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 June 30, 1997
-------------
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 August 6, 1997 was
31,666,061 ($.01 par value).
<PAGE>
DUKE REALTY INVESTMENTS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
June 30, 1997 (Unaudited) and December 31, 1996 2
Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 1997 and 1996
(Unaudited) 3
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1997 and 1996
(Unaudited) 4
Condensed Consolidated Statement of Shareholders'
Equity for the six months ended June 30, 1997
(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 9-16
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, December 31,
ASSETS 1997 1996
------ ---------- ------------
(Unaudited)
<S> <C> <C>
Real estate investments:
Land and improvements $ 157,298 $ 140,391
Buildings and tenant improvements 1,141,879 1,041,040
Construction in progress 77,808 44,060
Land held for development 82,780 65,185
--------- ---------
1,459,765 1,290,676
Accumulated depreciation (96,491) (82,207)
--------- ---------
Net real estate investments 1,363,274 1,208,469
Cash 3,107 5,334
Accounts receivable from tenants,
net of allowance of $533 and $709 3,008 5,260
Straight-line rent receivable, net
of allowance of $841 12,376 10,956
Receivables on construction contracts 10,839 12,859
Investments in unconsolidated companies 112,837 79,362
Deferred financing costs, net of
accumulated amortization of $4,537
and $3,529 7,562 8,127
Deferred leasing and other costs,
net of accumulated amortization of
$10,468 and $8,276 30,502 24,404
Escrow deposits and other assets 7,374 6,371
--------- ---------
$1,550,879 $1,361,142
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Indebtedness:
Secured debt $ 271,857 $ 261,815
Unsecured notes 240,000 240,000
Unsecured line of credit 103,000 24,000
--------- ---------
614,857 525,815
Construction payables and amounts
due subcontractors 35,065 23,167
Accounts payable 2,545 1,585
Accrued real estate taxes 15,034 14,888
Accrued interest 5,106 4,437
Other accrued expenses 7,029 7,312
Other liabilities 7,807 8,312
Tenant security deposits and prepaid rents 9,348 7,611
--------- ---------
Total liabilities 696,791 593,127
--------- ---------
Minority interest 18,867 13,083
--------- ---------
Shareholders' equity:
Series A preferred shares and paid-in
capital ($.01 par value); 5,000 shares
authorized; 300 shares issued and
outstanding 72,288 72,288
Common shares and paid-in capital
($.01 par value); 150,000 and 45,000
shares authorized; 31,660 and
29,486 shares issued and outstanding 813,625 731,107
Distributions in excess of net income (50,692) (48,463)
--------- ---------
Total shareholders' equity 835,221 754,932
--------- ---------
$1,550,879 $1,361,142
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 2 -
<PAGE>
<TABLE>
<CAPTION>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
-------------------- ------------------
1997 1996 1997 1996
-------- -------- ------- -------
<S> <C> <C> <C> <C>
RENTAL OPERATIONS:
Revenues:
Rental income $49,802 $36,379 $ 98,860 $71,714
Equity in earnings of
unconsolidated companies 1,784 1,345 3,644 2,547
------ ------ ------- ------
51,586 37,724 102,504 74,261
------ ------ ------- ------
Operating expenses:
Rental expenses 8,793 6,684 18,022 13,814
Real estate taxes 4,673 3,299 9,115 6,507
Interest expense 9,349 6,650 17,951 14,617
Depreciation and amortization 10,398 9,111 20,241 16,157
------ ------ ------- ------
33,213 25,744 65,329 51,095
------ ------ ------- ------
Earnings from rental operations 18,373 11,980 37,175 23,166
------ ------ ------- ------
SERVICE OPERATIONS:
Revenues:
Property management, maintenance
and leasing fees 3,214 2,948 5,855 5,662
Construction management and
development fees 1,645 1,836 2,711 3,153
Other income 270 353 502 668
------ ------ ------- ------
5,129 5,137 9,068 9,483
------ ------ ------- ------
Operating expenses:
Payroll 2,545 2,382 4,885 4,617
Maintenance 528 421 916 717
Office and other 344 707 1,093 1,339
------ ------ ------- ------
3,417 3,510 6,894 6,673
------ ------ ------- ------
Earnings from service operations 1,712 1,627 2,174 2,810
------ ------ ------- ------
General and administrative expense (1,574) (1,196) (2,890) (2,263)
------ ------ ------- ------
Operating income 18,511 12,411 36,459 23,713
OTHER INCOME (EXPENSE):
Interest income 177 267 427 613
Earnings from property sales 102 1,618 382 1,604
Other expense (376) (53) (419) (67)
Other minority interest in
earnings of subsidiaries (440) (243) (425) (430)
Minority interest in earnings
of unitholders (1,572) (1,701) (3,330) (3,486)
------ ------ ------- ------
Net income 16,402 12,299 33,094 21,947
Dividends on preferred shares (1,706) - (3,412) -
------ ------ ------- ------
Net income available for common
shares $14,696 $12,299 $ 29,682 $21,947
====== ====== ======= ======
Net income per common share $ .47 $ .42 $ .95 $ .82
====== ====== ======= ======
Weighted average number of
common shares outstanding 31,584 29,144 31,200 26,714
====== ====== ======= ======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 3 -
<PAGE>
<TABLE>
<CAPTION>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS)
(UNAUDITED)
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 33,094 $21,947
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of buildings and
tenant improvements 17,241 13,839
Amortization of deferred financing costs 690 603
Amortization of deferred leasing and other costs 2,310 1,715
Minority interest in earnings 3,755 3,916
Straight-line rental income (1,642) (1,544)
Earnings from property sales (382) (1,604)
Construction contracts, net 13,918 (3,261)
Other accrued revenues and expenses, net 5,524 3,973
Equity in earnings in excess of income
distributions received from unconsolidated
companies (3,046) (468)
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 71,462 39,116
------- ------
Cash flows from investing activities:
Rental property development costs (79,808) (60,452)
Acquisition of rental properties (44,434) (65,426)
Acquisition of land held for development
and infrastructure costs (29,068) (6,832)
Recurring costs:
Tenant improvements (4,259) (3,092)
Leasing commissions (2,431) (1,385)
Building improvements (337) (219)
Other deferred costs and other assets (7,414) 1,814
Proceeds from property sales, net 23,025 35,468
Other distributions received from
unconsolidated companies - 6,935
Net investment in and advances to
unconsolidated companies (30,681) (409)
------- ------
NET CASH USED BY INVESTING ACTIVITIES (175,407) (93,598)
------- ------
Cash flows from financing activities:
Proceeds from issuance of common shares, net 63,684 126,083
Payments on indebtedness including principal
amortization (1,458) (1,030)
Borrowings (repayments) on lines of credit, net 79,000 (45,000)
Distributions to common shareholders (31,911) (26,191)
Distributions to preferred shareholders (3,412) -
Distributions to minority interest (3,900) (4,278)
Deferred financing costs (285) (543)
------- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 101,718 49,041
------- ------
NET DECREASE IN CASH (2,227) (5,441)
------- ------
Cash at beginning of period 5,334 5,727
------- ------
Cash at end of period $ 3,107 $ 286
======= ======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 4 -
<PAGE>
<TABLE>
<CAPTION>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Series A
Preferred Common
Shares Shares Distributions
and Paid-in and Paid-in in Excess of
Capital Capital Net Income Total
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $72,288 $731,107 $(48,463) $754,932
Net income - - 33,094 33,094
Issuance of common shares, net
of underwriting discounts and
offering costs of $3,299 - 63,779 - 63,779
Acquisition of minority
interest - 18,739 - 18,739
Distributions to common
shareholders ($1.02 per
common share) - - (31,911) (31,911)
Distributions to preferred
shareholders - - (3,412) (3,412)
------ ------- ------ -------
BALANCE AT JUNE 30, 1997 $72,288 $813,625 $(50,692) $835,221
====== ======= ====== =======
</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"). The Company owns 90.35% of
DRLP at June 30, 1997. The remaining interests in DRLP ("Limited
Partner Units") are exchangeable for shares of the Company's
common stock on a one-for-one basis. The Company periodically
acquires a portion of the minority interest in DRLP through the
issuance of shares of common stock for a like number of Limited
Partner Units. The acquisition of this minority interest is
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. In addition, the Company conducts
operations 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.
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 1.00%. The Company also
has a demand $10 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 $1.7 million and $1.6
million for such services for the six months
- 6 -
<PAGE>
ended June 30, 1997 and 1996, 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. DERIVATIVE FINANCIAL INSTRUMENTS
The Company may enter into derivative financial instruments such
as interest rate swaps and treasury locks in order to
mitigate its interest rate risk on a related financial instrument.
The Company has designated these derivative financial instruments
as hedges and applies deferral accounting as the instrument to be hedged
exposes the Company to interest rate risk and the derivative
financial instrument reduces that exposure. Gains and losses
related to the derivative financial instrument are deferred and
amortized to interest expense over the term of the hedged
instrument.
In April 1997, the Company entered into a Forward Treasury
Lock Agreement in order to hedge its exposure to interest rate
fluctuations on an anticipated $100 million unsecured debt
financing expected to close in the third quarter of 1997. Any
gain or loss under the agreement will be amortized to interest
expense over the term of the financing. Based on the applicable
treasury rates as of June 30, 1997, the amount of loss to be
amortized to interest expense would have been approximately
$2.4 million.
5. SUBSEQUENT EVENTS
On July 24, 1997, the Board of Directors declared a dividend of
$.59 per share of common stock which is payable on August 29,
1997, to common shareholders of record on August 15, 1997.
On July 24, 1997, the Board of Directors declared a dividend
of $.56875 per depositary share of Series A Cumulative Preferred
Shares which is payable on August 29, 1997 to preferred
shareholders of record on August 15, 1997. Each depositary share
represents one-tenth of a share of the Company's 9.10% Series A
Preferred Shares.
On July 11, 1997, the Company issued $150 million of Series
B Cumulative Step-up Redeemable Preferred Shares raising net
proceeds of $146.1 million. These securities are not redeemable
prior to September 30, 2007 and offer a cumulative preferential
distribution of 7.99% through September 2012, and 9.99%
thereafter. On July 24, 1997, the Board of Directors declared a
dividend of $.88778 per depositary share on the Series B
Cumulative Step-up Redeemable Preferred Shares. The dividend is
payable on September 30, 1997 to preferred shareholders of record
on September 16, 1997 and is applicable to the period beginning
July 11, 1997 and ending September 30, 1997. Each depositary
share represents one-tenth of a share of the Company's 7.99%
Series B Preferred Shares.
On August 7, 1997, the Company announced that its Board of Directors
declared a 2-for-1 stock split in the form of a 100% stock dividend on its
common stock. The stock dividend will be payable August 25, 1997 to
shareholders of record on August 18, 1997.
- 7 -
<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 June 30,
1997, the related condensed consolidated statements of operations
for the three and six months ended June 30, 1997 and 1996, the
related condensed consolidated statements of cash flows for the
six months ended June 30, 1997 and 1996, and the related
condensed consolidated statement of shareholders' equity for the
six months ended June 30, 1997. 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,
1996, 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 29, 1997, 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, 1996 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
July 31, 1997
- 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 of 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 95.71% at
June 30, 1997. 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 June 30, 1997 and 1996
(in thousands, except percentages):
<TABLE>
<CAPTION>
Total Percent of
Square Feet Total Square Feet Percent Occupied
---------------- ----------------- ----------------
Type 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL
Service Centers 3,051 2,971 9.71% 12.80% 94.93% 93.62%
Bulk 18,702 12,926 59.55 55.67 95.64% 90.50%
OFFICE
Suburban 6,875 4,684 21.89 20.17 96.86% 97.12%
CBD 699 699 2.22 3.01 91.09% 81.29%
Medical 369 333 1.18 1.43 95.79% 90.26%
RETAIL 1,710 1,606 5.45 6.92 95.15% 92.98%
------ ------ ------ ------
Total 31,406 23,219 100.00% 100.00% 95.71% 92.13%
====== ====== ======= =======
</TABLE>
Management expects occupancy of the in-service property portfolio to
remain stable because (i) only 5.5% and 10.8% of the Company's
occupied square footage is subject to leases expiring in the remainder
of 1997 and in 1998, respectively, and (ii) the Company's renewal
percentage averaged 80%, 65% and 73% in 1996, 1995 and 1994,
respectively.
- 9 -
<PAGE>
The following table reflects the Company's in-service portfolio lease
expiration schedule as of June 30, 1997 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 Portfolio
------------------- ---------------- ---------------- -----------------
Year of Sq. Contractual Sq. Contractual Sq. Contractual Sq. Contractual
Exp. Ft. Rent Ft. Rent Ft. Rent Ft. Rent
- ------- ------ ----------- ---- ----------- ---- ----------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1,334 $ 5,285 299 $ 3,111 25 $ 277 1,658 $ 8,673
1998 2,357 9,029 769 8,348 111 1,182 3,237 18,559
1999 2,217 9,568 1,036 11,164 117 1,191 3,370 21,923
2000 2,112 8,862 788 9,513 107 1,290 3,007 19,665
2001 2,644 10,248 874 9,688 88 1,061 3,606 20,997
2002 2,604 9,161 1,002 10,787 157 1,669 3,763 21,617
2003 301 1,816 249 2,849 40 342 590 5,007
2004 934 3,810 213 2,609 13 125 1,160 6,544
2005 1,440 4,586 698 9,736 177 1,507 2,315 15,829
2006 2,284 7,141 509 8,078 5 67 2,798 15,286
2007 and
There-
after 2,555 7,878 1,213 15,856 787 6,760 4,555 30,494
------ ------ ----- ------ ----- ------ ------ -------
Total
Leased 20,782 $77,384 7,650 $91,739 1,627 $15,471 30,059 $184,594
====== ====== ===== ====== ===== ====== ====== =======
Total
Portfolio
Sq.Ft. 21,753 7,943 1,710 31,406
====== ===== ===== ======
Annualized
net effective
rent per
sq.ft. $ 3.72 $ 11.99 $ 9.51 $ 6.14
====== ====== ====== =======
</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 4.1 million square feet of
properties under development at June 30, 1997 over the next five
quarters. The 4.1 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>
3rd Quarter 1997 1,329 65% $ 54,840 11.3%
4th Quarter 1997 1,717 37% 77,353 11.5%
1st Quarter 1998 699 95% 25,086 11.3%
Thereafter 352 27% 38,151 11.9%
----- -------
4,097 55% $195,430 11.5%
===== =======
</TABLE>
- 10 -
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Following is a summary of the Company's operating results and property
statistics for the three and six months ended June 30, 1997 and 1996
(in thousands, except number of properties and per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Rental Operations revenue $51,586 $37,724 $102,504 $74,261
Service Operations revenue 5,129 5,137 9,068 9,483
Earnings from Rental Operations 18,373 11,980 37,175 23,166
Earnings from Service Operations 1,712 1,627 2,174 2,810
Operating income 18,511 12,411 36,459 23,713
Net income available for
common shares $14,696 $12,299 $29,682 $21,947
Weighted average common
shares outstanding 31,584 29,144 31,200 26,714
Net income per common share $ .47 $ .42 $ .95 $ .82
Number of in-service properties
at end of period 262 219 262 219
In-service square footage at
end of period 31,406 23,219 31,406 23,219
Under development square
footage at end of period 4,097 3,400 4,097 3,400
</TABLE>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 TO THREE MONTHS ENDED JUNE
30, 1996
- -------------------------------------------------------------------------
Rental Operations
- -----------------
The Company increased its in-service portfolio of rental properties
from 219 properties comprising 23.2 million square feet at June
30, 1996 to 262 properties comprising 31.4 million square feet at
June 30, 1997 through the acquisition of 28 properties totaling
3.6 million square feet and the completion of 19 properties and 4
building expansions totaling 5.1 million square feet developed by
the Company. The Company also disposed of 4 properties totaling
495,000 square feet. These 43 net additional rental properties
primarily account for the $13.9 million increase in revenues from
Rental Operations from 1996 to 1997. The increase from 1996 to
1997 in rental expenses, real estate taxes and depreciation and
amortization expense is also a result of the additional 43 in-
service rental properties.
Interest expense increased by approximately $2.6 million from
$6.7 million for the three months ended June 30, 1996 to $9.3
million for the three months ended June 30, 1997 due to additional
unsecured debt issued in its medium-term note program in the last
two quarters of 1996 to fund the development and acquisition
of additional rental properties.
As a result of the above-mentioned items, earnings from
rental operations increased $6.4 million from $12.0 million for
the three months ended June 30, 1996 to $18.4 million for the three
months ended June 30, 1997.
Service Operations
- ------------------
Service Operation revenues and total operating expenses
remained stable for both the three months ended June 30, 1997 and
1996. As a result, earnings from Service Operations increased slightly
from $1.6 million for the three months ended June 30, 1996 to $1.7
million for the three months ended June 30, 1997.
- 11 -
<PAGE>
General and Administrative Expense
- ---------------------------------
General and administrative expense increased from $1.2 million for
the three months ended June 30, 1996 to $1.6 million for the three
months ended June 30, 1997 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 $267,000 for the three months
ended June 30, 1996 to $177,000 for the three months ended June
30, 1997 primarily as a result of interest income which was earned
on certain escrows during the three months ended June 30, 1996
which were refunded later in 1996. Other expense consists of
costs incurred during the pursuit of various build-to-suit
development projects or the acquisition of real estate assets.
During the three months ended June 30, 1997, approximately
$312,000 of costs were expensed in connection with the decision
to abandon the acquisition of a large real estate portfolio.
Net Income Available for Common Shares
- -------------------------------------
Net income available for common shares for the three months ended
June 30, 1997 was $14.7 million compared to net income available for
common shares of $12.3 million for the three months ended June 30,
1996. This increase results primarily from the operating result
fluctuations in rental and service operations explained above.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO SIX MONTHS ENDED
JUNE 30, 1996
- -------------------------------------------------------------------------
Rental Operations
- -----------------
The Company increased its in-service portfolio of rental properties
from 219 properties comprising 23.2 million square feet at June
30, 1996 to 262 properties comprising 31.4 million square feet at June
30, 1997 through the acquisition of 28 properties totaling 3.6
million square feet and the completion of 19 properties and 4
building expansions totaling 5.1 million square feet developed by
the Company. The Company also disposed of 4 properties totaling
495,000 square feet. These 43 net additional rental properties
primarily account for the $28.2 million increase in revenues from
Rental Operations from 1996 to 1997. The Company also received
a $1.2 million net lease termination payment made by a tenant in
one of the Company's office properties which is included in rental
income for the six months ended June 30, 1997. The increase from
1996 to 1997 in rental expenses, real estate taxes and
depreciation and amortization expense is also a result of the
additional 43 in-service rental properties.
Interest expense increased by approximately $3.3 million from
$14.6 million for the six months ended June 30, 1996 to $17.9
million for the six months ended June 30, 1997 due to additional
unsecured debt issued in its medium-term note program in the last
two quarters of 1996 to fund the development and acquisition
of additional rental properties.
As a result of the above-mentioned items, earnings from
rental operations increased $14.0 million from $23.2 million for
the six months ended June 30, 1996 to $37.2 million for the six
months ended June 30, 1997.
- 12 -
<PAGE>
Service Operations
- ------------------
Service Operation revenues decreased to $9.1 million for the
six months ended June 30, 1997 as compared to $9.5 million for
the six months ended June 30, 1996. This decrease was primarily the
result of a decrease in construction management fees caused by
certain higher profit third-party construction projects that were
in process during the six months ended June 30, 1996 which
resulted in higher revenue margins. Service Operation operating
expenses increased from $6.7 million to $6.9 million for the
six months ended June 30, 1997 as compared to the six months
ended June 30, 1996 primarily as a result of an increase in
operating expenses resulting from the overall growth of the Company.
As a result of the above-mentioned items, earnings from
Service Operations decreased from $2.8 million for the six months
ended June 30, 1996 to $2.2 million for the six months ended June
30, 1997.
General and Administrative Expense
- ---------------------------------
General and administrative expense increased from $2.3 million for
the six months ended June 30, 1996 to $2.9 million for the six
months ended June 30, 1997 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 $613,000 for the six months ended
June 30, 1996 to $427,000 for the six months ended June 30, 1997
primarily as a result of interest income which was earned on
certain escrows during the six months ended June 30, 1996 which were
refunded later in 1996. Other expense consists of the write-off of
costs incurred during the pursuit of various build-to-suit
development projects or the acquisition of real estate assets.
During the six months ended June 30, 1997, approximately
$312,000 of costs were written-off in connection with the
decision to terminate the pursuit of the acquisition of a
large real estate portfolio.
Net Income Available for Common Shares
- --------------------------------------
Net income available for common shares for the six months ended
June 30, 1997 was $29.7 million compared to net income available for
common shares of $21.9 million for the six months ended June 30,
1996. 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 $71.5 million
and $39.1 million for the six months ended June 30, 1997 and
1996, respectively, represents the primary source of liquidity
to fund distributions to shareholders, unitholders and the other
minority interests and to fund recurring costs
- 13 -
<PAGE>
associated with the renovation and re-letting of the
Company's properties. 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 $175.4 million
and $93.6 million for the six months ended June 30, 1997 and
1996, 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. In 1997, $153.3 million was
invested in the development and acquisition of additional rental
properties and the acquisition of land held for development. In
1996, the investment in the development and acquisition of additional rental
properties and land held for development was $132.7 million. During the six
months ended June 30, 1997, the Company invested over $30 million
in a newly formed joint venture with an institutional investor which
allowed the joint venture to purchase a 345,000 square foot
office property in Chicago, Illinois which was over 95% occupied.
Net cash provided by financing activities totaling $101.2 million
and $49.0 million for the six months ended June 30, 1997 and
1996, respectively, represents the source of funds from equity
and debt offerings and borrowings on the lines of credit to fund
the Company's investing activities. Also included in financing
activities are the distribution of funds to shareholders and
minority interests. In 1996, the Company received $126.1 million of net
proceeds from a common equity offering which was used to pay down amounts
outstanding on the unsecured line of credit and to fund current
development and acquisition activity. In January 1997, the
Company received $56.7 million of net proceeds from a common
equity offering which was used to pay down amounts outstanding on
the unsecured line of credit and to fund current development
activity. During the six months ended June 30, 1997, the Company
also received $7.0 million of net proceeds from the issuance of
common stock under its Direct Stock Purchase and Dividend
Reinvestment Plan and the exercise of employee stock options.
The Company has a $150 million unsecured line of credit which matures in
April 1998. In January 1996, the borrowing rate was LIBOR plus
1.625%. In September 1996, the borrowing rate was reduced to
LIBOR plus 1.25%. On March 27, 1997 the borrowing rate was further
reduced to LIBOR plus 1.00%. The Company also has a demand $10
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 Form S-3 Registration
Statements with the Securities and Exchange Commission ("Shelf
Registrations") which had remaining availability as of July 30,
1997 of approximately $760.0 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 debt outstanding at June 30, 1997 consists of notes
totaling $614.9 million with a weighted average interest rate of
7.44% maturing at various dates through 2017. The Company has
$343.0 million of unsecured debt and $271.9 million of secured debt
outstanding at June 30, 1997. Scheduled principal amortization of such debt
totaled $1.5 million for the six months ended June 30, 1997.
- 14 -
<PAGE>
Following is a summary of the scheduled future amortization
and maturities of the Company's indebtedness at June 30, 1997
(in thousands):
<TABLE>
<CAPTION>
Repayments
----------------------------------------- Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
---- ------------ ---------- -------- -----------------
<S> <C> <C> <C> <C>
1997 $ 2,033 $ 10,000 $ 12,033 6.61%
1998 4,574 149,590 154,164 6.84%
1999 5,323 28,470 33,793 6.17%
2000 3,418 44,853 48,271 7.39%
2001 3,137 59,954 63,091 8.71%
2002 3,412 50,000 53,412 7.37%
2003 1,144 68,216 69,360 8.48%
2004 1,239 50,000 51,239 7.15%
2005 1,346 100,000 101,346 7.48%
2006 1,465 - 1,465 7.58%
Thereafter 17,391 9,292 26,683 7.71%
------ ------- -------
Total $44,482 $570,375 $614,857 7.44%
====== ======= =======
</TABLE>
The 1997 maturities consist of the outstanding balance on
the Company's $10 million demand secured line of credit.
The Company intends to pay regular quarterly dividends from net
cash provided by operating activities. A quarterly dividend of
$.59 per Common Share was declared on July 24, 1997 payable on
August 29, 1997 to shareholders of record on August 15, 1997,
which represents an annualized dividend of $2.36 per share. A
quarterly dividend of $.56875 per depositary share of Series A
Preferred Shares was declared on July 24, 1997 which is payable on
August 29, 1997 to preferred shareholders of record on July 24,
1997. On July 24, 1997, the Board of Directors declared a dividend
of $.88778 per depositary share on the Series B Cumulative Step-
up Redeemable Preferred Shares. The dividend is payable on
September 30, 1997 to preferred shareholders of record on September
16, 1997 and is applicable to the period beginning July 11, 1997
and ending September 30, 1997. Each depositary share represents one-
tenth of a share of the Company's 7.99% Series B Preferred
Shares.
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.
The following table reflects the calculation of the Company's FFO
for the three and six months ended June 30 as follows (in thousands):
- 15 -
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income available for
common shares $ 14,696 $12,299 $ 29,682 $21,947
Add back:
Depreciation and amortization 10,052 8,793 19,551 15,554
Share of joint venture
depreciation and amortization 791 443 1,314 883
Earnings from property sales (102) (1,618) (382) (1,604)
Minority interest share of add-backs (1,031) (829) (2,042) (1,869)
------- ------ ------- ------
FUNDS FROM OPERATIONS $ 24,406 $19,088 $ 48,123 $34,911
======= ====== ======= ======
CASH FLOW PROVIDED BY (USED BY):
Operating activities $ 42,489 $24,647 $ 71,462 $39,116
Investing activities (133,944) (13,733) (175,407) (93,598)
Financing activities 81,865 (22,718) 101,718 49,041
</TABLE>
The increase in FFO for the three and six months ended June 30, 1997
compared to the three and six months ended June 30, 1996 results
primarily from the increased in-service rental property portfolio as
discussed above under "Results of Operations."
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.
- 16 -
<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
- --------------------------
When used in this Form 10-Q, the words "believes," "expects,"
"estimates" and similar expressions are intended to identify
forward looking- statements. Such statements are subject
to certain risks and uncertainties which could cause actual
results to differ materially. In particular, among the factors
that could cause actual results to differ materially are continued
qualification as a real estate investment trust, general business and
economic conditions, competition, increases in real estate construction
costs, interest rates, accessibility of debt and equity capital markets
and other risks inherent in the real estate business including tenant
defaults, potential liability relating to environmental matters and
illiquidity of real estate investments. Readers are cautioned not to
place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events. Readers are also advised to
refer to the Company's Form 8-K Report as filed with the U.S.
Securities and Exchange Commission on March 29, 1996 for additional
information concerning these risks.
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)
- 17 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DUKE REALTY INVESTMENTS, INC.
-----------------------------
Registrant
Date: August 8, 1997 /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 -
Exhibit 15
- ----------
The Board of Directors
Duke Realty Investments, Inc.
Gentlemen:
RE: Registration Statements Nos. 33-64567, 33-64659, 33-55727, 333-04695,
333-24289, 333-26833, and 333-26845
With respect to the subject registration statements, we acknowledge
our awareness of the use therein of our report dated July 31,
1997 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
August 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DUKE
REALTY INVESTMENTS, INC. AND SUBSIDIARIES' JUNE 30, 1997 CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 3,107
<SECURITIES> 0
<RECEIVABLES> 27,597
<ALLOWANCES> (1,374)
<INVENTORY> 0
<CURRENT-ASSETS> 24,328
<PP&E> 1,459,765
<DEPRECIATION> (96,491)
<TOTAL-ASSETS> 1,550,879
<CURRENT-LIABILITIES> 81,934
<BONDS> 614,857
0
72,288
<COMMON> 762,993
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,550,879
<SALES> 0
<TOTAL-REVENUES> 112,381
<CGS> 57,581
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,167
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,951
<INCOME-PRETAX> 29,682
<INCOME-TAX> 0
<INCOME-CONTINUING> 29,682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,682
<EPS-PRIMARY> $0.95
<EPS-DILUTED> 0
</TABLE>
