Edgar Filing: DUKE REALTY CORP

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, 2018



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-9044 (Duke Realty Corporation) 0-20625 (Duke Realty Limited Partnership)

DUKE REALTY CORPORATION

DUKE REALTY LIMITED PARTNERSHIP

(Exact Name of Registrant as Specified in Its Charter)



Indiana (Duke Realty Corporation)		35-1740409 (Duke Realty Corporation)
Indiana (Duke Realty Limited Partnership)		35-1898425 (Duke Realty Limited Partnership)
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
600 East 96^thStreet, 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 on its corporate Web site, if any, every Interactive Data File required to be submitted 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 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

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, 2018
Common Stock 0.01 par value per share		358,319,306

EXPLANATORY NOTE

This report (the "Report") combines the quarterly reports on Form 10-Q for the period ended September 30, 2018 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 September 30, 2018. 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
Part I - Financial Information

Item 1.		Financial Statements

	Duke Realty Corporation:
		Consolidated Balance Sheets - September 30, 2018 (Unaudited) and December 31, 2017	3
		Consolidated Statements of Operations and Comprehensive Income (Unaudited) - Three and Nine Months Ended September 30, 2018 and 2017	4
		Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2018 and 2017	5
		Consolidated Statement of Changes in Equity (Unaudited) - Nine Months Ended September 30, 2018	6

	Duke Realty Limited Partnership:
		Consolidated Balance Sheets - September 30, 2018 (Unaudited) and December 31, 2017	7
		Consolidated Statements of Operations and Comprehensive Income (Unaudited) - Three and Nine Months Ended September 30, 2018 and 2017	8
		Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2018 and 2017	9
		Consolidated Statement of Changes in Equity (Unaudited) - Nine Months Ended September 30, 2018	10

	Duke Realty Corporation and Duke Realty Limited Partnership:
		Notes to Consolidated Financial Statements (Unaudited)	11

Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.		Controls and Procedures	47

Part II - Other Information

Item 1.		Legal Proceedings	48
Item 1A.		Risk Factors	48
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.		Defaults Upon Senior Securities	49
Item 4.		Mine Safety Disclosures	49
Item 5.		Other Information	49
Item 6.		Exhibits	50

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share amounts)



	September 30, 2018			December 31, 2017
	(Unaudited)
ASSETS
Real estate investments:
Real estate assets	$	6,943,629		$	6,593,567
Construction in progress	515,324			401,407
Investments in and advances to unconsolidated joint ventures	107,811			126,487
Undeveloped land	314,075			226,987
	7,880,839			7,348,448
Accumulated depreciation	(1,294,370		)	(1,193,905		)
Net real estate investments	6,586,469			6,154,543

Real estate investments and other assets held-for-sale	53,653			17,550

Cash and cash equivalents	133,405			67,562
Accounts receivable, net of allowance of $458 and $1,709	19,494			19,427
Straight-line rent receivable, net of allowance of $4,628 and $5,254	102,480			93,005
Receivables on construction contracts, including retentions	33,699			13,480
Deferred leasing and other costs, net of accumulated amortization of $211,212 and $209,451	305,143			292,682
Restricted cash held in escrow for like-kind exchange	127,597			116,405
Notes receivable from property sales	276,744			426,657
Other escrow deposits and other assets	186,126			186,885
	$	7,824,810		$	7,388,196
LIABILITIES AND EQUITY
Indebtedness:
Secured debt, net of deferred financing costs of $270 and $614	$	80,716		$	311,349
Unsecured debt, net of deferred financing costs of $26,583 and $20,500	2,553,460			2,111,542
	2,634,176			2,422,891

Liabilities related to real estate investments held-for-sale	606			1,163

Construction payables and amounts due subcontractors, including retentions	100,323			54,545
Accrued real estate taxes	89,671			67,374
Accrued interest	27,463			17,911
Other liabilities	208,874			210,825
Tenant security deposits and prepaid rents	38,773			39,109
Total liabilities	3,099,886			2,813,818
Shareholders' equity:
Common shares ($0.01 par value); 600,000 shares authorized; 358,307 and 356,361 shares issued and outstanding, respectively	3,583			3,564
Additional paid-in capital	5,240,495			5,205,316
Distributions in excess of net income	(571,617		)	(676,036		)
Total shareholders' equity	4,672,461			4,532,844
Noncontrolling interests	52,463			41,534
Total equity	4,724,924			4,574,378
	$	7,824,810		$	7,388,196

See accompanying Notes to Consolidated Financial Statements

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
	2018			2017			2018			2017
Revenues:
Rental and related revenue	$	196,912		$	169,611		$	582,461		$	507,123
General contractor and service fee revenue	34,986			25,217			94,552			58,192
	231,898			194,828			677,013			565,315
Expenses:
Rental expenses	17,704			16,224			54,869			46,967
Real estate taxes	31,515			28,157			93,857			81,569
General contractor and other services expenses	33,730			24,079			89,392			54,077
Depreciation and amortization	78,855			67,992			232,216			197,028
	161,804			136,452			470,334			379,641
Other operating activities:
Equity in earnings of unconsolidated joint ventures	5,552			1,841			15,521			58,523
Promote income	—			—			—			20,007
Gain on sale of properties	(107		)	21,952			194,741			93,339
Gain on land sales	3,915			5,665			7,221			8,449
Other operating expenses	(668		)	(770		)	(2,591		)	(2,226		)
Impairment charges	—			(3,622		)	—			(4,481		)
General and administrative expenses	(8,959		)	(10,075		)	(43,441		)	(41,165		)
	(267		)	14,991			171,451			132,446
Operating income	69,827			73,367			378,130			318,120
Other income (expenses):
Interest and other income, net	4,129			6,404			13,319			9,197
Interest expense	(21,462		)	(20,835		)	(62,137		)	(65,401		)
Loss on debt extinguishment	(89		)	(16,568		)	(240		)	(26,104		)
Income from continuing operations before income taxes	52,405			42,368			329,072			235,812
Income tax benefit (expense)	897			(359		)	(9,495		)	(7,918		)
Income from continuing operations	53,302			42,009			319,577			227,894
Discontinued operations:
Income before gain on sales and income taxes	85			2,563			108			17,747
Gain on sale of depreciable properties	136			120,179			3,157			1,229,270
Income tax benefit (expense)	—			876			—			(10,736		)
Income from discontinued operations	221			123,618			3,265			1,236,281
Net income	53,523			165,627			322,842			1,464,175
Net income attributable to noncontrolling interests	(498		)	(358		)	(3,009		)	(18,163		)
Net income attributable to common shareholders	$	53,025		$	165,269		$	319,833		$	1,446,012
Basic net income per common share:
Continuing operations attributable to common shareholders	$	0.15		$	0.12		$	0.88		$	0.63
Discontinued operations attributable to common shareholders	—			0.34			0.01			3.43
Total	$	0.15		$	0.46		$	0.89		$	4.06
Diluted net income per common share:
Continuing operations attributable to common shareholders	$	0.15		$	0.12		$	0.88		$	0.63
Discontinued operations attributable to common shareholders	—			0.34			0.01			3.40
Total	$	0.15		$	0.46		$	0.89		$	4.03
Weighted average number of common shares outstanding	357,898			355,905			357,235			355,614
Weighted average number of common shares and potential dilutive securities	361,410			362,102			362,745			361,947

Comprehensive income:
Net income	$	53,523		$	165,627		$	322,842		$	1,464,175
Other comprehensive loss:
Amortization of interest contracts	—			—			—			(682		)
Comprehensive income	$	53,523		$	165,627		$	322,842		$	1,463,493

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the nine months ended September 30,

(in thousands)

(Unaudited)



	2018			2017
Cash flows from operating activities:
Net income	$	322,842		$	1,464,175
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of buildings and tenant improvements	190,460			179,918
Amortization of deferred leasing and other costs	41,756			42,996
Amortization of deferred financing costs	4,303			4,049
Straight-line rental income and expense, net	(16,763		)	(12,021		)
Impairment charges	—			4,481
Loss on debt extinguishment	240			26,104
Gains on land and depreciated property sales	(205,119		)	(1,331,058		)
Third-party construction contracts, net	(5,088		)	2,679
Other accrued revenues and expenses, net	43,627			25,848
Equity in earnings in excess of operating distributions received from unconsolidated joint ventures	(4,609		)	(45,298		)
Net cash provided by operating activities	371,649			361,873
Cash flows from investing activities:
Development of real estate investments	(459,513		)	(421,702		)
Acquisition of real estate investments and related intangible assets	(208,914		)	(620,869		)
Acquisition of undeveloped land	(194,171		)	(127,662		)
Second generation tenant improvements, leasing costs and building improvements	(34,311		)	(34,350		)
Other deferred leasing costs	(27,691		)	(22,399		)
Other assets	(5,929		)	(4,886		)
Proceeds from the repayments of notes receivable from property sales	149,913			3,628
Proceeds from land and depreciated property sales, net	434,584			2,283,917
Capital distributions from unconsolidated joint ventures	19,176			111,635
Capital contributions and advances to unconsolidated joint ventures	(2,728		)	(6,303		)
Net cash (used for) provided by investing activities	(329,584		)	1,161,009
Cash flows from financing activities:
Proceeds from issuance of common shares, net	30,591			7,309
Proceeds from unsecured debt	450,000			—
Payments on unsecured debt	(1,998		)	(691,492		)
Payments on secured indebtedness including principal amortization	(231,070		)	(71,154		)
Repayments on line of credit, net	—			(43,000		)
Distributions to common shareholders	(214,463		)	(202,770		)
Distributions to noncontrolling interests, net	(1,746		)	(8,407		)
Tax payments on stock-based compensation awards	(8,389		)	(14,868		)
Change in book cash overdrafts	22,669			11,245
Deferred financing costs	(8,485		)	(16		)
Redemption of Limited Partner Units	—			(457		)
Net cash provided by (used for) financing activities	37,109			(1,013,610		)
Net increase in cash, cash equivalents and restricted cash	79,174			509,272
Cash, cash equivalents and restricted cash at beginning of period	193,627			57,038
Cash, cash equivalents and restricted cash at end of period	$	272,801		$	566,310

Non-cash investing and financing activities:
Carrying amount of pre-existing ownership interest in acquired property	$	5,034		$	—
Non-cash property contribution from noncontrolling interests	$	3,200		$	—
Notes receivable from buyers in property sales	$	—		$	404,846
Conversion of Limited Partner Units to common shares	$	1,967		$	1,714

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statement of Changes in Equity

For the nine months ended September 30, 2018

(in thousands, except per share data)

(Unaudited)



	Common Shareholders
		Common Stock		Additional Paid-in Capital		Distributions in Excess of Net Income			Noncontrolling Interests			Total
Balance at December 31, 2017		$	3,564	$	5,205,316	$	(676,036	)	$	41,534		$	4,574,378
Net income		—		—		319,833			3,009			322,842
Issuance of common shares		11		30,580		—			—			30,591
Contributions from noncontrolling interests		—		—		—			3,475			3,475
Stock-based compensation plan activity		7		2,633		(951		)	8,433			10,122
Conversion of Limited Partner Units		1		1,966		—			(1,967		)	—
Distributions to common shareholders ($0.60 per share)		—		—		(214,463		)	—			(214,463		)
Distributions to noncontrolling interests		—		—		—			(2,021		)	(2,021		)
Balance at September 30, 2018		$	3,583	$	5,240,495	$	(571,617	)	$	52,463		$	4,724,924

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)



	September 30, 2018			December 31, 2017
	(Unaudited)
ASSETS
Real estate investments:
Real estate assets	$	6,943,629		$	6,593,567
Construction in progress	515,324			401,407
Investments in and advances to unconsolidated joint ventures	107,811			126,487
Undeveloped land	314,075			226,987
	7,880,839			7,348,448
Accumulated depreciation	(1,294,370		)	(1,193,905		)
Net real estate investments	6,586,469			6,154,543

Real estate investments and other assets held-for-sale	53,653			17,550

Cash and cash equivalents	133,405			67,562
Accounts receivable, net of allowance of $458 and $1,709	19,494			19,427
Straight-line rent receivable, net of allowance of $4,628 and $5,254	102,480			93,005
Receivables on construction contracts, including retentions	33,699			13,480
Deferred leasing and other costs, net of accumulated amortization of $211,212 and $209,451	305,143			292,682
Restricted cash held in escrow for like-kind exchange	127,597			116,405
Notes receivable from property sales	276,744			426,657
Other escrow deposits and other assets	186,126			186,885
	$	7,824,810		$	7,388,196
LIABILITIES AND EQUITY
Indebtedness:
Secured debt, net of deferred financing costs of $270 and $614	$	80,716		$	311,349
Unsecured debt, net of deferred financing costs of $26,583 and $20,500	2,553,460			2,111,542
	2,634,176			2,422,891

Liabilities related to real estate investments held-for-sale	606			1,163

Construction payables and amounts due subcontractors, including retentions	100,323			54,545
Accrued real estate taxes	89,671			67,374
Accrued interest	27,463			17,911
Other liabilities	208,874			210,825
Tenant security deposits and prepaid rents	38,773			39,109
Total liabilities	3,099,886			2,813,818
Partners' equity:
Common equity (358,307 and 356,361 General Partner Units issued and outstanding, respectively)	4,672,461			4,532,844
Limited Partners' common equity (3,302 and 3,283 Limited Partner Units issued and outstanding, respectively)	48,010			40,563
Total partners' equity	4,720,471			4,573,407
Noncontrolling interests	4,453			971
Total equity	4,724,924			4,574,378
	$	7,824,810		$	7,388,196

See accompanying Notes to Consolidated Financial Statements

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
	2018			2017			2018			2017
Revenues:
Rental and related revenue	$	196,912		$	169,611		$	582,461		$	507,123
General contractor and service fee revenue	34,986			25,217			94,552			58,192
	231,898			194,828			677,013			565,315
Expenses:
Rental expenses	17,704			16,224			54,869			46,967
Real estate taxes	31,515			28,157			93,857			81,569
General contractor and other services expenses	33,730			24,079			89,392			54,077
Depreciation and amortization	78,855			67,992			232,216			197,028
	161,804			136,452			470,334			379,641
Other operating activities:
Equity in earnings of unconsolidated joint ventures	5,552			1,841			15,521			58,523
Promote income	—			—			—			20,007
Gain on sale of properties	(107		)	21,952			194,741			93,339
Gain on land sales	3,915			5,665			7,221			8,449
Other operating expenses	(668		)	(770		)	(2,591		)	(2,226		)
Impairment charges	—			(3,622		)	—			(4,481		)
General and administrative expenses	(8,959		)	(10,075		)	(43,441		)	(41,165		)
	(267		)	14,991			171,451			132,446
Operating income	69,827			73,367			378,130			318,120
Other income (expenses):
Interest and other income, net	4,129			6,404			13,319			9,197
Interest expense	(21,462		)	(20,835		)	(62,137		)	(65,401		)
Loss on debt extinguishment	(89		)	(16,568		)	(240		)	(26,104		)
Income from continuing operations before income taxes	52,405			42,368			329,072			235,812
Income tax benefit (expense)	897			(359		)	(9,495		)	(7,918		)
Income from continuing operations	53,302			42,009			319,577			227,894
Discontinued operations:
Income before gain on sales and income taxes	85			2,563			108			17,747
Gain on sale of depreciable properties	136			120,179			3,157			1,229,270
Income tax benefit (expense)	—			876			—			(10,736		)
Income from discontinued operations	221			123,618			3,265			1,236,281
Net income	53,523			165,627			322,842			1,464,175
Net (income) loss attributable to noncontrolling interests	(3		)	1,177			(7		)	(4,736		)
Net income attributable to common unitholders	$	53,520		$	166,804		$	322,835		$	1,459,439
Basic net income per Common Unit:
Continuing operations attributable to common unitholders	$	0.15		$	0.12		$	0.88		$	0.63
Discontinued operations attributable to common unitholders	—			0.34			0.01			3.43
Total	$	0.15		$	0.46		$	0.89		$	4.06
Diluted net income per Common Unit:
Continuing operations attributable to common unitholders	$	0.15		$	0.12		$	0.88		$	0.63
Discontinued operations attributable to common unitholders	—			0.34			0.01			3.40
Total	$	0.15		$	0.46		$	0.89		$	4.03
Weighted average number of Common Units outstanding	361,200			359,206			360,585			358,921
Weighted average number of Common Units and potential dilutive securities	361,410			362,102			362,745			361,947

Comprehensive income:
Net income	$	53,523		$	165,627		$	322,842		$	1,464,175
Other comprehensive loss:
Amortization of interest contracts	—			—			—			(682		)
Comprehensive income	$	53,523		$	165,627		$	322,842		$	1,463,493

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the nine months ended September 30,

(in thousands)

(Unaudited)



	2018			2017
Cash flows from operating activities:
Net income	$	322,842		$	1,464,175
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of buildings and tenant improvements	190,460			179,918
Amortization of deferred leasing and other costs	41,756			42,996
Amortization of deferred financing costs	4,303			4,049
Straight-line rental income and expense, net	(16,763		)	(12,021		)
Impairment charges	—			4,481
Loss on debt extinguishment	240			26,104
Gains on land and depreciated property sales	(205,119		)	(1,331,058		)
Third-party construction contracts, net	(5,088		)	2,679
Other accrued revenues and expenses, net	43,627			25,848
Equity in earnings in excess of operating distributions received from unconsolidated joint ventures	(4,609		)	(45,298		)
Net cash provided by operating activities	371,649			361,873
Cash flows from investing activities:
Development of real estate investments	(459,513		)	(421,702		)
Acquisition of real estate investments and related intangible assets	(208,914		)	(620,869		)
Acquisition of undeveloped land	(194,171		)	(127,662		)
Second generation tenant improvements, leasing costs and building improvements	(34,311		)	(34,350		)
Other deferred leasing costs	(27,691		)	(22,399		)
Other assets	(5,929		)	(4,886		)
Proceeds from the repayments of notes receivable from property sales	149,913			3,628
Proceeds from land and depreciated property sales, net	434,584			2,283,917
Capital distributions from unconsolidated joint ventures	19,176			111,635
Capital contributions and advances to unconsolidated joint ventures	(2,728		)	(6,303		)
Net cash (used for) provided by investing activities	(329,584		)	1,161,009
Cash flows from financing activities:
Contributions from the General Partner	30,591			7,309
Proceeds from unsecured debt	450,000			—
Payments on unsecured debt	(1,998		)	(691,492		)
Payments on secured indebtedness including principal amortization	(231,070		)	(71,154		)
Repayments on line of credit, net	—			(43,000		)
Distributions to common unitholders	(216,484		)	(204,654		)
Contributions from (distributions to) noncontrolling interests, net	275			(6,523		)
Tax payments on stock-based compensation awards	(8,389		)	(14,868		)
Change in book cash overdrafts	22,669			11,245
Deferred financing costs	(8,485		)	(16		)
Redemption of Limited Partner Units	—			(457		)
Net cash provided by (used for) financing activities	37,109			(1,013,610		)
Net increase in cash, cash equivalents and restricted cash	79,174			509,272
Cash, cash equivalents and restricted cash at beginning of period	193,627			57,038
Cash, cash equivalents and restricted cash at end of period	$	272,801		$	566,310

Non-cash investing and financing activities:
Carrying amount of pre-existing ownership interest in acquired property	$	5,034		$	—
Non-cash property contribution from noncontrolling interests	$	3,200		$	—
Notes receivable from buyers in property sales	$	—		$	404,846
Conversion of Limited Partner Units to common shares of the General Partner	$	1,967		$	1,714

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Statement of Changes in Equity

For the nine months ended September 30, 2018

(in thousands, except per unit data)

(Unaudited)



	Common Unitholders
	General			Limited
	Partner's			Partners'			Total
	Common Equity			Common Equity			Partners' Equity			Noncontrolling Interests		Total Equity
Balance at December 31, 2017	$	4,532,844		$	40,563		$	4,573,407		$	971	$	4,574,378
Net income	319,833			3,002			322,835			7		322,842
Capital contribution from the General Partner	30,591						30,591			—		30,591
Stock-based compensation plan activity	1,689			8,433			10,122			—		10,122
Contributions from noncontrolling interests	—			—			—			3,475		3,475
Conversion of Limited Partner Units	1,967			(1,967		)	—			—		—
Distributions to common unitholders ($0.60 per Common Unit)	(214,463		)	(2,021		)	(216,484		)	—		(216,484		)
Balance at September 30, 2018	$	4,672,461		$	48,010		$	4,720,471		$	4,453	$	4,724,924

See accompanying Notes to Consolidated Financial Statements

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 2017 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, 2017 (the "2017 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 2017 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 September 30, 2018. 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.

As of September 30, 2018, 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 10) are conducted through the Partnership. We conduct our Service Operations (see Note 10) through Duke Realty Services, LLC, Duke Realty Services Limited Partnership and Duke Construction Limited Partnership ("DCLP"), which are consolidated entities that are 100% owned by a combination of the General Partner and the Partnership. DCLP is owned through a taxable REIT subsidiary. The consolidated financial statements include our accounts and the accounts of our majority-owned or controlled subsidiaries.

2. New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Revenue Recognition and De-recognition of Non-Financial Assets

On January 1, 2018, we concurrently adopted Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606") and ASC 610-20, Other Income: Gains and Losses from the De-recognition of Non-financial Assets ("ASC 610-20") using a modified retrospective ("cumulative effect") method of adoption. ASC 606 has superseded nearly all existing GAAP revenue recognition guidance, although its scope excludes lease contracts, which represent our primary source of revenue. 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.

General Contractor and Service Fee Revenue

Beginning with the January 1, 2018 adoption date, general contractor and service fee revenues, as presented on the Consolidated Statements of Operations, are accounted for within the scope of ASC 606. General contractor and service fee revenues are comprised primarily of construction and development related revenues earned from third parties while acting in capacity of a developer, as a general contractor or a construction manager. There are other ancillary streams of revenue included in general contractor and service fee revenues (see Note 10), such as management fees earned from unconsolidated joint ventures, which are not significant. Opening and closing balances of construction receivables are presented separately on the Consolidated Balance Sheets. Over billed construction receivables totaled $927,000 and $276,000 at September 30, 2018 and December 31, 2017, respectively. We generally do not have any contract assets associated with our construction arrangements.

Our construction arrangements are typically structured with only one performance obligation, which generally represents either an obligation to construct a new building or to construct fixtures in an existing building, and these single performance obligations are satisfied over time as construction progresses. We recognize revenue as we satisfy such performance obligations using the percentage of completion method, which is an input method allowed under ASC 606. Using this method, profits are recorded based on our estimates of the percentage of completion of individual contracts, commencing when the work performed under the contracts reaches a point where the final costs can be estimated with reasonable accuracy. The percentage of completion estimates are based on a comparison of the contract expenditures incurred to the estimated final costs. We believe the percentage of completion method is a faithful depiction of the transfer of goods and services as changes in job performance and estimated profitability, which result in revisions to costs and income and are recognized in the period in which the revisions are determined, have not historically been significant. We typically receive regular progress payments on the majority of our construction arrangements and such arrangements generally have an original duration of less than one year.

As the result of the relatively short duration of our construction arrangements, we have elected to apply the optional disclosure exemptions, included in ASC 606, related to our remaining performance obligations for our in-process construction projects, for which any future variable consideration is not material.

De-Recognition of Non-Financial Assets

ASC 610-20 provides guidance on how entities recognize sales, including partial sales, of non-financial assets (and in-substance non-financial assets) to non-customers. ASC 606 includes guidance governing the sale of non-financial assets with customers, while sales of non-financial assets to non-customers are governed by ASC 610-20. The only difference in the treatment of sales to customers and non-customers is the presentation in the Consolidated Statements 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 have concluded that our property sales represent transactions with non-customers. In the typical course of our business, sales of non-financial assets represent only one performance obligation and are recognized when an enforceable contract is in place, collectability is ensured and control is transferred to the buyer.

ASC 610-20 also requires the seller to recognize a full gain or loss in a partial sale of non-financial assets, to the extent control is not retained. Any noncontrolling interest retained by the seller would, accordingly, be measured at fair value. We have primarily disposed of property and land in all cash transactions with no contingencies and no future involvement in the operations, and therefore, the adoption of ASC 610-20 has not significantly impacted the recognition of property and land sales.

There was no cumulative adjustment recognized to beginning retained earnings as of January 1, 2018 as the result of adopting ASC 606 and ASC 610-20.

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, cash equivalents and restricted cash in the statement of cash flows. As a result, entities will no longer present transfers between cash, cash equivalents and restricted cash in the statement of cash flows. We adopted this standard on January 1, 2018, on a retrospective basis, and the adoption did not have a material impact on our consolidated financial statements.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows (in thousands):



	September 30, 2018		December 31, 2017
Cash and cash equivalents	$	133,405	$	67,562
Restricted cash held in escrow for like-kind exchange	127,597		116,405
Restricted cash included in other escrow deposits and other assets	11,799		9,660
Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows	$	272,801	$	193,627

Restricted cash held in escrow for like-kind exchange on the Consolidated Balance Sheets includes cash received from the property dispositions but restricted only for qualifying like-kind exchange transactions.

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. We adopted this standard on January 1, 2018, on a retrospective basis, and the adoption did not have a material impact on our consolidated financial statements.

Cloud Computing Arrangements

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement ("CCA") That is a Service Contract ("ASU 2018-15"). ASU 2018-15 requires entities that enter into hosted CCA service arrangements to apply the existing internal-use software guidance to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Under that model, both internal and external costs incurred in developing, coding and testing the new system are capitalizable, while the costs incurred in training and certain data conversion are expensed. ASU 2018-15 will be effective for fiscal years beginning on or after December 15, 2019 prospectively to eligible costs after the date the guidance is first applied or retrospectively, with early adoption permitted. We adopted ASU 2018-15 early and have applied it since January 1, 2018. The adoption did not have a material impact on our consolidated financial statements.

New Accounting Pronouncement Not Yet Adopted

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.

For lessors, the accounting under ASU 2016-02 will remain largely unchanged from current GAAP; however ASU 2016-02 requires that lessors expense certain initial direct costs, which are capitalizable under existing leasing standards, as incurred. Under the new standard, only the incremental costs of signing a lease will be capitalizable. If the new standard had been in effect, internal lease related costs totaling $9.2 million and $13.9 million, which are currently capitalizable, would have been expensed during the nine months ended September 30, 2018 and for the year ended December 31, 2017, respectively.

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 ASC 606, when ASU 2016-02 becomes effective. However, on July 30, 2018 the FASB issued targeted amendments, one of which provides lessors an optional election to not separate "non-lease" components from the related lease components when certain criteria are met and instead account for those components as a single component. We believe we will meet the criteria to account for lease and non-lease components as a single lease component.

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 classification. ASU 2016-02 will impact the accounting and disclosure requirements for ground leases, and other operating leases, where we are the lessee. At September 30, 2018, we had approximately 20 office and ground leases. Our future minimum rental payments under these office and ground leases did not materially change from the amounts that are included in the Contractual Obligations section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Annual Report.

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 (i) relief from re-assessing whether an expired or existing contract meets the definition of a lease, (ii) relief from re-assessing the classification of expired or existing leases at the adoption date and (iii) allowing previously capitalized initial direct leasing costs to continue to be amortized.

ASU 2016-02 and any subsequent amendments will be effective for us on January 1, 2019. The targeted amendments issued on July 30, 2018, also provide a transitional option that will permit lessors to use the effective date of ASU 2016-02 as the date of initial application, without restating comparative periods, and to recognize a cumulative effect adjustment as of the effective date. We will apply the practical expedients as well as the optional relief provided by the targeted amendments.

3. Reclassifications

Certain amounts in the accompanying consolidated financial statements for 2017 have been reclassified to conform to the 2018 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.

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.