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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1994 OR
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 INVESTMENTS, INC.
State of Incorporation: IRS Employer ID Number:
Indiana 35-1740409
Address of principal executive offices:
8888 Keystone Crossing, Suite 1200
Indianapolis, Indiana 46240
Telephone: (317) 846-4700
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 twelve 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.
Yes X No
The number shares outstanding as of August 9, 1994 was 16,046,144 Common Shares
($.01 par value).
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DUKE REALTY INVESTMENTS, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
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<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1994
(Unaudited) and December 31, 1993 3
Consolidated Statements of Operations for the six
months ended June 30, 1994 and 1993 (Unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1994 and 1993 (Unaudited) 5
Consolidated Statement of Shareholders' Equity for
the six months ended June 30, 1994 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-11
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security
Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Real estate investments:
Land and improvements $ 62,608 $ 55,563
Buildings and tenant improvements 526,709 484,813
Construction in progress 26,040 9,726
Land held for development 39,230 42,741
------- -------
654,587 592,843
Accumulated depreciation (30,795) (23,725)
------- -------
Net real estate investments 623,792 569,118
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Cash and cash equivalents 5,030 10,065
Accounts receivable, net of allowance of $433 and $304 4,350 4,558
Accrued straight-line rents, net of allowance of $841 and $93 4,217 3,499
Receivables on construction contracts 23,558 15,901
Investments in unconsolidated companies 12,342 14,270
Deferred costs, net of accumulated amortization of $2,510 and $2,973 15,163 12,026
Escrow deposits and other assets 4,035 3,448
------- -------
$ 692,487 $ 632,885
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Property indebtedness:
Mortgage loans $ 243,950 $ 240,135
Revolving line of credit 56,500 -
Construction loans 944 4,728
Land contract payable - 3,570
Notes payable 260 601
Construction payables 1,197 812
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302,851 249,846
------- -------
Amounts due subcontractors 18,063 14,670
Note payable on construction contract 8,288 -
Accounts payable 1,145 1,122
Accrued real estate taxes 7,324 8,214
Accrued expenses 2,021 3,363
Other liabilities 3,977 3,629
Tenant security deposits and deferred rents 3,213 3,053
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Total liabilities 346,882 283,897
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Minority interest 2,112 1,950
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Common shares ($.01 par value); 45,000,000 and 5,524,000
shares authorized; 16,046,000 and 2,045,000 shares
issued and outstanding 160 160
Additional paid-in capital 377,450 377,450
Distributions in excess of net income (34,117) (30,572)
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Total shareholders' equity 343,493 347,038
------- -------
$ 692,487 $ 632,885
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</TABLE>
See accompanying notes to consolidated financial statements.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three For the six For the three For the six
months ended months ended months ended months ended
June 30, 1994 June 30, 1994 June 30, 1993 June 30, 1993
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
RENTAL OPERATIONS:
Revenues:
Rental income $ 21,509 41,843 4,394 8,625
Interest and other income 175 405 46 55
-------- ------- ----- -----
21,684 42,248 4,440 8,680
-------- ------- ----- -----
Operating expenses:
Rental expenses 4,204 8,579 1,009 1,959
Real estate taxes 2,259 4,201 473 943
Interest expense 4,492 8,723 1,963 3,814
Depreciation and amortization 4,119 8,138 1,091 2,222
General and administrative 482 922 161 349
------ ------- ----- -----
15,556 30,563 4,697 9,287
------ ------- ----- -----
Earnings (loss) from rental operations 6,128 11,685 ( 257) ( 607)
------ ------- ----- -----
SERVICE OPERATIONS:
Revenues:
Property management, maintenance and
leasing fees 2,941 5,393 - -
Construction management and development fees 1,324 2,963 - -
Interest and other income 346 663 - -
------ ------- ------ -----
4,611 9,019 - -
------ ------- ------ -----
Operating expenses:
Payroll 2,079 4,202 - -
Maintenance 262 487 - -
Office and other 612 1,209 - -
------ ------- ------ -----
2,953 5,898 - -
------ ------- ------ -----
Earnings from service operations 1,658 3,121 - -
------ ------- ------ -----
Operating income (loss) 7,786 14,806 ( 257) ( 607 )
------ ------- ------ ------
Earnings (loss) from property sales ( 46) 135 - -
Equity in earnings of unconsolidated companies 32 593 - -
Minority interest in earnings of subsidiaries (1,951) ( 4,114) - -
------ ------- ------ -----
Net income (loss) $ 5,821 11,420 ( 257) ( 607)
====== ====== ====== =====
Net income (loss) per share $ .36 .71 ( .13) ( .30)
====== ====== ====== =====
Weighted average number of shares outstanding 16,046 16,046 2,045 2,045
====== ====== ====== =====
</TABLE>
See accompanying notes to consolidated financial statements.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the six For the six
months ended months ended
June 30, 1994 June 30, 1993
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 11,420 $ ( 607)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation of buildings and tenant improvements 7,102 1,971
Amortization of deferred costs 1,036 251
Minority interest in earnings of subsidiaries 4,114 -
Straight-line rent adjustment (1,466) 92
Accrued straight-line rent reserve 748 -
Earnings from property sales ( 135) -
Construction contracts, net 4,409 -
Other accrued revenues and expenses, net (1,326) 350
Equity in earnings of unconsolidated companies ( 593) -
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 25,309 2,057
-------- -------
Cash flows from investing activities:
Proceeds from property sales 1,155 -
Building and development costs (54,521) ( 11)
Tenant improvements ( 1,957) ( 439)
Purchase price reduction payments received - 6
Distributions received from unconsolidated companies 470 -
Deferred costs and other assets ( 3,733) 176
-------- -------
NET CASH USED BY INVESTING ACTIVITIES (58,586) ( 268)
-------- -------
Cash flows from financing activities:
Proceeds from property indebtedness 60,100 3,398
Payments on property indebtedness (11,980) (2,765)
Distributions to shareholders and unitholders (18,430) (1,719)
Distributions to minority interest ( 487) -
Deferred financing costs ( 961) ( 713)
-------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 28,242 (1,799)
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS ( 5,035) ( 10)
-------- -------
Cash and cash equivalents at beginning of period 10,065 10
-------- -------
Cash and cash equivalents at end of period $ 5,030 $ -
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Distributions
Common Paid-in in Excess of
Shares Capital Net Income
------ ---------- -------------
<S> <C> <C> <C>
Balance at December 31, 1993 $ 160 $377,450 $(30,572)
Net income - - 11,420
Distributions to shareholders ($.45 per share) - - (14,441)
Distributions to unitholders in excess of
minority interest - - (524)
-------- -------- --------
Balance at June 30, 1994 $ 160 $377,450 $(34,117)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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DUKE REALTY INVESTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. FINANCIAL STATEMENTS
The interim condensed consolidated financial statements included herein
have been prepared by Duke Realty Investments, Inc. (the "Company")
without audit. The statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions for form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles 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. These financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report to
Shareholders.
THE COMPANY
On October 4, 1993, the Company completed the acquisition of
substantially all of the properties and businesses of Duke Associates, a
full-service commercial real estate firm operating primarily in the
Midwest. In connection with the acquisition, the Company effected a 1
for 4.2 reverse stock split of existing common shares and issued an
additional 14,000,833 shares through an offering ("Offering"). All of
the share and per share amounts have been restated to reflect the
reverse split.
The following unaudited pro forma information has been prepared assuming
the Offering and the acquisition of the Duke Associates' properties and
businesses had occurred at the beginning of the period presented:
<TABLE>
<CAPTION>
June 30, 1993
----------------------------
(in thousands, except per share amounts) Six Months Three Months
Ended Ended
---------- ------------
<S> <C> <C>
Rental revenues $ 39,866 $ 20,338
Earnings from rental operations 9,811 5,308
Earnings from service operations 1,270 955
Operating income 11,081 6,263
Net income 8,922 5,072
Net income per share .56 .32
</TABLE>
2. PROPERTY INDEBTEDNESS
The Company borrowed $56,500,000 under a $60 million revolving credit
facility which is available to fund current development costs and
provide working capital. The revolving line of
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credit matures on June 30, 1996 and bears interest payable monthly at
LIBOR plus 2% (effective rate of 6.133% at June 30, 1994).
The Company has a commitment from an institutional lender for a seven
year, $60 million mortgage loan which bears interest at 8.72%. This
loan is anticipated to close in early August 1994. The proceeds will be
used to retire the outstanding balance of the line of credit and to fund
development in process.
3. RELATED PARTY TRANSACTIONS
The Company provided management, leasing, construction and other tenant
related services for fees totaling $908,000 for the six months ended
June 30, 1994, to partnerships in which the former principal owners of
Duke Associates (who are now officers and/or directors of the Company)
have continuing ownership interests. Management believes the terms for
such services are equivalent to those available in the market. The
Company has an option to purchase each of the properties owned by these
partnerships.
4. SUBSEQUENT EVENTS
On July 28, 1994, the Board of Directors declared a dividend of $.47 per
Common Share payable on August 31, 1994, to share-holders of record on
August 17, 1994.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
REORGANIZATION AND OFFERING
In October 1993, the Company acquired substantially all of the
properties and businesses of Duke Associates, a full-service commercial
real estate firm operating primarily in the Midwest (the
"Reorganization"). In connection with the acquisition, the Company
effected a 1 for 4.2 reverse stock split relating to its existing shares
and subsequently issued an additional 14,000,833 shares of Common Stock
through an offering (the "Offering"). Substantially all of the $309.3
million of net proceeds of the Offering were used to repay indebtedness
of the reorganized company. Prior to the Reorganization, the Company
had a debt to total market capitalization ratio of approximately 66%.
The Reorganization reduced the Company's debt to total market
capitalization ratio to approximately 37% as of June 30, 1994. As a
result of the Reorganization the Company's properties are owned through
Duke Realty Limited Partnership, an Indiana partnership, of which the
Company is the sole general partner and owner of 78% of the partnership
interests ("Units").
RESULTS OF OPERATIONS - HISTORICAL AND PRO FORMA
The historical results of operations changed dramatically in all
respects for the six months ended June 30, 1993 to 1994 because of the
Reorganization and Offering discussed above. All operating categories
of revenues and expenses reflect significant increases due to the
addition of properties and businesses purchased in connection with the
Reorganization.
The pro forma operating results of the reorganized company are presented
in note 1 to the consolidated financial statements. The earnings from
rental operations increased from $9.8 million on a pro forma basis for
the six months ended June 30, 1993 to $11.7 million for the six months
ended June 30, 1994. This $1.9 million increase is primarily attributed
to a $2.4 million increase in rental income from expansion of the
property portfolio and increase in the occupancy of the properties,
offset by the establishment of a reserve for accrued straight-line rents
receivable of $750,000.
The earnings from service operations increased from $1.3 million on a
pro forma basis for the six months ended June 30, 1993 to $3.1 million
for the six months ended June 30, 1994. This $1.8 million increase
results primarily from increased leasing fees of the managed properties
portfolio and increased construction management and development fees
resulting from increased construction and development activity.
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Primarily as a result of the operating increases above, net income
increased from $8.9 million on a pro forma basis for the six months
ended June 30, 1993 to $11.4 million for the six months ended June 30,
1994. In addition, pro forma Funds From Operations (see definition and
discussion below) increased from $20.5 million or $1.00 per fully
diluted share (assuming all minority interest Units were exchanged for
Common Stock) on a pro forma basis for the six months ended June 30,
1993 to $23.2 million or $1.13 per fully diluted share for the six
months ended June 30, 1994.
The occupancy at June 30, 1994 for all of the properties in which the
Company owns a whole or partial interest was 94.5% for the industrial
properties, 90.3% for the office and medical office properties, and
92.7% for the retail properties, for an overall occupancy rate of 93.0%.
Management expects occupancy to remain stable because only 4% and 9% of
the Company's portfolio is subject to leases expiring in the rest of
1994 and 1995, respectively.
FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
Management believes that Funds From Operations (defined as net income or
loss adjusted for depreciation and amortization and gains or losses from
property sales) and Funds Available For Distribution (defined as Funds
From Operations adjusted for straight-line rent adjustments and second
generation capital expenditures) are the industry standards for
reporting the operations of real estate investment trusts. Funds From
Operations were $23.2 million or $1.13 per fully diluted share for the
six months ended June 30, 1994 compared to $20.5 million or $1.00 per
fully diluted share on a pro forma basis for the six months ended June
30, 1993. This growth is due to portfolio expansion, increased average
occupancy of the portfolio and increased earnings from the service
operations. Funds Available For Distribution were $20.3 million for the
six months ended June 30, 1994 or $.99 per fully diluted share.
At June 30, 1994, the Company had approximately 1.5 million square feet
of property under development which was approximately 80% pre-leased.
This development is expected to contribute significantly to the
Company's future growth of Funds From Operations.
While management believes that Funds From Operations and Funds Available
For Distribution are the most relevant and widely used measures of the
Company's operating performance, such amounts should not be considered
as alternatives to net income as an indicator of the Company's operating
performance, do not represent cash flow from operations as defined by
generally accepted accounting principles, and are not indicative of cash
available to fund all cash flow needs.
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LIQUIDITY AND CAPITAL RESOURCES
The Company pays regular quarterly dividends with a general policy of
distributing no more than 90% of Funds From Operations. The dividend
paid in May 1994 represented a conservative 82% of first quarter Funds
From Operations. In March 1994, the Company obtained a $60 million
revolving credit facility which is being used to fund existing and new
development costs and to provide working capital as needed. The Company
has a commitment from an institutional lender for a seven year, $60
million mortgage loan which bears interest at 8.72%. This loan is
anticipated to close in early August 1994. The proceeds will be used to
retire the outstanding balance of the line of credit and to fund
development in process. The Company expects the undistributed Funds
Available For Distribution to be adequate for renovation and reletting
costs. Additional development costs of new projects are being funded
through the existing revolving line of credit or other construction
financing which will be replaced with the proceeds of the $60 million
loan.
The Company intends to limit its debt to no more than 50% of its total
market capitalization. The Company's debt to total market
capitalization ratio at June 30, 1994 was 36.7%.
The mortgage debt outstanding at June 30, 1994 consists of notes
totaling $243.9 million with a weighted average interest rate of 6.93%
maturing at various dates through 2018. Upon closing of the $60 million
loan, the weighted average interest rate of mortgage debt will be 7.28%.
Scheduled principal amortization of mortgage debt totaled $784,000 for
the six months ended June 30, 1994 and scheduled amortization for the
remainder of 1994 is $1.3 million. The Company also had one
construction loan outstanding at June 30, 1994 which had a balance
outstanding of $944,000 bearing interest at prime plus 1% and due in
August 1994. The Company had $56.5 million outstanding on its revolving
line of credit at June 30, 1994 which requires monthly payments of
interest at LIBOR plus 2% (effective rate of 6.133% at June 30, 1994)
and matures in March 1996.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Company had an option to acquire three buildings in Indianapolis,
Indiana (Haverwood I and II, and Woodfield I) from Duke Associates (a
related party). The Company was notified by the owner of these
properties that it had entered into a Sale and Purchase Agreement with
the mortgage lender on the properties. The Company elected not to
exercise its purchase option and, therefore, the lender acquired the
property in May of 1994 and the Company's option lapsed. The Company
retained the management and leasing representation on the buildings;
therefore, there will be no effect on the Company's results of
operations.
Item 6. Exhibits and Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUKE REALTY INVESTMENTS, INC.
Registrant
Date: August 9, 1994 /s/ Thomas L. Hefner
President and Chief Executive
Officer
/s/ Darell E. Zink, Jr.
Executive Vice President and
Chief Financial Officer
/s/ Dennis D. Oklak
Vice President and Treasurer
(Chief Accounting Officer)
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