
266,230

 
$
596,382

   
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)
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
267,098

 
$
597,342

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
191,554

 
192,135

Amortization of deferred leasing and other costs
47,093

 
51,517

Amortization of deferred financing costs
3,998

 
5,543

Straight-line rental income and expense, net
(10,832
)
 
(18,498
)
Impairment charges
15,098

 
7,896

Loss on debt extinguishment
8,673

 
82,589

Gain on dissolution of unconsolidated company
(30,697
)
 
—

Gains on land and depreciated property sales
(140,512
)
 
(644,044
)
Third-party construction contracts, net
5,601

 
(3,805
)
Other accrued revenues and expenses, net
14,773

 
7,129

Operating distributions received (less than) in excess of equity in earnings from unconsolidated companies
(24,476
)
 
414

Net cash provided by operating activities
347,371

 
278,218

Cash flows from investing activities:
 
 
 
Development of real estate investments
(308,199
)
 
(221,201
)
Acquisition of real estate investments and related intangible assets
(16,029
)
 
(28,849
)
Acquisition of undeveloped land
(77,593
)
 
(39,881
)
Second generation tenant improvements, leasing costs and building improvements
(39,169
)
 
(45,688
)
Other deferred leasing costs
(25,949
)
 
(26,940
)
Other assets
164,450

 
(38,104
)
Proceeds from land and depreciated property sales, net
369,118

 
1,534,177

Capital distributions from unconsolidated companies
52,514

 
68,915

Capital contributions and advances to unconsolidated companies
(54,853
)
 
(55,020
)
Net cash provided by investing activities
64,290

 
1,147,409

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common shares, net
217,513

 
4,592

Proceeds from unsecured debt
375,000

 
—

Payments on unsecured debt
(285,339
)
 
(759,948
)
Payments on secured indebtedness including principal amortization
(352,723
)
 
(221,085
)
Repayments of line of credit, net
(71,000
)
 
(106,000
)
Distributions to common shareholders
(187,885
)
 
(175,967
)
Distributions to noncontrolling interests
(1,955
)
 
(1,403
)
Change in book overdrafts
(11,025
)
 
(7,754
)
Deferred financing costs
(6,569
)
 
(110
)
Net cash used for financing activities
(323,983
)
 
(1,267,675
)
Net increase in cash and cash equivalents
87,678

 
157,952

Cash and cash equivalents at beginning of period
22,533

 
17,922

Cash and cash equivalents at end of period
$
110,211

 
$
175,874

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Mortgage notes receivable from buyers in property sales
$
1,685

 
$
204,428

Conversion of Limited Partner Units to common shares
$
1,015

 
$
2,416

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, 2016
(in thousands, except per share data)
(Unaudited)
 
 
Common Shareholders
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
 
Distributions
in Excess of
Net Income
 
Noncontrolling
Interests
 
Total
Balance at December 31, 2015
 
$
3,453

 
$
4,961,923

 
$
1,806

 
$
(1,785,250
)
 
$
22,869

 
$
3,204,801

Net income
 


 
—

 
—

 
264,388

 
2,710

 
267,098

Other comprehensive loss
 
—

 
—

 
(868
)
 
—

 
—

 
(868
)
Issuance of common shares
 
84

 
217,429

 
—

 
—

 
—

 
217,513

Stock-based compensation plan activity
 
8

 
7,008

 
—

 
(1,468
)
 
4,670

 
10,218

Conversion of Limited Partner Units
 
1

 
1,014

 
—

 
—

 
(1,015
)
 
—

Distributions to common shareholders ($0.54 per share)
 
—

 
—

 
—

 
(187,885
)
 
—

 
(187,885
)
Distributions to noncontrolling interests
 
—

 
—

 
—

 
—

 
(1,955
)
 
(1,955
)
Balance at September 30, 2016
 
$
3,546

 
$
5,187,374

 
$
938

 
$
(1,710,215
)
 
$
27,279

 
$
3,508,922

See accompanying Notes to Consolidated Financial Statements



6

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

 
September 30,
2016
 
December 31, 2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
     Land and improvements
$
1,494,196

 
$
1,391,763

     Buildings and tenant improvements
4,919,897

 
4,740,837

     Construction in progress
290,647

 
321,062

     Investments in and advances to unconsolidated companies
261,447

 
268,390

     Undeveloped land
316,369

 
383,045

 
7,282,556

 
7,105,097

     Accumulated depreciation
(1,282,033
)
 
(1,192,425
)
              Net real estate investments
6,000,523

 
5,912,672

 
 
 
 
Real estate investments and other assets held-for-sale
18,184

 
45,801

 
 
 
 
Cash and cash equivalents
110,211

 
22,533

Accounts receivable, net of allowance of $1,185 and $1,113
26,180

 
18,846

Straight-line rent receivable, net of allowance of $6,664 and $6,155
118,594

 
116,781

Receivables on construction contracts, including retentions
8,528

 
16,459

Deferred leasing and other costs, net of accumulated amortization of $255,300 and $245,426
335,109

 
346,374

Escrow deposits and other assets
244,752

 
416,049

 
$
6,862,081

 
$
6,895,515

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
     Secured debt, net of deferred financing costs of $1,062 and $1,552
$
385,763

 
$
738,444

     Unsecured debt, net of deferred financing costs of $23,692 and $20,046
2,605,288

 
2,510,697

     Unsecured line of credit
—

 
71,000

 
2,991,051

 
3,320,141

 
 
 
 
Liabilities related to real estate investments held-for-sale
238

 
972

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
51,339

 
54,921

Accrued real estate taxes
93,722

 
71,617

Accrued interest
30,601

 
34,447

Other accrued expenses
41,314

 
61,827

Other liabilities
103,602

 
106,283

Tenant security deposits and prepaid rents
41,292

 
40,506

     Total liabilities
3,353,159

 
3,690,714

Partners' equity:
 
 
 
     Common equity (354,616 and 345,285 General Partner Units issued and outstanding, respectively)
3,480,705

 
3,180,126

 
3,480,705

 
3,180,126

Limited Partners' common equity (3,427 and 3,487 Limited Partner Units issued and outstanding, respectively)
24,478

 
20,032

     Accumulated other comprehensive income
938

 
1,806

            Total partners' equity
3,506,121

 
3,201,964

Noncontrolling interests
2,801

 
2,837

     Total equity
3,508,922

 
3,204,801

 
$
6,862,081

 
$
6,895,515

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
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
206,848

 
$
200,938

 
$
609,171

 
$
617,549

General contractor and service fee revenue
19,351

 
33,599

 
68,546

 
110,320

 
226,199

 
234,537

 
677,717

 
727,869

Expenses:
 
 
 
 
 
 
 
Rental expenses
26,084

 
30,137

 
81,092

 
96,355

Real estate taxes
31,313

 
27,702

 
90,888

 
86,228

General contractor and other services expenses
17,182

 
29,694

 
60,330

 
98,455

Depreciation and amortization
80,688

 
79,898

 
238,647

 
240,135

 
155,267

 
167,431

 
470,957

 
521,173

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings (loss) of unconsolidated companies
12,010

 
(5,088
)
 
37,404

 
16,281

Gain on dissolution of unconsolidated company
—

 
—

 
30,697

 
—

Promote income
2,212

 
—

 
26,299

 
—

Gain on sale of properties
82,698

 
71,259

 
137,589

 
202,153

Gain on land sales
1,601

 
1,659

 
2,438

 
24,096

Other operating expenses
(1,424
)
 
(1,467
)
 
(3,496
)
 
(4,579
)
Impairment charges
(3,042
)
 
(2,426
)
 
(15,098
)
 
(7,896
)
General and administrative expenses
(12,534
)
 
(11,340
)
 
(42,216
)
 
(47,582
)
 
81,521

 
52,597

 
173,617

 
182,473

Operating income
152,453

 
119,703

 
380,377

 
389,169

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
507

 
1,343

 
3,597

 
3,056

Interest expense
(34,606
)
 
(41,615
)
 
(109,520
)
 
(134,576
)
(Loss) gain on debt extinguishment
(6,243
)
 
64

 
(8,673
)
 
(82,589
)
Acquisition-related activity
(7
)
 
(5,660
)
 
(82
)
 
(6,993
)
Income from continuing operations before income taxes
112,104

 
73,835

 
265,699

 
168,067

Income tax benefit
359

 
3,305

 
173

 
4,109

Income from continuing operations
112,463

 
77,140

 
265,872

 
172,176

Discontinued operations:
 
 
 
 
 
 
 
Income (loss) before gain on sales
377

 
(43
)
 
741

 
10,546

Gain on sale of depreciable properties, net of tax
319

 
111

 
485

 
414,620

           Income from discontinued operations
696

 
68

 
1,226

 
425,166

Net income
113,159

 
77,208

 
267,098

 
597,342

Net income attributable to noncontrolling interests
(14
)
 
(23
)
 
(40
)
 
(72
)
Net income attributable to common unitholders
$
113,145

 
$
77,185

 
$
267,058

 
$
597,270

Basic net income per Common Unit:
 
 
 
 
 
 
 
Continuing operations attributable to common unitholders
$
0.32

 
$
0.22

 
$
0.75

 
$
0.49

Discontinued operations attributable to common unitholders
—

 
—

 
—

 
1.22

Total
$
0.32

 
$
0.22

 
$
0.75

 
$
1.71

Diluted net income per Common Unit:
 
 
 
 
 
 
 
Continuing operations attributable to common unitholders
$
0.32

 
$
0.22

 
$
0.75

 
$
0.49

Discontinued operations attributable to common unitholders
—

 
—

 
—

 
1.21

Total
$
0.32

 
$
0.22

 
$
0.75

 
$
1.70

Weighted average number of Common Units outstanding
355,351

 
348,760

 
351,840

 
348,595

Weighted average number of Common Units and potential dilutive securities
358,981

 
352,150

 
355,405

 
352,013

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
113,159

 
$
77,208

 
$
267,098

 
$
597,342

Other comprehensive loss:
 
 
 
 
 
 
 
Amortization of interest contracts
(255
)
 
(274
)
 
(845
)
 
(837
)
Other
(23
)
 
—

 
(23
)
 
(123
)
Total other comprehensive loss
(278
)
 
(274
)
 
(868
)
 
(960
)
Comprehensive income
$
112,881

 
$
76,934

 
$
266,230

 
$
596,382


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)
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
267,098

 
$
597,342

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
191,554

 
192,135

Amortization of deferred leasing and other costs
47,093

 
51,517

Amortization of deferred financing costs
3,998

 
5,543

Straight-line rental income and expense, net
(10,832
)
 
(18,498
)
Impairment charges
15,098

 
7,896

Loss on debt extinguishment
8,673

 
82,589

Gain on dissolution of unconsolidated company
(30,697
)
 
—

Gains on land and depreciated property sales
(140,512
)
 
(644,044
)
Third-party construction contracts, net
5,601

 
(3,805
)
Other accrued revenues and expenses, net
14,773

 
6,949

Operating distributions received (less than) in excess of equity in earnings from unconsolidated companies
(24,476
)
 
414

Net cash provided by operating activities
347,371

 
278,038

Cash flows from investing activities:
 
 
 
Development of real estate investments
(308,199
)
 
(221,201
)
Acquisition of real estate investments and related intangible assets
(16,029
)
 
(28,849
)
Acquisition of undeveloped land
(77,593
)
 
(39,881
)
Second generation tenant improvements, leasing costs and building improvements
(39,169
)
 
(45,688
)
Other deferred leasing costs
(25,949
)
 
(26,940
)
Other assets
164,450

 
(38,104
)
Proceeds from land and depreciated property sales, net
369,118

 
1,534,177

Capital distributions from unconsolidated companies
52,514

 
68,915

Capital contributions and advances to unconsolidated companies
(54,853
)
 
(55,020
)
Net cash provided by investing activities
64,290

 
1,147,409

Cash flows from financing activities:
 
 
 
Contributions from the General Partner
217,513

 
4,772

Proceeds from unsecured debt
375,000

 
—

Payments on unsecured debt
(285,339
)
 
(759,948
)
Payments on secured indebtedness including principal amortization
(352,723
)
 
(221,085
)
Repayments of line of credit, net
(71,000
)
 
(106,000
)
Distributions to common unitholders
(189,764
)
 
(177,815
)
Contributions from (distributions to) noncontrolling interests, net
(76
)
 
445

Change in book overdrafts
(11,025
)
 
(7,754
)
Deferred financing costs
(6,569
)
 
(110
)
 Net cash used for financing activities
(323,983
)
 
(1,267,495
)
 Net increase in cash and cash equivalents
87,678

 
157,952

Cash and cash equivalents at beginning of period
22,533

 
17,922

Cash and cash equivalents at end of period
$
110,211

 
$
175,874

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Mortgage notes receivable from buyers in property sales
$
1,685

 
$
204,428

Conversion of Limited Partner Units to common shares of the General Partner
$
1,015

 
$
2,416

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, 2016
(in thousands, except per unit data)
(Unaudited)
 
Common Unitholders
 
 
 
 
 
General
 
Limited
 
Accumulated
 
 
 
 
 
 
 
 Partner's
 
Partners'
 
Other
 
Total
 
 
 
 
 
Common Equity
 
Common Equity
 
Comprehensive
Income
 
Partners' Equity
 
Noncontrolling
Interests
 
Total Equity
Balance at December 31, 2015
$
3,180,126

 
$
20,032

 
$
1,806

 
$
3,201,964

 
$
2,837

 
$
3,204,801

Net income
264,388

 
2,670

 
—

 
267,058

 
40

 
267,098

Other comprehensive loss
—

 
—

 
(868
)
 
(868
)
 
—

 
(868
)
Capital contribution from the General Partner
217,513

 
—

 
—

 
217,513

 
—

 
217,513

Stock-based compensation plan activity
5,548

 
4,670

 
—

 
10,218

 
—

 
10,218

Conversion of Limited Partner Units to common shares of the General Partner
1,015

 
(1,015
)
 
—

 
—

 
—

 
—

Distributions to Partners ($0.54 per Common Unit)
(187,885
)
 
(1,879
)
 
—

 
(189,764
)
 
—

 
(189,764
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
(76
)
 
(76
)
Balance at September 30, 2016
$
3,480,705

 
$
24,478

 
$
938

 
$
3,506,121

 
$
2,801

 
$
3,508,922


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 the General Partner and the Partnership. The 2015 year-end consolidated balance sheet data included in 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, 2015 (the "2015 Annual Report"), 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 2015 Annual Report.
The General Partner was formed in 1985, and we believe that it qualifies as a 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 99.0% of the Common Units at September 30, 2016. The remaining 1.0% of 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, as amended (the "Partnership Agreement"), the General Partner is obligated to redeem the Limited Partner Units in shares of its common stock, unless it determines in its reasonable discretion that the issuance of shares of its common stock could cause it to fail to qualify as a REIT. Each Limited Partner Unit shall be redeemed for one share of the General Partner's common stock, or, in the event that the issuance of shares could cause the General Partner to fail to qualify as a REIT, cash equal to the fair market value of one share of the General Partner's common stock at the time of redemption, in each case, subject to certain adjustments described in the Partnership Agreement. The Limited Partner Units are not required, per the terms of the Partnership Agreement, to be redeemed in registered shares of the General Partner.
As of September 30, 2016, we owned and operated a portfolio consisting primarily of industrial and medical office properties and provided 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.  

11

2.    New Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 an entity expects to be entitled in exchange for fulfilling those performance obligations. ASU 2014-09 will be effective for public entities for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted in periods ending after December 15, 2016. ASU 2014-09 allows for either full or modified retrospective adoption.
We have begun to evaluate each of our revenue streams under the new standard and the pattern of recognition is not expected to change significantly. Additionally, we have primarily disposed of property and land in all cash transactions with no contingencies and no future involvement in the operations, and therefore, do not expect the new standard to significantly impact the recognition of property and land sales. We have not yet selected a transition method.
Consolidation
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 made targeted amendments to the current consolidation guidance and ended the deferral granted to investment companies from applying the existing variable interest entity ("VIE") guidance. ASU 2015-02 was effective for public entities for annual and interim reporting periods beginning after December 15, 2015. We adopted ASU 2015-02 during the three months ended March 31, 2016, and it has not had a significant impact on our consolidated financial statements.
Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). ASU 2015-03 required that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 was effective for us retrospectively for financial statements issued for annual and interim reporting periods beginning after December 15, 2015. We adopted ASU 2015-03 during the three months ended March 31, 2016.
Debt issuance costs related to the Partnership's unsecured line of credit continue to be presented as assets in the consolidated balance sheets, as part of escrow deposits and other assets, pursuant to ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.
Business Combinations
In September 2015, the FASB issued ASU 2015-16, Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments ("ASU 2015-16"). ASU 2015-16 amended the retroactive requirement to apply adjustments made to provisional amounts recognized in a business combination. The update required that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 was effective for annual and interim periods beginning after December 15, 2015. We adopted ASU 2015-16 during the three months ended March 31, 2016 and it has not had a significant impact on our consolidated financial statements.



12

Leases
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). ASU 2016-02 supersedes existing leasing standards.
ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. ASU 2016-02 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 also requires that lessors expense certain initial direct costs, which are capitalizable under existing leasing standards, as incurred.
ASU 2016-02 is effective for us retrospectively for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted. A set of practical expedients for implementation, which must be elected as a package and for all leases, may also be elected. These practical expedients include relief from re-assessing lease classification at the adoption date for expired or existing leases, although a right-of-use asset and lease liability would still be recorded for such leases. We are currently assessing the method of adoption and the impact that ASU 2016-02 will have on our consolidated financial statements.
Stock Based Compensation
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Accounting ("ASU 2016-09"). ASU 2016-09 requires that all excess tax benefits and tax deficiencies related to stock based compensation arrangements must be recognized in the income statement as they occur as opposed to the current guidance where excess tax benefits are recorded in equity. ASU 2016-09 also allows entities to make an accounting policy election to either continue to estimate forfeitures on stock based compensation arrangements or to account for forfeitures as they occur. ASU 2016-09 is effective for annual and interim reporting periods beginning after December 15, 2016 with early adoption permitted. We do not believe ASU 2016-09 will have a material impact on our consolidated financial statements.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows ("ASU 2016-15"). ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows and how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU 2016-15 is effective for us retrospectively for annual and interim reporting periods beginning after December 15, 2017 with early adoption permitted. We do not believe ASU 2016-15 will have a material impact on our consolidated financial statements.
3.    Reclassifications
Certain amounts in the accompanying consolidated financial statements for 2015, including the change in presentation of deferred financing costs pursuant to ASU 2015-03, have been reclassified to conform to the 2016 consolidated financial statement presentation.
4.    Variable Interest Entities
Partnership
As the result of the adoption of ASU 2015-02, which stipulates that limited partnerships (and similar entities) where the limited partners do not have substantive participating or kick-out rights are VIEs, we determined that the Partnership is a VIE. Prior to the adoption of ASU 2015-02, the General Partner consolidated the Partnership pursuant to the voting interest model. We concluded that, because it holds majority ownership and exercises control

13

over every aspect of the Partnership's operations, the General Partner is the primary beneficiary of the Partnership and, as such, will continue to consolidate the Partnership.

The assets and liabilities of the General Partner and the Partnership are substantially the same, as the General Partner does not have any significant assets other than its investment in the Partnership. All of the Company's debt is also an obligation of the Partnership.

Unconsolidated Joint Ventures
We have equity interests in unconsolidated joint ventures that primarily own and operate rental properties or hold land for development. We consolidate those joint ventures that are considered to be VIEs where we are the primary beneficiary. We analyze our investments in joint ventures to determine if the joint venture is considered a VIE and would require consolidation. We (i) evaluate the sufficiency of the total equity investment at risk, (ii) review the voting rights and decision-making authority of the equity investment holders as a group and whether there are limited partners (or similar owning entities) that lack substantive participating or kick out rights, guaranteed returns, protection against losses, or capping of residual returns within the group and (iii) establish whether activities within the venture are on behalf of an investor with disproportionately few voting rights in making this VIE determination.
To the extent that we own interests in a VIE and we (i) are the sole entity that has the power to direct the activities of the VIE and (ii) have the obligation or rights to absorb the VIE's losses or receive its benefits, then we would be determined to be the primary beneficiary and would consolidate the VIE. To the extent we own interests in a VIE, then at each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary beneficiary.
There were no unconsolidated joint ventures, in which we have any recognized assets or liabilities or have retained any economic exposure to loss at September 30, 2016 that met the criteria to be considered VIEs. Our maximum loss exposure for guarantees of joint venture indebtedness, none of which relate to VIEs, totaled $52.7 million at September 30, 2016.
5.    Acquisitions and Dispositions

Acquisitions and dispositions for the periods presented were completed in accordance with our strategy to reposition our investment concentration among the product types and markets in which we operate. The results of operations for all acquired properties have been included in continuing operations within our consolidated financial statements since their respective dates of acquisition.
Acquisitions

We acquired two properties during the nine months ended September 30, 2016, which included a property received as part of a non-cash distribution in connection with the dissolution of an unconsolidated joint venture. The following table summarizes amounts recognized for each major class of asset and liability (in thousands) for these acquisitions during the nine months ended September 30, 2016:
Real estate assets
$
72,824

Lease related intangible assets
6,427

Fair value of acquired net assets
$
79,251

Acquired leases had an average remaining life at acquisition of approximately 8.9 years.

We have included $2.1 million in rental revenues and a net loss of $28,000 in continuing operations during the nine months ended September 30, 2016 for the properties since their respective dates of acquisition.

Distribution of Joint Venture Properties
Included in our property acquisitions for the nine months ended September 30, 2016 was an industrial property that we received as part of a non-cash distribution of properties from Duke/Hulfish LLC ("Duke/Hulfish"), a 20%

14

owned unconsolidated joint venture. On June 30, 2016, as part of a plan of dissolution, Duke/Hulfish distributed its ownership in seven properties to our partner in the joint venture while distributing its ownership interest in one property to us. We also received $2.8 million in cash from the joint venture in order to balance the value of the distributions received in accordance with the applicable ownership percentages. As the result of this dissolution transaction, we recognized a gain equal to the excess of the fair value of the one property distributed to us, plus the cash that we received, over the carrying value of our 20% investment in the eight properties that were distributed from Duke/Hulfish (both to us and our partner). The computation of this gain is shown as follows (in thousands):
Fair value of one property received in non-cash distribution
$
63,000

Cash received at dissolution
2,760

Carrying value of investment in properties distributed to partners
(35,063
)
Gain on dissolution of unconsolidated company
$
30,697


In connection with the dissolution of Duke/Hulfish, and the sale of its final property to a third party in July 2016, we recognized promote income (additional incentive-based cash distributions from the joint venture, in excess of our 20% ownership interest) totaling $26.3 million for the nine months ended September 30, 2016.
      
Fair Value Measurements
     
The fair value estimates used in allocating the aggregate purchase price of an acquisition, to the extent accounted for as a business combination, among the individual components of real estate assets and liabilities were determined primarily through calculating the "as-if vacant" value of a building, using the income approach, and relied significantly upon internally determined assumptions. We have determined that these estimates primarily rely upon level 3 inputs, which are unobservable inputs based on our own assumptions. The most significant assumptions utilized in making the lease-up and future disposition estimates used in calculating the "as-if vacant" value for acquisition activity during the nine months ended September 30, 2016 are as follows: 
 
Low
High
Discount rate
7.46%
8.10%
Exit capitalization rate
6.46%
6.96%
Lease-up period (months)
12
12
Net rental rate per square foot - Industrial
$3.39
$3.39
Net rental rate per square foot - Medical Office
$15.40
$15.40
Acquisition-Related Activity
The acquisition-related activity in our consolidated Statements of Operations and Comprehensive Income consisted of adjustments to the fair value of contingent consideration from acquisitions after the measurement period was complete and transaction costs for completed acquisitions.
Dispositions
Dispositions of buildings (see Note 11 for the number of buildings sold as well as for their classification between continuing and discontinued operations) and undeveloped land generated net cash proceeds of $369.1 million and $1.53 billion during the nine months ended September 30, 2016 and 2015, respectively.

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 (in thousands):

15

 
Book Value at 12/31/2015
 
Book Value at 9/30/2016
 
Fair Value at 12/31/2015
 
Issuances and
Assumptions
 
Payments/Payoffs
 
Adjustments
to Fair Value
 
Fair Value at 9/30/2016
Fixed rate secured debt
$
736,896

 
$
384,025

 
$
789,095

 
$
—

 
$
(352,382
)
 
$
(11,765
)
 
$
424,948

Variable rate secured debt
3,100

 
2,800

 
3,100

 
—

 
(300
)
 
—

 
2,800

Unsecured debt
2,530,743

 
2,628,980

 
2,624,795

 
375,000

 
(276,764
)
 
93,015

 
2,816,046

Unsecured line of credit
71,000

 
—

 
70,852

 
—

 
(71,000
)
 
148

 
—

Total
$
3,341,739

 
$
3,015,805

 
$
3,487,842

 
$
375,000

 
$
(700,446
)
 
$
81,398

 
$
3,243,794

Less: Deferred financing costs
21,598

 
24,754

 
 
 
 
 
 
 
 
 
 
Total indebtedness as reported on the consolidated balance sheets
$
3,320,141

 
$
2,991,051

 
 
 
 
 
 
 
 
 
 
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 2.50% to 3.30%, depending on the attributes of the specific loans. The current market rates we utilized were internally estimated; therefore, we have concluded that our determination of fair value for our fixed rate secured debt was primarily based upon level 3 inputs.
During the nine months ended September 30, 2016, we repaid five loans, totaling $346.4 million, which had a weighted average stated rate of 5.90%.
Unsecured Debt
At September 30, 2016, 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 103.00% to 137.00% of face value.
During the nine months ended September 30, 2016, we issued $375.0 million of senior unsecured notes that bear interest at a stated interest rate of 3.25%, have an effective interest rate of 3.36%, and mature on June 30, 2026. A portion of these proceeds were used to repurchase, through a tender offer, $72.0 million of our 5.95% senior unsecured notes due February 2017 ("5.95% Senior Unsecured Notes"), for a cash payment of $74.5 million in June 2016. In July 2016, we redeemed the remaining $203.0 million of 5.95% Senior Unsecured Notes for a cash payment of $209.0 million. Together, the repurchase and the redemption resulted in an $8.7 million loss on debt extinguishment, which included repurchase premiums, redemption premiums and the write-off of unamortized deferred financing costs.

We utilize a discounted cash flow methodology in order to estimate the fair value of our $250.0 million variable rate term loan. Our estimate of the current market rate for our variable rate term loan was 1.68% and was based primarily upon level 3 inputs. To the extent that credit spreads have changed since the origination of this term loan,

16

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 would represent 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. As our credit spreads have not changed appreciably, we believe that the contractual interest rate and the current market rate on the term loan are the same.

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, 2016.

Unsecured Line of Credit
Our unsecured line of credit at September 30, 2016 is described as follows (in thousands):
Description
Maximum
Capacity
 
Maturity Date
 
Outstanding Balance at September 30, 2016
Unsecured Line of Credit - Partnership
$
1,200,000

 
January 2019
 
$
—


The Partnership's unsecured line of credit has an interest rate on borrowings of LIBOR plus 1.05% and a maturity date of January 2019 (with extension options that could extend the maturity date to January 2020). 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 $1.60 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, 2016, 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. To the extent that credit spreads have changed since the origination of the 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 would represent 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. As our credit spreads have not changed appreciably, we believe that the contractual interest rate and the current market rate on the line of credit are the same. To the extent there are outstanding borrowings, this current market rate is internally estimated and therefore would be primarily based upon a level 3 input.
      
7.    Shareholders' Equity of the General Partner and Partners' Capital of the Partnership
General Partner
During the nine months ended September 30, 2016, the General Partner issued 8.3 million common shares pursuant to its at the market ("ATM") equity program, generating gross proceeds of approximately $216.2 million and, after deducting commissions and other costs, net proceeds of approximately $213.6 million. The proceeds from these offerings were contributed to the Partnership and used to fund development activities and loan repayments.




17

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 (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Management fees
$
1,035

 
$
1,835

 
$
3,585

 
$
5,388

Leasing fees
629

 
692

 
2,061

 
1,714

Construction and development fees
1,307

 
2,247

 
6,666

 
3,377

9.    Net Income Per Common Share or Common Unit
Basic net income per common share or Common Unit is computed by dividing net income 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 per common share is computed by dividing the sum of basic net income 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 per Common Unit is computed by dividing the basic net income 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 (in thousands): 

18

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
General Partner
 
 
 
 
 
 
 
Net income attributable to common shareholders
$
112,014

 
$
76,434

 
$
264,388

 
$
591,058

Less: Dividends on participating securities
(580
)
 
(593
)
 
(1,751
)
 
(1,803
)
Basic net income attributable to common shareholders
111,434

 
75,841

 
262,637

 
589,255

Add back dividends on dilutive participating securities
580

 
593

 
1,751

 
1,803

Noncontrolling interest in earnings of common unitholders
1,131

 
751

 
2,670

 
6,212

Diluted net income attributable to common shareholders
$
113,145

 
$
77,185

 
$
267,058

 
$
597,270

Weighted average number of common shares outstanding
351,856

 
345,256

 
348,341

 
344,986

Weighted average Limited Partner Units outstanding
3,495

 
3,504

 
3,499

 
3,609

Other potential dilutive shares
3,630

 
3,390

 
3,565

 
3,418

Weighted average number of common shares and potential dilutive securities
358,981

 
352,150

 
355,405

 
352,013

 
 
 
 
 
 
 
 
Partnership
 
 
 
 
 
 
 
Net income attributable to common unitholders
$
113,145

 
$
77,185

 
$
267,058

 
$
597,270

Less: Distributions on participating securities
(580
)
 
(593
)
 
(1,751
)
 
(1,803
)
Basic net income attributable to common unitholders
$
112,565

 
$
76,592

 
$
265,307

 
$
595,467

Add back distributions on dilutive participating securities
580

 
593

 
1,751

 
1,803

Diluted net income attributable to common unitholders
$
113,145

 
$
77,185

 
$
267,058

 
$
597,270

Weighted average number of Common Units outstanding
355,351

 
348,760

 
351,840

 
348,595

Other potential dilutive units
3,630

 
3,390

 
3,565

 
3,418

Weighted average number of Common Units and potential dilutive securities
358,981

 
352,150

 
355,405

 
352,013

The following table summarizes the potentially dilutive shares or units 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,
 
2016
 
2015
 
2016
 
2015
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
170

 
997

 
170

 
997

Outstanding participating securities
—

 
—

 
—

 
—

10.    Segment Reporting
Reportable Segments
We had three reportable operating segments at September 30, 2016, the first two of which consist of the ownership and rental of (i) industrial and (ii) medical office real estate investments. Beginning in 2016, our office properties are no longer presented as a separate reportable segment, as they no longer meet the quantitative thresholds for separate presentation, and are referred to as part of our non-reportable Rental Operations. The operations of our industrial and medical office properties as well as our non-reportable Rental Operations, are collectively referred to as "Rental Operations." Our third 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 (in thousands): 

19

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
 
Rental Operations:
 
 
 
 
 
 
 
 
Industrial
 
$
149,746

 
$
136,276

 
$
432,945

 
$
419,391

Medical Office
 
45,353

 
39,911

 
130,713

 
120,213

Non-reportable Rental Operations
 
10,065

 
23,277

 
38,490

 
72,103

Service Operations
 
19,351

 
33,599

 
68,546

 
110,320

Total segment revenues
 
224,515

 
233,063

 
670,694

 
722,027

Other revenue
 
1,684

 
1,474

 
7,023

 
5,842

Consolidated revenue from continuing operations
 
226,199

 
234,537

 
677,717

 
727,869

Discontinued operations
 
380

 
7

 
735

 
32,171

Consolidated revenue
 
$
226,579

 
$
234,544

 
$
678,452

 
$
760,040

Supplemental Performance Measure
Property-level net operating income on a cash basis ("PNOI") is the non-GAAP supplemental performance measure that we 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 following table). 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 following table) 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 (in thousands and excluding discontinued operations): 

20

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
PNOI
 
 
 
 
 
 
 
 
Industrial
 
$
109,350

 
$
96,966

 
$
314,349

 
$
285,087

Medical Office
 
29,401

 
25,827

 
84,822

 
76,878

Non-reportable Rental Operations
 
4,083

 
4,636

 
12,273

 
14,100

PNOI, excluding all sold/held-for-sale properties
 
142,834

 
127,429

 
411,444

 
376,065

PNOI from sold/held-for-sale properties included in continuing operations
 
1,840

 
12,136

 
16,512

 
46,635

PNOI, continuing operations
 
$
144,674

 
$
139,565

 
$
427,956

 
$
422,700

 
 
 
 
 
 
 
 
 
Earnings from Service Operations
 
2,169

 
3,905

 
8,216

 
11,865

 
 

 

 

 

Rental Operations revenues and expenses excluded from PNOI:
Straight-line rental income and expense, net
 
5,008

 
5,723

 
10,832

 
16,830

Revenues related to lease buyouts
 
1,491

 
408

 
1,725

 
1,366

Amortization of lease concessions and above and below market rents
 
(303
)
 
(357
)
 
(1,361
)
 
(2,559
)
Intercompany rents and other adjusting items
 
(27
)
 
(434
)
 
(246
)
 
(1,306
)
Non-Segment Items:
 
 
 
 
 
 
 
 
Equity in earnings (loss) of unconsolidated companies
 
12,010

 
(5,088
)
 
37,404

 
16,281

Gain on dissolution of unconsolidated company
 
—

 
—

 
30,697

 
—

Promote income
 
2,212

 
—

 
26,299