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, 1998
------------------
OR
/ / 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) 808-6000
-------------------------
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 10, 1998 was 83,694,882
($.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, 1998 (Unaudited) and December 31, 1997 2
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1998 and 1997
(Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statement of Shareholders' Equity
for the nine months ended September 30, 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 9-17
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
<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 1998 1997
------ ------------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate investments:
Land and improvements $ 290,567 $ 231,614
Buildings and tenant improvements 1,963,006 1,591,604
Construction in progress 139,044 107,242
Investments in unconsolidated companies 125,655 106,450
Land held for development 124,237 139,817
--------- ---------
2,642,509 2,176,727
Accumulated depreciation (161,649) (116,264)
--------- ---------
Net real estate investments 2,480,860 2,060,463
Cash and cash equivalents 22,033 10,353
Accounts receivable from tenants,
net of allowance of $717 and $420 6,798 5,932
Straight-line rent receivable,
net of allowance of $841 19,318 14,746
Receivables on construction contracts 32,253 22,700
Deferred financing costs, net of
accumulated amortization of $11,576
and $9,101 11,473 12,386
Deferred leasing and other costs,
net of accumulated amortization
of $14,736 and $9,251 45,749 34,369
Escrow deposits and other assets 32,525 15,265
--------- ---------
$2,651,009 $2,176,214
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Indebtedness:
Secured debt $ 328,045 $ 367,119
Unsecured notes 590,000 340,000
Unsecured line of credit 109,000 13,000
--------- ---------
1,027,045 720,119
Construction payables and amounts
due subcontractors 43,028 40,786
Accounts payable 4,727 1,342
Accrued expenses:
Real estate taxes 36,559 25,203
Interest 7,866 6,883
Other 19,651 13,848
Other liabilities 15,368 11,720
Tenant security deposits and
prepaid rents 17,411 14,268
--------- ---------
Total liabilities 1,171,655 834,169
--------- ---------
Minority interest 108,703 107,364
--------- ---------
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; 82,570 and 76,065
shares issued and outstanding 1,215,038 1,071,990
Distributions in excess of net income (62,725) (55,647)
--------- ---------
Total shareholders' equity 1,370,651 1,234,681
--------- ---------
$2,651,009 $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
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
1998 1997 1998 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
RENTAL OPERATIONS:
Revenues:
Rental income $87,699 $53,729 $245,037 $152,589
Equity in earnings of
unconsolidated companies 2,649 2,489 8,066 6,133
------ ------ ------- -------
90,348 56,218 253,103 158,722
------ ------ ------- -------
Operating expenses:
Rental expenses 16,115 10,204 43,799 28,226
Real estate taxes 8,984 5,252 24,871 14,367
Interest expense 16,701 9,606 43,926 28,247
Depreciation and amortization 17,660 10,702 48,445 30,253
------ ------ ------- -------
59,460 35,764 161,041 101,093
------ ------ ------- -------
Earnings from rental
operations 30,888 20,454 92,062 57,629
------ ------ ------- -------
SERVICE OPERATIONS:
Revenues:
Property management,
maintenance
and leasing fees 3,606 3,315 10,240 9,170
Construction management and
development fees 3,425 2,385 8,115 5,096
Other income 253 217 851 719
------ ------ ------- -------
7,284 5,917 19,206 14,985
------ ------ ------- -------
Operating expenses:
Payroll 3,178 2,542 9,865 7,427
Maintenance 613 498 1,811 1,414
Office and other 678 552 2,000 1,645
------ ------ ------- -------
4,469 3,592 13,676 10,486
------ ------ ------- -------
Earnings from service
operations 2,815 2,325 5,530 4,499
------ ------ ------- -------
General and administrative
expense (2,792) (1,457) (8,235) (4,347)
------ ------ ------- -------
Operating income 30,911 21,322 89,357 57,781
OTHER INCOME (EXPENSE):
Interest income 518 795 1,107 1,222
Earnings from property sales 661 1,425 1,615 1,807
Other expense (131) (220) (192) (639)
Minority interest in earnings
of unitholders (3,116) (1,691) (9,264) (5,021)
Other minority interest in
earnings of subsidiaries (692) (350) (946) (775)
------ ------ ------- -------
Net income 28,151 21,281 81,677 54,375
Dividends on preferred shares (4,702) (4,370) (14,108) (7,782)
------ ------ ------- -------
Net income available for
common shares $23,449 $16,911 $ 67,569 $ 46,593
====== ====== ======= =======
Net income per common share:
Basic $ .29 $ .26 $ .85 $ .74
====== ====== ======= =======
Diluted $ .29 $ .26 $ .84 $ .73
====== ====== ======= =======
Weighted average number of
common shares outstanding 81,594 65,309 79,461 63,380
====== ====== ======= =======
Weighted average number of
common and dilutive
potential common shares 93,279 72,971 91,252 71,054
====== ====== ======= =======
</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>
1998 1997
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 81,677 $ 54,375
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of buildings and
tenant improvements 43,039 26,707
Amortization of deferred financing
costs 1,018 1,025
Amortization of deferred leasing
and other costs 5,406 3,546
Minority interest in earnings 10,210 5,796
Straight-line rent adjustment (4,763) (2,507)
Earnings from property sales (1,615) (1,807)
Construction contracts, net (7,311) 13,290
Other accrued revenues and
expenses, net 26,099 13,614
Equity in earnings in excess
of distributions received
from unconsolidated companies (4,651) (3,901)
------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 149,109 110,138
------- -------
Cash flows from investing activities:
Rental property development costs (163,682) (142,028)
Acquisition of rental properties (231,338) (213,673)
Acquisition of land held for
development and infrastructure costs (25,139) (58,865)
Recurring costs:
Tenant improvements (7,611) (5,901)
Leasing costs (4,668) (3,614)
Building improvements (1,572) (480)
Other deferred leasing costs (11,533) (12,599)
Other deferred costs and other
assets (18,661) (4,481)
Proceeds from property sales, net 7,498 31,741
Other distributions received from
unconsolidated companies - 60,000
Net investment in and advances to
unconsolidated companies (14,095) (30,636)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (470,801) (380,536)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common
shares, net 136,661 300,472
Proceeds from issuance of preferred
shares, net - 146,050
Proceeds from indebtedness 250,000 100,000
Borrowings (repayments) on lines
of credit, net 96,000 (34,000)
Repayments on indebtedness including
principal amortization (48,269) (7,076)
Distributions to common shareholders (74,647) (50,594)
Distributions to preferred shareholders (14,108) (7,782)
Distributions to minority interest (10,910) (6,548)
Deferred financing costs (1,355) (1,326)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 333,372 439,196
------- -------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 11,680 168,798
Cash and cash equivalents at beginning
of period 10,353 5,334
------- -------
Cash and cash equivalents at end of period $ 22,033 $174,132
------- -------
</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, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Shares Common 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, 1997 $218,338 $1,071,990 $(55,647) $1,234,681
Net income - - 81,677 81,677
Issuance of
common shares,
net of underwriting
discounts and
offering costs
of $5,401 - 137,344 - 137,344
Acquisition of
minority interest - 5,704 - 5,704
Distributions to
common
shareholders ($.94
per common share) - - (74,647) (74,647)
Distributions to
preferred
shareholders - - (14,108) (14,108)
------- --------- ------- ---------
BALANCE AT
SEPTEMBER 30, 1998 $218,338 $1,215,038 $(62,725) $1,370,651
======= ========= ====== =========
</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 88.4% at
September 30, 1998. The remaining interests in DRLP 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 $450 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 .50% - .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 .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 $2.0 million and $2.4
million for such services for the nine months ended September 30,
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 common share for the three and nine months ended
September 30:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic net income available for
common shares $23,449 $16,911 $67,569 $46,593
Minority interest in earnings
of unitholders 3,116 1,691 9,264 5,021
------ ------ ------ ------
Diluted net income available
for common shares and
dilutive potential shares $26,565 $18,602 $76,833 $51,614
====== ====== ====== ======
Weighted average number of
common shares outstanding 81,594 65,309 79,461 63,380
Weighted average partnership
units outstanding 10,840 6,760 10,894 6,858
Dilutive shares for long-term
compensation plans 845 902 897 816
------ ------ ------ ------
Weighted average number of
common shares and dilutive
potential common shares 93,279 72,971 91,252 71,054
====== ====== ====== ======
</TABLE>
5.SUBSEQUENT EVENTS
On October 22, 1998, the Board of Directors declared a dividend of
$.34 per share of common stock which is payable on November 30,
1998, to common shareholders of record on November 12, 1998.
On October 22, 1998, the Board of Directors declared a dividend of
$.56875 per depositary share of Series A Cumulative Preferred
Shares which is payable on November 30, 1998, to preferred
shareholders of record on November 16, 1998. Each depositary share
represents one-tenth of a share of the Company's 9.10% Series A
Preferred Shares.
On October 22, 1998, the Board of Directors declared a dividend of
$.99875 per depositary share of Series B Cumulative Step-up
Redeemable Preferred Shares which is payable on December 31, 1998,
to preferred shareholders of record on December 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 September 30, 1998,
the related condensed consolidated statements of operations for the
three and nine months ended September 30, 1998 and 1997, the
related condensed consolidated statements of cash flows for the
nine months ended September 30, 1998 and 1997, and the related
condensed consolidated statement of shareholders' equity for the
nine months ended September 30, 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
October 30, 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 93.7% the last two years. The
Company expects to continue to maintain its overall occupancy 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, 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 5,382 3,122 10.9% 9.1% 93.7% 93.4%
Bulk 29,009 20,134 58.6 58.8 95.1% 94.6%
OFFICE
Suburban 12,169 8,593 24.6 25.1 96.0% 96.8%
CBD 699 699 1.4 2.0 97.0% 94.0%
RETAIL 2,249 1,692 4.5 5.0 97.0% 96.3%
------ ------ ----- -----
Total 49,508 34,240 100.0% 100.0% 95.3% 95.1%
====== ====== ===== =====
</TABLE>
Management expects occupancy of the in-service property portfolio
to remain stable because (i) only 3.9% and 10.8% 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 September 30, 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
----------------- ---------------- --------------- ------------------
Yr of Sq. Contract Sq. Contract Sq. Contract Sq. Contract
Exp. Ft. Rent Ft. Rent Ft. Rent Ft. Rent
- ----- -------- -------- ------ --------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1,405 $ 5,682 424 $ 4,675 25 $ 177 1,854 $ 10,534
1999 3,555 15,054 1,425 15,610 100 1,142 5,080 31,806
2000 3,015 12,649 1,156 14,553 123 1,501 4,294 28,703
2001 3,601 14,851 1,762 21,996 92 1,121 5,455 37,968
2002 4,368 17,913 1,519 17,138 143 1,578 6,030 36,629
2003 3,657 16,083 1,302 16,712 141 1,500 5,100 34,295
2004 1,298 6,067 383 4,878 17 178 1,698 11,123
2005 2,725 8,694 1,023 13,946 216 1,846 3,964 24,486
2006 2,174 8,260 732 10,581 8 108 2,914 18,949
2007 2,344 7,631 573 7,902 76 760 2,993 16,293
2008 and
There-
after 4,495 15,839 2,064 27,909 1,240 11,187 7,799 54,935
------ ------- ------ ------- ----- ------ ------ -------
Total
Leased 32,637 $128,723 12,363 $155,900 2,181 $21,098 47,181 $305,721
====== ======= ====== ======= ===== ====== ====== =======
Total
Port-
folio
Sq.Ft. 34,391 12,868 2,249 49,508
====== ====== ===== ======
Annualized
net effective
rent per
sq. ft. $ 3.94 $ 12.61 $ 9.67 $ 6.48
======= ======= ====== =======
</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 5.1 million square feet of properties
under development at September 30, 1998 over the next three
quarters and thereafter. The 5.1 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 Anticipated
In-Service Square Percent Project Stabilized
Date Feet Leased Costs Return
------------ ------ ------ -------- ----------
<S> <C> <C> <C> <C>
4th Quarter 1998 2,067 60% $114,708 12.1%
1st Quarter 1999 1,573 18% 87,631 11.4%
2nd Quarter 1999 541 56% 46,914 11.8%
Thereafter 907 42% 102,259 10.7%
----- -------
5,088 43% $351,512 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 nine months ended September
30, 1998 and 1997 (in thousands, except number of properties and
per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Rental Operations revenue $90,348 $56,218 $253,103 $158,722
Service Operations revenue 7,284 5,917 19,206 14,985
Earnings from Rental Operations 30,888 20,454 92,062 57,629
Earnings from Service Operations 2,815 2,325 5,530 4,499
Operating income 30,911 21,322 89,357 57,781
Net income available for
common shares 23,449 16,911 67,569 46,593
Weighted average common
shares outstanding 81,594 65,309 79,461 63,380
Weighted average common and
dilutive potential common
shares 93,279 72,971 91,252 71,054
Basic income per common share $ .29 $ .26 $ .85 $ .74
Diluted income per common share $ .29 $ .26 $ .84 $ .73
Number of in-service properties
at end of period 428 278 428 278
In-service square footage
at end of period 49,508 34,240 49,508 34,240
Under development square
footage at end of period 5,088 4,490 5,088 4,490
</TABLE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
-------------------------------------------------------------------------
Rental Operations
-----------------
The Company increased its in-service portfolio of rental properties
from 278 properties comprising 34.2 million square feet at
September 30, 1997 to 428 properties comprising 49.5 million square
feet at September 30, 1998 through the acquisition of 118
properties totaling 9.2 million square feet and the completion of
34 properties and four building expansions totaling 6.1 million
square feet developed by the Company. The Company also disposed of
two properties totaling 21,000 square feet. These 150 net
additional rental properties primarily account for the $34.1
million increase in revenues from Rental Operations from 1997 to
1998. The Company received approximately $2.3 million of lease
termination payments which are included in rental income for the
three months ended September 30, 1998. Included in rental income
for the three months ended September 30, 1997 are approximately
$252,000 of 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 150 in-
service rental properties.
Interest expense increased by approximately $7.1 million from $9.6
million for the three months ended September 30, 1997 to $16.7
million for the three months ended September 30, 1998 as a result
of additional unsecured debt issued in the third quarter of 1997 to
fund the development and acquisition of additional rental
properties as well as $250 million of unsecured debt issued in the
first two quarters of 1998 to fund development and acquisition
activity.
As a result of the above-mentioned items, earnings from rental
operations increased $10.4 million from $20.5 million for the three
months ended September 30, 1997 to $30.9 million for the three
months ended September 30, 1998.
- 11 -
<PAGE>
Service Operations
------------------
Service Operation revenues increased by $1.4 million from $5.9
million for the three months ended September 30, 1997 to $7.3
million for the three months ended September 30, 1998 primarily as
a result of increases in construction management fee revenue due to
an increase in third-party construction volume.
Service Operations operating expenses increased from $3.6 million to $4.5
million for the three months ended September 30, 1998 as compared to the
three months ended September 30, 1997 primarily as a result of an increase
in construction activity and 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 $2.3 million for the three months ended
September 30, 1997 to $2.8 million for the three months ended
September 30, 1998.
General and Administrative Expense
----------------------------------
General and administrative expense increased from $1.5 million for
the three months ended September 30, 1997 to $2.8 million for the
three months ended September 30, 1998 primarily as a result of
increases in payroll related expenses, advertising costs and state
and local taxes due to the overall growth of the Company.
Net Income Available for Common Shares
--------------------------------------
Net income available for common shares for the three months ended
September 30, 1998 was $23.5 million compared to net income
available for common shares of $16.9 million for the three months
ended September 30, 1997. This increase results primarily from the
operating result fluctuations in rental and service operations
explained above.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
-----------------------------------------------------------------------
Rental Operations
-----------------
The Company increased its in-service portfolio of rental properties
from 278 properties comprising 34.2 million square feet at
September 30, 1997 to 428 properties comprising 49.5 million square
feet at September 30, 1998 through the acquisition of 118
properties totaling 9.2 million square feet and the completion of
34 properties and four building expansions totaling 6.1 million
square feet developed by the Company. The Company also disposed of
two properties totaling 21,000 square feet. These 150 net
additional rental properties primarily account for the $94.4
million increase in revenues from Rental Operations from 1997 to
1998. The Company received approximately $6.3 million of lease
termination payments which are included in rental income for the
nine months ended September 30, 1998. Included in rental income for
the nine months ended September 30, 1997 are approximately $1.9
million of 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 150 in-
service rental properties.
- 12 -
<PAGE>
Interest expense increased by approximately $15.7 million from
$28.2 million for the nine months ended September 30, 1997 to
$43.9 million for the nine months ended September 30, 1998 as a
result of additional unsecured debt issued in the third quarter of
1997 to fund the development and acquisition of additional rental
properties as well as $250 million of unsecured debt issued in the
first two quarters of 1998 to fund development and acquisitions.
As a result of the above-mentioned items, earnings from rental
operations increased $34.5 million from $57.6 million for the nine
months ended September 30, 1997 to $92.1 million for the nine
months ended September 30, 1998.
Service Operations
------------------
Service Operation revenues increased to $19.2 million for the nine
months ended September 30, 1998 as compared to $15.0 million for
the nine months ended September 30, 1997 primarily as a result of
an increase in third-party construction volume. Service Operation
operating expenses increased from $10.5 million to $13.7 million
for the nine months ended September 30, 1998 as compared to the
nine months ended September 30, 1997 primarily as a result of an
increase in construction activity and the overall growth of the
Company.
As a result of the above-mentioned items, earnings from Service
Operations increased from $4.5 million for the nine months ended
September 30, 1997 to $5.5 million for the nine months ended
September 30, 1998.
General and Administrative Expense
----------------------------------
General and administrative expense increased from $4.3 million for
the nine months ended September 30, 1997 to $8.2 million for the
nine months ended September 30, 1998 primarily as a result of
increases in payroll related expenses, advertising costs and state
and local taxes due to the overall growth of the Company.
Net Income Available for Common Shares
--------------------------------------
Net income available for common shares for the nine months ended
September 30, 1998 was $67.6 million compared to net income
available for common shares of $46.6 million for the nine months
ended September 30, 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 $149.1 million
and $110.1 million for the nine months ended September 30, 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.
- 13 -
<PAGE>
Net cash used by investing activities totaling $470.8 million and
$380.5 million for the nine months ended September 30, 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 net of
proceeds received from property sales. In 1998, $420.2 million was
invested in the development and acquisition of additional rental
properties and the acquisition of land held for development,
including the acquisition of five portfolios consisting of 22
industrial buildings and 17 office buildings. In 1997, the
investment in the development and acquisition of additional rental
properties and land held for development was $414.6 million. During
the nine months ended September 30, 1997, the Company contributed
properties to an existing joint venture at an agreed value of
approximately $60.8 million and received a cash distribution of
$60.0 million from the proceeds of a mortgage loan received in May
1997. The joint venture partner contributed $753,000 of cash to the
venture to maintain proportionate ownership interest. During the
nine months ended September 30, 1997, the Company also invested
$32.2 million in a newly formed joint venture with an institutional
investor which allowed the joint venture to purchase office
property consisting of approximately 345,000 square feet and 17
acres.
Net cash provided by financing activities totaling $333.4 million
and $439.2 million for the nine months ended September 30, 1998 and
1997, 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 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 and acquisition activity. In 1998, the
Company received $136.7 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 nine months ended September 30,
1998, the Company received $21.2 million of net proceeds from the
issuance of common stock under its Direct Stock Purchase and
Dividend Reinvestment Plan compared to $10.0 million of net
proceeds received under the Direct Stock Purchase and Dividend
Reinvestment Plan during the first nine months of 1997. 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. In the second quarter of 1998, the Company received
$100.0 million of proceeds from the offering of 6.75% Senior Notes
due May 30, 2008 and $50.0 million in proceeds from the issuance of
7.25% notes under the Company's medium-term note program. 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 $100.0 million from the offering of 6.95% Pass-
Through Asset Trust Securities due August 2004.
The Company has a $450 million unsecured line of credit which
matures in April 2001. This facility was increased from $250
million in September 1998 and bears interest payable at the 30-day
LIBOR plus .50% - .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 .65%.
- 14 -
<PAGE>
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, 1998 of
approximately $1.2 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 September 30, 1998 consists of notes
totaling $1.027 billion with a weighted average interest rate of
7.29% maturing at various dates through 2028. The Company has
$699.0 million of unsecured debt and $328.0 million of secured debt
outstanding at September 30, 1998. Scheduled principal amortization
of such debt totaled $5.3 million for the nine months ended
September 30, 1998.
Following is a summary of the scheduled future amortization and
maturities of the Company's indebtedness at September 30, 1998 (in
thousands):
<TABLE>
<CAPTION>
Repayments
------------------------------------------- Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
---- ------------ ---------- ----------- ----------------
<S> <C> <C> <C> <C>
1998 $ 1,673 $ 6,999 $ 8,672 6.59%
1999 5,905 30,450 36,355 6.41%
2000 6,288 64,850 71,138 7.14%
2001 5,954 183,560 189,514 6.72%
2002 6,462 50,000 56,462 7.39%
2003 4,519 66,144 70,663 8.46%
2004 3,509 177,032 180,541 7.41%
2005 3,800 100,000 103,800 7.49%
2006 4,117 100,000 104,117 7.07%
2007 3,653 14,955 18,608 7.75%
Thereafter 37,175 150,000 187,175 6.89%
------ ------- ---------
Total $83,055 $943,990 $1,027,045 7.29%
====== ======= =========
</TABLE>
The Company intends to pay the following regular quarterly
dividends from net cash provided by operating activities:
<TABLE>
<CAPTION>
DIVIDEND
DESCRIPTION PER SHARE DECLARATION SHAREHOLDER DATE DATE
OF EQUITY DECLARED DATE OF RECORD PAYABLE
----------- --------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Common Stock $ .34 October 22, 1998 November 12, 1998 November 30, 1998
Series A
Preferred $.56875 October 22, 1998 November 16, 1998 November 30, 1998
Series B
Preferred $.99875 October 22, 1998 December 17, 1998 December 31, 1998
</TABLE>
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.
- 15 -
<PAGE>
The following table reflects the calculation of the Company's FFO
for the three and nine months ended September 30 as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income available for
common shares $23,449 $16,911 $ 67,569 $46,593
Add back:
Depreciation and amortization 17,660 10,702 48,445 30,253
Share of joint venture
adjustments 1,101 757 2,651 2,071
Earnings from property sales (661) (1,425) (1,615) (1,807)
Minority interest share of
add-backs (2,128) (938) (5,966) (2,980)
------ ------ ------- ------
Funds From Operations $39,421 $26,007 $111,084 $74,130
====== ====== ======= ======
Cash flow provided by (used by):
Operating activities $ 48,798 $ 38,676 $149,109 $110,138
Investing activities (119,313) (205,129) (470,801) (380,536)
Financing activities 70,169 337,478 333,372 439,196
</TABLE>
The increase in FFO for the three and nine months ended September
30, 1998 compared to the three and nine months ended September 30,
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
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 three
months of 1998, prior to adopting Issue No. 97-11, the Company
capitalized approximately $275,000 of internal costs of pre-
acquisition activities which under Issue 97-11 would have been
expensed.
YEAR 2000
The Company recognizes that the Year 2000 problem could affect its
operations as well as the proper functioning of the embedded
systems included in the Company's properties. In any particular
property, the problem could affect the functioning of elevators,
heating and air conditioning systems, security systems and other
automated building systems. The Company continues to evaluate the
Year 2000 readiness of its operations and those of its properties,
through identifying and contacting suppliers of building systems
and other critical business partners to determine if the building
systems are affected and whether these entities have an effective
plan in place to address the Year 2000 issue. The Company also
continues to evaluate its own systems to determine the impact of
the Year 2000. The Company has completed the process of
inventorying and evaluating the existing properties' systems and
intends to continue to inventory and assess
- 16 -
<PAGE>
the systems of new properties as developed and acquired. The
Company has developed a work plan detailing the tasks and resources
required to ready its and its properties' operations and systems
for the Year 2000. This work plan includes prioritization of all
systems and appropriate timetables for the necessary remediation
and testing of these systems, as well as contingency plans if
readiness cannot be achieved. Contingency plans generally provide
for obtaining or allowing for alternative access, limited
electrical service, security and other basic services. In addition,
in many cases the Company will be relying on statements from
outside vendors as to the Year 2000 readiness of their systems, and
will not, in most circumstances, attempt any independent
verification. Based on the information prepared by the Company or
received to date, the Company expects that the costs to achieve
Year 2000 readiness will not be material. The Company expects to
pass on most of the costs to achieve Year 2000 readiness in any
particular property to the tenants, and will otherwise expense the
costs as incurred.
There can be no assurance that the Company will be able to identify
and correct all aspects of the Year 2000 problem that affect it in
sufficient time, that its contingency plans or that the costs of
achieving Year 2000 readiness will not be material. The Company,
however, does not currently expect the Year 2000 problem will have
a material impact on the Company's business, operations, or
financial condition.
- 17 -
<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
-----------------------------------------
Exhibits
--------
Exhibit 15. Letter regarding unaudited interim financial information
Exhibit 27. Financial Data Schedule (EDGAR Filing Only)
Reports on Form 8-K
-------------------
None.
- 18 -
<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 12, 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
(Chief Accounting Officer)
- 19 -
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, 333-66919 and 333-26845
With respect to the subject registration statements, we
acknowledge our awareness of the use therein of our report dated
October 30, 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 9, 1998
<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> 1,767,739
<DEPRECIATION> (103,236)
<TOTAL-ASSETS> 1,926,469
<CURRENT-LIABILITIES> 95,635
<BONDS> 596,239
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> 28,247
<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> $.73
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES' SEPTEMBER 30, 1998
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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 22,033
<SECURITIES> 0
<RECEIVABLES> 59,927
<ALLOWANCES> (1,558)
<INVENTORY> 0
<CURRENT-ASSETS> 93,609
<PP&E> 2,642,509
<DEPRECIATION> (161,649)
<TOTAL-ASSETS> 2,651,009
<CURRENT-LIABILITIES> 144,610
<BONDS> 1,027,045
0
218,338
<COMMON> 1,152,313
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,651,009
<SALES> 0
<TOTAL-REVENUES> 275,031
<CGS> 139,218
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,926
<INCOME-PRETAX> 67,569
<INCOME-TAX> 0
<INCOME-CONTINUING> 67,569
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,569
<EPS-PRIMARY> $.85
<EPS-DILUTED> $.84
</TABLE>
