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 March 31, 1998
--------------
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 May 5, 1998 was 80,698,881
($.01 par value).
<PAGE>
DUKE REALTY INVESTMENTS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
- - ----------------------------- ----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
March 31, 1998 (Unaudited) and December 31, 1997 2
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1997 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statement of Shareholders' Equity
for the three months ended March 31, 1998 (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 9-14
PART II - OTHER INFORMATION
- - ---------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
<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>
MARCH 31, December 31,
ASSETS 1998 1997
------ --------- -------------
(Unaudited)
<S> <C> <C>
Real estate investments:
Land and improvements $ 243,417 $ 231,614
Buildings and tenant improvements 1,695,001 1,591,604
Construction in progress 100,203 107,242
Investments in unconsolidated companies 115,909 106,450
Land held for development 138,889 139,817
---------- ----------
2,293,419 2,176,727
Accumulated depreciation (131,629) (116,264)
---------- ----------
Net real estate investments 2,161,790 2,060,463
Cash 29,169 10,353
Accounts receivable from tenants, net of
allowance of $528 and $420 5,603 5,932
Straight-line rent receivable,
net of allowance of $841 16,033 14,746
Receivables on construction contracts 20,724 22,700
Deferred financing costs, net of accumulated
amortization of $9,763 and $9,101 10,562 12,386
Deferred leasing and other costs, net of
accumulated amortization of $10,732 and $9,251 37,588 34,369
Escrow deposits and other assets 17,384 15,265
--------- ---------
$2,298,853 $2,176,214
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Indebtedness:
Secured debt $ 363,898 $ 367,119
Unsecured notes 440,000 340,000
Unsecured line of credit - 13,000
--------- ---------
803,898 720,119
Construction payables and amounts
due subcontractors 33,675 40,786
Accounts payable 1,315 1,342
Accrued expenses:
Real estate taxes 27,997 25,203
Interest 4,372 6,883
Other 11,117 13,848
Other liabilities 14,479 11,720
Tenant security deposits and prepaid rents 17,050 14,268
--------- ---------
Total liabilities 913,903 834,169
--------- ---------
Minority interest 107,773 107,364
--------- ---------
Shareholders' equity:
Preferred shares and paid-in capital
($.01 par value); 5,000 shares authorized:
9.10% Series A, 300 shares issued and
outstanding (liquidation preference of
$75,000) 72,288 72,288
7.99% Series B, 300 shares issued and
outstanding (liquidation preference of
$150,000) 146,050 146,050
Common shares and paid-in capital
($.01 par value); 150,000 shares
authorized; 78,068 and 76,065 shares
issued and outstanding 1,115,103 1,071,990
Distributions in excess of net income (56,264) (55,647)
--------- ---------
Total shareholders' equity 1,277,177 1,234,681
--------- ---------
$2,298,853 $2,176,214
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 2 -
<PAGE>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
RENTAL OPERATIONS:
Revenues:
Rental income $76,835 $49,058
Equity in earnings of
unconsolidated companies 2,841 1,860
------ ------
79,676 50,918
------ ------
Operating expenses:
Rental expenses 13,845 9,229
Real estate taxes 7,834 4,442
Interest expense 12,879 8,946
Depreciation and amortization 14,260 9,499
------ ------
48,818 32,116
------ ------
Earnings from rental operations 30,858 18,802
------ ------
SERVICE OPERATIONS:
Revenues:
Property management, maintenance and
leasing fees 3,037 2,641
Construction management and
development fees 1,559 1,066
Other income 304 232
------ ------
4,900 3,939
------ ------
Operating expenses:
Payroll 2,883 2,340
Maintenance 604 388
Office and other 518 749
------ ------
4,005 3,477
------ ------
Earnings from service operations 895 462
------ ------
General and administrative expense (2,340) (1,316)
------ ------
Operating income 29,413 17,948
OTHER INCOME (EXPENSE):
Interest income 189 250
Earnings from property sales 586 280
Other expense (31) (43)
Minority interest in earnings of
unitholders (3,192) (1,758)
Other minority interest in earnings
of subsidiaries - 15
------ ------
Net income 26,965 16,692
Dividends on preferred shares (4,703) (1,706)
------ ------
Net income available for common shares $22,262 $14,986
====== ======
Net income per common share:
Basic $ .29 $ .24
====== ======
Diluted $ .29 $ .24
====== ======
Weighted average number of common
shares outstanding 76,655 61,624
====== ======
Weighted average number of common and
dilutive potential common shares 88,596 69,579
====== ======
</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 THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,965 $ 16,692
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of buildings and tenant
improvements 12,650 8,386
Amortization of deferred financing costs 354 344
Amortization of deferred leasing and other costs 1,610 1,113
Minority interest in earnings 3,192 1,743
Straight-line rental income (1,416) (765)
Earnings from property sales (586) (280)
Construction contracts, net (5,135) 3,119
Other accrued revenues and expenses, net 3,502 161
Equity in earnings in excess of distributions
received from unconsolidated companies (2,085) (1,540)
------- -------
Net cash provided by operating activities 39,051 28,973
------- -------
Cash flows from investing activities:
Rental property development costs (48,522) (29,168)
Acquisition of real estate investments (36,573) -
Acquisition of land held for development
and infrastructure costs (8,310) (5,634)
Recurring costs:
Tenant improvements (2,106) (2,168)
Leasing commissions (1,197) (1,295)
Building improvements (692) (116)
Other deferred leasing costs (3,370) (4,116)
Other deferred costs and other assets (2,586) (1,315)
Proceeds from property sales, net 1,177 1,280
Net investment in and advances to unconsolidated
companies (6,870) 1,369
------- -------
Net cash used by investing activities (109,049) (41,163)
Cash flows from financing activities:
Proceeds from issuance of common shares, net 42,560 59,390
Payments on indebtedness including principal
amortization (4,021) (759)
Proceeds from indebtedness 100,000 -
Repayments on lines of credit, net (20,000) (19,000)
Distributions to common shareholders (22,879) (15,807)
Distributions to preferred shareholders (4,703) (1,706)
Distributions to minority interest (3,490) (2,221)
Deferred financing costs 1,347 (44)
------- -------
Net cash provided by financing activities 88,814 19,853
------- -------
Net increase in cash 18,816 7,663
------- -------
Cash and cash equivalents at beginning of period 10,353 5,334
------- -------
Cash and cash equivalents at end of period $ 29,169 $ 12,997
======= =======
</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 THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Common Shares Distri-
Shares Shares butions
and Paid-in and Paid-in in Excess
Capital Capital of Net
Income Total
----------- ------------- ---------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $218,338 $1,071,990 $(55,647) $1,234,681
Issuance of common shares,
net of underwriting
discounts and offering
costs of $1,933 - 43,113 - 43,113
Net income - - 26,965 26,965
Distributions to common
shareholders ($.30 per
common share) - - (22,879) (22,879)
Distributions to preferred
shareholders - - (4,703) (4,703)
------- --------- ------ ---------
Balance at March 31, 1998 $218,338 $1,115,103 $(56,264) $1,277,177
======= ========= ====== =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 5 -
<PAGE>
DUKE REALTY INVESTMENTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. FINANCIAL STATEMENTS
The interim condensed consolidated financial statements included herein
have been prepared by Duke Realty Investments, Inc. (the "Company")
without audit. The statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and the instructions for Form 10-Q and Rule 10 - 01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. These financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report to Shareholders.
THE COMPANY
The Company's rental operations are conducted through Duke Realty
Limited Partnership ("DRLP"), of which the Company owns 87.6% of DRLP
at March 31, 1998. The remaining interests in DRLP ("Limited Partner
Units") are exchangeable for shares of the Company's common stock on a
one-for-one basis. 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 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 at the 30-day LIBOR rate plus .65%.
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 $600,000 and $750,000 for such services for the three months
ended March 31, 1998 and 1997, 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.
- 6 -
<PAGE>
4. NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income
available for common shares by the weighted average number of common
shares outstanding for the period. Diluted net income per share is
computed by dividing the sum of net income available for common shares
and minority interest in earnings of unitholders, by the sum of the
weighted average number of common shares and dilutive potential common
shares outstanding for the period.
The following table reconciles the components of basic and diluted net
income per share as of March 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Basic net income available for
common shares $22,262 $14,986
Minority interest in earnings of
unitholders 3,192 1,758
------ ------
Diluted net income available for
common shares and dilutive
potential shares $25,454 $16,744
====== ======
Weighted average number of common
shares outstanding 76,655 61,624
Weighted average partnership
units outstanding 10,995 7,132
Dilutive shares for long-term
compensation plans 946 823
------ ------
Weighted average number of common
shares and dilutive potential
common shares 88,596 69,579
====== ======
</TABLE>
5. SUBSEQUENT EVENTS
On April 23, 1998, the Board of Directors declared a dividend of $.30
per share of common stock which is payable on May 29, 1998, to common
shareholders of record on May 13, 1998.
On April 23, 1998, the Board of Directors declared a dividend of
$.56875 per depositary share on the Series A Cumulative Redeemable
Preferred Shares which is payable on May 29, 1998 to preferred
shareholders of record on May 15, 1998. Each depositary share
represents one-tenth of a share of the Company's 9.10% Series A
preferred shares.
On April 23, 1998, 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 June 30, 1998
to shareholders of record on June 17, 1998. 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 March 31, 1998, the
related condensed consolidated statements of operations and cash flows
for the three months ended March 31, 1998 and 1997, and the related
condensed consolidated statement of shareholders' equity for the three
months ended March 31, 1998. 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, 1997, 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 28, 1998, 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, 1997 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
May 5, 1998
- 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 94% the last two years and was at 94% at March
31, 1998. The Company expects to continue to maintain its overall
occupancy levels at comparable levels and also expects to be able to
increase rental rates as leases are renewed or new leases are
executed. This stable occupancy as well as increasing rental rates
should improve the Company's results of operations from its in-service
properties. The Company's strategy for continued growth also includes
developing and acquiring additional rental properties in its primary
markets and expanding into other attractive Midwestern markets.
The following table sets forth information regarding the Company's in-
service portfolio of rental properties as of March 31, 1998 and 1997
(in thousands, except percentages):
<TABLE>
<CAPTION>
Total Percent of
Square Feet Total Square Feet Percent Occupied
------------- ----------------- ----------------
Type 1998 1997 1998 1997 1998 1997
------------------ ----- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL
Service Centers 3,761 3,051 8.59% 11.03% 91.71% 93.04%
Bulk 26,878 15,531 61.37% 56.15% 92.88% 95.95%
OFFICE
Suburban 10,129 6,319 23.13% 22.84% 96.30% 96.53%
CBD 699 699 1.60% 2.53% 95.20% 87.55%
Medical 289 369 .65% 1.34% 98.38% 95.18%
RETAIL 2,041 1,690 4.66% 6.11% 95.30% 94.52%
------ ------ ------- ------- ------ ------
Total 43,797 27,659 100.00% 100.00% 93.75% 95.45%
====== ====== ======= ======= ====== ======
</TABLE>
Management expects occupancy of the in-service property portfolio to remain
stable because (i) only 8.6% and 12.3% of the Company's occupied square
footage is subject to leases expiring in the remainder of 1998 and in 1999,
respectively, and (ii) the Company's renewal percentage averaged 81%, 80%
and 65% in 1997, 1996 and 1995, respectively.
- 9 -
<PAGE>
The following table reflects the Company's in-service portfolio lease
expiration schedule as of March 31, 1998 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
----------------- --------------- --------------- -------------------
Contrac- Contrac- Contrac- Contrac-
Yr.of Square tual Square tual Square tual Square tual
Exp. Foot Rent Foot Rent Feet Rent Foot Rent
- - ----- ----- ------- ------ -------- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 2,734 $ 10,641 759 $ 8,393 29 $ 345 3,522 $ 19,379
1999 3,558 15,034 1,365 15,153 119 1,254 5,042 31,441
2000 2,909 12,358 1,011 13,167 128 1,555 4,048 27,080
2001 3,162 12,901 1,473 17,798 91 1,084 4,726 31,783
2002 3,795 15,399 1,480 16,986 157 1,740 5,432 34,125
2003 1,997 8,125 696 8,567 87 925 2,780 17,617
2004 842 3,872 302 3,746 17 178 1,161 7,796
2005 1,814 5,824 955 13,241 181 1,562 2,950 20,627
2006 2,052 7,212 647 9,837 5 67 2,704 17,116
2007 2,319 7,160 362 4,635 76 760 2,757 12,555
2008
and
There-
after 3,230 11,746 1,654 22,785 1,055 8,512 5,939 43,043
------ ------- ------ ------- ----- ------ ------ -------
Total
Leased 28,412 $110,272 10,704 $134,308 1,945 $17,982 41,061 $262,562
====== ======= ====== ======= ===== ====== ====== =======
Total
Port-
folio
Sq.Ft. 30,639 11,117 2,041 43,797
====== ====== ===== ======
Annualized
net effec-
tive rent
per sq. ft. $ 3.88 $ 12.55 $ 9.25 $ 6.39
======= ======= ====== =======
</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 4.3 million square feet of properties under development at March 31,
1998 over the next four quarters. The 4.3 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>
2nd Quarter 1998 2,218 69% $ 70,045 11.2%
3rd Quarter 1998 442 41% 39,541 12.0%
4th Quarter 1998 811 15% 91,231 11.5%
1st Quarter 1999 823 85% 110,402 10.0%
----- -------
4,294 59% $311,219 11.0%
===== =======
</TABLE>
RESULTS OF OPERATIONS
---------------------
Following is a summary of the Company's operating results and property
statistics for the three months ended March 31, 1998 and 1997 (in
thousands, except number of properties and per share amounts):
- 10 -
<PAGE>
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Rental Operations revenue $79,676 $50,918
Service Operations revenue 4,900 3,939
Earnings from Rental Operations 30,858 18,802
Earnings from Service Operations 895 462
Operating income 29,413 17,948
Net income available for common
shares $22,262 $14,986
Weighted average common shares
outstanding 76,655 61,624
Weighted average common and
dilutive potential common shares 88,596 69,579
Basic income per common share $ .29 $ .24
Diluted income per common share $ .29 $ .24
Number of in-service properties
at end of period 381 250
In-service square footage at end
of period 43,797 27,659
Under development square footage
at end of period 4,294 5,079
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998
TO THREE MONTHS ENDED MARCH 31, 1997
- - ------------------------------------------------
Rental Operations
-----------------
The Company increased its in-service portfolio of rental properties
from 250 properties comprising 27.7 million square feet at March 31,
1997 to 381 properties comprising 43.8 million square feet at March
31, 1998 through the acquisition of 100 properties totaling 9.5
million square feet and the completion of 36 properties and two
building expansions totaling 7.1 million square feet developed by the
Company. The Company also disposed of 5 properties totaling
approximately 400,000 square feet. These 131 net additional rental
properties primarily account for the $28.8 million increase in
revenues from Rental Operations from 1997 to 1998. The Company also
received $3.4 million of net lease termination payments which is
included in rental income for the three months ended March 31, 1998.
Included in rental income for the three months ended March 31, 1997 is
$1.2 million of net lease termination payments. The increase from 1997
to 1998 in rental expenses, real estate taxes and depreciation and
amortization expense is also a result of the additional 131 in-service
rental properties.
Interest expense increased by approximately $4.0 million from $8.9
million for the three months ended March 31, 1997 to $12.9 million for
the three months ended March 31, 1998 due to additional unsecured debt
issued in the Company's medium-term note program in the third quarter
of 1997 to fund the development and acquisition of additional rental
properties.
As a result of the above-mentioned items, earnings from rental
operations increased $12.1 million from $18.8 million for the three
months ended March 31, 1997 to $30.9 million for the three months
ended March 31, 1998.
Service Operations
------------------
Service Operations revenues increased to $4.9 million for the three
months ended March 31, 1998 as compared to $3.9 million for the three
months ended March 31, 1997 primarily as a result of increases in
construction management fee revenue because of an increase in third-
party construction volume. Service Operations operating expenses
increased from $3.5 million to $4.0 million for the three months
- 11 -
<PAGE>
ended March 31, 1998 as compared to the three months ended March 31,
1997 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 increased from $462,000 for the three months ended March
31, 1997 to $895,000 for the three months ended March 31, 1998.
General and Administrative Expense
----------------------------------
General and administrative expense increased from $1.3 million for the
three months ended March 31, 1997 to $2.3 million for the three months
ended March 31, 1998 primarily as a result of the growth in revenues
and net income of the Company.
Other Income (Expense)
---------------------
Interest income decreased from $250,000 for the three months ended
March 31, 1997 to $189,000 for the three months ended March 31, 1998
primarily as a result of interest income which was earned on short-
term investments during the three months ended March 31, 1997. Other
expense consists of costs incurred in pursuit of unsuccessful
development on acquisition opportunities.
Net Income Available for Common Shares
--------------------------------------
Net income available for common shares for the three months ended
March 31, 1998 was $22.3 million compared to net income available for
common shares of $15.0 million for the three months ended March 31,
1997. 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 $39.1 million and
$29.0 million for the three months ended March 31, 1998 and 1997,
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 $109.0 million and
$41.2 million for the three months ended March 31, 1998 and 1997,
respectively, represents the investment of funds by the Company to
expand its portfolio of rental properties through the development and
acquisition of additional rental properties. In 1998, $93.4 million
was invested in the development and acquisition of additional rental
properties and the acquisition of land held for development. In 1997,
the investment in the development and acquisition of additional rental
properties and land held for development was $34.8 million. Included
in the $93.4 million of net cash used by investing activities for the
development and acquisition of rental properties for the three months
ended March 31, 1998 are acquisitions of two portfolios consisting of
fourteen industrial buildings and one office building.
- 12 -
<PAGE>
Net cash provided by financing activities totaling $88.8 million and
$19.9 million for the three months ended March 31, 1998 and 1997,
respectively, represents funds from equity and debt offerings and
borrowings under the lines of credit to fund the Company's investing
activities. Also included in financing activities is the distribution
of funds to shareholders and minority interests. 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. In
1998, the Company received $33.1 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. During the three months ended March 31, 1998,
the Company received $7.4 million of net proceeds from the issuance of
common stock under its Direct Stock Purchase and Dividend Reinvestment
Plan. In the first quarter of 1998, the Company received $100.0
million of net proceeds from the offering of 7.05% Puttable Reset
Securities due March 1, 2006.
The Company has a $200 million unsecured line of credit which matures
in April 2001 and bears interest at the 30-day LIBOR rate 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 at the 30-day LIBOR rate plus .65%.
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 May 5, 1998 of approximately
$1.4 billion 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 March 31, 1998 consists of notes
totaling $803.9 million with a weighted average interest rate of 7.50%
maturing at various dates through 2025. The Company has $440.0 million
of unsecured debt and $363.9 million of secured debt outstanding at
March 31, 1998. Scheduled principal amortization of such debt totaled
$1.7 million for the three months ended March 31, 1998.
Following is a summary of the scheduled future amortization and
maturities of the Company's indebtedness at March 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
Repayments
--------------------------------------------- Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
- - ---------- ------------ ----------- ---------- -----------------
<S> <C> <C> <C> <C>
1998 $ 5,140 $ 40,659 $ 45,799 7.16%
1999 5,827 30,450 36,277 6.68%
2000 6,204 64,850 71,054 7.15%
2001 5,864 74,560 80,424 8.33%
2002 6,366 50,000 56,366 7.40%
2003 4,415 66,141 70,556 8.47%
2004 3,398 177,035 180,433 7.41%
2005 3,681 100,000 103,681 7.49%
2006 3,989 100,000 103,989 7.07%
2007 3,516 14,939 18,455 7.77%
Thereafter 36,864 - 36,864 6.84%
------ ------- --------
Total $85,264 $718,634 $803,898 7.50%
====== ======= =======
</TABLE>
-13 -
<PAGE>
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 April 23, 1998 payable on May 29, 1998 to
shareholders of record on May 13, 1998, 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 April
23, 1998 which is payable on May 29, 1998 to preferred shareholders of
record on May 15, 1998. A quarterly dividend of $.99875 per depositary
share on the Series B Cumulative Step-Up Redeemable Preferred Shares
was declared on April 23, 1998 which is payable on June 30, 1998 to
preferred shareholders of record on June 17, 1998.
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 months ended March 31 as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1998 1997
------- ------
<S> <C> <C>
Net income available for
common shares $22,262 $14,986
Add back:
Depreciation and amortization 14,260 9,499
Share of joint venture
adjustments 582 523
Earnings from property
sales (586) (280)
Minority interest share
of add-backs (1,788) (1,011)
------ ------
FUNDS FROM OPERATIONS $34,730 $23,717
====== ======
CASH FLOW PROVIDED BY (USED BY):
Operating activities $ 39,051 $28,973
Investing activities (109,049) (41,163)
Financing activities 88,814 19,853
</TABLE>
The increase in FFO for the three months ended March 31, 1998 compared
to the three months ended March 31, 1997 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.
RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
In March 1998, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus on Issue No. 97-11
"Accounting for Internal Costs Relating to Real Estate Property
- 14 -
<PAGE>
Acquisitions" which requires the internal cost of pre-acquisition
activities incurred in connection with the acquisition of an operating
property be expensed as incurred. During the first quarter of 1998,
the Company capitalized approximately $275,000 of internal costs of
pre-acquisition activities which under Issue No. 97-11 would have been
expensed.
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)
- 15 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DUKE REALTY INVESTMENTS, INC.
----------------------------
Registrant
Date: May 14, 1998 /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
- 16 -
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, 333-49911, 333-39965, 333-50081 and 333-26845
With respect to the subject registration statements, we acknowledge
our awareness of the use therein of our report dated May 5, 1998
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
May 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DUKE
REALTY INVESTMENTS, INC. AND SUBSIDIARIES' MARCH 31, 1998 CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 29,169
<SECURITIES> 0
<RECEIVABLES> 43,729
<ALLOWANCES> (1,369)
<INVENTORY> 0
<CURRENT-ASSETS> 72,880
<PP&E> 2,293,419
<DEPRECIATION> (131,629)
<TOTAL-ASSETS> 2,298,853
<CURRENT-LIABILITIES> 217,778
<BONDS> 803,898
0
218,338
<COMMON> 1,058,839
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,298,853
<SALES> 0
<TOTAL-REVENUES> 85,351
<CGS> 42,315
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,879
<INCOME-PRETAX> 22,262
<INCOME-TAX> 0
<INCOME-CONTINUING> 22,262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,262
<EPS-PRIMARY> $.29
<EPS-DILUTED> $.29
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DUKE
REALTY INVESTMENTS, INC. AND SUBSIDIARIES' MARCH 31, 1997 CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,997
<SECURITIES> 0
<RECEIVABLES> 28,065
<ALLOWANCES> (1,377)
<INVENTORY> 0
<CURRENT-ASSETS> 35,650
<PP&E> 1,423,854
<DEPRECIATION> (90,075)
<TOTAL-ASSETS> 1,417,578
<CURRENT-LIABILITIES> 82,462
<BONDS> 506,056
0
72,288
<COMMON> 756,772
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,417,578
<SALES> 0
<TOTAL-REVENUES> 55,387
<CGS> 28,006
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,449
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,946
<INCOME-PRETAX> 14,986
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,986
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,986
<EPS-PRIMARY> $.24
<EPS-DILUTED> $.24
</TABLE>
