<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
------
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
----- -----
The number of Common Shares outstanding as of November 11, 1996 was
29,429,274 ($.01 par value).
<PAGE>
DUKE REALTY INVESTMENTS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ -------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
September 30, 1996 (Unaudited) and December 31, 1995 2
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1996 and
1995 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1996 and 1995 (Unaudited) 4
Condensed Consolidated Statement of Shareholders' Equity
for the nine months ended September 30, 1996 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6-8
Independent Accountants' Review Report 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-18
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
<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 SEPTEMBER 30, December 31,
------ 1996 1995
------------- ------------
<S> (Unaudited)
Real estate investments: <C> <C>
Land and improvements $ 131,048 $ 91,550
Buildings and tenant improvements 977,111 712,614
Construction in progress 43,041 96,698
Land held for development 66,018 62,637
--------- ---------
1,217,218 963,499
Accumulated depreciation (75,071) (56,335)
--------- ---------
Net real estate investments 1,142,147 907,164
Cash and cash equivalents 11,923 5,727
Accounts receivable from tenants, net of
allowance of $603 and $624 4,414 5,184
Accrued straight-line rents, net of allowance
of $841 10,022 8,101
Receivables on construction contracts 12,972 9,462
Investments in unconsolidated companies 73,242 67,771
Deferred financing costs, net of accumulated
amortization of $3,136 and $2,072 7,710 8,141
Deferred leasing and other costs, net of
accumulated amortization of $7,560 and $4,959 22,141 20,620
Escrow deposits and other assets 9,704 13,418
--------- ---------
$1,294,275 $1,045,588
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Indebtedness:
Secured debt $ 263,882 $ 259,820
Unsecured notes 190,000 150,000
Unsecured line of credit 12,000 45,000
--------- ---------
465,882 454,820
Construction payables and amounts due
subcontractors 25,447 21,410
Accounts payable 2,423 1,132
Accrued real estate taxes 13,012 10,374
Accrued interest 1,100 3,461
Other accrued expenses 6,538 5,504
Other liabilities 7,814 5,490
Tenant security deposits and prepaid rents 6,705 3,872
--------- ---------
Total liabilities 528,921 506,063
--------- ---------
Minority interest 12,687 4,736
--------- ---------
Shareholders' equity:
Series A preferred shares and paid-in capital
($.01 par value); 5,000 shares authorized;
300 shares issued and outstanding in 1996 72,288 -
Common shares and paid-in capital ($.01 par
value); 45,000 shares authorized; 29,423
and 24,152 shares issued and outstanding 728,969 578,529
Distributions in excess of net income (48,590) (43,740)
--------- ---------
Total shareholders' equity 752,667 534,789
--------- ---------
$1,294,275 $1,045,588
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 2 -
<PAGE>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
------ ------ ------ --------
<S> <C> <C> <C> <C>
RENTAL OPERATIONS:
Revenues:
Rental income $40,001 $28,923 $111,715 $80,698
Equity in earnings of
unconsolidated companies 1,447 175 3,994 645
------ ------ ------- ------
41,448 29,098 115,709 81,343
------ ------ ------- ------
Operating expenses:
Rental expenses 7,328 5,437 21,209 14,981
Real estate taxes 3,451 2,515 9,958 6,805
Interest expense 7,858 4,870 22,475 14,923
Depreciation and amortization 7,075 6,297 23,232 17,400
------ ------ ------ ------
25,712 19,119 76,874 54,109
------ ------ ------ ------
Earnings from rental
operations 15,736 9,979 38,835 27,234
------ ------ ------ ------
SERVICE OPERATIONS:
Revenues:
Property management,
maintenance and leasing fees 3,027 3,023 8,689 8,279
Construction management and
development fees 1,744 1,763 4,897 4,218
Other income 271 340 939 784
------ ------ ------ ------
5,042 5,126 14,525 13,281
------ ------ ------ ------
Operating expenses:
Payroll 2,179 2,069 6,796 5,713
Maintenance 417 386 1,134 932
Office and other 619 525 1,958 1,493
------ ------ ------ ------
3,215 2,980 9,888 8,138
------ ------ ------ ------
Earnings from service
operations 1,827 2,146 4,637 5,143
------ ------ ------ ------
General and administrative
expense (1,081) (895) (3,344) (2,538)
------ ------ ------ ------
Operating income 16,482 11,230 40,128 29,839
OTHER INCOME (EXPENSE):
Interest income 316 421 929 1,322
Earnings (loss) from property
sales (235) - 1,369 -
Other minority interest in
earnings of subsidiaries (268) (306) (698) (736)
Minority interest in earnings
of unitholders (1,945) (2,039) (5,431) (5,413)
------ ------ ------ ------
Net income 14,350 9,306 36,297 25,012
Allocation to preferred shares (872) - (872) -
------ ------ ------ ------
Net income available for
common shares $13,478 $ 9,306 $35,425 $25,012
====== ====== ====== ======
Net income per common share $ .46 $ .39 $ 1.28 $ 1.13
====== ====== ====== ======
Weighted average number of
common shares outstanding 29,357 24,136 27,601 22,183
====== ====== ====== ======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 3 -
<PAGE>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 36,297 $ 25,012
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of buildings and tenant
improvements 19,632 14,626
Amortization of deferred financing
costs 895 901
Amortization of deferred leasing and
other costs 2,705 1,873
Minority interest in earnings 6,129 6,149
Straight-line rent adjustment (2,362) (1,808)
Earnings from property sales (1,369) -
Construction contracts, net 527 13,554
Other accrued revenues and expenses,
net 7,209 2,004
Equity in earnings in excess of
distributions received from
unconsolidated companies (560) (123)
-------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 69,103 62,188
-------- --------
Cash flows from investing activities:
Rental property development costs (95,384) (79,868)
Rental property recurring building
improvements (405) (490)
Acquisition of rental properties (132,225) (42,058)
Acquisition of businesses - (25,620)
Acquisition of undeveloped land and
infrastructure costs (11,187) (21,498)
Recurring tenant improvements (4,333) (3,200)
Recurring leasing costs (2,157) (1,902)
Other deferred costs and other assets (25) (6,902)
Proceeds from property sales, net 36,657 38
Distribution received from unconsolidated
companies 6,935 -
Net investment in and advances to
unconsolidated companies (383) (7,744)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (202,507) (189,244)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common shares,
net 129,160 96,297
Proceeds from issuance of preferred shares,
net 72,288 -
Proceeds from indebtedness 40,000 150,051
Borrowings on secured line of credit, net 7,000 -
Repayments on indebtedness including
principal amortization (27,410) (59,610)
Repayments on unsecured line of credit, net (33,000) -
Distributions to shareholders (41,147) (31,004)
Distributions to minority interest (6,584) (6,584)
Deferred financing costs (707) (2,832)
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 139,600 146,318
-------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 6,196 19,262
-------- --------
Cash and cash equivalents at beginning
of period 5,727 40,433
-------- --------
Cash and cash equivalents at end
of period $ 11,923 $ 59,695
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 4 -
<PAGE>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN
THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Series A
Peferred Shares Common Shares Distributions
and Paid-in and Paid-in in Excess of
Capital Capital Net Income Total
----------------- ------------- ------------- ---------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balance at
December
31, 1995 $ - $ 578,529 $(43,740) $534,789
Proceeds from
issuance of
common shares,
net of under-
writing discounts
and offering costs
of $7,299 - 129,273 - 129,273
Proceeds from
issuance of
preferred shares,
net of under-
writing discounts
and offering
costs of
$2,712 72,288 - - 72,288
Acquisition of
minority
interest - 21,167 - 21,167
Net income - - 36,297 36,297
Distributions to
common shareholders
($1.49 per
common share) - - (41,147) (41,147)
------ ------- ------- -------
Balance at
September
30, 1996 $72,288 $728,969 $(48,590) $752,667
====== ======= ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 5 -
<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 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 88.8% of the partnership interests ("Units") as of September
30, 1996. The limited partnership interests are 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.
In March 1996, the Company issued 4,400,000 shares (including 400,000 shares
issued on April 4, 1996 related to the exercise of the Underwriters'
over-allotment option) of Common Stock through an additional offering (the
"1996 Offering") receiving net proceeds of approximately $125.3 million.
During the second quarter of 1996, the Company implemented a direct stock
purchase and dividend reinvestment plan and has received approximately $3.9
million of net proceeds from the sale of 129,140 shares of Common Stock
through the plan. The proceeds of the 1996 Offering and the dividend
reinvestment plan were used to pay down the Company's unsecured line of
credit which had been used to fund the development and acquisition of
additional rental properties.
In August 1996, the Company issued 300,000 shares of 9.10% Series A
Cumulative Redeemable Preferred Shares ("the 1996 Preferred Offering")
receiving net proceeds of approximately $72.3 million. On or after August
31, 2001, the Series A Preferred Shares may be redeemed for cash at the
option of the Company, in whole or in part at a redemption price of $250.00
per share plus accrued and unpaid distributions, if any, to the redemption
date. The redemption price of the Series A Preferred Shares (other than any
portion thereof consisting of accrued and unpaid distributions) may only be
paid from the proceeds of other capital shares of the Company, which may
include other classes or series of preferred shares. The Series A Preferred
Shares have no stated maturity, will not
- 6 -
<PAGE>
be subject to sinking fund or mandatory redemption provisions and are not
convertible into any other securities of the Company. Distributions on the
Series A Preferred Shares will be cumulative from the date of original issue
and will be payable quarterly on or about the last day of February, May,
August and November of each year, commencing on December 2, 1996, at the
rate of 9.10% of the liquidation preference per annum (equivalent to $22.75
per annum per share). The proceeds of the 1996 Preferred Offering were used
to retire existing secured debt as well as to fund the development and
acquisition of additional rental properties.
During 1996, as a result of Unitholders exchanging their Units for shares
of Common Stock of the Company pursuant to the DRLP Partnership Agreement,
the Company acquired a portion of the minority interest in DRLP through the
issuance of 725,291 shares of Common Stock for a like number of Units.
The acquisition of the minority interest was accounted for under the purchase
method with assets acquired recorded at the fair market value of the Company's
Common Stock on the date of acquisition. The acquisition amount of $21.2
million was allocated to rental properties based on their estimated fair
values.
2. LINES OF CREDIT
The Company has a $150 million unsecured revolving credit facility which is
available to fund the development and acquisition of additional rental
properties and to 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 1.25%. 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%.
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 $2.5 million and $2.1 million for such services for the nine
months ended September 30, 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.
- 7 -
<PAGE>
5. SUBSEQUENT EVENTS
On October 24, 1996, the Board of Directors declared a dividend of $.51
per share of Common Stock which is payable on November 29, 1996, to common
shareholders of record on November 15, 1996.
On October 24, 1996, the Board of Directors declared a dividend of $6.6354
per share of Series A Preferred Stock for the period August 16, 1996 through
November 30, 1996 which is payable on December 2, 1996 to preferred
shareholders of record on November 18, 1996.
In November 1996, the Company issued $50 million of unsecured debt at an
interest rate of 7.14%. This debt matures in November 2004 and the proceeds
were used to retire amounts outstanding on the Company's lines of credit.
- 8 -
<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 September 30, 1996, the related
condensed consolidated statements of operations for the three and nine
months ended September 30, 1996 and 1995, the related condensed
consolidated statements of cash flows for the nine months ended September
30, 1996 and 1995, and the related condensed consolidated statement of
shareholders' equity for the nine months ended September 30, 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 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, shareholders' equity 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
October 31, 1996
- 9 -
<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 portfolio 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 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
occupancy rate of its in-service portfolio has exceeded 92% the last
two years and was at 94.2% at September 30, 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 September 30, 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 3,047 2,328 11.74% 13.63% 93.94% 95.98%
Bulk 14,296 8,750 55.08% 51.23% 94.03% 96.18%
OFFICE
Suburban 5,815 3,617 22.41% 21.18% 95.84% 92.58%
CBD 699 699 2.69% 4.09% 85.20% 93.07%
Medical 333 294 1.28% 1.72% 91.59% 89.20%
RETAIL 1,766 1,392 6.80% 8.15% 95.05% 93.49%
------ ------ ------- -------
Total 25,956 17,080 100.00% 100.00% 94.23% 94.92%
====== ====== ======= =======
</TABLE>
Management expects occupancy of the in-service property portfolio to remain
stable because (i) only 3.0% and 9.6% 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 82%, 65%
and 73% in the nine months ended September 30, 1996 and the years ended
December 31, 1995 and 1994, respectively.
- 10 -
<PAGE>
The following table reflects the Company's in-service portfolio lease
expiration schedule as of September 30, 1996 by product type indicating
square footage and annualized net effective rents under expiring leases (in
thousands, except per square foot amounts):
<TABLE>
<CAPTION>
Industrial Office Retail Total
--------------- --------------- --------------- ---------------
Year of
Expir- Square Contract Square Contract Square Contract Square Contract
ation Feet Rent Feet Rent Feet Rent Feet Rent
- ------ ----- -------- ----- -------- ------ -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 615 $ 2,711 104 $ 960 17 $ 133 736 $ 3,804
1997 1,547 6,512 733 7,877 67 719 2,347 15,108
1998 2,373 9,075 691 7,200 115 1,208 3,179 17,483
1999 2,063 8,922 821 8,900 119 1,203 3,003 19,025
2000 2,000 7,814 725 8,965 124 1,421 2,849 18,200
2001 2,130 8,667 707 7,724 106 1,188 2,943 17,579
2002 327 1,438 694 7,347 106 994 1,127 9,779
2003 73 645 154 1,927 36 328 263 2,900
2004 865 3,397 92 1,079 13 126 970 4,602
2005 1,440 4,552 496 6,357 173 1,479 2,109 12,388
There-
after 2,873 8,699 1,257 15,750 802 6,233 4,932 30,682
------ ------ ----- ------ ----- ------ ------ -------
Total
Leased 16,306 $62,432 6,474 $74,086 1,678 $15,032 24,458 $151,550
====== ====== ===== ====== ===== ====== ====== =======
Total
Port-
folio 17,343 6,847 1,766 25,956
====== ===== ===== ======
Annualized net
effective rent
per square foot $ 3.83 $ 11.44 $ 8.96 $ 6.20
====== ====== ====== =======
</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 development and acquisition of
additional rental properties in its primary markets; (ii) the expansion
into other attractive Midwestern markets; and (iii) the completion of the
three million square feet of properties under development at September 30,
1996 over the next six quarters. The three million square feet of properties
under development should provide future earnings from rental operations
growth for the Company as they are placed in service as follows (in
thousands, except percent leased and stabilized returns):
<TABLE>
<CAPTION>
Anticipated
In-Service Square Percent Project Stabilized
Date Feet Leased Costs Return
- ---------------- ------ ------- ------- -----------
<S> <C> <C> <C> <C>
4th Quarter 1996 778 66% $ 38,922 11.8%
1st Quarter 1997 541 34% 15,160 10.9%
2nd Quarter 1997 631 64% 31,591 12.2%
3rd Quarter 1997 930 84% 23,387 11.4%
Thereafter 100 80% 8,923 12.6%
----- -------
2,980 66% $117,983 11.8%
===== =======
</TABLE>
RESULTS OF OPERATIONS
- ---------------------
Following is a summary of the Company's operating results and property
statistics for the three and nine months ended September 30, 1996 and
1995 (in thousands, except number of properties and per share amounts):
- 11 -
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
1996 1995 1996 1995
------ ------ ------ -----
<S> <C> <C> <C> <C>
Rental Operations
revenue $41,448 $29,098 $115,709 $81,343
Service Operations revenue 5,042 5,126 14,525 13,281
Earnings from Rental
Operations 15,736 9,979 38,835 27,234
Earnings from Service
Operations 1,827 2,146 4,637 5,143
Operating income 16,482 11,230 40,128 29,839
Net income available for
common shares $13,478 $ 9,306 $ 35,425 $25,012
Weighted average common
shares outstanding 29,357 24,136 27,601 22,183
Net income per common
share $ .46 $ .39 $ 1.28 $ 1.13
Number of in-service
properties at end of
period 233 167 233 167
In-service square footage
at end of period 25,956 17,080 25,956 17,080
Under development square
footage at end of period 2,980 2,807 2,980 2,807
</TABLE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1996 TO THREE MONTHS ENDED
- -------------------------------------------------------------------------
SEPTEMBER 30, 1995
- ------------------
Rental Operations
- -----------------
The Company increased its in-service portfolio of rental properties from
167 properties comprising 17.1 million square feet at September 30, 1995
to 233 properties comprising 26.0 million square feet at September 30,
1996 through the acquisition of 50 properties totaling 5.0 million square
feet and the completion of 18 properties and three building expansions
totaling 4.1 million square feet developed by the Company. The Company also
disposed of two properties totaling 226,000 square feet. These 66 net
additional rental properties primarily account for the $12.3 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 66 in-service rental
properties.
The increase in equity in earnings of unconsolidated companies is due to
the formation of a 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. In May 1996, the
Company contributed a 600,000 square foot industrial building to the joint
venture at an agreed value of $13.9 million and received a distribution of
$6.935 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 $3.0 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 millions on the Company's line of
credit; (ii) retire $39.5 million 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) to fund development
and acquisition of additional rental properties during the fourth quarter
of 1995.
- 12 -
<PAGE>
As a result of the above-mentioned items, earnings from rental operations
increased $5.7 million from $10.0 million for the three months ended
September 30, 1995 to $15.7 million for the three months ended September 30,
1996.
Service Operations
- ------------------
Service Operation revenues remained stable at $5.0 million for the three
months ended September 30, 1996 as compared to $5.1 million for the three
months ended September 30, 1995. Service Operation operating expenses
increased from $3.0 million to $3.2 million for the three months ended
September 30, 1996 as compared to the three months ended September 30, 1995
primarily as a result of an increase in operating expenses resulting from the
overall growth of the Company and the additional regional offices opened in
1995 and 1996.
As a result of the above-mentioned items, earnings from Service Operations
decreased from $2.1 million for the three months ended September 30, 1995 to
$1.8 million for the three months ended September 30, 1996.
General and Administrative Expense
- ----------------------------------
General and administrative expense increased from $895,000 for the three
months ended September 30, 1995 to $1.1 million for the three months ended
September 30, 1996 primarily as a result of increased state and local taxes
due to the growth in revenues and net income of the Company.
Other Income (Expense)
- ----------------------
Interest income decreased from $421,000 for the three months ended
September 30, 1995 to $316,000 for the three months ended September
30, 1996 primarily as a result of the temporary short-term investment
of excess proceeds from an equity offering in May 1995 and a debt
offering in September 1995 which resulted in excess cash balances being
invested through September 30, 1995.
During the three months ended September 30, 1996, the Company recognized a
loss of $235,000 on property sales. The majority of the loss related to
additional closing costs paid related to a sale of a property in the second
quarter of 1996. The year-to-date gain on the sale of this building is $1.4
million.
Net Income Available for Common Shares
- --------------------------------------
Net income available for common shares for the three months ended September
30, 1996 was $13.5 million compared to net income available for common shares
of $9.3 million for the three months ended September 30, 1995. This increase
results primarily from the operating result fluctuations in rental and
service operations explained above.
- 13 -
<PAGE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 TO NINE MONTHS ENDED
- ----------------------------------------------------------------------
SEPTEMBER 30, 1995
- ------------------
Rental Operations
- -----------------
The expansion of the in-service rental property portfolio by 66 additional
rental properties from September 30, 1995 to September 30, 1996 primarily
accounts for the $34.4 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 66 in-service rental properties.
The increase in equity in earnings of unconsolidated companies is due to the
effect of the formation of Dugan Realty L.L.C. on December 28, 1995, as
discussed previously.
Interest expense increased by approximately $7.6 million. This increase was
primarily because of the 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%.
As a result of the above-mentioned items, earnings from rental operations
increased $11.6 million from $27.2 million for the nine months ended
September 30, 1995 to $38.8 million for the nine months ended September
30, 1996.
Service Operations
- ------------------
Service Operation revenues increased from $13.3 million to $14.5 million for
the nine months ended September 30, 1996 as compared to the nine months ended
September 30, 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. Service Operation
expenses increased from $8.1 million to $9.9 million for the nine months
ended September 30, 1996 as compared to the nine months ended September 30,
1995 primarily as a result of an increase in operating expenses resulting
from the overall growth of the Company and the additional regional offices
opened in 1995 and 1996.
As a result of the above-mentioned items, earnings from Service Operations
decreased from $5.1 million to $4.6 million for the nine months ended
September 30, 1995 and 1996, respectively.
Other Income (Expense)
- ----------------------
Interest income decreased from $1.3 million for the nine months ended
September 30, 1995 to $929,000 for the nine months ended September 30, 1996
primarily as a result of the temporary short-term investment of excess
proceeds from an equity offering in May 1995 and a debt offering in September
1995 which resulted in excess cash balances being invested through September
30, 1995.
- 14 -
<PAGE>
During the nine months ended September 30, 1996, the Company sold a 251,000
square foot corporate headquarters facility that it recently completed for John
Alden Life Insurance Company in Miami, Florida. The project was sold for
approximately $32.9 million pursuant to the purchase option contained in John
Alden's lease agreement. The Company recognized a gain of approximately $1.4
million on the sale.
General and Administrative Expense
- ----------------------------------
General and administrative expense increased from $2.5 million for the nine
months ended September 30, 1995 to $3.3 million for the nine months ended
September 30, 1996 primarily as a result of increased state and local taxes
due to the growth in revenues of the Company. Property advertising expense as
well as certain public company expenses also increased due to the rapidly
expanding size of the Company.
Net Income Available for Common Shares
- --------------------------------------
Net income available for common shares for the nine months ended September
30, 1996 was $35.4 million compared to net income available for common shares
of $25.0 million for the nine months ended September 30, 1995. This increase
results primarily from the operating result fluctuations in rental and
service operations and earnings from property sales explained above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaling $69.1 million and $62.2
million for the nine months ended September 30, 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. Excluding the impact of the timing of cash receipts
and payments related to the Company's third-party construction contracts,
net cash provided by operating activities increased from $48.6 million for
nine months ended September 30, 1995 to $68.6 million for the nine months
ended September 30, 1996. This increase is primarily a result of, 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 $202.5 million and $189.2
million for the nine months ended September 30, 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 net of proceeds received from property sales. During the
nine months ended September 30, 1996, the Company sold two properties and
three parcels of land for net proceeds of $36.7 million. The sale of the
John Alden Miami building pursuant to a purchase option accounted for $32.9
million of these proceeds. In 1995, $147.5 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 $227.6 million. Included in the $227.6 million of net cash used
by investing
-15-
<PAGE>
activities for the development and acquisition of rental
properties for the nine months ended September 30, 1996 is $44.9 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 mortgage debt and the issuance of $8.4 million of Units.
Net cash provided by financing activities totaling $146.3 million for the
nine months ended September 30, 1995 is comprised mainly of proceeds from
a $96.3 million equity offering in May 1995 and a $150 million unsecured debt
offering in September 1995 net of distributions to shareholders and
unitholders.
In March 1996, the Company received $125.3 million from the 1996 Offering
which was used to pay down amounts outstanding on the unsecured line of
credit. During the nine months ended September 30, 1996, the Company also
received $3.9 million of net proceeds from the issuance of common stock under
its dividend reinvestment and optional stock purchase program. In August
1996, the Company received $72.3 million of net proceeds from the 1996
Preferred Offering. The Company used $25.8 million of these proceeds to
pay off existing secured debt which was scheduled to mature in the fourth
quarter of 1996 and the remainder to fund the development and acquisition of
additional rental properties. In July 1996, the Company issued $40 million of
unsecured debt under its medium-term note program. These notes mature in July
2000 and bear interest at 7.28%. These proceeds were used to fund third
quarter development and acquisition activity.
In April 1995, the Company obtained a $100 million unsecured line of credit
with a borrowing rate of LIBOR plus 2.00% 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%. In September
1996, the borrowing rate was further reduced to LIBOR plus 1.25%. 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 Company currently has on file two Form S-3 Registration Statements with
the Securities and Exchange Commission ("Shelf Registrations") which had
remaining availability as of November 11, 1996 of approximately $470 million
to issue common stock, preferred stock or unsecured debt securities. The
Company intends to issue additional equity or debt under these Shelf
Registrations as capital needs arise to fund the development and acquisition
of additional rental properties.
The total mortgage debt outstanding at September 30, 1996 consists of notes
totaling $465.9 million with a weighted average interest rate of 7.70%
maturing at various dates through 2014. The Company has $202.0 million of
unsecured debt and $263.9 million of secured debt outstanding at September
30, 1996. Scheduled principal amortization of such mortgage debt totaled $1.6
million for the nine months ended September 30, 1996.
- 16 -
<PAGE>
Following is a summary of the scheduled future amortization and maturities of
the Company's indebtedness at September 30, 1996 (in thousands):
<TABLE>
<CAPTION>
Repayments
-------------------------------------------
Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
---- ------------ --------- -------- ----------------
<S> <C> <C> <C> <C>
1996 $ 507 $ 40,853 $ 41,360 6.29%
1997 2,303 24,216 26,519 9.15%
1998 2,478 57,216 59,694 7.09%
1999 2,698 - 2,698 8.28%
2000 2,717 44,854 47,571 7.38%
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 5.61%
2005 300 100,000 100,300 7.51%
Thereafter 4,077 - 4,077 5.61%
------ ------- -------
Total $20,573 $445,309 $465,882 7.70%
====== ======= =======
</TABLE>
The 1996 maturities consist of a $33.9 million secured loan which was
scheduled to mature in October 1996, as well as the outstanding balance on
the Company's $7 million demand secured line of credit. The Company has
extended the $33.9 million loan until April 1997 and intends to refinance the
loan prior to April 1997.
The Company intends to pay regular quarterly dividends from net cash provided
by operating activities. A quarterly dividend of $.51 per Common Share was
declared on October 24, 1996 payable on November 29, 1996 to shareholders of
record on November 15, 1996, which represents an annualized dividend of $2.04
per share. A quarterly dividend of $6.6354 per share of Series A Preferred
Stock was declared on October 24, 1996 for the period August 16, 1996 through
November 30, 1996 which is payable on December 2, 1996 to preferred
shareholders of record on November 18, 1996.
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.
- 17 -
<PAGE>
The following table reflects the calculation of the Company's FFO for the
three and nine months ended September 30 as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ --------------------
1996 1995 1996 1995
------ ------ --------- --------
<S> <C> <C> <C> <C>
Net income available for
common shares $ 13,478 $ 9,306 $35,425 $ 25,012
Add back:
Depreciation and amortization 6,783 5,981 22,337 16,499
Share of joint venture
depreciation and
amortization 484 92 1,367 236
(Earnings) loss from property
sales 235 - (1,369) -
Minority interest share of
add-backs (778) (491) (2,647) (1,902)
------- ------ ------- -------
FUNDS FROM OPERATIONS $ 20,202 $14,888 $ 55,113 $ 39,845
======= ====== ======= =======
CASH FLOW PROVIDED BY
(USED BY):
Operating activities $ 30,001 $21,391 $ 69,103 $ 62,188
Investing activities (108,923) (74,823) (202,507) (189,244)
Financing activities 90,559 77,715 139,600 146,318
</TABLE>
The increase in FFO for the three and nine months ende September 30, 1996
compared to the three and nine months ended September 30, 1995 results
primarily from the increased in-service rental property portfolio as
discussed above under "Results of Operations."
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 calculations of FFO for the three and nine months ended
September 30, 1995 have been revised accordingly.
The calculations of FFO for the three and nine months ended September 30,
1995 have also been revised to conform with the presentation of FFO for the
three and nine months ended September 30, 1996 which exclude 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.
- 18 -
<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, budgets and other factors
which, by their nature, involve known risks, uncertainties and other factors
which may cause the actual results, performance or achievements of Duke
Realty Investments to be materially different from any future results implied
by such statements. In particular, among the factors that could cause actual
results to differ materially are the following: business conditions and
general economy; competitive factors; interest rates and other risks inherent
in the real estate business. For further information on factors that could
impact the Company and the statements contained herein, reference is made to
the Company's other filings with the Securities and Exchange Commission.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
Exhibit 15. Letter regarding unaudited interim financial information
Exhibit 27. Financial Data Schedule (EDGAR Filing Only)
- 19 -
<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: November 11, 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)
- 20 -
<PAGE>
Exhibit 15
- ----------
The Board of Directors
Duke Realty Investments, Inc.:
Gentlemen:
RE: Registration Statements Nos. 33-61361, 33-64567, 33-64659, 33-55727,
and 333-4695
With respect to the subject registration statements, we
acknowledge our awareness of the use therein of our report
dated October 31, 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
October 31, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DUKE
REALTY INVESTMENTS, INC. AND SUBSIDIARIES' SEPTEMBER 30, 1996 CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 11,923
<SECURITIES> 0
<RECEIVABLES> 28,852
<ALLOWANCES> (1,444)
<INVENTORY> 0
<CURRENT-ASSETS> 39,013
<PP&E> 1,217,218
<DEPRECIATION> (75,071)
<TOTAL-ASSETS> 1,294,275
<CURRENT-LIABILITIES> 75,726
<BONDS> 465,882
0
72,288
<COMMON> 680,379
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,294,275
<SALES> 0
<TOTAL-REVENUES> 132,532
<CGS> 67,631
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,001
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,475
<INCOME-PRETAX> 35,425
<INCOME-TAX> 0
<INCOME-CONTINUING> 35,425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,425
<EPS-PRIMARY> $1.28
<EPS-DILUTED> 0
</TABLE>
