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, 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 November 12, 1997
was 75,289,991 ($.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, 1997 (Unaudited) and December 31, 1996 2
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1997 and 1996
(Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 (Unaudited) 4
Condensed Consolidated Statement of Shareholders' Equity
for the nine months ended September 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
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
------ ------------ ------------
(Unaudited)
<S> <C> <C>
Real estate investments:
Land and improvements $ 176,967 $ 140,391
Buildings and tenant improvements 1,284,726 1,041,040
Construction in progress 101,041 44,060
Land held for development 102,781 65,185
--------- ---------
1,665,515 1,290,676
Accumulated depreciation (103,236) (82,207)
--------- ---------
Net real estate investments 1,562,279 1,208,469
Cash 174,132 5,334
Accounts receivable from tenants,
net of allowance of $395 and $709 3,855 5,260
Straight-line rent receivable, net
of allowance of $841 12,785 10,956
Receivables on construction contracts 17,168 12,859
Investments in unconsolidated companies 102,224 79,362
Deferred financing costs, net of
accumulated amortization of
$4,771 and $3,529 8,187 8,127
Deferred leasing and other costs, net of
accumulated amortization of $11,781
and $8,276 34,987 24,404
Escrow deposits and other assets 10,852 6,371
--------- ---------
$1,926,469 $1,361,142
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Indebtedness:
Secured debt $ 256,239 $ 261,815
Unsecured notes 340,000 240,000
Unsecured line of credit - 24,000
--------- ---------
596,239 525,815
Construction payables and amounts due
subcontractors 40,766 23,167
Accounts payable 2,487 1,585
Accrued real estate taxes 20,020 14,888
Accrued interest 3,969 4,437
Other accrued expenses 8,965 7,312
Other liabilities 8,613 8,312
Tenant security deposits and
prepaid rents 10,815 7,611
--------- ---------
Total liabilities 691,874 593,127
--------- ---------
Minority interest 18,260 13,083
--------- ---------
Shareholders' equity:
Preferred shares and paid-in
capital ($.01 par value), 5,000
shares authorized:
9.10% Series A, 300 shares issued
and outstanding 72,288 72,288
7.99% Series B, 300 shares issued
and outstanding 146,050 -
Common shares and paid-in capital
($.01 par value);
150,000 and 45,000 shares authorized;
74,982 and 58,972 shares issued
and outstanding 1,050,461 731,107
Distributions in excess of net income (52,464) (48,463)
--------- ---------
Total shareholders' equity 1,216,335 754,932
--------- ---------
$1,926,469 $1,361,142
========= =========
</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,
---------------------- --------------------
1997 1996 1997 1996
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
RENTAL OPERATIONS:
Revenues:
Rental income $53,729 $40,001 $152,589 $111,715
Equity in earnings of
unconsolidated companies 2,489 1,447 6,133 3,994
------ ------ ------- -------
56,218 41,448 158,722 115,709
------ ------ ------- -------
Operating expenses:
Rental expenses 10,204 7,282 28,226 21,096
Real estate taxes 5,252 3,451 14,367 9,958
Interest expense 9,271 7,858 27,222 22,475
Depreciation and
amortization 11,037 7,075 31,278 23,232
------ ------ ------- -------
35,764 25,666 101,093 76,761
------ ------ ------- -------
Earnings from rental
operations 20,454 15,782 57,629 38,948
------ ------ ------- -------
SERVICE OPERATIONS:
Revenues:
Property management,
maintenance and leasing
fees 3,315 3,027 9,170 8,689
Construction management and
development fees 2,385 1,744 5,096 4,897
Other income 217 271 719 939
------ ------ ------- -------
5,917 5,042 14,985 14,525
Operating expenses: ------ ------ ------- -------
Payroll 2,542 2,179 7,427 6,796
Maintenance 498 417 1,414 1,134
Office and other 552 619 1,645 1,958
------ ------ ------- -------
3,592 3,215 10,486 9,888
------ ------ ------- -------
Earnings from service
operations 2,325 1,827 4,499 4,637
------ ------ ------- -------
General and administrative
expense (1,457) (1,081) (4,347) (3,344)
------ ------ ------- -------
Operating income 21,322 16,528 57,781 40,241
OTHER INCOME (EXPENSE):
Interest income 795 316 1,222 929
Earnings (loss) from property
sales 1,425 (235) 1,807 1,369
Other expense (220) (46) (639) (113)
Minority interest in earnings
of unitholders (1,691) (1,945) (5,021) (5,431)
Other minority interest in
earnings of subsidiaries (350) (268) (775) (698)
------ ------ ------- -------
Net income 21,281 14,350 54,375 36,297
Dividends on preferred shares (4,370) (872) (7,782) (872)
------ ------ ------- -------
Net income available for
common shares $16,911 $13,478 $ 46,593 $ 35,425
====== ====== ======= =======
Net income per common share $ .26 $ .23 $ .74 $ .64
====== ====== ======= =======
Weighted average number of
common shares outstanding 65,309 58,714 63,380 55,202
====== ====== ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 3 -
<PAGE>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 54,375 $ 36,297
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation of buildings and tenant
improvements 26,707 19,632
Amortization of deferred financing costs 1,025 895
Amortization of deferred leasing and other
costs 3,546 2,705
Minority interest in earnings 5,796 6,129
Straight-line rent adjustment (2,507) (2,362)
Earnings from property sales (1,807) (1,369)
Construction contracts, net 13,290 527
Other accrued revenues and expenses, net 13,614 7,209
Equity in earnings in excess of distributions
received from unconsolidated companies (3,901) (560)
------- -------
Net cash provided by operating activities 110,138 69,103
------- -------
Cash flows from investing activities:
Rental property development costs (142,028) (95,384)
Acquisition of rental properties (213,673) (132,225)
Acquisition of land held for development
and infrastructure costs (58,865) (11,187)
Recurring costs:
Tenant improvements (5,901) (4,333)
Leasing costs (3,614) (2,157)
Building improvements (480) (405)
Other deferred costs and other assets (17,080) (25)
Proceeds from property sales, net 31,741 36,657
Other distributions received from
unconsolidated companies 60,000 6,935
Net investment in and advances to
unconsolidated companies (30,636) (383)
------- -------
Net cash used by investing activities (380,536) (202,507)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common shares, net 300,472 129,160
Proceeds from issuance of preferred shares, net 146,050 72,288
Proceeds from indebtedness 100,000 40,000
Repayments on lines of credit, net (34,000) (26,000)
Repayments on indebtedness including
principal amortization (7,076) (27,410)
Distributions to common shareholders (50,594) (41,147)
Distributions to preferred shareholders (7,782) -
Distributions to minority interest (6,548) (6,584)
Deferred financing costs (1,326) (707)
------- -------
Net cash provided by financing activities 439,196 139,600
------- -------
Net increase in cash 168,798 6,196
------- -------
Cash at beginning of period 5,334 5,727
------- -------
Cash at end of period $174,132 $ 11,923
======= =======
</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, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Series A Series B
Preferred Preferred Common
Shares Shares Shares Distributions
and Paid-in and Paid-in and Paid-in in Excess of
Capital Capital Capital Net Income Total
----------- ----------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C>
Balance at
December 31,
1996 $72,288 - $ 731,107 $(48,463) $ 754,932
Net income - - - 54,375 54,375
Issuance of
common shares,
net of
underwriting
discounts and
related costs
of $13,168 - - 300,615 - 300,615
Issuance of
preferred
shares, net of
underwriting
discounts and
related costs
of $3,950 - 146,050 - - 146,050
Acquisition of
minority
interest - - 18,739 - 18,739
Distributions
to common
shareholders
($.805 per
common share) - - - (50,594) (50,594)
Distributions
to preferred
shareholders - - - (7,782) (7,782)
------ ------- --------- ------ ---------
Balance at
September 30,
1997 $72,288 $146,050 $1,050,461 $(52,464) $1,216,335
====== ======= ========= ====== =========
</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.
Share and per share amounts in the consolidated financial
statements of the Company have been restated to reflect the two-for-
one split of the Company's common stock payable on August 25, 1997
to common shareholders of record on August 18, 1997.
THE COMPANY
The Company's rental operations are conducted through Duke Realty
Limited Partnership ("DRLP"). The Company owns 91.7% of DRLP at
September 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 $200 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 2001 and bears interest
payable monthly at the 30-day London Interbank Offered Rate
("LIBOR") plus .80%. 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%.
- 6 -
<PAGE>
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 $2.4 million and $2.5
million for such services for the nine months ended September 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.
5. SUBSEQUENT EVENTS
On October 23, 1997, the Board of Directors declared a dividend of
$.30 per share of common stock which is payable on November 28,
1997, to common shareholders of record on November 14, 1997.
On October 23, 1997, the Board of Directors declared a dividend of
$.56875 per depositary share of Series A Cumulative Preferred
Shares which is payable on November 28, 1997 to preferred
shareholders of record on November 14, 1997. Each depositary share
represents one-tenth of a share of the Company's 9.10% Series A
Preferred Shares.
On October 23, 1997, the Board of Directors declared a dividend of
$.99875 per depositary share on the Series B Cumulative Step-up
Redeemable Preferred Shares. The dividend is payable on December
31, 1997 to preferred shareholders of record on December 17, 1997.
Each depositary share represents one-tenth of a share of the
Company's 7.99% Series B Preferred Shares.
- 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 September 30, 1997,
the related condensed consolidated statements of operations for the
three and nine months ended September 30, 1997 and 1996, the
related condensed consolidated statements of cash flows for the
nine months ended September 30, 1997 and 1996, and the related
condensed consolidated statement of shareholders' equity for the
nine months ended September 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
October 27, 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 95.1% at September 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 September 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 3,122 3,047 9.1% 11.7% 93.4% 93.9%
Bulk 20,134 14,296 58.8 55.1 94.6% 94.0%
OFFICE
Suburban 8,303 5,815 24.3 22.4 96.8% 95.8%
CBD 699 699 2.0 2.7 94.0% 85.2%
Medical 290 333 0.9 1.3 98.4% 91.6%
RETAIL 1,692 1,766 4.9 6.8 96.3% 95.5%
------ ------ ----- -----
Total 34,240 25,956 100.0% 100.0% 95.1% 94.2%
====== ====== ===== =====
</TABLE>
Management expects occupancy of the in-service property portfolio
to remain stable because (i) only 3.0% and 10.3% 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 September 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 758 $ 3,146 212 $ 2,170 21 $ 239 991 $ 5,555
1998 2,431 9,054 835 9,745 94 1,019 3,360 19,818
1999 2,281 9,775 1,169 12,639 114 1,181 3,564 23,595
2000 2,159 8,973 914 11,322 122 1,461 3,195 21,756
2001 2,644 10,225 1,370 16,022 93 1,100 4,107 27,347
2002 2,964 10,953 1,260 14,118 155 1,669 4,379 26,740
2003 403 2,321 338 3,959 43 381 784 6,661
2004 938 3,832 270 3,309 17 168 1,225 7,309
2005 1,440 4,501 771 10,729 177 1,509 2,388 16,739
2006 1,853 6,298 533 8,340 5 67 2,391 14,705
2007
and
There-
after 4,094 14,523 1,305 17,367 789 6,807 6,188 38,697
------ ------ ----- ------- ----- ------ ------ -------
Total
Leased 21,965 $83,601 8,977 $109,720 1,630 $15,601 32,572 $208,922
====== ====== ===== ======= ===== ====== ====== =======
Total
Portfolio
Sq.
Feet 23,256 9,292 1,692 34,240
====== ===== ===== ======
Annualized
Net
Effective
Rent per
Sq. Foot $ 3.81 $ 12.22 $ 9.57 $ 6.41
====== ======= ====== =======
</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 4.5 million square feet of properties under
development at September 30, 1997 over the next four quarters. The 4.5
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 Anticipated
In-Service Square Percent Project Stabilized
Date Feet Leased Costs Return
---------------- ------ ------- ------- -----------
<S> <C> <C> <C> <C>
4th Quarter 1997 1,557 50% $ 81,142 11.7%
1st Quarter 1998 1,036 82% 38,973 11.4%
2nd Quarter 1998 1,548 54% 78,467 11.5%
Thereafter 349 55% 32,825 11.5%
----- -------
4,490 59% $231,407 11.6%
===== =======
</TABLE>
- 10 -
<PAGE>
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, 1997 and 1996 (in thousands, except number of properties and
per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Rental Operations revenue $56,218 $41,448 $158,722 $115,709
Service Operations revenue 5,917 5,042 14,985 14,525
Earnings from Rental
Operations 20,454 15,782 57,629 38,948
Earnings from Service
Operations 2,325 1,827 4,499 4,637
Operating income 21,322 16,528 57,781 40,241
Net income available
for common shares $16,911 $13,478 $46,593 $ 35,425
Weighted average common
shares outstanding 65,309 58,714 63,380 55,202
Net income per common
share $ .26 $ .23 $ .74 $ .64
Number of in-service
properties at end
of period 278 233 278 233
In-service square
footage at end
of period 34,240 25,956 34,240 25,956
Under development
square footage
at end of period 4,490 2,980 4,490 2,980
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THREE MONTHS ENDED
-------------------------------------------------------------------------
SEPTEMBER 30, 1996
------------------
Rental Operations
-----------------
The Company increased its in-service portfolio of rental properties
from 233 properties comprising 25.9 million square feet at
September 30, 1996 to 278 properties comprising 34.2 million square
feet at September 30, 1997 through the acquisition of 32 properties
totaling 4.2 million square feet and the completion of 20
properties and 2 building expansions totaling 4.7 million square
feet developed by the Company. The Company also disposed of 7
properties totaling 592,000 square feet. These 45 net additional
rental properties primarily account for the $14.8 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 45 in-service rental properties.
Interest expense increased by approximately $1.4 million from $7.9
million for the three months ended September 30, 1996 to $9.3
million for the three months ended September 30, 1997 due to
additional unsecured debt issued in the Company's medium-term note
program in the last quarter of 1996 to fund the development and
acquisition of additional rental properties as well as $100 million
of unsecured debt issued in the third quarter to fund 1997
development and acquisition activity.
As a result of the above-mentioned items, earnings from rental
operations increased $4.6 million from $15.8 million for the three
months ended September 30, 1996 to $20.4 million for the three
months ended September 30, 1997.
Service Operations
------------------
Service Operation revenues increased by $900,000 from $5.0 million
for the three months ended September 30, 1996 to $5.9 million for
the three months ended September 30, 1997 due mainly to increased
construction fee revenue related to increased construction volume.
As a result, earnings from
- 11 -
<PAGE>
Service Operations increased slightly from $1.8 million for the
three months ended September 30, 1996 to $2.3 million for the three
months ended September 30, 1997.
General and Administrative Expense
----------------------------------
General and administrative expense increased from $1.1 million for
the three months ended September 30, 1996 to $1.5 million for the
three months ended September 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 increased from $316,000 for the three months ended
September 30, 1996 to $795,000 for the three months ended September
30, 1997 primarily as a result of interest income which was earned
on excess cash balances resulting from the September 1997 Common
Stock offerings. 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
September 30, 1997, approximately $174,000 of costs were expensed
in connection with the decision to terminate the pursuit of the
acquisition of two large real estate portfolios.
Net Income Available for Common Shares
--------------------------------------
Net income available for common shares for the three months ended
September 30, 1997 was $16.9 million compared to net income
available for common shares of $13.5 million for the three months
ended September 30, 1996. This increase results primarily from the
operating result fluctuations in rental and service operations
explained above.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
----------------------------------------------------------------------
SEPTEMBER 30, 1996
------------------
Rental Operations
-----------------
The Company increased its in-service portfolio of rental properties
from 233 properties comprising 25.9 million square feet at
September 30, 1996 to 278 properties comprising 34.2 million square
feet at September 30, 1997 through the acquisition of 32 properties
totaling 4.2 million square feet and the completion of 20
properties and 2 building expansions totaling 4.7 million square
feet developed by the Company. The Company also disposed of 7
properties totaling 592,000 square feet. These 45 net additional
rental properties primarily account for the $43.0 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 45 in-service
rental properties.
- 12 -
<PAGE>
Interest expense increased by approximately $4.7 million from $22.5
million for the nine months ended September 30, 1996 to $27.2
million for the nine months ended September 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 well as $100 million
of unsecured debt issued in the third quarter to fund 1997
development and acquisitions.
As a result of the above-mentioned items, earnings from rental
operations increased $18.7 million from $38.9 million for the nine
months ended September 30, 1996 to $57.6 million for the nine
months ended September 30, 1997.
Service Operations
------------------
Service Operation revenues increased to $15.0 million for the nine
months ended September 30, 1997 as compared to $14.5 million for
the nine months ended September 30, 1996. This increase was
primarily the result of an increase in third-party maintenance fee
revenue. Service Operation operating expenses increased from $9.9
million to $10.5 million for the nine months ended September 30, 1997
as compared to the nine months ended September 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 slightly from $4.6 million for the nine months
ended September 30, 1996 to $4.5 million for the nine months ended
September 30, 1997.
General and Administrative Expense
----------------------------------
General and administrative expense increased from $3.3 million for
the nine months ended September 30, 1996 to $4.3 million for the
nine months ended September 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 increased from $929,000 for the nine months ended
September 30, 1996 to $1.2 million for the nine months ended
September 30, 1997 primarily as a result of interest income which
was earned on excess cash balances resulting from the September
1997 Common Stock offerings. 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 nine months ended September 30, 1997, approximately
$486,000 of costs were expensed in connection with the decision to
terminate the pursuit of the acquisition of two large real estate
portfolios.
Net Income Available for Common Shares
--------------------------------------
Net income available for common shares for the nine months ended
September 30, 1997 was $46.6 million compared to net income
available for common shares of $35.4 million for the nine months
- 13 -
<PAGE>
ended September 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 $110.1 million
and $69.1 million for the nine months ended September 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 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 $380.5 million and
$202.5 million for the nine months ended September 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, $414.6 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
$238.8 million. During the nine months ended September 30, 1997,
the Company contributed properties to an existing joint venture at
an agreed value of approximately $60 million. The Company recorded
its investment in the joint venture related to this additional
contribution at its carrying value of $48.6 million. The joint
venture partner contributed cash to the venture equal to 49.9% of
the agreed value of the properties contributed, $30.0 million, and
this cash was distributed to the Company and reduced its recorded
investment in the venture. This same joint venture received $60
million of proceeds from a mortgage loan financing and distributed
50.1% of the proceeds to the Company. During the nine months ended
September 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 $439.2 million
and $139.6 million for the nine months ended September 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 $129.2 million
of net proceeds from common equity offerings which was used to pay
down amounts outstanding on the unsecured line of credit and to
fund current development and acquisition activity. In 1997, the
Company received $300.5 million of net proceeds from common equity
offerings which was used to pay down amounts outstanding on the
unsecured line of credit and to fund current development activity.
In the third quarter of 1997, the Company received $146.1 million
of net proceeds from the offering of 7.99% Series B Step-Up
Redeemable Preferred Shares and $100 million from the offering of
6.95% Pass-Through Asset Trust Securities due August 2004.
- 14 -
<PAGE>
The Company has a $200 million unsecured line of credit which matures
in April 2001. This facility bears interest payable at the 30-day LIBOR
plus .80%. The Company has been able to reduce the borrowing rate on
this line of credit from LIBOR plus 1.625% at December 31, 1996 to
the current interest rate of LIBOR plus .80%. 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 Form S-3 Registration Statements
with the Securities and Exchange Commission ("Shelf Registrations")
which had remaining availability as of September 30, 1997 of
approximately $514.0 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 September 30, 1997 consists of notes
totaling $596.2 million with a weighted average interest rate of
7.57% maturing at various dates through 2017. The Company has
$340.0 million of unsecured debt and $256.2 million of secured debt
outstanding at September 30, 1997. Scheduled principal amortization
of such debt totaled $2.6 million for the nine months ended
September 30, 1997.
Following is a summary of the scheduled future amortization and
maturities of the Company's indebtedness at September 30, 1997 (in
thousands):
</TABLE>
<TABLE>
<CAPTION>
Repayments
--------------------------------------- Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
---- ------------ ---------- --------- -----------------
<S> <C> <C> <C> <C>
1997 $ 915 $ - $ 915 7.77%
1998 4,574 42,090 46,664 7.15%
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 1,239 150,000 151,239 7.28%
2005 1,346 100,000 101,346 7.48%
2006 1,465 - 1,465 7.58%
Thereafter 17,391 9,292 26,683 7.70%
------ ------- -------
Total $43,364 $552,875 $596,239 7.57%
====== ======= =======
</TABLE>
Share and per share amounts in the consolidated financial
statements of the Company have been restated to reflect the two-for-
one split of the Company's common stock payable on August 25, 1997
to common shareholders of record on August 18, 1997.
The Company intends to pay regular quarterly dividends from net
cash provided by operating activities. A quarterly dividend of $.30
per Common Share was declared on October 23, 1997 payable on
November 28, 1997 to shareholders of record on November 14, 1997,
which represents an annualized dividend of $1.20 per share. A
quarterly dividend of $.56875 per depositary share of Series A
Preferred Shares was declared on October 23, 1997 which is payable
on November 28, 1997 to preferred shareholders of record on
November 14, 1997. On October 23, 1997, the Board of Directors
declared a dividend of $.99875 per depositary share on the Series B
Cumulative Step-Up Redeemable Preferred Shares. The dividend is
payable on December 31, 1997 to preferred shareholders of record on
December 17, 1997. Each depositary share represents one-tenth of a
share of the Company's 7.99% Series B Preferred Shares.
- 15 -
<PAGE>
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 nine months ended September 30 as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income available for
common shares $16,911 $13,478 $46,593 $35,425
Add back:
Depreciation and
amortization 10,702 6,783 30,253 22,337
Share of joint venture
depreciation and
amortization 757 484 2,071 1,367
(Earnings) loss from
property sales (1,425) 235 (1,807) (1,369)
Minority interest share of
add-backs (938) (778) (2,980) (2,647)
------ ------ ------ ------
Funds From Operations $26,007 $20,202 $74,130 $55,113
====== ====== ====== ======
Cash flow provided by
(used by):
Operating activities $ 38,676 $ 29,987 $110,138 $ 69,103
Investing activities (205,129) (108,909) (380,536) (202,507)
Financing activities 337,478 90,559 439,196 139,600
</TABLE>
The increase in FFO for the three and nine months ended September
30, 1997 compared to the three and nine months ended September 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 -
<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 13, 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
------------------------------
Executive Vice President and
Chief Administrative Officer
(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
October 27, 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
November 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES SEPTEMBER 30, 1997,
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-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 174,132
<SECURITIES> 0
<RECEIVABLES> 35,044
<ALLOWANCES> (1,236)
<INVENTORY> 0
<CURRENT-ASSETS> 206,007
<PP&E> 1,665,515
<DEPRECIATION> (103,236)
<TOTAL-ASSETS> 1,926,469
<CURRENT-LIABILITIES> 95,635
<BONDS> 0
0
218,338
<COMMON> 997,997
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,926,469
<SALES> 0
<TOTAL-REVENUES> 176,736
<CGS> 89,343
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,578
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,222
<INCOME-PRETAX> 46,593
<INCOME-TAX> 0
<INCOME-CONTINUING> 46,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,593
<EPS-PRIMARY> $.74
<EPS-DILUTED> 0
</TABLE>
