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 March 31, 2019



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 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 April 24, 2019
Common Stock 0.01 par value per share		359,428,082

EXPLANATORY NOTE

This report (the "Report") combines the quarterly reports on Form 10-Q for the period ended March 31, 2019 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 March 31, 2019. 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 - March 31, 2019 (Unaudited) and December 31, 2018	3
		Consolidated Statements of Operations and Comprehensive Income (Unaudited) - Three Months Ended March 31, 2019 and 2018	4
		Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2019 and 2018	5
		Consolidated Statements of Changes in Equity (Unaudited) - Three Months Ended March 31, 2019 and 2018	6


	Duke Realty Limited Partnership:
		Consolidated Balance Sheets - March 31, 2019 (Unaudited) and December 31, 2018	7
		Consolidated Statements of Operations and Comprehensive Income (Unaudited) - Three Months Ended March 31, 2019 and 2018	8
		Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2019 and 2018	9
		Consolidated Statements of Changes in Equity (Unaudited) - Three Months Ended March 31, 2019 and 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	25
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.		Controls and Procedures	44

Part II - Other Information

Item 1.		Legal Proceedings	45
Item 1A.		Risk Factors	45
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.		Defaults Upon Senior Securities	45
Item 4.		Mine Safety Disclosures	45
Item 5.		Other Information	45
Item 6.		Exhibits	46

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share amounts)



	March 31, 2019			December 31, 2018
	(Unaudited)
ASSETS
Real estate investments:
Real estate assets	$	7,428,408		$	7,248,346
Construction in progress	482,326			477,162
Investments in and advances to unconsolidated joint ventures	116,679			110,795
Undeveloped land	379,839			360,816
	8,407,252			8,197,119
Accumulated depreciation	(1,380,313		)	(1,344,176		)
Net real estate investments	7,026,939			6,852,943

Real estate investments and other assets held-for-sale	1,940			1,082

Cash and cash equivalents	15,295			17,901
Accounts receivable	14,496			14,254
Straight-line rent receivable	115,210			109,334
Receivables on construction contracts, including retentions	24,095			41,215
Deferred leasing and other costs, net of accumulated amortization of $199,478 and $200,744	308,460			313,799
Notes receivable from property sales	237,550			272,550
Other escrow deposits and other assets	218,495			180,946
	$	7,962,480		$	7,804,024
LIABILITIES AND EQUITY
Indebtedness:
Secured debt, net of deferred financing costs of $204 and $238	$	36,896		$	79,563
Unsecured debt, net of deferred financing costs of $25,072 and $26,062	2,549,928			2,548,938
Unsecured line of credit	240,000			30,000
	2,826,824			2,658,501

Liabilities related to real estate investments held-for-sale	41			—

Construction payables and amounts due subcontractors, including retentions	76,380			92,288
Accrued real estate taxes	67,460			73,358
Accrued interest	26,932			16,153
Other liabilities	238,246			205,433
Tenant security deposits and prepaid rents	45,426			45,048
Total liabilities	3,281,309			3,090,781
Shareholders' equity:
Common shares ($0.01 par value); 600,000 shares authorized; 359,420 and 358,851 shares issued and outstanding, respectively	3,594			3,589
Additional paid-in capital	5,250,157			5,244,375
Accumulated other comprehensive loss	(14,018		)	(4,676		)
Distributions in excess of net income	(618,123		)	(585,087		)
Total shareholders' equity	4,621,610			4,658,201
Noncontrolling interests	59,561			55,042
Total equity	4,681,171			4,713,243
	$	7,962,480		$	7,804,024

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income

For the three months ended March 31,

(in thousands, except per share amounts)

(Unaudited)



	2019			2018
Revenues:
Rental and related revenue	$	209,965		$	193,456
General contractor and service fee revenue	54,964			41,101
	264,929			234,557
Expenses:
Rental expenses	20,668			19,913
Real estate taxes	32,442			31,146
General contractor and other services expenses	52,586			40,409
Depreciation and amortization	75,992			77,529
	181,688			168,997
Other operating activities:
Equity in earnings of unconsolidated joint ventures	4,715			8,287
Gain on sale of properties	(163		)	44,886
Gain on land sales	750			2,949
Other operating expenses	(2,123		)	(1,269		)
Non-incremental costs related to successful leases	(2,156		)	—
General and administrative expenses	(21,983		)	(21,023		)
	(20,960		)	33,830
Operating income	62,281			99,390
Other income (expenses):
Interest and other income, net	2,758			4,463
Interest expense	(22,132		)	(20,000		)
Loss on debt extinguishment	(13		)	—
Gain on involuntary conversion	2,259			—
Income from continuing operations before income taxes	45,153			83,853
Income tax expense	(385		)	(10,329		)
Income from continuing operations	44,768			73,524
Discontinued operations:
Loss before gain on sales	—			(8		)
Gain on sale of properties	155			132
Income from discontinued operations	155			124
Net income	44,923			73,648
Net income attributable to noncontrolling interests	(372		)	(685		)
Net income attributable to common shareholders	$	44,551		$	72,963
Basic net income per common share:
Continuing operations attributable to common shareholders	$	0.12		$	0.20
Diluted net income per common share:
Continuing operations attributable to common shareholders	$	0.12		$	0.20
Weighted average number of common shares outstanding	359,139			356,740
Weighted average number of common shares and potential dilutive securities	362,362			360,400

Comprehensive income:
Net income	$	44,923		$	73,648
Other comprehensive loss:
Unrealized losses on interest rate swap contracts	(9,342		)	—
Comprehensive income	$	35,581		$	73,648

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the three months ended March 31,

(in thousands)

(Unaudited)



	2019			2018
Cash flows from operating activities:
Net income	$	44,923		$	73,648
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of buildings and tenant improvements	62,423			63,944
Amortization of deferred leasing and other costs	13,569			13,585
Amortization of deferred financing costs	1,562			1,418
Straight-line rental income and expense, net	(5,704		)	(6,288		)
Loss on debt extinguishment	13			—
Gain on involuntary conversion	(2,259		)	—
Gains on land and property sales	(742		)	(47,967		)
Third-party construction contracts, net	11,700			(367		)
Other accrued revenues and expenses, net	(10,893		)	19,862
Equity in earnings in excess of operating distributions received from unconsolidated joint ventures	(33		)	(4,673		)
Net cash provided by operating activities	114,559			113,162
Cash flows from investing activities:
Development of real estate investments	(85,772		)	(104,346		)
Acquisition of real estate investments and related intangible assets	(76,081		)	(22,801		)
Acquisition of undeveloped land	(53,551		)	(67,256		)
Second generation tenant improvements, leasing costs and building improvements	(10,245		)	(14,102		)
Other deferred leasing costs	(1,712		)	(9,798		)
Other assets	(9,381		)	(685		)
Proceeds from the repayments of notes receivable from property sales	35,000			39,868
Proceeds from land and property sales, net	1,910			131,380
Capital distributions from unconsolidated joint ventures	—			9,404
Capital contributions and advances to unconsolidated joint ventures	(6,474		)	—
Net cash used for investing activities	(206,306		)	(38,336		)
Cash flows from financing activities:
Proceeds from issuance of common shares, net	4,492			706
Payments on unsecured debt	—			(656		)
Payments on secured indebtedness including principal amortization	(42,665		)	(1,345		)
Borrowings on line of credit, net	210,000			75,000
Distributions to common shareholders	(77,237		)	(71,398		)
Distributions to noncontrolling interests, net	(505		)	(680		)
Tax payments on stock-based compensation awards	(5,467		)	(7,984		)
Change in book cash overdrafts	9,700			(33,448		)
Other financing activities	(9,920		)	—
Deferred financing costs	—			(285		)
Net cash provided by (used for) financing activities	88,398			(40,090		)
Net (decrease) increase in cash, cash equivalents and restricted cash	(3,349		)	34,736
Cash, cash equivalents and restricted cash at beginning of period	25,517			193,627
Cash, cash equivalents and restricted cash at end of period	$	22,168		$	228,363

Non-cash operating activities:
Liabilities and right-of-use assets - operating leases	$	38,792		$	—

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

For the three months ended March 31, 2019 and 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	—		—			72,963			685			73,648
Issuance of common shares	—		706			—			—			706
Stock-based compensation plan activity	6		(1,167		)	(449		)	6,140			4,530
Distributions to common shareholders ($0.20 per share)	—		—			(71,398		)	—			(71,398		)
Distributions to noncontrolling interests	—		—			—			(680		)	(680		)
Balance at March 31, 2018	$	3,570	$	5,204,855		$	(674,920	)	$	47,679		$	4,581,184



	Common Shareholders
	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss			Distributions in Excess of Net Income			Noncontrolling Interests			Total
Balance at December 31, 2018	$	3,589	$	5,244,375	$	(4,676	)	$	(585,087	)	$	55,042		$	4,713,243
Net income	—		—		—			44,551			372			44,923
Other comprehensive loss	—		—		(9,342		)	—			—			(9,342		)
Issuance of common shares	1		4,491		—			—			—			4,492
Contributions from noncontrolling interests	—		—		—			—			312			312
Stock-based compensation plan activity	4		1,291		—			(350		)	4,652			5,597
Distributions to common shareholders ($0.215 per share)	—		—		—			(77,237		)	—			(77,237		)
Distributions to noncontrolling interests	—		—		—			—			(817		)	(817		)
Balance at March 31, 2019	$	3,594	$	5,250,157	$	(14,018	)	$	(618,123	)	$	59,561		$	4,681,171

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)



	March 31, 2019			December 31, 2018
	(Unaudited)
ASSETS
Real estate investments:
Real estate assets	$	7,428,408		$	7,248,346
Construction in progress	482,326			477,162
Investments in and advances to unconsolidated joint ventures	116,679			110,795
Undeveloped land	379,839			360,816
	8,407,252			8,197,119
Accumulated depreciation	(1,380,313		)	(1,344,176		)
Net real estate investments	7,026,939			6,852,943

Real estate investments and other assets held-for-sale	1,940			1,082

Cash and cash equivalents	15,295			17,901
Accounts receivable	14,496			14,254
Straight-line rent receivable	115,210			109,334
Receivables on construction contracts, including retentions	24,095			41,215
Deferred leasing and other costs, net of accumulated amortization of $199,478 and $200,744	308,460			313,799
Notes receivable from property sales	237,550			272,550
Other escrow deposits and other assets	218,495			180,946
	$	7,962,480		$	7,804,024
LIABILITIES AND EQUITY
Indebtedness:
Secured debt, net of deferred financing costs of $204 and $238	$	36,896		$	79,563
Unsecured debt, net of deferred financing costs of $25,072 and $26,062	2,549,928			2,548,938
Unsecured line of credit	240,000			30,000
	2,826,824			2,658,501

Liabilities related to real estate investments held-for-sale	41			—

Construction payables and amounts due subcontractors, including retentions	76,380			92,288
Accrued real estate taxes	67,460			73,358
Accrued interest	26,932			16,153
Other liabilities	238,246			205,433
Tenant security deposits and prepaid rents	45,426			45,048
Total liabilities	3,281,309			3,090,781
Partners' equity:
Common equity (359,420 and 358,851 General Partner Units issued and outstanding, respectively)	4,635,628			4,662,877
Limited Partners' common equity (3,149 and 2,920 Limited Partner Units issued and outstanding, respectively)	54,941			50,585
Accumulated other comprehensive loss	(14,018		)	(4,676		)
Total partners' equity	4,676,551			4,708,786
Noncontrolling interests	4,620			4,457
Total equity	4,681,171			4,713,243
	$	7,962,480		$	7,804,024

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income

For the three months ended March 31,

(in thousands, except per unit amounts)

(Unaudited)



	2019			2018
Revenues:
Rental and related revenue	$	209,965		$	193,456
General contractor and service fee revenue	54,964			41,101
	264,929			234,557
Expenses:
Rental expenses	20,668			19,913
Real estate taxes	32,442			31,146
General contractor and other services expenses	52,586			40,409
Depreciation and amortization	75,992			77,529
	181,688			168,997
Other operating activities:
Equity in earnings of unconsolidated joint ventures	4,715			8,287
Gain on sale of properties	(163		)	44,886
Gain on land sales	750			2,949
Other operating expenses	(2,123		)	(1,269		)
Non-incremental costs related to successful leases	(2,156		)	—
General and administrative expenses	(21,983		)	(21,023		)
	(20,960		)	33,830
Operating income	62,281			99,390
Other income (expenses):
Interest and other income, net	2,758			4,463
Interest expense	(22,132		)	(20,000		)
Loss on debt extinguishment	(13		)	—
Gain on involuntary conversion	2,259			—
Income from continuing operations before income taxes	45,153			83,853
Income tax expense	(385		)	(10,329		)
Income from continuing operations	44,768			73,524
Discontinued operations:
Loss before gain on sales	—			(8		)
Gain on sale of properties	155			132
Income from discontinued operations	155			124
Net income	44,923			73,648
Net loss (income) attributable to noncontrolling interests	10			(2		)
Net income attributable to common unitholders	$	44,933		$	73,646
Basic net income per Common Unit:
Continuing operations attributable to common unitholders	$	0.12		$	0.20
Diluted net income per Common Unit:
Continuing operations attributable to common unitholders	$	0.12		$	0.20
Weighted average number of Common Units outstanding	362,204			360,095
Weighted average number of Common Units and potential dilutive securities	362,362			360,400
Comprehensive income:
Net income	$	44,923		$	73,648
Other comprehensive loss:
Unrealized losses on interest rate swap contracts	(9,342		)	—
Comprehensive income	$	35,581		$	73,648

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the three months ended March 31,

(in thousands)

(Unaudited)



	2019			2018
Cash flows from operating activities:
Net income	$	44,923		$	73,648
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of buildings and tenant improvements	62,423			63,944
Amortization of deferred leasing and other costs	13,569			13,585
Amortization of deferred financing costs	1,562			1,418
Straight-line rental income and expense, net	(5,704		)	(6,288		)
Loss on debt extinguishment	13			—
Gain on involuntary conversion	(2,259		)	—
Gains on land and property sales	(742		)	(47,967		)
Third-party construction contracts, net	11,700			(367		)
Other accrued revenues and expenses, net	(10,893		)	19,862
Equity in earnings in excess of operating distributions received from unconsolidated joint ventures	(33		)	(4,673		)
Net cash provided by operating activities	114,559			113,162
Cash flows from investing activities:
Development of real estate investments	(85,772		)	(104,346		)
Acquisition of real estate investments and related intangible assets	(76,081		)	(22,801		)
Acquisition of undeveloped land	(53,551		)	(67,256		)
Second generation tenant improvements, leasing costs and building improvements	(10,245		)	(14,102		)
Other deferred leasing costs	(1,712		)	(9,798		)
Other assets	(9,381		)	(685		)
Proceeds from the repayments of notes receivable from property sales	35,000			39,868
Proceeds from land and property sales, net	1,910			131,380
Capital distributions from unconsolidated joint ventures	—			9,404
Capital contributions and advances to unconsolidated joint ventures	(6,474		)	—
Net cash used for investing activities	(206,306		)	(38,336		)
Cash flows from financing activities:
Contributions from the General Partner	4,492			706
Payments on unsecured debt	—			(656		)
Payments on secured indebtedness including principal amortization	(42,665		)	(1,345		)
Borrowings on line of credit, net	210,000			75,000
Distributions to common unitholders	(77,915		)	(72,078		)
Contributions from noncontrolling interests, net	173			—
Tax payments on stock-based compensation awards	(5,467		)	(7,984		)
Change in book cash overdrafts	9,700			(33,448		)
Other financing activities	(9,920		)	—
Deferred financing costs	—			(285		)
Net cash provided by (used for) financing activities	88,398			(40,090		)
Net (decrease) increase in cash, cash equivalents and restricted cash	(3,349		)	34,736
Cash, cash equivalents and restricted cash at beginning of period	25,517			193,627
Cash, cash equivalents and restricted cash at end of period	$	22,168		$	228,363

Non-cash operating activities:
Liabilities and right-of-use assets - operating leases	$	38,792		$	—

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

For the three months ended March 31, 2019 and 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	72,963			683			73,646			2		73,648
Capital contribution from the General Partner	706			—			706			—		706
Stock-based compensation plan activity	(1,610		)	6,140			4,530			—		4,530
Distributions to common unitholders ($0.20 per Common Unit)	(71,398		)	(680		)	(72,078		)	—		(72,078		)
Balance at March 31, 2018	$	4,533,505		$	46,706		$	4,580,211		$	973	$	4,581,184



	Common Unitholders
	General			Limited			Accumulated
	Partner's			Partners'			Other			Total
	Common Equity			Common Equity			Comprehensive Loss			Partners' Equity			Noncontrolling Interests			Total Equity
Balance at December 31, 2018	$	4,662,877		$	50,585		$	(4,676	)	$	4,708,786		$	4,457		$	4,713,243
Net income	44,551			382			—			44,933			(10		)	44,923
Other comprehensive loss	—			—			(9,342		)	(9,342		)	—			(9,342		)
Capital contribution from the General Partner	4,492						—			4,492			—			4,492
Stock-based compensation plan activity	945			4,652			—			5,597			—			5,597
Contributions from noncontrolling interests	—			—			—			—			312			312
Distributions to common unitholders ($0.215 per Common Unit)	(77,237		)	(678		)	—			(77,915		)	—			(77,915		)
Distributions to noncontrolling interests	—			—			—			—			(139		)	(139		)
Balance at March 31, 2019	$	4,635,628		$	54,941		$	(14,018	)	$	4,676,551		$	4,620		$	4,681,171

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 2018 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, 2018 (the "2018 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 2018 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 March 31, 2019. 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 March 31, 2019, 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

Leases

On January 1, 2019, we adopted Accounting Standards Codification ("ASC") 842, Leases ("ASC 842"), utilizing the available election to adopt on a prospective basis. ASC 842 has superseded all previous GAAP guidance for accounting for leases.

As part of adoption, we elected the package of practical expedients available for implementation, which included: (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. Due in large part to electing these practical expedients, the adoption of ASC 842 did not result in recording a cumulative adjustment to the opening balance of distributions in excess of net income.

Lessor Accounting

Our primary business is the development, acquisition, and operation of industrial real estate properties that are held for investment and leased to tenants. Due to electing the package of practical expedients that allow for relief from re-assessing the classification of existing leases at the adoption date, as well as based on the characteristics of our underlying assets and leases, all of our leases are classified as operating leases. We manage residual risk through investing in properties that we believe will appreciate in value over time. We also perform a credit analysis for tenants prior to leases being executed, and on an ongoing basis, and ensure collectability is probable prior to recognizing lease revenues on an accrual basis. For lessors, the accounting under ASC 842 remains largely unchanged with the notable exception that ASC 842 requires that lessors expense certain initial direct costs, which were capitalizable under prior leasing standards, as incurred. Under the new standard, only the incremental costs of signing a lease are capitalizable and we recognized $2.2 million of expense for internal costs related to successful leases for the three months ended March 31, 2019, presented separately on the Consolidated Statements of Operations and Comprehensive Income, which previously would have been capitalized. For the three months ended March 31, 2018, we capitalized $4.7 million of internal lease related costs which would have been expensed had ASC 842 been effective.

ASC 842 also provides lessors an additional practical expedient to not separate rental recovery revenue related to lease-related services from the associated rental revenue related to the lease when certain criteria are met. The lease-related services provided to our tenants include property management, common area maintenance and utilities. We assessed the applicable criteria, concluding that the timing and pattern of transfer for our lease-related services and the revenue from the underlying leases are the same and that lease classification does not change, and elected to apply this additional practical expedient.

All revenues related to lease and lease-related services are included in, and comprise substantially all of, the caption "Rental and Related Revenue" on the Consolidated Statements of Operations and Comprehensive Income. The components of Rental and Related Revenue are as follows (in thousands):



	March 31, 2019
Rental revenue - fixed payments	$	156,674
Rental revenue - variable payments (1)	53,291
Rental and related revenue	$	209,965

(1) Primarily includes tenant recoveries for real estate taxes, insurance and common area maintenance.

The future minimum rents due to us under non-cancelable operating leases are as follows (in thousands):



Year	March 31, 2019		December 31, 2018
2019	$	463,579	$	600,385
2020	604,917		586,609
2021	548,979		529,961
2022	480,747		463,462
2023	411,773		397,150
Thereafter	1,637,200		1,582,598
	$	4,147,195	$	4,160,165

Lessee Accounting

ASC 842 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 determines 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 ("ROU") asset and a lease liability for all leases with a term of greater than 12 months regardless of classification.

As of March 31, 2019, our lease arrangements primarily consisted of office and ground leases. Adoption of the practical expedients resulted in the continued classification of our leases as operating leases. Expense recognized on these leases for the three months ended March 31, 2019 was not material.

For these arrangements, we recognized a ROU asset and a corresponding lease liability at the January 1, 2019 adoption date of ASC 842, representing the discounted value of future lease payments required under our lease arrangements. A $38.8 million ROU asset, net of pre-existing lease related accruals, was included in Other Escrow Deposits and Other Assets, and a corresponding lease liability of $44.5 million was included in Other Liabilities on our Consolidated Balance Sheets as of March 31, 2019. In determining these amounts we elected an available practical expedient that allows us, as a lessee, to not separate lease and non-lease components.

The following table summarizes the future operating lease payments (in thousands) to be made under our non-cancellable lease arrangements:



Year	March 31, 2019			December 31, 2018
2019	$	4,618		$	6,487
2020	7,594			7,594
2021	2,987			2,987
2022	2,255			2,255
2023	1,949			1,949
Thereafter	85,523			85,523
Total undiscounted operating lease payments	$	104,926		$	106,795
Less: imputed interest	(60,454		)
Present value of operating lease payments	$	44,472

The weighted average remaining lease term for our lease arrangements, on a combined basis as of March 31, 2019, was 32.9 years. The weighted average discount rate for our lease arrangements as of March 31, 2019 was 4.62%. As the discount rates implied in our lease arrangements are not readily determinable, we utilized our current credit ratings and credit yields observed from market traded securities with similar credit ratings to form a reasonable basis to establish secured borrowing rates when determining the present value of future lease payments.

3. Reclassifications

Certain amounts in the accompanying consolidated financial statements for 2018 have been reclassified to conform to the 2019 consolidated financial statement presentation.

4. 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):



	March 31, 2019		December 31, 2018
Cash and cash equivalents	$	15,295	$	17,901
Restricted cash included in other escrow deposits and other assets	6,873		7,616
Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows	$	22,168	$	25,517

5. 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.

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 the other 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 March 31, 2019, that met the criteria to be considered VIEs. Our maximum loss exposure for guarantees of unconsolidated joint venture indebtedness, none of which relate to VIEs, totaled $124.1 million at March 31, 2019.

6. Acquisitions and Dispositions

Acquisitions and dispositions for the periods presented were completed in accordance with our strategy to reposition our investment concentration among the markets in which we operate and to increase our overall investments in quality industrial projects. Transaction costs related to asset acquisitions are capitalized and transaction costs related to business combinations and dispositions are expensed.

Acquisitions

We paid cash of $76.1 million and $22.8 million for asset acquisitions during the three months ended March 31, 2019 and 2018, respectively.

We acquired two properties during the three months ended March 31, 2019. We determined that these two properties did not meet the definition of a business 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 three months ended March 31, 2019:



Real estate assets	$	74,486
Lease related intangible assets	3,207
Fair value of acquired net assets	$	77,693

The leases in the acquired properties had a weighted average remaining life at acquisition of approximately 5.9 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 three months ended March 31, 2019 are as follows:



	Low	High
Exit capitalization rate	4.23%	4.62%
Net rental rate per square foot	$5.90	$7.08

Capitalized acquisition costs were insignificant and the fair value of the two properties acquired during the three months ended March 31, 2019 was substantially the same as the cost of acquisition.

Dispositions

Dispositions of buildings and undeveloped land generated net cash proceeds of $1.9 million and $131.4 million during the three months ended March 31, 2019 and 2018, respectively. Additionally, during the three months ended March 31, 2019, we collected $35.0 million of principal on notes receivable primarily related to the sale of our medical office portfolio (the "Medical Office Portfolio Disposition") during 2017. The number of buildings sold, as well as their classification between continuing and discontinued operations, is disclosed in Note 11.

7. Indebtedness

All debt is issued 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 12/31/2018		Book Value at 3/31/2019		Fair Value at 12/31/2018		Issuances and Assumptions		Payments/Payoffs			Adjustments to Fair Value			Fair Value at 3/31/2019
Fixed rate secured debt	$	77,601	$	34,900	$	80,238	$	—	$	(42,665	)	$	(380	)	$	37,193
Variable rate secured debt	2,200		2,200		2,200		—		—			—			2,200
Unsecured debt	2,575,000		2,575,000		2,549,963		—		—			80,200			2,630,163
Unsecured line of credit	30,000		240,000		30,000		210,000		—			—			240,000
Total	$	2,684,801	$	2,852,100	$	2,662,401	$	210,000	$	(42,665	)	$	79,820		$	2,909,556
Less: Deferred financing costs	26,300		25,276
Total indebtedness as reported on the consolidated balance sheets	$	2,658,501	$