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 June 30, 2017
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)
dukerealtylogostacka01a01a10.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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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
Emerging growth company  o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Duke Realty Limited Partnership:
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  x
Smaller reporting company  o
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Duke Realty Corporation
Yes  o 
No  x
 
Duke Realty Limited Partnership
Yes  o
No  x




Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Class
 
Outstanding Common Shares of Duke Realty Corporation at July 31, 2017
Common Stock, $.01 par value per share
 
355,732,029


EXPLANATORY NOTE
This report (the "Report") combines the quarterly reports on Form 10-Q for the period ended June 30, 2017 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 99.1% of the common partnership interests of the Partnership ("General Partner Units") as of June 30, 2017. The remaining 0.9% 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:
 
 
 
Consolidated Balance Sheets - June 30, 2017 (Unaudited) and December 31, 2016
 
 
Consolidated Statements of Operations and Comprehensive Income (Unaudited) - Three and Six Months Ended June 30, 2017 and 2016
 
 
Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2017 and 2016
 
 
Consolidated Statement of Changes in Equity (Unaudited) - Six Months Ended June 30, 2017
 
 
 
 
 
Duke Realty Corporation and Duke Realty Limited Partnership:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
 
June 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Real estate assets
$
5,500,036

 
$
5,144,805

Construction in progress
469,734

 
303,644

Investments in and advances to unconsolidated companies
132,817

 
197,807

Undeveloped land
189,469

 
237,436

 
6,292,056

 
5,883,692

Accumulated depreciation
(1,122,527
)
 
(1,042,944
)
Net real estate investments
5,169,529

 
4,840,748

 
 
 
 
Real estate investments and other assets held-for-sale
213,654

 
1,324,258

 
 
 
 
Cash and cash equivalents
76,326

 
12,639

Accounts receivable, net of allowance of $1,557 and $1,391
23,580

 
15,838

Straight-line rent receivable, net of allowance of $4,371 and $5,268
86,824

 
82,554

Receivables on construction contracts, including retentions
9,274

 
6,159

Deferred leasing and other costs, net of accumulated amortization of $200,560 and $186,798
263,358

 
258,741

Restricted cash held in escrow for like-kind exchange
839,128

 
40,102

Notes receivable from property sales
423,946

 
25,460

Other escrow deposits and assets
211,950

 
165,503

 
$
7,317,569

 
$
6,772,002

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
Secured debt, net of deferred financing costs of $784 and $969
$
337,729

 
$
383,725

Unsecured debt, net of deferred financing costs of $19,583 and $22,083
1,942,399

 
2,476,752

Unsecured line of credit
—

 
48,000

 
2,280,128

 
2,908,477

 
 
 
 
Liabilities related to real estate investments held-for-sale
9,089

 
56,291

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
73,749

 
44,250

Accrued real estate taxes
65,551

 
59,112

Accrued interest
13,944

 
23,633

Other liabilities
173,457

 
153,846

Tenant security deposits and prepaid rents
38,195

 
33,100

Total liabilities
2,654,113

 
3,278,709

Shareholders' equity:
 
 
 
Common shares ($0.01 par value); 600,000 shares authorized; 355,713 and 354,756 shares issued and outstanding, respectively
3,557

 
3,548

Additional paid-in capital
5,196,184

 
5,192,011

Accumulated other comprehensive income
—

 
682

Distributions in excess of net income
(585,592
)
 
(1,730,423
)
Total shareholders' equity
4,614,149

 
3,465,818

Noncontrolling interests
49,307

 
27,475

Total equity
4,663,456

 
3,493,293

 
$
7,317,569

 
$
6,772,002

See accompanying Notes to Consolidated Financial Statements

3

DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three and six months ended June 30,
(in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
165,836

 
$
157,910

 
$
337,512

 
$
318,497

General contractor and service fee revenue
23,576

 
26,044

 
32,975

 
49,195

 
189,412

 
183,954

 
370,487

 
367,692

Expenses:
 
 
 
 
 
 
 
Rental expenses
14,506

 
17,017

 
30,743

 
37,752

Real estate taxes
26,902

 
24,899

 
53,412

 
49,685

General contractor and other services expenses
22,374

 
22,228

 
29,998

 
43,148

Depreciation and amortization
67,013

 
61,136

 
129,036

 
120,669

 
130,795

 
125,280

 
243,189

 
251,254

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings of unconsolidated companies
51,933

 
3,534

 
56,682

 
25,394

Gain on dissolution of unconsolidated company
—

 
30,697

 
—

 
30,697

Promote income
20,007

 
24,087

 
20,007

 
24,087

Gain on sale of properties
34,341

 
39,314

 
71,387

 
54,891

Gain on land sales
1,279

 
707

 
2,784

 
837

Other operating expenses
(718
)
 
(836
)
 
(1,457
)
 
(2,072
)
Impairment charges
—

 
(5,651
)
 
(859
)
 
(12,056
)
General and administrative expenses
(11,858
)
 
(11,584
)
 
(31,090
)
 
(29,682
)
 
94,984

 
80,268

 
117,454

 
92,096

Operating income
153,601

 
138,942

 
244,752

 
208,534

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
2,260

 
567

 
2,792

 
3,090

Interest expense
(21,680
)
 
(29,511
)
 
(44,566
)
 
(59,644
)
Loss on debt extinguishment
(9,561
)
 
(2,430
)
 
(9,536
)
 
(2,430
)
Acquisition-related activity
—

 
(72
)
 
—

 
(75
)
Income from continuing operations before income taxes
124,620

 
107,496

 
193,442

 
149,475

Income tax (expense) benefit
(5,426
)
 
157

 
(7,557
)
 
(186
)
Income from continuing operations
119,194

 
107,653

 
185,885

 
149,289

Discontinued operations:
 
 
 
 
 
 
 
Income before gain on sales
11,095

 
2,278

 
15,185

 
4,484

Gain on sale of depreciable properties
1,109,091

 
252

 
1,109,091

 
166

Income tax expense
(11,613
)
 
—

 
(11,613
)
 
—

Income from discontinued operations
1,108,573

 
2,530

 
1,112,663

 
4,650

Net income
1,227,767

 
110,183

 
1,298,548

 
153,939

Net income attributable to noncontrolling interests
(17,224
)
 
(1,116
)
 
(17,805
)
 
(1,565
)
Net income attributable to common shareholders
$
1,210,543

 
$
109,067

 
$
1,280,743

 
$
152,374

Basic net income per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.33

 
$
0.30

 
$
0.52

 
$
0.43

Discontinued operations attributable to common shareholders
3.07

 
0.01

 
3.08

 
0.01

Total
$
3.40

 
$
0.31

 
$
3.60

 
$
0.44

Diluted net income per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.33

 
$
0.30

 
$
0.51

 
$
0.43

Discontinued operations attributable to common shareholders
3.05

 
0.01

 
3.06

 
0.01

Total
$
3.38

 
$
0.31

 
$
3.57

 
$
0.44

Weighted average number of common shares outstanding
355,647

 
347,464

 
355,466

 
346,564

Weighted average number of common shares and potential dilutive securities
361,981

 
354,433

 
361,789

 
352,227

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
1,227,767

 
$
110,183

 
$
1,298,548

 
$
153,939

Other comprehensive loss:
 
 
 
 
 
 
 
Amortization of interest contracts and other
(426
)
 
(295
)
 
(682
)
 
(590
)
Comprehensive income
$
1,227,341

 
$
109,888

 
$
1,297,866

 
$
153,349

   
See accompanying Notes to Consolidated Financial Statements

4

DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30,
(in thousands)
(Unaudited)
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
1,298,548

 
$
153,939

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
124,883

 
126,594

Amortization of deferred leasing and other costs
30,002

 
31,365

Amortization of deferred financing costs
2,672

 
2,608

Straight-line rental income and expense, net
(7,722
)
 
(5,768
)
Impairment charges
859

 
12,056

Loss on debt extinguishment
9,536

 
2,430

Gain on dissolution of unconsolidated company
—

 
(30,697
)
Accrued promote income
—

 
(24,087
)
Gains on land and depreciated property sales
(1,183,262
)
 
(55,894
)
Third-party construction contracts, net
(1,945
)
 
723

Other accrued revenues and expenses, net
4,179

 
1,012

Operating distributions received less than equity in earnings from unconsolidated companies
(46,303
)
 
(16,080
)
Net cash provided by operating activities
231,447

 
198,201

Cash flows from investing activities:
 
 
 
Development of real estate investments
(288,833
)
 
(213,262
)
Acquisition of real estate investments and related intangible assets
(237,472
)
 
(16,029
)
Acquisition of undeveloped land
(67,923
)
 
(27,243
)
Second generation tenant improvements, leasing costs and building improvements
(20,112
)
 
(30,237
)
Other deferred leasing costs
(16,091
)
 
(14,993
)
Other assets
(828,707
)
 
182,996

Proceeds from land and depreciated property sales, net
1,977,127

 
174,882

Capital distributions from unconsolidated companies
111,557

 
36,328

Capital contributions and advances to unconsolidated companies
(2,039
)
 
(50,955
)
Net cash provided by investing activities
627,507

 
41,487

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common shares, net
3,690

 
99,844

Proceeds from unsecured debt
—

 
375,000

Payments on unsecured debt
(545,924
)
 
(75,668
)
Payments on secured indebtedness including principal amortization
(46,123
)
 
(348,743
)
Repayments of line of credit, net
(48,000
)
 
(71,000
)
Distributions to common shareholders
(135,131
)
 
(124,651
)
Distributions to noncontrolling interests
(1,298
)
 
(1,304
)
Tax payments on stock-based compensation awards
(9,003
)
 
(6,829
)
Change in book overdrafts
(13,470
)
 
(10,974
)
Deferred financing costs
(8
)
 
(6,196
)
Net cash used for financing activities
(795,267
)
 
(170,521
)
Net increase in cash and cash equivalents
63,687

 
69,167

Cash and cash equivalents at beginning of period
12,639

 
22,533

Cash and cash equivalents at end of period
$
76,326

 
$
91,700

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Notes receivable from buyers in property sales
$
400,000

 
$
1,685

Conversion of Limited Partner Units to common shares
$
1,683

 
$
185

See accompanying Notes to Consolidated Financial Statements


5

DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the six months ended June 30, 2017
(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, 2016
 
$
3,548

 
$
5,192,011

 
$
682

 
$
(1,730,423
)
 
$
27,475

 
$
3,493,293

Net income
 
—

 
—

 
—

 
1,280,743

 
17,805

 
1,298,548

Other comprehensive loss
 
—

 
—

 
(682
)
 
—

 
—

 
(682
)
Issuance of common shares
 
1

 
3,689

 
—

 
—

 
—

 
3,690

Stock-based compensation plan activity
 
7

 
(1,198
)
 
—

 
(781
)
 
7,008

 
5,036

Conversion of Limited Partner Units
 
1

 
1,682

 
—

 
—

 
(1,683
)
 
—

Distributions to common shareholders ($0.38 per share)
 
—

 
—

 
—

 
(135,131
)
 
—

 
(135,131
)
Distributions to noncontrolling interests
 
—

 
—

 
—

 
—

 
(1,298
)
 
(1,298
)
Balance at June 30, 2017
 
$
3,557

 
$
5,196,184

 
$
—

 
$
(585,592
)
 
$
49,307

 
$
4,663,456

See accompanying Notes to Consolidated Financial Statements



6

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

 
June 30,
2017
 
December 31, 2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Real estate assets
$
5,500,036

 
$
5,144,805

     Construction in progress
469,734

 
303,644

     Investments in and advances to unconsolidated companies
132,817

 
197,807

     Undeveloped land
189,469

 
237,436

 
6,292,056

 
5,883,692

     Accumulated depreciation
(1,122,527
)
 
(1,042,944
)
              Net real estate investments
5,169,529

 
4,840,748

 
 
 
 
Real estate investments and other assets held-for-sale
213,654

 
1,324,258

 
 
 
 
Cash and cash equivalents
76,326

 
12,639

Accounts receivable, net of allowance of $1,557 and $1,391
23,580

 
15,838

Straight-line rent receivable, net of allowance of $4,371 and $5,268
86,824

 
82,554

Receivables on construction contracts, including retentions
9,274

 
6,159

Deferred leasing and other costs, net of accumulated amortization of $200,560 and $186,798
263,358

 
258,741

Restricted cash held in escrow for like-kind exchange
839,128

 
40,102

Notes receivable from property sales
423,946

 
25,460

Other escrow deposits and other assets
211,950

 
165,503

 
$
7,317,569

 
$
6,772,002

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
     Secured debt, net of deferred financing costs of $784 and $969
$
337,729

 
$
383,725

     Unsecured debt, net of deferred financing costs of $19,583 and $22,083
1,942,399

 
2,476,752

     Unsecured line of credit
—

 
48,000

 
2,280,128

 
2,908,477

 
 
 
 
Liabilities related to real estate investments held-for-sale
9,089

 
56,291

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
73,749

 
44,250

Accrued real estate taxes
65,551

 
59,112

Accrued interest
13,944

 
23,633

Other liabilities
173,457

 
153,846

Tenant security deposits and prepaid rents
38,195

 
33,100

     Total liabilities
2,654,113

 
3,278,709

Partners' equity:
 
 
 
     Common equity (355,713 and 354,756 General Partner Units issued and outstanding, respectively)
4,614,149

 
3,465,136

Limited Partners' common equity (3,302 and 3,408 Limited Partner Units issued and outstanding, respectively)
40,651

 
24,691

     Accumulated other comprehensive income
—

 
682

            Total partners' equity
4,654,800

 
3,490,509

Noncontrolling interests
8,656

 
2,784

     Total equity
4,663,456

 
3,493,293

 
$
7,317,569

 
$
6,772,002

See accompanying Notes to Consolidated Financial Statements

7

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three and six months ended June 30,
(in thousands, except per unit amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
165,836

 
$
157,910

 
$
337,512

 
$
318,497

General contractor and service fee revenue
23,576

 
26,044

 
32,975

 
49,195

 
189,412

 
183,954

 
370,487

 
367,692

Expenses:
 
 
 
 
 
 
 
Rental expenses
14,506

 
17,017

 
30,743

 
37,752

Real estate taxes
26,902

 
24,899

 
53,412

 
49,685

General contractor and other services expenses
22,374

 
22,228

 
29,998

 
43,148

Depreciation and amortization
67,013

 
61,136

 
129,036

 
120,669

 
130,795

 
125,280

 
243,189

 
251,254

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings of unconsolidated companies
51,933

 
3,534

 
56,682

 
25,394

Gain on dissolution of unconsolidated company
—

 
30,697

 
—

 
30,697

Promote income
20,007

 
24,087

 
20,007

 
24,087

Gain on sale of properties
34,341

 
39,314

 
71,387

 
54,891

Gain on land sales
1,279

 
707

 
2,784

 
837

Other operating expenses
(718
)
 
(836
)
 
(1,457
)
 
(2,072
)
Impairment charges
—

 
(5,651
)
 
(859
)
 
(12,056
)
General and administrative expenses
(11,858
)
 
(11,584
)
 
(31,090
)
 
(29,682
)
 
94,984

 
80,268

 
117,454

 
92,096

Operating income
153,601

 
138,942

 
244,752

 
208,534

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
2,260

 
567

 
2,792

 
3,090

Interest expense
(21,680
)
 
(29,511
)
 
(44,566
)
 
(59,644
)
 Loss on debt extinguishment
(9,561
)
 
(2,430
)
 
(9,536
)
 
(2,430
)
Acquisition-related activity
—

 
(72
)
 
—

 
(75
)
Income from continuing operations before income taxes
124,620

 
107,496

 
193,442

 
149,475

Income tax (expense) benefit
(5,426
)
 
157

 
(7,557
)
 
(186
)
Income from continuing operations
119,194

 
107,653

 
185,885

 
149,289

Discontinued operations:
 
 
 
 
 
 
 
Income before gain on sales
11,095

 
2,278

 
15,185

 
4,484

Gain on sale of depreciable properties
1,109,091

 
252

 
1,109,091

 
166

Income tax expense
(11,613
)
 
—

 
(11,613
)
 
—

           Income from discontinued operations
1,108,573

 
2,530

 
1,112,663

 
4,650

Net income
1,227,767

 
110,183

 
1,298,548

 
153,939

Net income attributable to noncontrolling interests
(5,984
)
 
(15
)
 
(5,913
)
 
(26
)
Net income attributable to common unitholders
$
1,221,783

 
$
110,168

 
$
1,292,635

 
$
153,913

Basic net income per Common Unit:
 
 
 
 
 
 
 
Continuing operations attributable to common unitholders
$
0.33

 
$
0.30

 
$
0.52

 
$
0.43

Discontinued operations attributable to common unitholders
3.07

 
0.01

 
3.08

 
0.01

Total
$
3.40

 
$
0.31

 
$
3.60

 
$
0.44

Diluted net income per Common Unit:
 
 
 
 
 
 
 
Continuing operations attributable to common unitholders
$
0.33

 
$
0.30

 
$
0.51

 
$
0.43

Discontinued operations attributable to common unitholders
3.05

 
0.01

 
3.06

 
0.01

Total
$
3.38

 
$
0.31

 
$
3.57

 
$
0.44

Weighted average number of Common Units outstanding
358,952

 
350,968

 
358,776

 
350,065

Weighted average number of Common Units and potential dilutive securities
361,981

 
354,433

 
361,789

 
352,227

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
1,227,767

 
$
110,183

 
$
1,298,548

 
$
153,939

Other comprehensive loss:
 
 
 
 
 
 
 
Amortization of interest contracts and other
(426
)
 
(295
)
 
(682
)
 
(590
)
Comprehensive income
$
1,227,341

 
$
109,888

 
$
1,297,866

 
$
153,349


See accompanying Notes to Consolidated Financial Statements

8

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30,
(in thousands)
(Unaudited)
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
1,298,548

 
$
153,939

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
124,883

 
126,594

Amortization of deferred leasing and other costs
30,002

 
31,365

Amortization of deferred financing costs
2,672

 
2,608

Straight-line rental income and expense, net
(7,722
)
 
(5,768
)
Impairment charges
859

 
12,056

Loss on debt extinguishment
9,536

 
2,430

Gain on dissolution of unconsolidated company
—

 
(30,697
)
Accrued promote income
—

 
(24,087
)
Gains on land and depreciated property sales
(1,183,262
)
 
(55,894
)
Third-party construction contracts, net
(1,945
)
 
723

Other accrued revenues and expenses, net
4,179

 
1,012

Operating distributions received less than equity in earnings from unconsolidated companies
(46,303
)
 
(16,080
)
Net cash provided by operating activities
231,447

 
198,201

Cash flows from investing activities:
 
 
 
Development of real estate investments
(288,833
)
 
(213,262
)
Acquisition of real estate investments and related intangible assets
(237,472
)
 
(16,029
)
Acquisition of undeveloped land
(67,923
)
 
(27,243
)
Second generation tenant improvements, leasing costs and building improvements
(20,112
)
 
(30,237
)
Other deferred leasing costs
(16,091
)
 
(14,993
)
Other assets
(828,707
)
 
182,996

Proceeds from land and depreciated property sales, net
1,977,127

 
174,882

Capital distributions from unconsolidated companies
111,557

 
36,328

Capital contributions and advances to unconsolidated companies
(2,039
)
 
(50,955
)
Net cash provided by investing activities
627,507

 
41,487

Cash flows from financing activities:
 
 
 
Contributions from the General Partner
3,690

 
99,844

Proceeds from unsecured debt
—

 
375,000

Payments on unsecured debt
(545,924
)
 
(75,668
)
Payments on secured indebtedness including principal amortization
(46,123
)
 
(348,743
)
Repayments of line of credit, net
(48,000
)
 
(71,000
)
Distributions to common unitholders
(136,388
)
 
(125,903
)
Distributions to noncontrolling interests
(41
)
 
(52
)
Tax payments on stock-based compensation awards
(9,003
)
 
(6,829
)
Change in book overdrafts
(13,470
)
 
(10,974
)
Deferred financing costs
(8
)
 
(6,196
)
 Net cash used for financing activities
(795,267
)
 
(170,521
)
 Net increase in cash and cash equivalents
63,687

 
69,167

Cash and cash equivalents at beginning of period
12,639

 
22,533

Cash and cash equivalents at end of period
$
76,326

 
$
91,700

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Notes receivable from buyers in property sales
$
400,000

 
$
1,685

Conversion of Limited Partner Units to common shares of the General Partner
$
1,683

 
$
185

See accompanying Notes to Consolidated Financial Statements

9

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the six months ended June 30, 2017
(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, 2016
$
3,465,136

 
$
24,691

 
$
682

 
$
3,490,509

 
$
2,784

 
$
3,493,293

Net income
1,280,743

 
11,892

 
—

 
1,292,635

 
5,913

 
1,298,548

Other comprehensive loss
—

 
—

 
(682
)
 
(682
)
 
—

 
(682
)
Capital contribution from the General Partner
3,690

 
—

 
—

 
3,690

 
—

 
3,690

Stock-based compensation plan activity
(1,972
)
 
7,008

 
—

 
5,036

 
—

 
5,036

Conversion of Limited Partner Units to common shares of the General Partner
1,683

 
(1,683
)
 
—

 
—

 
—

 
—

Distributions to Partners ($0.38 per Common Unit)
(135,131
)
 
(1,257
)
 
—

 
(136,388
)
 
—

 
(136,388
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
(41
)
 
(41
)
Balance at June 30, 2017
$
4,614,149

 
$
40,651

 
$
—

 
$
4,654,800

 
$
8,656

 
$
4,663,456


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 2016 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, 2016 (the "2016 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 2016 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 99.1% of the Common Units at June 30, 2017. The remaining 0.9% 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.
During the three months ended June 30, 2017, we substantially completed the disposition of our medical office portfolio (the "Medical Office Portfolio Disposition", see Note 5) and exited from the medical office product segment. As of June 30, 2017, we owned and operated a portfolio primarily consisting of industrial properties and provided real estate services to third-party owners. Substantially all of our Rental Operations (see Note 9) are conducted through the Partnership. We conduct our Service Operations (see Note 9) 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

11

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
Business Combinations
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 provides revised guidance to determine when an acquisition meets the definition of a business or should be accounted for as an asset acquisition, likely resulting in more acquisitions being accounted for as asset acquisitions as opposed to business combinations. Transaction costs are capitalized for asset acquisitions while they are expensed as incurred for business combinations. ASU 2017-01 requires that when substantially all of the fair value of an acquisition is concentrated in a single identifiable asset or a group of similar identifiable assets it does not meet the definition of a business. ASU 2017-01 also revises the definition of a business to include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output. ASU 2017-01 will be effective, on a prospective basis, for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted ASU 2017-01 prospectively as of January 1, 2017 as permitted under the standard, which has not had a material impact to the consolidated financial statements.
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"). ASU 2016-18 requires entities to show the changes in the total of cash and restricted cash in the statement of cash flows. As a result, entities will no longer present transfers between cash and restricted cash in the statement of cash flows. ASU 2016-18 will be effective for us retrospectively for annual and interim reporting periods beginning after December 15, 2017 with early adoption permitted. We do not believe ASU 2016-18 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 will be 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.

Stock Compensation

In March 2016, the FASB issued ASU 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which simplifies certain aspects of accounting for share-based payment transactions, including income tax consequences, forfeitures and the classification of amounts paid to taxing authorities when shares are withheld to cover employee tax withholdings for certain stock based compensation plans in the statements of cash flows. ASU 2016-09 was effective for us as of January 1, 2017 and did not have a material impact on our consolidated financial statements.

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 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.

12


ASU 2016-02 also specifies that payments for certain lease-related services, which are often included in lease agreements, represent "non-lease" components that will become subject to the guidance in ASU 2014-09, Revenue from Contracts with Customers when ASU 2016-02 becomes effective. We are currently evaluating the materiality, and presentation and disclosure impacts, of this accounting change.

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 will impact the accounting and disclosure requirements for the ground leases, and other operating leases, where we are the lessee.

ASU 2016-02 will be effective for us under a modified retrospective approach 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 but have tentatively concluded that we will apply the practical expedients.

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 non-financial 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 also created guidance governing the sale of non-financial assets with customers and non-customers with the only difference in the treatment of these transactions being presentation in the statement of operations (revenue and expense is reported when the sale is to a customer and net gain or loss is reported when the sale is to a non-customer). Based on the nature of our business, we believe that our property sales represent transactions with non-customers.
In February 2017, the FASB issued ASU 2017-05, Other Income: Gains and Losses from the Derecognition of Nonfinancial Assets (“ASU 2017-05”). ASU 2017-05 provides guidance on how entities recognize sales, including partial sales, of nonfinancial assets (and in-substance nonfinancial assets) to noncustomers. ASU 2017-05 requires the seller to recognize a full gain or loss in a partial sale of nonfinancial assets, to the extent control is not retained. Any noncontrolling interest retained by the seller would, accordingly, be measured at fair value.
Both ASU 2014-09 and ASU 2017-05 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 and ASU 2017-05 allow for either full or modified retrospective ("cumulative effect") adoption. Both standards must be adopted concurrently. We have tentatively concluded that we will adopt both ASU 2014-09 and ASU 2017-05 using the cumulative effect method.

We have evaluated each of our revenue streams under ASU 2014-09 and determined that our revenues that will be impacted by this standard primarily include construction and development fees charged to third parties, fees for services performed for unconsolidated joint ventures and sales of real estate. We expect that the amount and timing of revenue recognition from these revenue streams referenced above will be generally consistent with our current

13

measurement and pattern of recognition. In addition, the pattern of recognition for sales of real estate is not expected to change significantly. 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 ASU 2017-05 to significantly impact the recognition of property and land sales.
3.    Reclassifications
Certain amounts in the accompanying consolidated financial statements for 2016, including the change in presentation for the medical office properties determined to be discontinued operations (see Note 10) and the tax payments on stock-based compensation awards pursuant to ASU 2016-09, have been reclassified to conform to the 2017 consolidated financial statement presentation.
4.    Variable Interest Entities
Partnership
Due to the fact that the Limited Partners do not have kick out rights, or substantive participating rights, the Partnership is a variable interest entity ("VIE"). Because the General Partner holds majority ownership and exercises control over every aspect of the Partnership's operations, the General Partner has been determined as the primary beneficiary and, therefore, consolidates 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 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 and (iii) establish whether or not 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. Consolidated joint ventures that are VIEs are not significant in any period presented in these consolidated financial statements.

To the extent that our joint ventures do not qualify as VIEs, they are consolidated if we control them through majority ownership interests or if we are the managing entity (general partner or managing member) and our partner does not have substantive participating rights. Control is further demonstrated by our ability to unilaterally make significant operating decisions, refinance debt and sell the assets of the joint venture without the consent of the non-managing entity and the inability of the non-managing entity to remove us from our role as the managing entity. Consolidated joint ventures that are not VIEs are not significant in any period presented in these consolidated financial statements.

There were no unconsolidated joint ventures, in which we have any recognized assets or liabilities or have retained any economic exposure to loss at June 30, 2017 that met the criteria to be considered VIEs. Our maximum loss

14

exposure for guarantees of unconsolidated joint venture indebtedness, none of which relate to VIEs, totaled $66.7 million at June 30, 2017.

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 and to increase our overall investments in quality industrial projects. With the exception of certain properties that have been sold or classified as held for sale, 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. Transaction costs related to asset acquisitions are capitalized and transaction costs related to business combinations and dispositions are expensed.

Acquisitions

We acquired 11 properties during the six months ended June 30, 2017. We determined that the 11 properties acquired during the six months ended June 30, 2017 did not meet the revised definition of a business as the result of adopting ASU 2017-01 and, accordingly, we accounted for them as asset acquisitions as opposed to business combinations.

The following table summarizes amounts recognized for each major class of assets (in thousands) for these acquisitions during the six months ended June 30, 2017:
Real estate assets
$
228,516

Lease related intangible assets
11,178

Fair value of acquired net assets
$
239,694

The leases in the acquired properties had a weighted average remaining life at acquisition of approximately 6.9 years.
     
Fair Value Measurements
     
We determine the fair value of the individual components of real estate asset acquisitions primarily through calculating the "as-if vacant" value of a building, using an income approach, which relies 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 used in calculating the "as-if vacant" value for acquisition activity during the six months ended June 30, 2017 are as follows: 
 
Low
High
Discount rate
5.81%
6.82%
Exit capitalization rate
4.31%
5.32%
Lease-up period (months)
9
12
Net rental rate per square foot - Industrial
$3.50
$5.70
Capitalized acquisition costs were insignificant and the fair value of the 11 properties acquired during the six months ended June 30, 2017 was substantially the same as the cost of acquisition.
Dispositions
Dispositions of buildings (see Note 10 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 $1.98 billion and $174.9 million during the six months ended June 30, 2017 and 2016, respectively.


15

Dispositions for the six months ended June 30, 2017 included 77 consolidated properties sold as part of the Medical Office Portfolio Disposition to a subsidiary of Healthcare Trust of America, Inc. ("HTA"), as well as certain other buyers, for a total sales price of $2.35 billion and a gain on sale of $1.14 billion. The Medical Office Portfolio Disposition was executed in connection with our strategy to focus solely on the industrial real estate product type.

A portion of the sale price for the Medical Office Portfolio Disposition was financed through either unsecured notes, or first mortgage interests in a portion of the sold properties, that we provided to HTA and other buyers, totaling $400.0 million, which is reflected within notes receivable from property sales in the Consolidated Balance Sheets. These instruments mature at various points over the next three years and all bear interest rates at 4.0%. We concluded that the value, and the rate of interest, for these financial instruments would approximate fair value as computed using an income approach and that this determination of fair value was primarily based upon level 3 inputs. We have reviewed the creditworthiness of the borrowers and have concluded it is probable that we will collect all amounts due according to their contractual terms.

In connection with the Medical Office Portfolio Disposition, during the six months ended June 30, 2017 we received $105.3 million for the sale of our interest in two unconsolidated joint ventures whose underlying assets were comprised of medical office properties, which is reflected within Capital Distributions from Unconsolidated Companies within the Consolidated Statements of Cash Flows. We recorded $47.5 million of income related to the sale of our interests in these unconsolidated joint ventures within equity in earnings in the Consolidated Statements of Operations and Comprehensive Income. In connection with the sale of our interest in one of these unconsolidated joint ventures, we also recorded promote income (additional incentive-based cash distributions from the joint venture, in excess of our ownership interest) of $20.0 million from the sale of our share interest, which is reflected as a separate line item in the Consolidated Statements of Operations and Comprehensive Income and reflected within net cash provided by operating activities within the Consolidated Statements of Cash Flows. In connection with the sale, we recorded income tax expense totaling $19.7 million including $11.6 million classified within discontinued operations and $8.0 million classified within continuing operations in the Consolidated Statements of Operations and Comprehensive Income.

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):
 
Book Value at 12/31/2016
 
Book Value at 6/30/2017
 
Fair Value at 12/31/2016
 
Payments/Payoffs
 
Adjustments
to Fair Value
 
Fair Value at 6/30/2017
Fixed rate secured debt
$
381,894

 
$
335,713

 
$
415,231

 
$
(46,123
)
 
$
(9,180
)
 
$
359,928

Variable rate secured debt
2,800

 
2,800

 
2,800

 
—

 
—

 
2,800

Unsecured debt
2,498,835

 
1,961,982

 
2,568,034

 
(536,853
)
 
12,339

 
2,043,520

Unsecured line of credit
48,000

 
—

 
48,000

 
(48,000
)
 
—

 
—

Total
$
2,931,529

 
$
2,300,495

 
$
3,034,065

 
$
(630,976
)
 
$
3,159

 
$
2,406,248

Less: Deferred financing costs
23,052

 
20,367

 
 
 
 
 
 
 
 
Total indebtedness as reported on the consolidated balance sheets
$
2,908,477

 
$
2,280,128

 
 
 
 
 
 
 
 

Secured Debt

Because our fixed rate secured debt is not actively traded in any marketplace, we utilized a discounted cash flow methodology to determine its fair value. Accordingly, we calculated fair value by applying an estimate of the current market rate to discount the debt's remaining contractual cash flows. Our estimate of a current market rate, which is the most significant input in the discounted cash flow calculation, is intended to replicate debt of similar maturity and loan-to-value relationship. The estimated rates ranged from 3.20% to 3.70%, depending on the attributes of the

16

specific loans. The current market rates we utilized were internally estimated; therefore, we have concluded that our determination of fair value for our fixed rate secured debt was primarily based upon level 3 inputs.

During the six months ended June 30, 2017, we repaid three fixed rate secured loans, totaling $42.9 million, which had a weighted average stated interest rate of 5.88%.

Unsecured Debt

At June 30, 2017, 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 98.00% to 128.00% of face value.
The indentures (and related supplemental indentures) governing our outstanding series of unsecured notes also require us to comply with financial ratios and other covenants regarding our operations. We were in compliance with all such financial covenants at June 30, 2017.

In June 2017, we repaid our $250.0 million variable rate term loan, which had a scheduled maturity date of January 2019 and bore interest at LIBOR plus 1.00%, and recognized a loss of $523,000 from the write-off of unamortized deferred financing costs. We also repaid $285.6 million of senior unsecured notes that had a stated interest rate of 6.50% and an effective interest rate of 6.08%, which had a scheduled maturity in January 2018, and recognized a loss of $9.0 million including the repayment premium and the write-off of unamortized deferred financing costs.

Unsecured Line of Credit
Our unsecured line of credit at June 30, 2017 is described as follows (in thousands):
Description
Borrowing
Capacity
 
Maturity Date
 
Outstanding Balance at June 30, 2017
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 0.93% and a maturity date of January 2019, which may be extended by a year at our option. 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 June 30, 2017, we were in compliance with all financial 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

17

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.    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
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Management fees
$
718

 
$
1,291

 
$
1,529

 
$
2,550

Leasing fees
80

 
1,053

 
514

 
1,432

Construction and development fees
1,062

 
2,239

 
1,685

 
5,359

8.    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 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), less dividends or distributions on participating securities that are anti-dilutive, by the sum of the weighted average number of common shares outstanding and, to the extent they are dilutive, weighted average number of Limited Partner Units outstanding and any potential dilutive securities for the period. Diluted net income per Common Unit is computed by dividing the net income attributable to common unitholders, less dividends or distributions on participating securities that are anti-dilutive, 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
General Partner
 
 
 
 
 
 
 
Net income attributable to common shareholders
$
1,210,543

 
$
109,067

 
$
1,280,743

 
$
152,374

Less: dividends on participating securities
(540
)
 
(582
)
 
(1,083
)
 
(1,171
)
Basic net income attributable to common shareholders
1,210,003

 
108,485

 
1,279,660

 
151,203

Add back dividends on dilutive participating securities
540

 
582

 
1,083

 
569

Noncontrolling interest in earnings of common unitholders
11,240

 
1,101

 
11,892

 
1,539

Diluted net income attributable to common shareholders
$
1,221,783

 
$
110,168

 
$
1,292,635

 
$
153,311

Weighted average number of common shares outstanding
355,647

 
347,464

 
355,466

 
346,564

Weighted average Limited Partner Units outstanding
3,305

 
3,504

 
3,310

 
3,501

Other potential dilutive shares
3,029

 
3,465

 
3,013

 
2,162

Weighted average number of common shares and potential dilutive securities
361,981

 
354,433

 
361,789

 
352,227

 
 
 
 
 
 
 
 
Partnership
 
 
 
 
 
 
 
Net income attributable to common unitholders
$
1,221,783

 
$
110,168

 
$
1,292,635

 
$
153,913

Less: distributions on participating securities
(540
)
 
(582
)
 
(1,083
)
 
(1,171
)
Basic net income attributable to common unitholders
$
1,221,243

 
$
109,586

 
$
1,291,552

 
$
152,742

Add back distributions on dilutive participating securities
540

 
582

 
1,083

 
569

Diluted net income attributable to common unitholders
$
1,221,783

 
$
110,168

 
$
1,292,635

 
$
153,311

Weighted average number of Common Units outstanding
358,952

 
350,968

 
358,776

 
350,065

Other potential dilutive units
3,029

 
3,465

 
3,013

 
2,162

Weighted average number of Common Units and potential dilutive securities
361,981

 
354,433

 
361,789

 
352,227

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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
General Partner and Partnership
 
 
 
 
 
 
 
Other potential dilutive shares or units:
 
 
 
 
 
 
 
Anti-dilutive outstanding potential shares or units under fixed stock option and other stock-based compensation plans
—

 
170

 
—

 
307

Anti-dilutive outstanding participating securities
—

 
—

 
—

 
1,706

9.    Segment Reporting
Reportable Segments
During the three months ended June 30, 2017, we substantially completed the Medical Office Portfolio Disposition, which resulted in all of our in-service medical office properties being classified within discontinued operations with the exception of a property that did not meet the criteria for classification as held for sale at June 30, 2017 (see Note 10). As a result of this transaction, our medical office properties are no longer presented as a separate reportable segment at June 30, 2017, with substantially all current and prior period operating results being classified within discontinued operations. The remaining medical office property included in continuing operations no longer meets the quantitative thresholds for separate presentation, and is classified as part of our non-reportable Rental Operations. Properties that are not included in our reportable segments, because they do not by themselves meet the quantitative thresholds for separate presentation as a reportable segment, are generally referred to as non-reportable Rental Operations. Our non-reportable Rental Operations primarily include our remaining office properties and medical office property at June 30, 2017.

As of June 30, 2017, after consideration of the Medical Office Portfolio Disposition, we had two reportable operating segments, the first consisting of the ownership and rental of industrial real estate investments. All of our industrial properties across the markets in which we operate are aggregated into one reportable segment as they

19

have similar economic characteristics and we provide similar leasing arrangements and services to similar types of, and in many cases, the same tenants. The operations of our industrial properties, as well as our non-reportable Rental Operations, are collectively referred to as "Rental Operations." Our second 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 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): 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
 
Rental Operations:
 
 
 
 
 
 
 
 
Industrial
 
$
162,559

 
$
140,219

 
$
319,441

 
$
283,199

Non-reportable Rental Operations
 
3,182

 
14,054

 
17,598

 
29,959

Service Operations
 
23,576

 
26,044

 
32,975

 
49,195

Total segment revenues
 
189,317

 
180,317

 
370,014

 
362,353

Other revenue
 
95

 
3,637

 
473

 
5,339

Consolidated revenue from continuing operations
 
189,412

 
183,954

 
370,487

 
367,692

Discontinued operations
 
35,165

 
42,736

 
81,404

 
84,181

Consolidated revenue
 
$
224,577

 
$
226,690

 
$
451,891

 
$
451,873


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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
PNOI
 
 
 
 
 
 
 
 
Industrial
 
$
120,346

 
$
103,289

 
$
235,535

 
$
203,892

Non-reportable Rental Operations
 
1,750

 
2,528

 
4,236

 
5,186

PNOI, excluding all sold/held-for-sale properties
 
122,096

 
105,817

 
239,771

 
209,078

PNOI from sold/held-for-sale properties included in continuing operations
 
372

 
9,812

 
1,956

 
21,366

PNOI, continuing operations
 
$
122,468

 
$
115,629

 
$
241,727

 
$
230,444

 
 
 
 
 
 
 
 
 
Earnings from Service Operations
 
1,202

 
3,816

 
2,977

 
6,047

 
 

 

 

 

Rental Operations revenues and expenses excluded from PNOI:
 
 
 
 
 
 
 
 
Straight-line rental income and expense, net
 
3,628

 
1,323

 
5,205

 
2,920

Revenues related to lease buyouts
 
72

 
69

 
9,857

 
234

Amortization of lease concessions and above and below market rents
 
(566
)
 
(695
)
 
(1,450
)
 
(1,612
)
Intercompany rents and other adjusting items
 
(188
)
 
(412
)
 
(413
)
 
(603
)
Non-Segment Items:
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated companies
 
51,933

 
3,534

 
56,682

 
25,394

Gain on dissolution of unconsolidated company
 
—

 
30,697

 
—

 
30,697

Promote income
 
20,007

 
24,087

 
20,007

 
24,087

Interest expense
 
(21,680
)
 
(29,511
)
 
(44,566
)
 
(59,644
)
Depreciation and amortization expense
 
(67,013
)
 
(61,136
)
 
(129,036
)
 
(120,669
)
Gain on sale of properties
 
34,341

 
39,314