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, 2000
--------------
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-WEEKS REALTY CORPORATION
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 April 30, 2000 was 126,488,686
($.01 par value).
<PAGE>
DUKE-WEEKS REALTY CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
March 31, 2000 (Unaudited) and December 31, 1999 2
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statement of Shareholders' Equity
for the three months ended March 31, 2000 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6-10
Independent Accountants' Review Report 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
Part II - Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote
of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibits
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUKE-WEEKS REALTY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
ASSETS (Unaudited)
------
<S> <C> <C>
Real estate investments:
Land and improvements $ 610,651 $ 602,789
Buildings and tenant improvements 4,149,512 4,124,117
Construction in progress 353,624 327,944
Investments in unconsolidated companies 150,266 145,587
Land held for development 257,919 246,533
--------- ---------
5,521,972 5,446,970
Accumulated depreciation (278,164) (254,574)
--------- ---------
Net real estate investments 5,243,808 5,192,396
Cash and cash equivalents 37,913 18,765
Accounts receivable, net of
allowance of $1,678 and $1,775 17,393 26,844
Straight-line rent receivable,
net of allowance of $841 31,345 29,770
Receivables on construction contracts 32,535 29,537
Deferred financing costs, net of
accumulated amortization of $9,834
and $9,082 16,149 16,651
Deferred leasing and other costs,
net of accumulated amortization of
$24,080 and $21,287 89,536 83,153
Escrow deposits and other assets 177,761 89,122
--------- ---------
$5,646,440 $5,486,238
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Indebtedness:
Secured debt $ 541,685 $ 528,665
Unsecured notes 1,326,762 1,326,811
Unsecured line of credit 408,000 258,000
--------- ---------
2,276,447 2,113,476
Construction payables and amounts
due subcontractors 73,166 89,985
Accounts payable 2,608 3,179
Accrued expenses:
Real estate taxes 54,884 47,604
Interest 19,913 20,658
Other 30,673 42,295
Other liabilities 32,009 30,544
Tenant security deposits and prepaid rents 38,797 36,156
--------- ---------
Total liabilities 2,528,497 2,383,897
--------- ---------
Minority interest 437,955 433,745
--------- ---------
Shareholders' equity:
Preferred shares ($.01 par value);
5,000 shares authorized 609,883 609,998
Common shares ($.01 par value);
150,000 shares authorized;
126,463 and 125,823 shares issued
and outstanding 1,265 1,258
Additional paid-in capital 2,151,506 2,139,772
Distributions in excess of net income (82,666) (82,432)
--------- ---------
Total shareholders' equity 2,679,988 2,668,596
--------- ---------
$5,646,440 $5,486,238
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 2 -
<PAGE>
DUKE-WEEKS REALTY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the three months ended March 31,
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
RENTAL OPERATIONS:
Revenues:
Rental income $171,910 $ 99,479
Equity in earnings of
unconsolidated companies 2,824 2,508
------- -------
174,734 101,987
------- -------
Operating expenses:
Rental expenses 28,842 18,626
Real estate taxes 18,520 10,817
Interest expense 32,681 15,991
Depreciation and amortization 39,779 20,454
------- -------
119,822 65,888
------- -------
Earnings from rental operations 54,912 36,099
------- -------
SERVICE OPERATIONS:
Revenues:
Property management, maintenance
and leasing fees 5,683 3,626
Construction and development
activity income 7,548 8,347
Other income 834 294
------- -------
14,065 12,267
------- -------
Operating expenses 8,689 7,231
------- -------
Earnings from service
operations 5,376 5,036
------- -------
General and administrative expense (5,164) (3,615)
------- -------
Operating income 55,124 37,520
OTHER INCOME (EXPENSE):
Interest income 1,620 599
Earnings from land and depreciated
property sales 14,686 2,314
Other expense (122) (232)
Minority interest in earnings of
common unitholders (7,434) (3,535)
Minority interest in earnings of
preferred unitholders (2,102) -
Other minority interest in
earnings of subsidiaries (661) (430)
------- -------
Net income 61,111 36,236
Dividends on preferred shares (12,252) (8,842)
------- -------
Net income available for
common shares $ 48,859 $ 27,394
======= =======
Net income per common share:
Basic $ .39 $ .32
======= =======
Diluted $ .39 $ .32
======= =======
Weighted average number of common
shares outstanding 126,070 86,370
======= =======
Weighted average number of common
and dilutive potential common
shares 146,326 98,094
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
DUKE-WEEKS REALTY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31,
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 61,111 $ 36,236
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of buildings and tenant improvements 35,714 18,260
Amortization of deferred leasing and other costs 4,065 2,194
Amortization of deferred financing costs 678 356
Minority interest in earnings 10,197 3,965
Straight-line rent adjustment (3,676) (1,770)
Earnings from land and depreciated property sales (14,686) (2,314)
Construction contracts, net (19,817) (34,091)
Other accrued revenues and expenses, net 3,781 9,511
Equity in earnings in (excess)/shortfall of
operating distributions received from
unconsolidated companies 168 (21)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 77,535 32,326
------- -------
Cash flows from investing activities:
Development of real estate investments (168,411) (67,163)
Acquisition of real estate investments - (54,854)
Acquisition of land held for development
and infrastructure costs (21,082) (47,809)
Recurring tenant improvements (7,411) (3,148)
Recurring leasing costs (5,387) (2,706)
Recurring building improvements (1,351) (259)
Other deferred leasing costs (10,027) (3,288)
Other deferred costs and other assets (4,097) (5,205)
Proceeds from land and depreciated
property sales, net 163,783 8,003
Tax deferred exchange escrow, net (97,558) -
Distributions from unconsolidated companies - 16,802
Net investment in unconsolidated companies (9,120) (7,993)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (160,661) (167,620)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common
shares, net 10,432 13,857
Proceeds/(payments) from issuance/
(repurchase) of preferred shares, net (115) 96,519
Proceeds from indebtedness 18,741 125,000
Payments on indebtedness including
principal amortization (5,383) (1,873)
Borrowings/(repayments) on lines of credit, net 150,000 (26,000)
Distributions to common shareholders (49,093) (29,349)
Distributions to preferred shareholders (12,252) (8,842)
Distributions to preferred unitholders (2,102) -
Distributions to minority interest (7,585) (3,980)
Deferred financing costs (369) (1,992)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 102,274 163,340
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 19,148 28,046
Cash and cash equivalents at beginning of period 18,765 6,950
------- -------
Cash and cash equivalents at end of period $ 37,913 $ 34,996
------- -------
Other non-cash items:
Assumption of debt for real estate acquisitions $ - $ 9,116
======= =======
Conversion of Limited Partner Units to shares $ 102 $ 507
======= =======
Issuance of Limited Partner Units for real
estate acquisitions $ 3,937 $ 715
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
DUKE-WEEKS REALTY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders' Equity
For the three months ended March 31, 2000
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Additional Distributions
Preferred Common Paid-in in Excess of
Stock Stock Capital Net Income Total
--------- ------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1999 $609,998 $1,258 $2,139,772 $(82,432) $2,668,596
Issuance of
common shares - 1 11,638 - 11,639
Acquisition of
minority interest - 6 96 - 102
Repurchase of
Preferred D
Series shares (115) - - - (115)
Net income - - - 61,111 61,111
Distributions to
preferred
shareholders - - - (12,252) (12,252)
Distributions to
common shareholders
($.39 per share) - - - (49,093) (49,093)
------- ----- --------- ------- ---------
BALANCE AT
MARCH 31, 2000 $609,883 $1,265 $2,151,506 $(82,666) $2,679,988
======= ===== ========= ======= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 5 -
<PAGE>
DUKE-WEEKS REALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL STATEMENTS
The interim condensed consolidated financial statements included
herein have been prepared by Duke-Weeks Realty Corporation (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-Weeks
Realty Limited Partnership ("DWRLP"), of which the Company owns
86.8% at March 31, 2000. The remaining interests in DWRLP are
exchangeable for shares of the Company's common stock on a one-
for-one basis. The Company conducts service 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 the following lines of credit available (in
thousands):
Outstanding
Borrowing Maturity Interest at March
Description Capacity Date Rate 31, 2000
------------------------ --------- ---------- ----------- -----------
Unsecured Line of Credit $450,000 April 2001 LIBOR + .70% $408,000
Unsecured Line of Credit 300,000 April 2001 LIBOR + .90% -
Secured Line of Credit 150,000 Jan. 2003 LIBOR + 1.05% 18,741
The lines of credit are used to fund development and acquisition
of additional rental properties and to provide working capital.
The $450 million line of credit allows the Company an option to
obtain borrowings from the financial institutions that
participate in the line of credit at rates lower than the stated
interest rate, subject to certain restrictions. Amounts
outstanding on the line of credit at March 31, 2000 are at LIBOR
+ .58% to .70%.
- 6 -
<PAGE>
3. RELATED PARTY TRANSACTIONS
The Company provides management, maintenance, leasing,
construction, and other tenant related services to properties in
which certain executive officers have continuing ownership
interests. The Company was paid fees totaling $536,000 and
$972,000 for such services for the three months ended March 31,
2000 and 1999, 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.
At March 31, 2000, other assets included outstanding loan
advances totaling $2.4 million due from a related party, under a
$5.7 million demand loan agreement. The loan bears interest at
LIBOR plus 2.10% and is secured by real estate assets held by the
related entity, for which the Company has arrangements to acquire
in future periods. Interest earned under the agreement and
included in the accompanying condensed consolidated statements of
operations totaled $70,934 in the three months ended March 31,
2000.
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 common
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 months ended
March 31:
2000 1999
---- ----
Basic net income available for common shares $ 48,859 $27,394
Minority interest in earnings of common unitholders 7,434 3,535
------- ------
Diluted net income available for common shares
and dilutive potential shares $ 56,293 $30,929
======= ======
Weighted average number of common shares
outstanding 126,070 86,370
Weighted average common partnership units
outstanding 19,055 10,828
Dilutive shares for long-term compensation plans 1,201 896
------- ------
Weighted average number of common shares and
dilutive potential common shares 146,326 98,094
======= ======
The Preferred D Series Convertible stock and Preferred G
Convertible units were both anti-dilutive at March 31, 2000;
therefore, no conversion to common shares is included in weighted
shares outstanding.
5. SEGMENT REPORTING
The Company is engaged in four operating segments; the ownership
and rental of office, industrial and retail real estate
investments and the providing of various real estate services
such as property management, maintenance, leasing and
construction management to third-party property owners ("Service
Operations"). The Company's reportable segments offer different
products or services and are managed separately because each
requires different operating strategies and management expertise.
There are no material intersegment sales or transfers.
- 7 -
<PAGE>
Non-segment revenue to reconcile to total revenue consists mainly
of equity in earnings of unconsolidated companies. Non-segment
assets to reconcile to total assets consist of corporate assets
including cash, deferred financing costs and investments in
unconsolidated companies.
The Company assesses and measures segment operating results based
on an industry performance measure referred to as Funds From
Operations ("FFO"). The National Association of Real Estate
Investment Trusts defines FFO as net income or loss, excluding
gains or losses from debt restructuring and sales of depreciated
operating property, plus operating property depreciation and
amortization and adjustments for minority interest and
unconsolidated companies on the same basis. FFO is not a measure
of operating results or cash flows from operating activities as
measured by generally accepted accounting principles, is not
necessarily indicative of cash available to fund cash needs and
should not be considered an alternative to cash flows as a
measure of liquidity. Interest expense and other non-property
specific revenues and expenses are not allocated to individual
segments in determining the Company's performance measure.
The revenues and FFO for each of the reportable segments for the
three months ended March 31, 2000 and 1999 and the assets for
each of the reportable segments as of March 31, 2000 and December
31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
2000 1999
---- ----
<S> <C> <C>
Revenues
Rental Operations:
Office $ 81,215 $ 60,443
Industrial 84,058 33,046
Retail 7,224 5,932
Service Operations 14,065 12,267
------- -------
Total Segment Revenues 186,562 111,688
Non-Segment Revenue 2,237 2,566
------- -------
Consolidated Revenue $188,799 $114,254
======= =======
Funds From Operations
---------------------
Rental Operations:
Office $ 55,161 $ 41,084
Industrial 65,655 24,863
Retail 5,650 4,661
Service Operations 5,376 5,036
------- -------
Total Segment FFO 131,842 75,644
Non-Segment FFO:
Interest expense (32,681) (15,991)
Interest income 1,620 599
General and administrative
expense (5,164) (3,615)
Gain on land sales 3,616 -
Other expenses (2,087) (803)
Minority interest in earnings
of common unitholders (7,434) (3,535)
Minority interest in earnings
of preferred unitholders (2,102) -
Minority interest in earnings
of subsidiaries (661) (430)
Minority interest share of FFO
adjustments (3,955) (2,189)
Joint venture FFO 4,288 4,022
Dividends on preferred shares (12,252) (8,842)
------- -------
Consolidated FFO 75,030 44,860
Depreciation and amortization (39,779) (20,454)
Share of joint venture adjustments (1,417) (1,515)
Earnings from depreciated
property sales 11,070 2,314
Minority interest share of
FFO adjustments 3,955 2,189
------- -------
Net Income Available for
Common Shareholders $ 48,859 $ 27,394
======= =======
</TABLE>
- 8 -
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Assets
------
Rental Operations:
Office $2,294,903 $2,252,795
Industrial 2,749,642 2,707,028
Retail 210,040 205,993
Service Operations 70,210 62,335
--------- ---------
Total Non-Segment Assets 5,324,795 5,228,151
Non-Segment Assets 321,645 258,087
--------- ---------
Consolidated Assets $5,646,440 $5,486,238
========= =========
</TABLE>
6. SHAREHOLDERS' EQUITY
The following series of preferred stock are outstanding as of
March 31, 2000 (in thousands, except percentages):
<TABLE>
<CAPTION>
Shares Dividend Redemption Liquidation
Description Outstd. Rate Date Preference Convertible
- ------------------ ------- --------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Preferred A Series 300 9.100% August 31, 2001 $ 75,000 No
Preferred B Series 300 7.990% Sept. 30, 2007 150,000 No
Preferred D Series 539 7.375% Dec. 31, 2003 134,883 Yes
Preferred E Series 400 8.250% Jan. 20, 2004 100,000 No
Preferred F Series 600 8.000% Oct. 10, 2002 150,000 No
</TABLE>
All series of preferred shares require cumulative distributions,
have no stated maturity date, and the redemption price of each
series may only be paid from the proceeds of other capital shares
of the Company, which may include other classes or series of
preferred shares.
The Preferred Series D shares are convertible at a conversion
rate of 9.3677 common shares for each preferred share
outstanding.
The dividend rate on the Preferred B Series shares increases to
9.99% after September 12, 2012.
7. MERGER WITH WEEKS CORPORATION
In July 1999, Weeks Corporation ("Weeks"), a self-administered,
self-managed geographically focused Real Estate Investment Trust
("REIT") which operated primarily in the southeastern United
States, was merged with and into Duke Realty Investments, Inc.
("Duke"). The combined company has continued its existence under
the name Duke-Weeks Realty Corporation ("the Company"). The total
purchase price of Weeks aggregated approximately $1.9 billion,
which included the assumption of the outstanding debt and
liabilities of Weeks of approximately $775 million. The
transaction was structured as a tax-free merger and was accounted
for under the purchase method.
The following summarized pro forma unaudited information
represents the combined historical operating results of Weeks and
Duke with the appropriate purchase accounting adjustments,
assuming the merger had occurred on January 1, 1999. The pro
forma financial information presented is not necessarily
indicative of what the Company's actual operating results would
have been had Weeks and Duke constituted a single entity during
such periods (in thousands, except per share amounts):
- 9 -
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
---- ----
(ACTUAL) (Pro Forma)
<S> <C> <C>
Rental Income $171,910 $144,274
======= =======
Net earnings attributable to Common Shares $ 48,859 $ 37,474
======= =======
Weighted average Common Shares outstanding:
Basic 126,070 113,595
======= =======
Diluted 146,326 135,598
======= =======
Earnings attributable to Common Shares:
Basic $ .39 $ .33
======= =======
Diluted $ .39 $ .33
======= =======
</TABLE>
8. OTHER MATTERS
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statment No.
133, "Accounting for Derivative Instruments and for Hedging Activities,"
effective for fiscal years beginning after June 15, 2000. The statment will
require the Comany to recognize all derivatives on the balance sheet at fair
value. Dervatives that are not hedges must be adjusted to fair value through
income. If the dervative is a hedge, then depending on the nature of the
hedge, changes in the fair value will either be offset through earnings,
against the change in fair value of hedged assets, liabilities or firm
commitments or recognized in other comprehensive income until the hedged
item is recognized in earnihgs. The ineffective portion of a hedge's change
in fair value will be immediately recognized in earnings. Based on the
information available at this time, the adoption of this statement is not
expected to have a material impact on the Company's financial statements.
RECLASSIFICATIONS
Certain 1999 balances have been reclassified to conform
to 2000 presentation.
9. SUBSEQUENT EVENTS
The Board of Directors declared the following dividends on April
26, 2000:
Quarterly
Class Amount/Share Record Date Payment Date
------------- ------------ ----------- ------------
Common $ 0.39 May 15, 2000 May 31, 2000
Preferred:
Series A $0.56875 May 17, 2000 May 31, 2000
Series B $0.99875 June 16, 2000 June 30, 2000
Series D $0.46094 June 16, 2000 June 30, 2000
Series E $0.51563 June 16, 2000 June 30, 2000
Series F $0.50000 July 17, 2000 July 31, 2000
- 10 -
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
DUKE-WEEKS REALTY CORPORATION:
We have reviewed the condensed consolidated balance sheet of Duke-
Weeks Realty Corporation and subsidiaries as of March 31, 2000,
the related condensed consolidated statements of operations for
the three months ended March 31, 2000 and 1999, the related
condensed consolidated statements of cash flows for the three
months ended March 31, 2000 and 1999, and the related condensed
consolidated statement of shareholders' equity for the three
months ended March 31, 2000. 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-Weeks
Realty Corporation and subsidiaries as of December 31, 1999, 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 25, 2000, 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, 1999 is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
KPMG LLP
Indianapolis, Indiana
April 26, 2000
- 11 -
<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 have continued to offer strong and
stable local economies and have provided attractive new
development opportunities because of their established
manufacturing base, skilled work force and moderate labor costs.
The Company expects to continue to maintain its overall occupancy
levels and also expects to be able to maintain rental rates as
leases are renewed or new leases are executed. This combination
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 markets.
The Company tracks Same Property performance which compares those
properties that are in-service for all of a two year period. The
net operating income from the same property portfolio increased
5.62% for the three months ended March 31, 2000 compared to the
three months ended March 31, 1999.
The following table sets forth information regarding the
Company's in-service portfolio of rental properties as of March
31, 2000 and 1999 (in thousands, except percentages):
<TABLE>
<CAPTION>
Total Percent of
Square Feet Total Square Feet Percent Occupied
----------- ----------------- ----------------
Type 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Industrial
Serv. Centers 12,870 6,771 14.0% 12.2% 93.1% 92.2%
Bulk 57,749 32,296 62.7% 58.2% 90.5% 94.4%
Office
Suburban 17,982 13,258 19.5% 23.9% 90.9% 95.0%
CBD 861 861 .9% 1.6% 93.6% 93.9%
Retail 2,703 2,287 2.9% 4.1% 96.5% 93.8%
------ ------ ------ -----
Total 92,165 55,473 100.0% 100.0% 91.2% 94.3%
====== ====== ====== ======
</TABLE>
The following table reflects the Company's in-service portfolio
lease expiration schedule as of March 31, 2000 by product type
indicating square footage and annualized net effective rents
under expiring leases (in thousands, except per square foot
amounts):
- 12 -
<PAGE>
<TABLE>
<CAPTION>
Total
Portfolio Industrial Office Retail
------------------- ---------------- --------------- --------------
Yr.of Sq. Ann. Rent Sq. Ann.Rent Sq. Ann.Rent Sq. Ann.Rent
Exp Ft. Revenue % Ft. Revenue Ft. Revenue Ft. Revenue
- ------ ----- --------- --- ---- ------- ------ -------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 5,473 $ 34,909 7% 4,468 $ 22,419 914 $ 11,405 91 $ 1,085
2001 9,278 59,663 10% 7,220 34,052 1,960 24,385 98 1,226
2002 11,037 70,570 12% 8,730 42,525 2,191 26,457 116 1,588
2003 10,033 70,466 12% 7,726 39,622 2,121 27,735 186 3,109
2004 10,087 73,912 13% 7,581 39,819 2,364 32,545 142 1,548
2005 9,479 64,293 11% 7,308 34,552 1,897 27,175 274 2,566
2006 5,407 36,432 6% 4,226 19,591 1,170 16,687 11 154
2007 4,423 29,146 5% 3,597 17,735 760 10,785 66 626
2008 5,443 33,333 6% 4,482 19,788 898 12,830 63 715
2009 6,331 41,560 7% 5,061 23,168 1,139 16,740 131 1,652
2010 and
There-
after 7,014 60,178 11% 3,838 19,328 1,746 27,963 1,430 12,887
------ ------- ---- ------ ------- ------ ------- ----- ------
Total
Leased 84,005 $574,462 100% 64,237 $312,599 17,160 $234,707 2,608 $27,156
====== ======= ==== ====== ======= ====== ======= ===== ======
Total
Portfolio
Sq Ft 92,165 70,619 18,843 2,703
====== ====== ====== =====
Annualized
net effective
rent per
square foot $ 6.84 $ 4.87 $ 13.68 $ 10.41
====== ======= ======= ======
</TABLE>
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 markets; and (iii) the completion
of the 9.9 million square feet of properties under development at
March 31, 2000 over the next three quarters and thereafter. These
properties under development should provide future earnings through
Service Operations income upon sale or 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>
HELD FOR RENTAL:
2nd Quarter 2000 4,306 49% $205,734 11.37%
3rd Quarter 2000 1,679 26% 160,073 11.75%
4th Quarter 2000 1,363 44% 122,841 11.42%
Thereafter 377 46% 46,656 10.84%
----- -------
7,725 43% $535,304 11.45%
----- -------
BUILD-TO-SUIT
FOR SALE:
2nd Quarter 2000 326 100% $ 45,440
3rd Quarter 2000 1,375 100% 60,776
4th Quarter 2000 - - -
Thereafter 450 100% 70,685
----- -------
2,151 100% 176,901
----- -------
Total 9,876 55% 712,205
===== =======
</TABLE>
MERGER WITH WEEKS CORPORATION
In July 1999, Weeks Corporation ("Weeks"), a self-administered,
self-managed geographically focused Real Estate Investment Trust
("REIT") which operated primarily in the southeastern United
States, was merged with and into Duke Realty Investments, Inc.
("Duke"). The combined company has continued its existence under
the name Duke-Weeks Realty Corporation ("the Company"). The total
purchase price of Weeks aggregated approximately $1.9 billion,
which included the assumption of the outstanding debt and
liabilities of Weeks of approximately $775 million. The
transaction was structured as a tax-free merger and was accounted
for under the purchase method.
- 13 -
<PAGE>
The following summarized pro forma unaudited information
represents the combined historical operating results of Weeks and
Duke with the appropriate purchase accounting adjustments,
assuming the merger had occurred on January 1, 1999. The pro
forma financial information presented is not necessarily
indicative of what the Company's actual operating results would
have been had Weeks and Duke constituted a single entity during
such periods (in thousands, except per share amounts):
Three Months Ended
March 31,
------------------
2000 1999
---- ----
(ACTUAL) (Pro Forma)
Rental Income $171,910 $144,274
======= =======
Net earnings attributable to Common Shares $ 48,859 $ 37,474
======= =======
Weighted average Common Shares outstanding:
Basic 126,070 113,595
======= =======
Diluted 146,326 135,598
======= =======
Earnings attributable to Common Shares:
Basic $ .39 $ .33
======= =======
Diluted $ .39 $ .33
======= =======
RESULTS OF OPERATIONS
---------------------
Following is a summary of the Company's operating results and
property statistics for the three months ended March 31, 2000 and
1999 (in thousands, except number of properties and per share
amounts):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Rental Operations revenue $174,734 $101,987
Service Operations revenue 14,065 12,267
Earnings from Rental Operations 54,912 36,099
Earnings from Service Operations 5,376 5,036
Operating income 55,124 37,520
Net income available for common
shares $ 48,859 $ 27,394
Weighted average common shares
outstanding 126,070 86,370
Weighted average common and
dilutive potential
common shares 146,326 98,094
Basic income per common share $ .39 $ .32
Diluted income per common share $ .39 $ .32
Number of in-service properties
at end of period 871 474
In-service square footage
at end of period 92,165 55,473
Under development square
footage at end of period 9,876 5,713
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 TO THREE MONTHS ENDED
MARCH 31, 1999
---------------------------------------------------------------------
Rental Operations
-----------------
The Company increased its in-service portfolio of rental
properties from 474 properties comprising 55.5 million square
feet at March 31, 1999 to 871 properties comprising 92.2 million
square feet at March 31, 2000 through the acquisition of 352
properties totaling 29.8 million square feet and the completion
of 75 properties and five building expansions totaling 10.9
million square feet developed by the Company. Of these additional
properties, 335 properties totaling 28.6 million square feet
relate to the merger with Weeks Corporation. The Company also
disposed of 30 properties totaling 4.0 million square feet. These
397 net additional rental properties primarily account for the
$72.7 million
- 14 -
<PAGE>
increase in revenues from Rental Operations from 1999 to 2000.
The increase in rental expenses, real estate taxes and depreciation
and amortization expense for the same period is also a result of the
additional 397 in-service rental properties.
The $16.7 million increase in interest expense is primarily
attributed to higher outstanding debt balances associated with
the financing of the Company's investment activities. The
increased balances include $450 million of unsecured debt issued
in 1999, the assumption of $185 million of secured debt
and $287 million of unsecured debt in the merger with Weeks
Corporation, and increased borrowings on the Company's unsecured
lines of credit. These higher borrowing costs were partially
offset by the capitalization of interest on increased property
development activities.
As a result of the above-mentioned items, earnings from rental
operations increased $18.8 million from $36.1 million for the
three months ended March 31, 1999 to $54.9 million for the three
months ended March 31, 2000.
Service Operations
------------------
Service Operation revenues increased by $1.8 million from $12.3
million for the three months ended March 31, 1999 to $14.1
million for the three months ended March 31, 2000 primarily as a
result of increases in construction and development revenue
arising from third-party construction volume.
As a result of the above-mentioned items, earnings from Service
Operations increased from $5.0 million for the three months ended
March 31, 1999 to $5.4 million for the three months ended March
31, 2000.
Earnings from Land and Depreciated Property Sales
-------------------------------------------------
The Company has a disposition strategy to pursue favorable
opportunities to dispose of real estate assets that no longer
meet long-term investment objectives of the Company, which
resulted in net sales proceeds of $163.8 million and a net gain
of $14.7 million during the three months ended March 31, 2000
Net Income Available for Common Shareholders
--------------------------------------------
Net income available for common shareholders for the three months
ended March 31, 2000 was $48.9 million compared to $27.4
million for the three months ended March 31, 1999. 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 $77.5 million
and $32.3 million for the three months ended March 31, 2000 and
1999, 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.
Net cash used by investing activities totaling $160.7 million and
$167.6 million for the three months ended March 31, 2000 and
1999, 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.
- 15 -
<PAGE>
Net cash provided by financing activities totaling $102.3 million
and $163.3 million for the three months ended March 31, 2000 and
1999, respectively, is comprised of debt and equity issuances,
net of distributions to shareholders and minority interests and
repayments of outstanding indebtedness.
The Company has the following lines of credit available (in
thousands):
Outstanding
Borrowing Maturity Interest at March
Description Capacity Date Rate 31, 2000
------------------------ --------- ---------- ------------ ----------
Unsecured Line of Credit $450,000 April 2001 LIBOR + .70% $408,000
Unsecured Line of Credit 300,000 April 2001 LIBOR + .90% -
Secured Line of Credit 150,000 Jan. 2003 LIBOR + 1.05% 18,741
The lines of credit are used to fund development and acquisition
of additional rental properties and to provide working capital.
The $450 million line of credit allows the Company an option to
obtain borrowings from the financial institutions that
participate in the line of credit at rates lower than the stated
interest rate, subject to certain restrictions. Amounts
outstanding on the line of credit at March 31, 2000 are at LIBOR
+ .58% to .70%.
The Company currently has on file three Form S-3 Registration
Statements with the Securities and Exchange Commission ("Shelf
Registrations") which had remaining availability as of March 31,
2000 of approximately $292.9 million to issue common stock,
preferred stock or unsecured debt securities. The Company intends
to issue additional equity or debt under these Shelf
Registrations as capital needs arise to fund the development and
acquisition of additional rental properties. The Company also
plans to file additional shelf registrations as necessary.
The total debt outstanding at March 31, 2000 consists of notes
totaling $2.3 billion with a weighted average interest rate of
7.15% maturing at various dates through 2028. The Company has
$1.7 billion of unsecured debt and $541.7 million of secured debt
outstanding at March 31, 2000. Scheduled principal amortization
of such debt totaled $2.7 million for the three months ended March
31, 2000.
Following is a summary of the scheduled future amortization and
maturities of the Company's indebtedness at March 31, 2000 (in
thousands):
<TABLE>
<CAPTION>
Future Repayments
----------------------------------------- Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
---- ------------ ----------- ------------ -----------------
<S> <C> <C> <C> <C>
2000 10,118 62,318 72,436 7.15%
2001 13,733 587,381 601,114 6.79%
2002 14,130 55,037 69,167 7.35%
2003 13,979 300,047 314,026 7.58%
2004 12,590 176,146 188,736 7.41%
2005 11,559 213,662 225,221 7.25%
2006 10,856 146,178 157,034 7.12%
2007 9,172 116,576 125,748 7.13%
2008 8,386 100,000 108,386 6.79%
2009 9,010 150,000 159,010 7.72%
Thereafter 32,455 223,114 255,569 6.98%
------- --------- ---------
Total $145,988 $2,130,459 $2,276,447 7.15%
======= ========= =========
</TABLE>
- 16 -
<PAGE>
FUNDS FROM OPERATIONS
Management believes that Funds From Operations ("FFO"), which is
defined by the National Association of Real Estate Investment
Trusts as net income or loss, excluding gains or losses from debt
restructuring and sales of depreciated property, plus operating
property depreciation and amortization and adjustments for
minority interest and unconsolidated companies 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>
2000 1999
---- ----
<S> <C> <C>
Net income available for common shares $ 48,859 $ 27,394
Add back (deduct):
Depreciation and amortization 39,779 20,454
Share of joint venture adjustments 1,417 1,515
Earnings from depreciated property sales (11,070) (2,314)
Minority interest share of add-backs (3,955) (2,189)
------- -------
Funds From Operations $ 77,535 $ 44,860
======= =======
Cash flow provided by (used by):
Operating activities $ 83,608 $ 32,326
Investing activities (160,661) (167,620)
Financing activities 102,274 163,340
</TABLE>
The increase in FFO for the three months ended March 31, 2000
compared to the three months ended March 31, 1999 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.
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
- 17 -
<PAGE>
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-WEEKS REALTY CORPORATION
Registrant
Date: May , 2000 /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-Weeks Realty Corporation
Gentlemen:
RE: Registration Statements Nos. 33-64567, 33-64659, 333-62381, 333-57755,
333-42513, 333-39965, 333-49911, 333-50081, 33-55727, 333-04695, 333-24289,
333-26833, 333-66919, 333-26845, 333-35008, 333-82061 and 333-82063
With respect to the subject registration statements, we
acknowledge our awareness of the use therein of our report dated
April 26, 2000 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 LLP
Indianapolis, Indiana
May 11, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
DUKE-WEEKS REALTY CORPORATION AND SUBSIDIARIES MARCH 31, 2000 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 37,913
<SECURITIES> 0
<RECEIVABLES> 83,792
<ALLOWANCES> (2,519)
<INVENTORY> 0
<CURRENT-ASSETS> 265,602
<PP&E> 5,521,972
<DEPRECIATION> (278,164)
<TOTAL-ASSETS> 5,646,440
<CURRENT-LIABILITIES> 252,050
<BONDS> 2,276,447
0
609,883
<COMMON> 2,070,105
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,646,440
<SALES> 0
<TOTAL-REVENUES> 205,105
<CGS> 0
<TOTAL-COSTS> 101,116
<OTHER-EXPENSES> 22,449
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,681
<INCOME-PRETAX> 48,459
<INCOME-TAX> 0
<INCOME-CONTINUING> 48,859
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,859
<EPS-BASIC> $.39
<EPS-DILUTED> $.39
</TABLE>
