<PAGE>
UNITED STATES
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 MARCH 31, 1996
------------------
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
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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 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.
Yes X No
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The number of shares outstanding as of May 10, 1996 was 29,294,912 Common Shares
($.01 par value).
<PAGE>
DUKE REALTY INVESTMENTS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
March 31, 1996 (Unaudited) and December 31, 1995 2
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1996 and 1995 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1995 (Unaudited) 4
Condensed Consolidated Statement of Shareholders' Equity
for the three months ended March 31, 1996 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6-7
Independent Accountants' Review Report 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-15
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports of Form 8-K 16-17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
------
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
Real estate investments:
Land and improvements $ 104,287 $ 91,550
Buildings and tenant improvements 811,680 712,614
Construction in progress 101,055 96,698
Land held for development 63,939 62,637
---------- ----------
1,080,961 963,499
Accumulated depreciation (61,766) (56,335)
---------- ----------
Net real estate investments 1,019,195 907,164
Cash and cash equivalents 12,090 5,727
Accounts receivable from tenants, net of allowance
of $593 and $624 5,292 5,184
Accrued straight-line rents, net of allowance of
$841 8,878 8,101
Receivables on construction contracts 11,504 9,462
Investments in unconsolidated companies 68,157 67,771
Deferred financing costs, net of accumulated
amortization of $2,438 and $2,072 8,057 8,141
Deferred leasing and other costs, net of
accumulated amortization of $5,751 and $4,959 21,212 20,620
Escrow deposits and other assets 8,516 13,418
---------- ----------
$1,162,901 $1,045,588
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Indebtedness:
Mortgage debt $ 282,354 $ 259,820
Unsecured notes 150,000 150,000
Lines of credit 18,000 45,000
---------- ----------
450,354 454,820
Construction payables and amounts due
subcontractors 21,828 21,410
Accounts payable 1,654 1,132
Accrued real estate taxes 11,268 10,374
Accrued interest 1,281 3,461
Other accrued expenses 3,968 5,504
Other liabilities 5,086 5,490
Tenant security deposits and prepaid rents 4,624 3,872
---------- ----------
Total liabilities 500,063 506,063
---------- ----------
Minority interest 16,362 4,736
---------- ----------
Common stock and paid in capital ($.01 par
value); 45,000 authorized; 28,153 and 24,152
shares issued and outstanding 692,403 578,529
Distributions in excess of net income (45,927) (43,740)
---------- ----------
Total shareholders' equity 646,476 534,789
---------- ----------
$1,162,901 $1,045,588
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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<PAGE>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1995
----------- ------------
<S> <C> <C>
RENTAL OPERATIONS:
Revenues:
Rental income $35,335 $ 25,112
Equity in earnings of unconsolidated companies 1,202 439
-------- --------
36,537 25,551
-------- --------
Operating expenses:
Rental expenses 7,144 4,884
Real estate taxes 3,208 1,925
Interest expense 7,967 5,145
Depreciation and amortization 7,046 5,592
-------- --------
25,365 17,546
-------- --------
Earnings from rental operations 11,172 8,005
-------- --------
SERVICE OPERATIONS:
Revenues:
Property management, maintenance and leasing
fees 2,714 2,476
Construction management and development fees 1,317 1,155
Other income 315 204
-------- --------
4,346 3,835
-------- --------
Operating expenses:
Payroll 2,235 1,744
Maintenance 296 236
Office and other 632 436
-------- --------
3,163 2,416
-------- --------
Earnings from service operations 1,183 1,419
-------- --------
General and administrative expense (1,067) (831)
-------- --------
Operating income 11,288 8,593
OTHER INCOME (EXPENSE):
Interest income 346 474
Loss from property sales (14) -
Other minority interest in earnings of
subsidiaries (187) (193)
Minority interest in earnings of unitholders (1,785) (1,458)
-------- --------
Net income $ 9,648 $ 7,416
-------- --------
-------- --------
Net income per share $ .40 $ .36
-------- --------
-------- --------
Weighted average number of shares outstanding 24,284 20,392
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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<PAGE>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1995
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,648 $ 7,416
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation of buildings and tenant improvements 5,936 4,641
Amortization of deferred financing costs 285 378
Amortization of deferred leasing and other costs 825 573
Minority interest in earnings of subsidiaries 1,972 1,651
Straight-line rent adjustment (831) (687)
Loss from property sales 14 -
Construction contracts, net (1,624) 2,328
Other accrued revenues and expenses, net (1,571) (366)
Equity in earnings of unconsolidated companies (185) (42)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,469 15,892
--------- --------
Cash flows from investing activities:
Proceeds from property sales, net 2,926 -
Rental property development costs (28,752) (15,690)
Rental property recurring building improvements (32) (65)
Acquisition of rental properties (55,038) (16,680)
Acquisition of undeveloped land (408) (474)
Recurring tenant improvements (1,762) (885)
Recurring leasing costs (632) (285)
Other deferred costs and other assets 4,048 (846)
Net investment in and advances to unconsolidated companies (215) (40)
--------- --------
NET CASH USED BY INVESTING ACTIVITIES (79,865) (34,965)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common shares, net 113,835 -
Proceeds from indebtedness 74,000 52
Payments on indebtedness (101,532) (1,755)
Distributions to shareholders (11,835) (9,585)
Distributions to minority interest (2,427) (2,127)
Deferred financing costs (282) (140)
--------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 71,759 (13,555)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 6,363 (32,628)
--------- --------
Cash and cash equivalents at beginning of period 5,727 40,433
--------- --------
Cash and cash equivalents at end of period $ 12,090 $ 7,805
--------- --------
--------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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<PAGE>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Distributions
Common in Excess of
Stock Net Income Total
------ ------------- -----
<S> <C> <C> <C>
Balance at December 31, 1995 $ 578,529 $ (43,740) $ 534,789
Proceeds from issuance of common
shares, net of underwriting
discounts and offering costs
of $6,665 113,874 - 113,874
Net income - 9,648 9,648
Distributions to shareholders
($.49 per share) - (11,835) (11,835)
--------- --------- ---------
Balance at March 31, 1996 $ 692,403 $ (45,927) $ 646,476
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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<PAGE>
DUKE REALTY INVESTMENTS, INC.
NOTES TO CONDENSED 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 consolidated financial statements and notes thereto
included in the Company's Annual Report to Shareholders.
THE COMPANY
The Company's rental operations are conducted through Duke Realty Limited
Partnership ("DRLP"), of which the Company is the sole general partner and
owner of 86.06% of the partnership interests ("Units") as of March 31,
1996. The 13.94% of remaining limited partnership interests are also
convertible into shares of Common Stock on a one-for-one basis. The related
service operations are conducted through Duke Realty Services Limited
Partnership and Duke Construction Limited Partnership, in which the
Company's wholly-owned subsidiary, Duke Services, Inc., is the sole general
partner. The consolidated financial statements include the accounts of the
Company and its majority-owned or controlled subsidiaries. The equity
interests in these majority-owned or controlled subsidiaries not owned by
the Company are reflected as minority interests in the consolidated
financial statements.
On September 29, 1994, the Company issued an additional 3,887,300 shares of
Common Stock through an additional offering (the "1994 Offering") and
received net proceeds of approximately $92.1 million. The proceeds of the
1994 Offering were used to pay down the Company's line of credit and to
fund current development and acquisition costs.
On May 23, 1995, the Company issued an additional 3,727,500 shares of
Common Stock through an additional offering (the "1995 Offering") and
received net proceeds of approximately $96.3 million. The proceeds of the
1995 Offering were used to fund current development and acquisition costs.
On September 22, 1995, the Company issued $150 million of Unsecured Notes
through a debt offering (the "1995 Debt Offering"). A portion of the
proceeds of the 1995 Debt Offering were used to reduce amounts outstanding
on the Company's unsecured line of credit and other mortgage debt and to
fund current development and acquisition costs.
On March 29, 1996, the Company issued an additional 4,000,000 shares of
Common Stock through an additional offering (the "1996 Offering") and
received net proceeds of approximately $113.8 million. The proceeds of the
1996 Offering were used to pay down the Company's line of credit which had
been used to fund current development and acquisition costs.
- 6 -
<PAGE>
2. LINES OF CREDIT
The Company has a $150 million unsecured revolving credit facility which is
available to fund current development costs and provide working capital.
The revolving line of credit matures in April 1998 and bears interest
payable monthly at the 30-day London Interbank Offered Rate ("LIBOR") plus
1.625%. The Company also has a demand $7 million secured revolving credit
facility which is available to provide working capital. This facility bears
interest payable monthly at the 30-day LIBOR rate plus .75%. Outstanding
borrowings as of March 31, 1996 under the $150 million and $7 million
credit facilities were $11 million and $7 million, respectively.
3. RELATED PARTY TRANSACTIONS
The Company provides management, maintenance, leasing, construction, and
other tenant related services to properties in which certain executive
officers have continuing ownership interests. The Company was paid fees
totaling $681,000 and $656,000 for such services for the three months ended
March 31, 1996 and 1995, respectively. Management believes the terms for
such services are equivalent to those available in the market. The Company
has an option to purchase the executive officers' interest in each of these
properties which expires October 2003. The option price of each property
was established at the date the option was granted.
4. RECLASSIFICATIONS
Certain 1995 balances have been reclassified to conform with the 1996
presentation.
5. SUBSEQUENT EVENTS
On April 4, 1996, the Company issued an additional 400,000 shares of Common
Stock in connection with the 1996 Offering related to the exercise of the
Underwriters' over-allotment option. The net proceeds of $11.4 million were
used to pay down the balance on the Company's unsecured revolving line of
credit.
On April 25, 1996, the Board of Directors declared a dividend of $.49 per
share of Common Stock payable on May 31, 1996, to shareholders of record on
May 17, 1996.
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<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
DUKE REALTY INVESTMENTS, INC.:
We have reviewed the condensed consolidated balance sheet of Duke Realty
Investments, Inc. and subsidiaries as of March 31, 1996, the related condensed
consolidated statements of operations and cash flows for the three months ended
March 31, 1996 and 1995, and the related statement of shareholders' equity for
the three months ended March 31, 1996. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Duke Realty Investments, Inc. and
subsidiaries as of December 31, 1995, and the related consolidated statements of
operations and cash flows for the year then ended (not presented herein); and in
our report dated January 31, 1996, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1995 is
fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
KPMG Peat Marwick LLP
Indianapolis, Indiana
April 19, 1996
- 8 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's operating results depend primarily upon income from the rental
operations of its industrial, office and retail properties located in its
primary markets. This income from rental operations is substantially influenced
by the supply and demand for the Company's rental space in its primary markets.
In addition, the Company's continued growth is dependent upon its ability to
maintain occupancy rates and increase rental rates on its in-service portfolios
and to continue development and acquisition of additional rental properties. The
Company's primary markets in the Midwest have continued to offer strong and
stable local economies compared to other regions of the United States and have
provided attractive new development opportunities because of their central
location, established manufacturing base, skilled work force and moderate labor
costs. Consequently, the Company's overall occupancy rate of its in-service
portfolio has exceeded 93% the last two years and was at 93.6% at March 31,
1996. The Company expects to continue to maintain its overall occupancy levels
at comparable levels and also expects to be able to increase rental rates as
leases are renewed or new leases are executed. This stable occupancy as well as
increasing rental rates should improve the Company's results of operations from
its in-service properties. The Company's strategy for continued growth also
includes developing and acquiring additional rental properties in its primary
markets and expanding into other attractive Midwestern markets.
The following table sets forth information regarding the Company's in-service
portfolio of rental properties as of March 31, 1996 and 1995 (in thousands,
except percentages):
<TABLE>
<CAPTION>
Total Percent of
Square Feet Total Square Feet Percent Occupied
---------------- ----------------- ----------------
Type 1996 1995 1996 1995 1996 1995
---- ------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL
Service Centers 2,970 2,051 13.32% 14.20% 94.60% 96.04%
Bulk 12,154 7,039 54.51% 48.74% 92.33% 94.08%
OFFICE
Suburban 4,685 3,090 21.01% 21.40% 96.26% 90.68%
CBD 699 698 3.14% 4.83% 93.62% 87.29%
Medical 333 198 1.49% 1.37% 89.64% 98.71%
RETAIL 1,456 1,366 6.53% 9.46% 93.73% 96.78%
------ ------ ------- ------- ------ ------
Total 22,297 14,442 100.00% 100.00% 93.55% 93.62%
------ ------ ------- ------- ------ ------
------ ------ ------- ------- ------ ------
</TABLE>
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<PAGE>
RESULTS OF OPERATIONS
Following is a summary of the Company's operating results and property
statistics for the three months ended March 31, 1996 and 1995 (in thousands,
except number of properties and per share amounts):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Rental Operations revenue $ 36,537 $ 25,551
Service Operations revenue 4,346 3,835
Earnings from Rental Operations 11,172 8,005
Earnings from Service Operations 1,183 1,419
Operating income 11,288 8,593
Net income $ 9,648 $ 7,416
Weighted average shares outstanding 24,284 20,392
Net income per share $ 0.40 $ 0.36
Number of in-service properties at end of period 215 136
In-service square footage at end of period 22,297 14,442
Under development square footage at end of period 2,891 2,991
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 TO THREE MONTHS ENDED MARCH 31,
1995
RENTAL OPERATIONS
The Company increased its in-service portfolio of rental properties from 136
properties comprising 14.4 million square feet at March 31, 1995 to 215
properties comprising 22.3 million square feet at March 31, 1996 through the
acquisition of 65 properties totaling 5.1 million square feet and the placement
in service of 18 properties and three building expansions totaling 3.3 million
square feet developed by the Company. The Company also disposed of four
properties totaling 603,000 square feet. These 79 net additional rental
properties primarily account for the $11.0 million increase in revenues from
Rental Operations from 1995 to 1996. The increase from 1995 to 1996 in rental
expenses, real estate taxes and depreciation and amortization expense is also a
result of the additional 79 in-service rental properties.
The increase in equity in earnings of unconsolidated companies is due to the
formation of a large joint venture on December 28, 1995. The Company formed this
joint venture (Dugan Realty L.L.C.) with an institutional real estate investor
and purchased 25 industrial buildings totaling approximately 2.3 million square
feet. Upon formation of the venture, the Company contributed approximately 1.4
million square feet of recently developed and acquired industrial properties,
113 acres of recently acquired land held for future development and
approximately $16.7 million of cash for a 50.1% interest in the joint venture
with a total initial recorded investment of approximately $59.4 million. The
Company accounts for its investment in this joint venture on the equity method
because the joint venture partner's approval is required for all major decisions
and the joint venture partner has equal control regarding the primary day-to-day
operations of the venture.
Interest expense increased by approximately $2.8 million. This increase was
primarily because of interest expense on the $150 million of unsecured notes
which the Company issued in September 1995. These notes bear interest at an
effective rate of 7.46%. The proceeds from these notes were used to (i) retire
the outstanding balance of $35.0 million on the Company's line of credit; (ii)
retire $39.5 million
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<PAGE>
of mortgage debt which had a weighted average interest rate of 6.08% and was
scheduled to reset at a market interest rate in the fourth quarter of 1995; and
(iii) fund development and acquisition of additional rental properties during
the fourth quarter of 1995.
As a result of the above-mentioned items, earnings from rental operations
increased $3.2 million from $8.0 million for the three months ended March 31,
1995 to $11.2 million for the three months ended March 31, 1996.
Management expects occupancy of the in-service property portfolio to remain
stable because (i) only 8.7% and 8.4% of the Company's occupied square footage
is subject to leases expiring in the remainder of 1996 and in 1997,
respectively, and (ii) the Company's renewal percentage averaged 65%, 73% and
65% in 1995, 1994 and 1993, respectively.
The following table reflects the Company's lease expiration schedule as of March
31, 1996, including properties under development, by product type indicating
square footage and annualized net effective rents under expiring leases (in
thousands):
<TABLE>
<CAPTION>
Industrial Office Retail Total
--------------- ---------------- ---------------- ---------------
Year of Square Square Square Square
Expiration Feet Dollars Feet Dollars Feet Dollars Feet Dollars
---------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1,656 $ 5,598 344 $ 3,356 54 $ 548 2,054 $ 9,502
1997 1,275 5,852 619 6,729 74 822 1,968 13,403
1998 2,356 8,957 652 6,934 113 1,187 3,121 17,078
1999 1,938 8,147 709 7,643 111 1,115 2,758 16,905
2000 1,865 8,289 644 8,024 123 1,383 2,632 17,696
2001 1,910 7,325 484 5,160 86 953 2,480 13,438
2002 217 963 640 6,647 88 784 945 8,394
2003 55 555 146 1,819 37 328 238 2,702
2004 857 3,260 89 1,042 13 126 959 4,428
2005 703 2,557 491 6,290 173 1,479 1,367 10,326
Thereafter 2,613 7,890 1,421 19,026 967 6,970 5,001 33,886
------ ------- ----- ------- ----- ------- ------ --------
Total Leased 15,445 $59,393 6,239 $72,670 1,839 $15,695 23,523 $147,758
------ ------- ----- ------- ----- ------- ------ --------
------ ------- ----- ------- ----- ------- ------ --------
Total Portfolio 16,653 6,559 1,975 25,188
------ ----- ----- ------
------ ----- ----- ------
Annualized net
effective rent
per square foot $ 3.84 $ 11.65 $ 8.53 $ 6.28
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
This stable occupancy, along with stable rental rates in each of the
Company's markets, will allow the in-service portfolio to continue to provide
a comparable or increasing level of earnings from rental operations. The
Company also expects to realize growth in earnings from rental operations
through (i) the placement in-service of the 2.9 million square feet of
properties under development at March 31, 1996 over the next six quarters;
(ii) the development and acquisition of additional rental properties in its
primary markets; and (iii) the expansion into other attractive Midwestern
markets.
SERVICE OPERATIONS
Service Operation revenues increased from $3.8 million to $4.3 million for the
three months ended March 31, 1996 as compared to the three months ended March
31, 1995 primarily as a result of increases in maintenance fee revenue because
of winter weather conditions and construction management fee revenue because of
an increase in construction volume.
- 11 -
<PAGE>
Service Operation operating expenses increased from $2.4 million to $3.2 million
for the three months ended March 31, 1996 as compared to the three months ended
March 31, 1995 primarily as a result of (i) an increase in operating expenses
resulting from the overall growth of the Company and (ii) a decrease in costs
allocated to the Rental Operations segment because of a reduction in development
and leasing activity in the Company's owned properties for the quarter.
As a result of the above-mentioned items, earnings from Service Operations
decreased by approximately $236,000 for the three months ended March 31, 1996 as
compared to the three months ended March 31, 1995.
OTHER INCOME (EXPENSE)
Interest income decreased from $474,000 for the three months ended March 31,
1995 to $346,000 for the three months ended March 31, 1996 primarily as a result
of the temporary short-term investment of excess proceeds from the 1994 Offering
which resulted in approximately $40 million of cash on hand at December 31,
1994.
NET INCOME
Net income for the three months ended March 31, 1996 was $9.6 million compared
to net income of $7.4 million for the three months ended March 31, 1995. This
increase results primarily from the operating result fluctuations in rental and
service operations explained above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaling $14.5 million and $15.9
million for the three months ended March 31, 1996 and 1995, respectively,
represents the primary source of liquidity to fund distributions to
shareholders, unitholders and the other minority interests and to fund recurring
costs associated with the renovation and re-letting of the Company's properties.
The primary reason for the decrease in net cash provided by operating activities
is the timing of cash receipts and payments related to the Company's third-party
construction contracts. Excluding the impact of these construction contracts,
net cash provided by operating activities increased from $13.6 million for three
months ended March 31, 1995 to $16.1 million for the three months ended March
31, 1996. This increase is primarily due to, as discussed above under "Results
of Operations," the increase in net income resulting from the expansion of the
in-service portfolio through development and acquisitions of additional rental
properties.
Net cash used by investing activities totaling $79.9 million and $35.0 million
for the three months ended March 31, 1996 and 1995, respectively, represents the
investment of funds by the Company to expand its portfolio of rental properties
through the development and acquisition of additional rental properties. In
1995, $32.4 million was invested in the development and acquisition of
additional rental properties. In 1996, the investment in the development and
acquisition of additional rental properties increased to $83.8 million. Included
in the $83.8 million of net cash used by investing activities for the
development and acquisition of rental properties is $53.3 million related to the
acquisition of eight suburban office buildings totaling 782,000 gross square
feet in Cleveland, Ohio. The purchase price of these eight buildings was
approximately $76 million which included the assumption of $23.1 million of
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<PAGE>
mortgage debt. The buildings were 99% leased in the aggregate and are primarily
located in a prime submarket on Cleveland's southside which has a vacancy rate
of less than 5%. The acquisition included the purchase of the operations of an
established Cleveland property management and development company that allowed
the Company to immediately have a presence in the market. This acquisition
positions the Company to immediately pursue additional industrial and suburban
office development and acquisition opportunities in Cleveland. Also included in
net cash provided by investing activities for the three months ended March 31,
1996 is the receipt of approximately $4.9 million of escrow deposits related to
one of the Company's mortgage loans.
Net cash used by financing activities totaling $13.5 million for the three
months ended March 31, 1995, is comprised mainly of distributions to
shareholders and unitholders. In 1996, the Company received $113.8 million from
the 1996 Offering which was used to pay down amounts outstanding on the
unsecured line of credit.
In March 1994, the Company obtained a $60 million secured credit facility which
was available to fund development and acquisition of additional rental
properties and to provide working capital as needed. In April 1995, the Company
replaced the secured line of credit with a $100 million unsecured line of credit
which matures in April 1998. In January 1996, the Company increased the
unsecured line of credit to $150 million and reduced the borrowing rate to LIBOR
plus 1.625%. There were $11 million of borrowings outstanding under this line of
credit as of March 31, 1996. The Company also has a demand $7 million secured
revolving credit facility which is available to provide working capital. This
facility bears interest payable at the 30-day LIBOR rate plus .75%. The current
30-day LIBOR rate as of April 22, 1996 was 5.4375%.
The Company currently has on file a Form S-3 Registration Statement with the
Securities and Exchange Commission ("Shelf Registration") which has remaining
availability as of March 31, 1996 of approximately $210 million to issue
additional common stock, preferred stock or unsecured debt securities. The
Company intends to issue additional equity or debt under this Shelf Registration
as capital needs arise to fund the development and acquisition of additional
rental properties.
The total debt outstanding at March 31, 1996 consists of notes totaling $450.4
million with a weighted average interest rate of 7.51% maturing at various dates
through 2018. Scheduled principal amortization of such debt totaled $532,000 for
the three months ended March 31, 1996.
- 13 -
<PAGE>
Following is a summary of the scheduled future amortization and maturities of
the Company's indebtedness (in thousands):
<TABLE>
<CAPTION>
Repayments
-------------------------------------
Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
---- ------------ ---------- ----- -----------------
<S> <C> <C> <C> <C>
1996 $ 1,614 $ 66,619 $ 68,233 5.39%
1997 2,282 22,841 25,123 9.14%
1998 2,478 56,216 58,694 7.10%
1999 2,698 - 2,698 8.26%
2000 2,717 4,854 7,571 7.87%
2001 2,378 59,954 62,332 8.72%
2002 2,590 50,000 52,590 7.37%
2003 252 68,216 68,468 8.48%
2004 273 - 273 5.20%
2005 300 100,000 100,300 7.51%
Thereafter 4,072 - 4,072 5.20%
-------- -------- --------
Total $ 21,654 $428,700 $450,354
-------- -------- --------
-------- -------- --------
</TABLE>
The 1996 maturities consist of $59.6 million of borrowings which mature in
October through December as well as $7.0 million drawn on the Company's demand
secured revolving credit facility. The Company currently intends to repay this
mortgage debt through the issuance of either common or preferred equity or
unsecured debt securities available under its Shelf Registration. The Company
estimates that if unsecured debt securities are issued, based on current market
interest rates, the rate on such debt would increase by approximately 2.6%. Of
the 1998 maturities, $11 million represents the outstanding balance as of March
31, 1996 on the Company's unsecured line of credit.
The Company intends to pay regular quarterly dividends from net cash provided by
operating activities. A quarterly dividend of $.49 per Common Share was declared
on April 25, 1996 payable on May 31, 1996 to shareholders of record on May 17,
1996, which represents an annualized dividend of $1.96 per share.
FUNDS FROM OPERATIONS
Management believes that Funds From Operations ("FFO"), which is defined by the
National Association of Real Estate Investment Trusts as net income or loss
excluding gains or losses from debt restructuring and sales of property plus
depreciation and amortization, and after adjustments for minority interest,
unconsolidated partnerships and joint ventures (adjustments for minority
interest, unconsolidated partnerships and joint ventures are calculated to
reflect FFO on the same basis), is the industry standard for reporting the
operations of real estate investment trusts.
- 14 -
<PAGE>
The following table reflects the calculation of the Company's FFO for the three
months ended March 31, as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net income $ 9,648 $ 7,416
Add back:
Depreciation and amortization 6,761 5,213
Share of joint venture depreciation and
amortization 440 73
Loss on property sales 14 -
Adjustment for minority interest share of
add-backs (1,040) (854)
-------- --------
FUNDS FROM OPERATIONS $ 15,823 $ 11,848
-------- --------
-------- --------
CASH FLOW PROVIDED BY (USED BY):
Operating activities $ 14,469 $ 15,892
Investing activities (79,865) (34,965)
Financing activities 71,759 (13,555)
</TABLE>
The increase in FFO for the three months ended March 31, 1996 compared to the
three months ended March 31, 1995 results primarily from the increased in-
service rental property portfolio as discussed above under "Results of
Operations." The following table indicates components of such growth for each
of the three months ended March 31, as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Rental operations:
Original portfolio $15,050 $15,029
Development 4,249 1,757
Acquisitions 5,796 1,568
Investments in unconsolidated companies 1,642 511
Interest expense (7,967) (5,145)
Amortization of deferred financing fees (285) (379)
-------- --------
Net rental operations 18,485 13,341
Service operations, net of minority interest 984 1,212
Minority interest of unitholders (1,785) (1,458)
Other, net (821) (393)
Adjustment for minority interest share of
add-backs (1,040) (854)
-------- --------
FUNDS FROM OPERATIONS $15,823 $11,848
-------- --------
-------- --------
</TABLE>
In March 1995, NAREIT issued a clarification of its definition of FFO effective
for years beginning after December 31, 1995. The clarification provides that
amortization of deferred financing costs and depreciation of non-rental real
estate assets are no longer to be added back to net income in arriving at FFO.
The Company adopted these changes effective January 1, 1996, and the calculation
of FFO for the three months ended March 31, 1995 has been revised accordingly.
The calculation of FFO for the three months ended March 31, 1995 has also been
revised to conform with the presentation of FFO for the three months ended March
31, 1996 which excludes amounts attributable to minority interests.
While management believes that FFO is the most relevant and widely used measure
of the Company's operating performance, such amount does not represent cash flow
from operations as defined by generally accepted accounting principles, should
not be considered as an alternative to net income as an indicator of the
Company's operating performance, and is not indicative of cash available to fund
all cash flow needs.
- 15 -
<PAGE>
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 statements contained herein which are not historical facts are forward-
looking statements based on economic forecasts, strategic plans and other
factors which, by their nature, involve risk and uncertainties. In particular,
among the factors that could cause actual results to differ materially are the
following: business conditions and general economy; competitive factors;
political decisions affecting land use permits, interest rates and other risks
inherent in the real estate business. For further information on factors which
could impact the Company and the statements, reference is made to the Company's
other filings with the Securities and Exchange Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A report on Form 8-K dated January 12, 1996, as amended on March 22, 1996 on
Form 8-K/A, was filed with the Commission to report under Item 5 the formation
of a joint venture on December 28, 1995 with an institutional real estate
investor.
A report on Form 8-K dated March 5, 1996, as amended on March 22, 1996 on Form
8-K/A, was filed with the Commission to report under Item 5 the acquisition of
eight suburban office buildings and the operations of an established property
management and development company in Cleveland, Ohio.
A report on Form 8-K dated March 28, 1996 was filed with the Commission to put
on file the following:
- - Terms Agreement dated March 25, 1996, which was filed pursuant to
Regulation S-K, Item 601(b)(1) in lieu of filing the otherwise required
exhibit to the registrant's registration statement on Form S-3, file no.
33-54997, under the Securities Act of 1933, as amended.
- 16 -
<PAGE>
- - Tax opinion of Bose McKinney & Evans, including consent, which was filed
pursuant to Regulation S-K, Item 601(b)(8) in lieu of filing the otherwise
required exhibit to the Registrant's registration statement on Form S-3,
file no. 33-54997, under the Securities Act of 1933, as amended.
A report on Form 8-K dated March 29, 1996, was filed with the Commission to
report under Item 5 cautionary statements identifying important factors that
could cause the Company's actual results to differ materially from those
projected in forward-looking statements of the Company made by, or on behalf of
the Company. These statements were filed in connection with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
Exhibit 15. Letter regarding unaudited interim financial information
Exhibit 27. Financial Data Schedule (EDGAR Filing Only)
- 17 -
<PAGE>
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: May 14, 1996 /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)
- 18 -
<PAGE>
EXHIBIT 15
The Board of Directors
Duke Realty Investments, Inc.:
Gentlemen:
RE: Registration Statements Nos. 33-61361, 33-64567, 33-64659, and 33-55727
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 19, 1996 related to our
review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant, or a report prepared or certified by an accountant within the
meaning of sections 7 and 11 of the Act.
KPMG Peat Marwick LLP
Indianapolis, Indiana
April 19, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DUKE REALTY
INVESTMENTS, INC. AND SUBSIDIARIES' MARCH 31, 1996 CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 12,090
<SECURITIES> 0
<RECEIVABLES> 27,108
<ALLOWANCES> (1,434)
<INVENTORY> 0
<CURRENT-ASSETS> 37,402
<PP&E> 1,080,961
<DEPRECIATION> (61,766)
<TOTAL-ASSETS> 1,162,901
<CURRENT-LIABILITIES> 49,709
<BONDS> 450,354
0
0
<COMMON> 0
<OTHER-SE> 646,476
<TOTAL-LIABILITY-AND-EQUITY> 1,162,901
<SALES> 0
<TOTAL-REVENUES> 41,215
<CGS> 21,628
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,972
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,967
<INCOME-PRETAX> 9,648
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,648
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,648
<EPS-PRIMARY> .40
<EPS-DILUTED> 0
</TABLE>
