DUKE REALTY CORP - Annual Report: 2019 (Form 10-K)

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•	enhances investors' understanding of the General Partner and the Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

•	eliminates duplicative disclosure and provides a more streamlined and readable presentation of information since a substantial portion of the Company's disclosure applies to both the General Partner and the Partnership; and

•	creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

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•	Changes in general economic and business conditions, including the financial condition of our tenants and the value of our real estate assets;

•	The General Partner's continued qualification as a REIT for U.S. federal income tax purposes;

•	Heightened competition for tenants and potential decreases in property occupancy;

•	Potential changes in the financial markets and interest rates;

•	Volatility in the General Partner's stock price and trading volume;

•	Our continuing ability to raise funds on favorable terms, or at all;

•	Our ability to successfully identify, acquire, develop and/or manage properties on terms that are favorable to us;

•	Potential increases in real estate construction costs including construction cost increases as the result of trade disputes and tariffs on goods imported in the United States;

•	Our real estate asset concentration in the industrial sector and potential volatility in this sector;

•	Our ability to successfully dispose of properties on terms that are favorable to us;

•	Our ability to successfully integrate our acquired properties;

•	Our ability to retain our current credit ratings;

•	Inherent risks related to disruption of information technology networks and related systems and cyber security attacks;

•	Inherent risks in the real estate business, including, but not limited to, tenant defaults, potential liability relating to environmental matters and liquidity of real estate investments; and

•	Other risks and uncertainties described herein, as well as those risks and uncertainties discussed from time to time in our other reports and other public filings with the Securities and Exchange Commission ("SEC").

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•	We could become engaged in a dispute with any of our joint venture partners that might affect our ability to develop or operate a property;

•	Our joint venture partners may have different objectives than we have regarding the appropriate timing and terms of any sale or refinancing of properties;

•	Our joint venture partners may have competing interests in our markets that could create conflict of interest issues; and

•	Maturities of debt encumbering our jointly owned investments may not be able to be refinanced at all or on terms that are as favorable as the current terms.

•	Changes in the general economic climate;

•	The availability of capital on favorable terms, or at all;

•	Increases in interest rates;

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•	Local conditions such as oversupply of property or a reduction in demand;

•	Competition for tenants;

•	Changes in market rental rates;

•	Delay or inability to collect rent from tenants who are bankrupt, insolvent or otherwise unwilling or unable to pay;

•	Difficulty in leasing or re-leasing space quickly or on favorable terms;

•	Costs associated with periodically renovating, repairing and reletting rental space;

•	Our ability to provide adequate maintenance and insurance on our properties;

•	Our ability to control variable operating costs;

•	Changes in government regulations; and

•	Potential liability under, and changes in, environmental, zoning, tax and other laws.

•	Unsuccessful development opportunities could result in direct expenses to us;

•	Construction costs could increase as the result of trade disputes and tariffs on goods imported in the United States;

•	Construction costs of a project may exceed original estimates, possibly making the project less profitable than originally estimated, or possibly unprofitable;

•	Time required to complete the construction of a project or to lease up the completed project may be greater than originally anticipated, thereby adversely affecting our cash flow and liquidity;

•	Occupancy rates and rents of a completed project may not be sufficient to make the project profitable; and

•	Favorable sources to fund our development activities may not be available.

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•	Prices paid for acquired facilities are based upon a series of market judgments; and

•	Costs of any improvements required to bring an acquired facility up to standards to establish the market position intended for that facility might exceed budgeted costs.

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•	liabilities for clean-up of undisclosed environmental contamination;

•	claims by tenants, vendors or other persons against the former owners of the properties;

•	liabilities incurred in the ordinary course of business; and

•	claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

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•	The General Partner would not be allowed a deduction for dividends distributed to shareholders and would be subject to federal corporate income tax (and any applicable state and local income taxes) on its taxable income at regular corporate income tax rates;

•	Unless the General Partner was entitled to relief under certain statutory provisions, it would be disqualified from treatment as a REIT for the four taxable years following the year during which it ceased to qualify as a REIT;

•	The General Partner's net earnings available for investment or distribution to its shareholders would decrease due to the additional tax liability for the year or years involved; and

•	The General Partner would no longer be required to make any distributions to shareholders in order to qualify as a REIT.

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•	The holders of 80% of the General Partner's outstanding shares of capital stock approve the transaction;

•	The transaction has been approved by three-fourths of those directors who served on the General Partner's board before the shareholder became a 10% owner; or

•	The significant shareholder complies with the "fair price" provisions of the General Partner's charter.

•	Any voluntary sale, exchange, merger, consolidation or other disposition of all or substantially all of the assets of the Partnership in one or more transactions other than a disposition occurring upon a financing or refinancing of the Partnership;

•	The General Partner's merger, consolidation or other business combination with another entity unless after the transaction substantially all of the assets of the surviving entity are contributed to the Partnership in exchange for Common Units;

•	The General Partner's assignment of its interests in the Partnership other than to one of its wholly owned subsidiaries; and

•	Any reclassification or recapitalization or change of outstanding shares of the General Partner's common stock other than certain changes in par value, stock splits, stock dividends or combinations.

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(1)	Represents the average annual base rental payments, on a straight-line basis for the term of each lease, from space leased to tenants as of December 31, 2019, excluding amounts paid by tenants as reimbursement for operating expenses. Unconsolidated joint venture properties are shown at 100% of square feet and net effective rents, without regard to our ownership percentage.

(2)	Annual net effective rent per leased square foot.

(3)	Represents properties not located in our primary markets.

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Owned or jointly controlled 519 primarily industrial properties, of which 497 properties with 146.4 million square feet were in service and 22 properties with 8.9 million square feet were under development. The 497 in-service properties were comprised of 459 consolidated properties with 135.5 million square feet and 38 unconsolidated joint venture properties with 11.0 million square feet. The 22 properties under development consisted of 21 consolidated properties with 8.7 million square feet and one unconsolidated joint venture property with 133,000 square feet.

•	Owned directly, or through ownership interests in unconsolidated joint ventures (with acreage not adjusted for our percentage ownership interest), approximately 1,380 acres of land and controlled approximately 1,000 acres through purchase options.

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•	We generated $432.7 million of total net cash proceeds from the disposition of 28 consolidated buildings and 110 acres of wholly owned undeveloped land.

•	We acquired six industrial properties during the year ended December 31, 2019 totaling $217.1 million.

•	We started new development projects with expected total costs of $1.09 billion, which included $8.2 million of expected total costs for a development project started within one unconsolidated joint venture. The development projects started in 2019 were, in aggregate, 54.6% leased at December 31, 2019.

•	We placed 19 newly completed wholly owned development projects in service, which totaled 7.3 million square feet with total costs of $578.4 million. These properties were 79.3% leased at December 31, 2019.

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The total estimated cost of our properties under construction at December 31, 2019, with costs for unconsolidated properties shown at 100%, totaled $1.06 billion, with $541.1 million of such costs already incurred. The total estimated cost for one unconsolidated joint venture property under construction at December 31, 2019 was $8.2 million, with $5.2 million of such costs already incurred. The consolidated properties under construction were 55.1% pre-leased, while the unconsolidated joint venture property under construction was 100% pre-leased.

•	Income from continuing operations before income taxes was $440.9 million and $392.2 million for the twelve months ended December 31, 2019 and 2018, respectively.

•	Same-property net operating income, on a cash basis, as defined hereafter under "Supplemental Performance Measures", increased by 4.7% for the twelve months ended December 31, 2019, as compared to the same period in 2018.

•	As the result of leasing up space in speculative developments throughout 2019, the percentage of total square feet leased for our in-service portfolio of consolidated properties increased from 96.4% at December 31, 2018 to 96.6% at December 31, 2019.

•	Total leasing activity for our consolidated properties totaled 24.3 million square feet in 2019 compared to 24.1 million square feet in 2018. The mix in leasing activity between renewals and the leasing of new developments was generally consistent with 2018.

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Total leasing activity for our consolidated properties in 2019 included 10.9 million square feet of lease renewals, which represented a 79.1% retention rate on a square foot basis. New second generation and renewal leases, on a combined basis, executed for consolidated properties during the year resulted in a 27.3% increase to net effective rents ("net effective rents" is defined hereafter in the "Key Performance Indicators" section) when compared to the previous leases of the same space.

•	During 2019, the General Partner issued 8.0 million common shares pursuant to its at the market ("ATM") equity programs, generating gross proceeds of $266.3 million and, after deducting commissions and other costs, net proceeds of $263.3 million.

•	In November 2019, we issued $400.0 million of senior unsecured notes, which bear interest at a stated interest rate of 2.88% and mature on November 15, 2029. In connection with this offering, we settled the outstanding forward starting interest rate swaps, which were designated hedges for this offering, for a cash

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•	In October 2019, we redeemed $250.0 million of senior unsecured notes, which had a scheduled maturity date of February 2021 and bore a stated interest rate of 3.88% and an effective rate of 3.91%. We recognized a loss on debt extinguishment of $6.3 million, which included a prepayment premium and the write-off of unamortized deferred financing costs.

•	In August 2019, we issued $175.0 million of senior unsecured notes that bear interest at a stated interest rate of 3.38%, have an effective interest rate of 2.80%, and mature on December 15, 2027.

•	During 2019, we repaid three fixed rate secured loans, totaling $41.7 million, which had a weighted average stated interest rate of 7.76%.

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•	We acquired 15 properties and placed 37 developments in service from January 1, 2018 to December 31, 2019, which provided incremental revenues from continuing operations of $65.8 million in the year ended December 31, 2019 when compared to 2018.

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Increased rental rates and, to a lesser extent, occupancy within our "same-property" portfolio, as well as the lease up of properties that were placed in service prior to January 1, 2018 but were not in the "same-property" portfolio, also contributed to the increase to rental and related revenue from continuing operations. Average rental rates and commencement occupancy in our "same-property" portfolio both increased from the year ended December 31, 2018.

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The sale of 43 in-service properties since January 1, 2018, which did not meet the criteria to be classified within discontinued operations, resulted in a decrease of $21.3 million to rental and related revenue from continuing operations in the year ended December 31, 2019, as compared to 2018, which partially offset the aforementioned increases to rental and related revenue from continuing operations.

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•	The acquisition of 36 properties and placing of 41 developments in service from January 1, 2017 to December 31, 2018 provided combined incremental revenues of $106.4 million in the year ended December 31, 2018 when compared to 2017.

•	Increased occupancy and rental rates within our "same-property" portfolio also contributed to the increase to rental and related revenue from continuing operations. Average commencement occupancy and rental rates in our "same-property" portfolio both increased, as compared to 2017.

•	Expense reimbursements increased primarily due to increased real estate taxes in our existing properties, as compared to 2017.

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The above items contributing to the increase to rental and related revenue from continuing operations were partially offset by the sale of 28 in-service properties since January 1, 2017, which did not meet the criteria to be classified within discontinued operations, and resulted in a $35.7 million decrease in rental and related revenue from continuing operations in the year ended December 31, 2018 when compared to 2017.

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The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be received pursuant to the lease over its remaining term and (ii) management's estimate of the amounts that would be received using fair market rates over the remaining term of the lease. The amounts allocated to above market leases are included in deferred leasing and other costs in the balance sheet and below market leases are included in other liabilities in the balance sheet; both are amortized to rental income over the remaining terms of the respective leases.

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Factors considered in determining the value allocable to in-place leases include estimates, during hypothetical lease up periods, related to space that is actually leased at the time of acquisition. These estimates include (i) lost rent at market rates, (ii) fixed operating costs that will be recovered from tenants and (iii) theoretical leasing commissions required to execute similar leases. These intangible assets are included in deferred leasing and other costs in the balance sheet and are amortized over the remaining term of the existing lease.

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•	property investment;

•	leasing/capital costs;

•	dividends and distributions to shareholders and unitholders;

•	long-term debt maturities;

•	opportunistic repurchases of outstanding debt; and

•	other contractual obligations.

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•	Real estate development costs were $446.8 million, $577.4 million, and $549.6 million during 2019, 2018, and 2017, respectively.

•	We paid cash of $598.4 million, $592.4 million and $1.23 billion, for real estate and undeveloped land acquisitions during 2019, 2018 and 2017, respectively.

•	Sales of land and property generated net proceeds of $432.7 million, $511.4 million and $2.52 billion during 2019, 2018 and 2017, respectively.

•	During 2019, we received repayments of $162.6 million on notes receivable from property sales, compared to $154.1 million and $3.7 million in 2018 and 2017, respectively.

•	Second generation tenant improvements, leasing costs and building improvements totaled $47.5 million, $53.5 million and $52.6 million during 2019, 2018 and 2017, respectively.

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We receive capital distributions from unconsolidated joint ventures, either as the result of selling our ownership interests in certain unconsolidated joint ventures or from our share of the proceeds from property sales from unconsolidated joint ventures. In 2019, we received $26.3 million in capital distributions from unconsolidated joint ventures, primarily related to the sale of three properties within three of our unconsolidated joint ventures. We received $23.1 million in capital distributions from unconsolidated joint ventures during 2018, primarily related to the sale of six properties within three of our unconsolidated joint ventures. We received $125.0 million in capital distributions from unconsolidated joint ventures during 2017, primarily related to selling our interests in two unconsolidated joint ventures in connection with the Medical Office Portfolio Disposition.

•	We made capital contributions and advances to unconsolidated joint ventures in the amounts of $34.5 million, $5.9 million and $10.3 million during 2019, 2018 and 2017, respectively.

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•	During 2019, the General Partner issued 8.0 million common shares pursuant to its ATM equity programs for net proceeds of $263.3 million, compared to 990,400 shares of common stock for net proceeds of $28.4 million in 2018. The General Partner did not issue any shares of common stock pursuant to its ATM equity programs during 2017.

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We issued $575.0 million, $450.0 million and $300.0 million of senior unsecured notes during 2019, 2018 and 2017, respectively. The 2019 unsecured debt issuances consist of $175.0 million of senior unsecured notes issued in August 2019 for gross proceeds of $182.3 million and $400.0 million of senior unsecured notes issued in November 2019 with a corresponding cash payment of $35.6 million for termination of the five forward starting interest rate swaps entered in 2018 and 2019.

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During 2019, the Partnership paid cash of $255.8 million for the early redemption of $250.0 million of senior unsecured notes that were scheduled to mature in February 2021. During 2018, the Partnership repaid $7.0 million of unsecured debt. In 2017, the Partnership paid cash of $689.6 million to execute the repayment of a $250.0 million variable rate term loan, which was prepayable without penalty, and the early redemption of $414.3 million of senior unsecured notes.

•	During 2019, the Partnership repaid three secured loans for $41.7 million compared to repayments of three secured loans for $227.1 million in 2018 and eight secured loans for $66.5 million in 2017.

•	We decreased net borrowings on the Partnership's unsecured line of credit by $30.0 million in 2019, increased net borrowings by $30.0 million in 2018 and decreased net borrowings by $48.0 million in 2017.

•	We paid regular cash dividends or distributions of $0.88, $0.815 and $0.77 per common share or per Common Unit during the years ended December 31, 2019, 2018 and 2017, respectively.

•	We paid a special dividend of $0.85 per common share or Common Unit during the fourth quarter of 2017. We did not pay special dividends in 2019 or 2018.

•	Changes in book cash overdrafts are classified as financing activities within our consolidated Statements of Cash Flows. Book cash overdrafts were $14.4 million, $14.3 million and $36.3 million at December 31, 2019, 2018 and 2017, respectively.

•	In 2019, we paid off a special assessment bond for $9.9 million, which was reflected within Other Financing Activities on our Consolidated Statements of Cash Flows. We did not make similar significant repayments during 2018 or 2017.

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(1)	Our long-term debt consists of both secured and unsecured debt and includes both principal and interest. Interest expense for variable rate debt was calculated using the interest rate at December 31, 2019.

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(2)	Represents fees on our unsecured line of credit, which has a contractual maturity date in January 2022, with two six-month extension options, which we may exercise at our discretion.

(3)	Our share of unconsolidated joint venture debt includes both principal and interest. Interest expense for variable rate debt was calculated using the interest rate at December 31, 2019.

(4)	Due to a new accounting standard effective January 1, 2019, as a lessee we are required to record both a right-of-use asset and lease liability for our ground and office space leases that we expect to approximate the present value of our future minimum lease payments at December 31, 2019. See Note 2 to the Consolidated Financial Statements for additional information.

(5)	Represents estimated remaining costs on the completion of owned development projects and third-party construction projects.

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(a)	The following documents are filed as part of this Annual Report:

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•	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the company;

•	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

•	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

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•	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Partnership;

•	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the General Partner; and

•	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership's assets that could have a material effect on the financial statements.

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(1)	The Company

(2)	Summary of Significant Accounting Policies

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(3)	Restricted Cash

(4)	Acquisitions and Dispositions

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(5)	Related Party Transactions

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(6)	Investments in Unconsolidated Joint Ventures

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(7)	Real Estate Assets, Discontinued Operations, Assets Held-for-Sale and Impairments

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(8)	Indebtedness

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•	In November 2019, we issued $400.0 million of senior unsecured notes that bear interest at a stated interest rate of 2.88%, have an effective interest rate of 3.96% when including the impact of interest rate swap amortization from AOCL, and mature on November 15, 2029.

•	In October 2019, we redeemed $250.0 million of senior unsecured notes that had a scheduled maturity date of February 2021 and bore a stated interest rate of 3.88% and an effective rate of 3.91%. We recognized a loss on debt extinguishment of $6.3 million, which included a prepayment premium and the write-off of unamortized deferred financing costs.

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In August 2019, we issued $175.0 million of senior unsecured notes bearing interest at a stated interest rate of 3.38% and maturing on December 15, 2027, at 104.16% par value, resulting in an effective interest rate of 2.80%. Proceeds from the unsecured notes offering were primarily used to repay the borrowings under the unsecured line of credit. The notes were issued as additional notes under an indenture pursuant to which we previously issued $300.0 million senior unsecured notes due 2027 in December 2017. These notes have substantially identical terms.

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In September 2018, we issued $450.0 million of senior unsecured notes that bear interest at a stated interest rate of 4.00%, have an effective interest rate of 4.13%, and mature on September 15, 2028. A portion of these proceeds were used to repay two of the secured loans noted above, totaling $223.9 million with a weighted average stated interest rate of 7.63% and a maturity date of March 10, 2019.

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(9)	Segment Reporting

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(10)	Employee Benefit Plans

(11)	Shareholders' Equity of the General Partner and Partners' Capital of the Partnership

(12)	Stock Based Compensation

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(13)	Financial Instruments

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(14)	Commitments and Contingencies

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(15)	Selected Interim Financial Information (unaudited)

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(16)	Subsequent Events

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(1)	The tax basis (in thousands) of our real estate assets at December 31, 2019 was approximately $7,289,109 (unaudited) for federal income tax purposes.

(2)	Depreciation of real estate is computed using the straight-line method not to exceed 40 years for buildings and 15 years for land improvements for properties that we develop, and not to exceed 30 years for buildings and 10 years for land improvements for properties that we acquire. Tenant improvements are depreciated over shorter periods based on lease terms (generally 3 to 10 years).

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