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DUKE REALTY CORP - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 1-9044 (Duke Realty Corporation) 0-20625 (Duke Realty Limited Partnership)
dukerealtylogostacka01a01a15.jpg
DUKE REALTY CORPORATION
DUKE REALTY LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)
Indiana
(Duke Realty Corporation)
 
35-1740409
 (Duke Realty Corporation)
Indiana
(Duke Realty Limited Partnership)
 
35-1898425
 (Duke Realty Limited Partnership)
(State or Other Jurisdiction
of Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
600 East 96th Street, Suite 100
 
 
Indianapolis,
Indiana
 
46240
        (Address of Principal Executive Offices)
 
(Zip Code)
Registrant's Telephone Number, Including Area Code:
(317)
808-6000
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of Class
 
Trading Symbols
 
Name of Exchange on Which Registered
Duke Realty Corporation
 
Common Stock, $0.01 par value
 
DRE
 
New York Stock Exchange
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.
Duke Realty Corporation
Yes
 No  
 
Duke Realty Limited Partnership
Yes 
 No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Duke Realty Corporation
Yes
 No  
 
Duke Realty Limited Partnership
Yes 
 No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Duke Realty Corporation:
Large accelerated filer
Accelerated filer  
Non-accelerated filer  
Smaller reporting company  
Emerging growth company
Duke Realty Limited Partnership:
Large accelerated filer 
 

Accelerated filer  
Non-accelerated filer  
Smaller reporting company  
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Duke Realty Corporation
Yes
No  
 
Duke Realty Limited Partnership
Yes  
No  
The number of shares of Duke Realty Corporation's common stock outstanding at July 31, 2019 was 361,443,988.



EXPLANATORY NOTE
This report (the "Report") combines the quarterly reports on Form 10-Q for the period ended June 30, 2019 of both Duke Realty Corporation and Duke Realty Limited Partnership. Unless stated otherwise or the context otherwise requires, references to "Duke Realty Corporation" or the "General Partner" mean Duke Realty Corporation and its consolidated subsidiaries, and references to the "Partnership" mean Duke Realty Limited Partnership and its consolidated subsidiaries. The terms the "Company," "we," "us" and "our" refer to the General Partner and the Partnership, collectively, and those entities owned or controlled by the General Partner and/or the Partnership.
Duke Realty Corporation is a self-administered and self-managed real estate investment trust ("REIT") and is the sole general partner of the Partnership, owning 99.1% of the common partnership interests of the Partnership ("General Partner Units") as of June 30, 2019. The remaining 0.9% of the common partnership interests ("Limited Partner Units" and, together with the General Partner Units, the "Common Units") are owned by limited partners. As the sole general partner of the Partnership, the General Partner has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Partnership.
The General Partner and the Partnership are operated as one enterprise. The management of the General Partner consists of the same members as the management of the Partnership. As the sole general partner with control of the Partnership, the General Partner consolidates the Partnership for financial reporting purposes, and the General Partner does not have any significant assets other than its investment in the Partnership. Therefore, the assets and liabilities of the General Partner and the Partnership are substantially the same.
We believe combining the quarterly reports on Form 10-Q of the General Partner and the Partnership into this single report results in the following benefits:
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.
 
We believe it is important to understand the few differences between the General Partner and the Partnership in the context of how we operate as an interrelated consolidated company. The General Partner's only material asset is its ownership of partnership interests in the Partnership. As a result, the General Partner does not conduct business itself, other than acting as the sole general partner of the Partnership and issuing public equity from time to time. The General Partner does not issue any indebtedness, but does guarantee some of the unsecured debt of the Partnership. The Partnership holds substantially all the assets of the business, directly or indirectly, and holds the ownership interests related to certain of the Company's investments. The Partnership conducts the operations of the business and has no publicly traded equity. Except for net proceeds from equity issuances by the General Partner, which are contributed to the Partnership in exchange for General Partner Units or Preferred Units, the Partnership generates the capital required by the business through its operations, its incurrence of indebtedness and the issuance of Limited Partner Units to third parties.
Noncontrolling interests, shareholders' equity and partners' capital are the main areas of difference between the consolidated financial statements of the General Partner and those of the Partnership. The noncontrolling interests in the Partnership's financial statements include the interests in consolidated investees not wholly owned by the Partnership. The noncontrolling interests in the General Partner's financial statements include the same noncontrolling interests at the Partnership level, as well as the common limited partnership interests in the Partnership, which are accounted for as partners' capital by the Partnership.
In order to highlight the differences between the General Partner and the Partnership, there are separate sections in this report, as applicable, that separately discuss the General Partner and the Partnership, including separate financial statements and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the General Partner and the Partnership, this report refers to actions or holdings as being actions or holdings of the collective Company.




DUKE REALTY CORPORATION/DUKE REALTY LIMITED PARTNERSHIP
INDEX
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
Duke Realty Corporation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Duke Realty Limited Partnership:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Duke Realty Corporation and Duke Realty Limited Partnership:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
 
June 30,
2019
 
December 31,
2018
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Real estate assets
$
7,669,915

 
$
7,248,346

Construction in progress
423,460

 
477,162

Investments in and advances to unconsolidated joint ventures
113,987

 
110,795

Undeveloped land
368,621

 
360,816

 
8,575,983

 
8,197,119

Accumulated depreciation
(1,427,919
)
 
(1,344,176
)
Net real estate investments
7,148,064

 
6,852,943

 
 
 
 
Real estate investments and other assets held-for-sale
20,472

 
1,082

 
 
 
 
Cash and cash equivalents
8,664

 
17,901

Accounts receivable
21,229

 
14,254

Straight-line rent receivable
120,155

 
109,334

Receivables on construction contracts, including retentions
22,450

 
41,215

Deferred leasing and other costs, net of accumulated amortization of $204,793 and $200,744
316,624

 
313,799

Notes receivable from property sales
142,550

 
272,550

Other escrow deposits and other assets
213,919

 
180,946

 
$
8,014,127

 
$
7,804,024

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
Secured debt, net of deferred financing costs of $189 and $238
$
36,053

 
$
79,563

Unsecured debt, net of deferred financing costs of $24,078 and $26,062
2,550,922

 
2,548,938

Unsecured line of credit
252,000

 
30,000

 
2,838,975

 
2,658,501

 
 
 
 
Liabilities related to real estate investments held-for-sale
633

 

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
67,062

 
92,288

Accrued real estate taxes
76,085

 
73,358

Accrued interest
22,276

 
16,153

Other liabilities
263,839

 
205,433

Tenant security deposits and prepaid rents
43,136

 
45,048

Total liabilities
3,312,006

 
3,090,781

Shareholders' equity:
 
 
 
Common shares ($0.01 par value); 600,000 shares authorized; 360,625 and 358,851 shares issued and outstanding, respectively
3,606

 
3,589

Additional paid-in capital
5,290,382

 
5,244,375

Accumulated other comprehensive loss
(28,717
)
 
(4,676
)
Distributions in excess of net income
(624,674
)
 
(585,087
)
Total shareholders' equity
4,640,597

 
4,658,201

Noncontrolling interests
61,524

 
55,042

Total equity
4,702,121

 
4,713,243

 
$
8,014,127

 
$
7,804,024

See accompanying Notes to Consolidated Financial Statements

3


DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three and six months ended June 30,
(in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
213,107

 
$
192,093

 
$
423,072

 
$
385,549

General contractor and service fee revenue
23,919

 
18,465

 
78,883

 
59,566

 
237,026

 
210,558

 
501,955

 
445,115

Expenses:
 
 
 
 
 
 
 
Rental expenses
17,597

 
16,377

 
38,265

 
36,290

Real estate taxes
32,375

 
31,196

 
64,817

 
62,342

General contractor and other services expenses
23,189

 
15,253

 
75,775

 
55,662

Depreciation and amortization
83,004

 
75,832

 
158,996

 
153,361

 
156,165

 
138,658

 
337,853

 
307,655

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings of unconsolidated joint ventures
4,143

 
1,682

 
8,858

 
9,969

Gain on sale of properties
30,592

 
149,962

 
30,429

 
194,848

Gain on land sales
1,950

 
357

 
2,700

 
3,306

Other operating expenses
(1,518
)
 
(1,529
)
 
(3,641
)
 
(2,798
)
Non-incremental costs related to successful leases
(3,447
)
 

 
(5,603
)
 

General and administrative expenses
(13,420
)
 
(13,459
)
 
(35,403
)
 
(34,482
)
 
18,300

 
137,013

 
(2,660
)
 
170,843

Operating income
99,161

 
208,913

 
161,442

 
308,303

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
2,534

 
4,727

 
5,292

 
9,190

Interest expense
(23,510
)
 
(20,675
)
 
(45,642
)
 
(40,675
)
Loss on debt extinguishment

 
(151
)
 
(13
)
 
(151
)
Gain on involuntary conversion

 

 
2,259

 

Income from continuing operations before income taxes
78,185

 
192,814

 
123,338

 
276,667

Income tax expense
(6,616
)
 
(63
)
 
(7,001
)
 
(10,392
)
Income from continuing operations
71,569

 
192,751

 
116,337

 
266,275

Discontinued operations:
 
 
 
 
 
 
 
Income before gain on sales

 
31

 

 
23

Gain on sale of properties
99

 
2,889

 
254

 
3,021

Income from discontinued operations
99

 
2,920

 
254

 
3,044

Net income
71,668

 
195,671

 
116,591

 
269,319

Net income attributable to noncontrolling interests
(615
)
 
(1,826
)
 
(987
)
 
(2,511
)
Net income attributable to common shareholders
$
71,053

 
$
193,845

 
$
115,604

 
$
266,808

Basic net income per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.20

 
$
0.53

 
$
0.32

 
$
0.74

Discontinued operations attributable to common shareholders

 
0.01

 

 
0.01

Total
$
0.20

 
$
0.54

 
$
0.32

 
$
0.75

Diluted net income per common share:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.20

 
$
0.53

 
$
0.32

 
$
0.73

Discontinued operations attributable to common shareholders

 
0.01

 

 
0.01

Total
$
0.20

 
$
0.54

 
$
0.32

 
$
0.74

Weighted average number of common shares outstanding
359,681

 
357,054

 
359,412

 
356,898

Weighted average number of common shares and potential dilutive securities
362,926

 
362,741

 
362,615

 
362,551

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
71,668

 
$
195,671

 
$
116,591

 
$
269,319

Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized losses on interest rate swap contracts
(14,699
)
 

 
(24,041
)
 

Comprehensive income
$
56,969

 
$
195,671

 
$
92,550

 
$
269,319

   
See accompanying Notes to Consolidated Financial Statements

4


DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30,
(in thousands)
(Unaudited)
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
116,591

 
$
269,319

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
131,878

 
126,039

Amortization of deferred leasing and other costs
27,118

 
27,322

Amortization of deferred financing costs
3,121

 
2,840

Straight-line rental income and expense, net
(10,466
)
 
(10,931
)
Loss on debt extinguishment
13

 
151

Gain on involuntary conversion
(2,259
)
 

Gains on land and property sales
(33,383
)
 
(201,175
)
Third-party construction contracts, net
15,645

 
(5,122
)
Other accrued revenues and expenses, net
10,021

 
24,760

Equity in earnings in excess of operating distributions received from unconsolidated joint ventures
(487
)
 
(2,585
)
Net cash provided by operating activities
257,792

 
230,618

Cash flows from investing activities:
 
 
 
Development of real estate investments
(205,315
)
 
(227,186
)
Acquisition of real estate investments and related intangible assets
(108,201
)
 
(208,914
)
Acquisition of undeveloped land
(200,872
)
 
(98,486
)
Second generation tenant improvements, leasing costs and building improvements
(20,463
)
 
(26,337
)
Other deferred leasing costs
(11,152
)
 
(20,787
)
Other assets
(7,224
)
 
(4,590
)
Proceeds from the repayments of notes receivable from property sales
130,000

 
149,890

Proceeds from land and property sales, net
97,526

 
433,551

Capital distributions from unconsolidated joint ventures

 
17,439

Capital contributions and advances to unconsolidated joint ventures
(5,962
)
 
(2,617
)
Net cash (used for) provided by investing activities
(331,663
)
 
11,963

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common shares, net
42,128

 
1,376

Payments on unsecured debt

 
(1,322
)
Payments on secured indebtedness including principal amortization
(43,502
)
 
(5,708
)
Borrowings on line of credit, net
222,000

 

Distributions to common shareholders
(154,550
)
 
(142,807
)
Distributions to noncontrolling interests, net
(1,180
)
 
(1,361
)
Tax payments on stock-based compensation awards
(5,469
)
 
(8,128
)
Change in book cash overdrafts
15,874

 
(35,331
)
Other financing activities
(9,920
)
 

Deferred financing costs

 
(285
)
Net cash provided by (used for) financing activities
65,381

 
(193,566
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(8,490
)
 
49,015

Cash, cash equivalents and restricted cash at beginning of period
25,517

 
193,627

Cash, cash equivalents and restricted cash at end of period
$
17,027

 
$
242,642

 
 
 
 
Non-cash operating activities:
 
 
 
Liabilities and right-of-use assets - operating leases
$
37,810

 
$

Carrying amount of pre-existing ownership interest in acquired property
$

 
$
5,034

Conversion of Limited Partner Units to common shares
$

 
$
1,938

See accompanying Notes to Consolidated Financial Statements


5


DUKE REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
For the three and six months ended June 30, 2019 and 2018
(in thousands, except per share data)
(Unaudited)
 
 
Common Shareholders
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Distributions
in Excess of
Net Income
 
Noncontrolling
Interests
 
Total
Balance at March 31, 2019
$
3,594

 
$
5,250,157

 
$
(14,018
)
 
$
(618,123
)
 
$
59,561

 
$
4,681,171

Net income

 

 

 
71,053

 
615

 
71,668

Other comprehensive loss

 

 
(14,699
)
 

 

 
(14,699
)
Issuance of common shares
12

 
37,624

 

 

 

 
37,636

Stock-based compensation plan activity

 
2,601

 

 
(291
)
 
2,023

 
4,333

Distributions to common shareholders ($0.215 per share)

 

 

 
(77,313
)
 

 
(77,313
)
Distributions to noncontrolling interests

 

 

 

 
(675
)
 
(675
)
Balance at June 30, 2019
$
3,606

 
$
5,290,382

 
$
(28,717
)
 
$
(624,674
)
 
$
61,524

 
$
4,702,121

Balance at December 31, 2018
$
3,589

 
$
5,244,375

 
$
(4,676
)
 
$
(585,087
)
 
$
55,042

 
$
4,713,243

Net income

 

 

 
115,604

 
987

 
116,591

Other comprehensive loss

 

 
(24,041
)
 

 

 
(24,041
)
Issuance of common shares
13

 
42,115

 

 

 

 
42,128

Contributions from noncontrolling interests

 

 

 

 
312

 
312

Stock-based compensation plan activity
4

 
3,892

 

 
(641
)
 
6,675

 
9,930

Distributions to common shareholders ($0.43 per share)

 

 

 
(154,550
)
 

 
(154,550
)
Distributions to noncontrolling interests

 

 

 

 
(1,492
)
 
(1,492
)
Balance at June 30, 2019
$
3,606

 
$
5,290,382

 
$
(28,717
)
 
$
(624,674
)
 
$
61,524

 
$
4,702,121


 
Common Shareholders
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Net Income
 
Noncontrolling
Interests
 
Total
Balance at March 31, 2018
$
3,570

 
$
5,204,855

 
$
(674,920
)
 
$
47,679

 
$
4,581,184

Net income

 

 
193,845

 
1,826

 
195,671

Issuance of common shares
1

 
669

 

 

 
670

Stock-based compensation plan activity

 
2,144

 
(201
)
 
1,592

 
3,535

Conversion of Limited Partner Units
1

 
1,937

 

 
(1,938
)
 

Distributions to common shareholders ($0.20 per share)

 

 
(71,409
)
 

 
(71,409
)
Distributions to noncontrolling interests

 

 

 
(681
)
 
(681
)
Balance at June 30, 2018
$
3,572

 
$
5,209,605

 
$
(552,685
)
 
$
48,478

 
$
4,708,970

Balance at December 31, 2017
$
3,564

 
$
5,205,316

 
$
(676,036
)
 
$
41,534

 
$
4,574,378

Net income

 

 
266,808

 
2,511

 
269,319

Issuance of common shares
1

 
1,375

 

 

 
1,376

Stock-based compensation plan activity
6

 
977

 
(650
)
 
7,732

 
8,065

Conversion of Limited Partner Units
1

 
1,937

 

 
(1,938
)
 

Distributions to common shareholders ($0.40 per share)

 

 
(142,807
)
 

 
(142,807
)
Distributions to noncontrolling interests

 

 

 
(1,361
)
 
(1,361
)
Balance at June 30, 2018
$
3,572

 
$
5,209,605

 
$
(552,685
)
 
$
48,478

 
$
4,708,970


See accompanying Notes to Consolidated Financial Statements

6


DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)

 
June 30,
2019
 
December 31, 2018
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Real estate assets
$
7,669,915

 
$
7,248,346

     Construction in progress
423,460

 
477,162

     Investments in and advances to unconsolidated joint ventures
113,987

 
110,795

     Undeveloped land
368,621

 
360,816

 
8,575,983

 
8,197,119

     Accumulated depreciation
(1,427,919
)
 
(1,344,176
)
              Net real estate investments
7,148,064

 
6,852,943

 
 
 
 
Real estate investments and other assets held-for-sale
20,472

 
1,082

 
 
 
 
Cash and cash equivalents
8,664

 
17,901

Accounts receivable
21,229

 
14,254

Straight-line rent receivable
120,155

 
109,334

Receivables on construction contracts, including retentions
22,450

 
41,215

Deferred leasing and other costs, net of accumulated amortization of $204,793 and $200,744
316,624

 
313,799

Notes receivable from property sales
142,550

 
272,550

Other escrow deposits and other assets
213,919

 
180,946

 
$
8,014,127

 
$
7,804,024

LIABILITIES AND EQUITY
 
 
 
Indebtedness:
 
 
 
     Secured debt, net of deferred financing costs of $189 and $238
$
36,053

 
$
79,563

     Unsecured debt, net of deferred financing costs of $24,078 and $26,062
2,550,922

 
2,548,938

     Unsecured line of credit
252,000

 
30,000

 
2,838,975

 
2,658,501

 
 
 
 
Liabilities related to real estate investments held-for-sale
633

 

 
 
 
 
Construction payables and amounts due subcontractors, including retentions
67,062

 
92,288

Accrued real estate taxes
76,085

 
73,358

Accrued interest
22,276

 
16,153

Other liabilities
263,839

 
205,433

Tenant security deposits and prepaid rents
43,136

 
45,048

     Total liabilities
3,312,006

 
3,090,781

Partners' equity:
 
 
 
Common equity (360,625 and 358,851 General Partner Units issued and outstanding, respectively)
4,669,314

 
4,662,877

Limited Partners' common equity (3,143 and 2,920 Limited Partner Units issued and outstanding, respectively)
56,910

 
50,585

Accumulated other comprehensive loss
(28,717
)
 
(4,676
)
            Total partners' equity
4,697,507

 
4,708,786

Noncontrolling interests
4,614

 
4,457

     Total equity
4,702,121

 
4,713,243

 
$
8,014,127

 
$
7,804,024

See accompanying Notes to Consolidated Financial Statements

7


DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three and six months ended June 30,
(in thousands, except per unit amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Rental and related revenue
$
213,107

 
$
192,093

 
$
423,072

 
$
385,549

General contractor and service fee revenue
23,919

 
18,465

 
78,883

 
59,566

 
237,026

 
210,558

 
501,955

 
445,115

Expenses:
 
 
 
 
 
 
 
Rental expenses
17,597

 
16,377

 
38,265

 
36,290

Real estate taxes
32,375

 
31,196

 
64,817

 
62,342

General contractor and other services expenses
23,189

 
15,253

 
75,775

 
55,662

Depreciation and amortization
83,004

 
75,832

 
158,996

 
153,361

 
156,165

 
138,658

 
337,853

 
307,655

Other operating activities:
 
 
 
 
 
 
 
Equity in earnings of unconsolidated joint ventures
4,143

 
1,682

 
8,858

 
9,969

Gain on sale of properties
30,592

 
149,962

 
30,429

 
194,848

Gain on land sales
1,950

 
357

 
2,700

 
3,306

Other operating expenses
(1,518
)
 
(1,529
)
 
(3,641
)
 
(2,798
)
Non-incremental costs related to successful leases
(3,447
)
 

 
(5,603
)
 

General and administrative expenses
(13,420
)
 
(13,459
)
 
(35,403
)
 
(34,482
)
 
18,300

 
137,013

 
(2,660
)
 
170,843

Operating income
99,161

 
208,913

 
161,442

 
308,303

Other income (expenses):
 
 
 
 
 
 
 
Interest and other income, net
2,534

 
4,727

 
5,292

 
9,190

Interest expense
(23,510
)
 
(20,675
)
 
(45,642
)
 
(40,675
)
Loss on debt extinguishment

 
(151
)
 
(13
)
 
(151
)
Gain on involuntary conversion

 

 
2,259

 

Income from continuing operations before income taxes
78,185

 
192,814

 
123,338

 
276,667

Income tax expense
(6,616
)
 
(63
)
 
(7,001
)
 
(10,392
)
Income from continuing operations
71,569

 
192,751

 
116,337

 
266,275

Discontinued operations:
 
 
 
 
 
 
 
Income before gain on sales

 
31

 

 
23

Gain on sale of properties
99

 
2,889

 
254

 
3,021

           Income from discontinued operations
99

 
2,920

 
254

 
3,044

Net income
71,668

 
195,671

 
116,591

 
269,319

Net loss (income) attributable to noncontrolling interests
6

 
(2
)
 
16

 
(4
)
Net income attributable to common unitholders
$
71,674

 
$
195,669

 
$
116,607

 
$
269,315

Basic net income per Common Unit:
 
 
 
 
 
 
 
Continuing operations attributable to common unitholders
$
0.20

 
$
0.53

 
$
0.32

 
$
0.74

Discontinued operations attributable to common unitholders

 
0.01

 

 
0.01

Total
$
0.20

 
$
0.54

 
$
0.32

 
$
0.75

Diluted net income per Common Unit:
 
 
 
 
 
 
 
Continuing operations attributable to common unitholders
$
0.20

 
$
0.53

 
$
0.32

 
$
0.73

Discontinued operations attributable to common unitholders

 
0.01

 

 
0.01

Total
$
0.20

 
$
0.54

 
$
0.32

 
$
0.74

Weighted average number of Common Units outstanding
362,826

 
360,447

 
362,517

 
360,272

Weighted average number of Common Units and potential dilutive securities
362,926

 
362,741

 
362,615

 
362,551

Comprehensive income:
 
 
 
 
 
 
 
Net income
$
71,668

 
$
195,671

 
$
116,591

 
$
269,319

Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized losses on interest rate swap contracts
(14,699
)
 

 
(24,041
)
 

Comprehensive income
$
56,969

 
$
195,671

 
$
92,550

 
$
269,319


See accompanying Notes to Consolidated Financial Statements

8


DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30,
(in thousands)
(Unaudited)
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
116,591

 
$
269,319

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of buildings and tenant improvements
131,878

 
126,039

Amortization of deferred leasing and other costs
27,118

 
27,322

Amortization of deferred financing costs
3,121

 
2,840

Straight-line rental income and expense, net
(10,466
)
 
(10,931
)
Loss on debt extinguishment
13

 
151

Gain on involuntary conversion
(2,259
)
 

Gains on land and property sales
(33,383
)
 
(201,175
)
Third-party construction contracts, net
15,645

 
(5,122
)
Other accrued revenues and expenses, net
10,021

 
24,760

Equity in earnings in excess of operating distributions received from unconsolidated joint ventures
(487
)
 
(2,585
)
Net cash provided by operating activities
257,792

 
230,618

Cash flows from investing activities:
 
 
 
Development of real estate investments
(205,315
)
 
(227,186
)
Acquisition of real estate investments and related intangible assets
(108,201
)
 
(208,914
)
Acquisition of undeveloped land
(200,872
)
 
(98,486
)
Second generation tenant improvements, leasing costs and building improvements
(20,463
)
 
(26,337
)
Other deferred leasing costs
(11,152
)
 
(20,787
)
Other assets
(7,224
)
 
(4,590
)
        Proceeds from the repayments of notes receivable from property sales
130,000

 
149,890

Proceeds from land and property sales, net
97,526

 
433,551

Capital distributions from unconsolidated joint ventures

 
17,439

Capital contributions and advances to unconsolidated joint ventures
(5,962
)
 
(2,617
)
Net cash (used for) provided by investing activities
(331,663
)
 
11,963

Cash flows from financing activities:
 
 
 
Contributions from the General Partner
42,128

 
1,376

Payments on unsecured debt

 
(1,322
)
Payments on secured indebtedness including principal amortization
(43,502
)
 
(5,708
)
Borrowings on line of credit, net
222,000

 

Distributions to common unitholders
(155,903
)
 
(144,168
)
Contributions from noncontrolling interests, net
173

 

Tax payments on stock-based compensation awards
(5,469
)
 
(8,128
)
Change in book cash overdrafts
15,874

 
(35,331
)
Other financing activities
(9,920
)
 

Deferred financing costs

 
(285
)
Net cash provided by (used for) financing activities
65,381

 
(193,566
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(8,490
)
 
49,015

Cash, cash equivalents and restricted cash at beginning of period
25,517

 
193,627

Cash, cash equivalents and restricted cash at end of period
$
17,027

 
$
242,642

 
 
 
 
Non-cash operating activities:
 
 
 
Liabilities and right-of-use assets - operating leases

$
37,810

 
$

Carrying amount of pre-existing ownership interest in acquired property
$

 
$
5,034

Conversion of Limited Partner Units to common shares of the General Partner
$

 
$
1,938

See accompanying Notes to Consolidated Financial Statements

9


DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
For the three and six months ended June 30, 2019 and 2018
(in thousands, except per unit data)
(Unaudited)

 
Common Unitholders
 
 
 
 
 
General
 
Limited
 
Accumulated
 
 
 
 
 
 
 
 Partner's
 
Partners'
 
Other
 
Total
 
 
 
 
 
Common Equity
 
Common Equity
 
Comprehensive
Loss
 
Partners' Equity
 
Noncontrolling
Interests
 
Total Equity
Balance at March 31, 2019
$
4,635,628

 
$
54,941

 
$
(14,018
)
 
$
4,676,551

 
$
4,620

 
$
4,681,171

Net income
71,053

 
621

 

 
71,674

 
(6
)
 
71,668

Other comprehensive loss

 

 
(14,699
)
 
(14,699
)
 

 
(14,699
)
Capital contribution from the General Partner
37,636

 

 

 
37,636

 

 
37,636

Stock-based compensation plan activity
2,310

 
2,023

 

 
4,333

 

 
4,333

Distributions to common unitholders ($0.215 per Common Unit)
(77,313
)
 
(675
)
 

 
(77,988
)
 

 
(77,988
)
Balance at June 30, 2019
$
4,669,314

 
$
56,910

 
$
(28,717
)
 
$
4,697,507

 
$
4,614

 
$
4,702,121

Balance at December 31, 2018
$
4,662,877

 
$
50,585

 
$
(4,676
)
 
$
4,708,786

 
$
4,457

 
$
4,713,243

Net income
115,604

 
1,003

 

 
116,607

 
(16
)
 
116,591

Other comprehensive loss

 

 
(24,041
)
 
(24,041
)
 

 
(24,041
)
Capital contribution from the General Partner
42,128

 

 

 
42,128

 

 
42,128

Stock-based compensation plan activity
3,255

 
6,675

 

 
9,930

 

 
9,930

Contributions from noncontrolling interests

 

 

 

 
312

 
312

Distributions to common unitholders ($0.43 per Common Unit)
(154,550
)
 
(1,353
)
 

 
(155,903
)
 

 
(155,903
)
Distributions to noncontrolling interests

 

 

 

 
(139
)
 
(139
)
Balance at June 30, 2019
$
4,669,314

 
$
56,910

 
$
(28,717
)
 
$
4,697,507

 
$
4,614

 
$
4,702,121


 
Common Unitholders
 
 
 
 
 
General
 
Limited
 
 
 
 
 
 
 
 Partner's
 
Partners'
 
Total
 
 
 
 
 
Common Equity
 
Common Equity
 
Partners' Equity
 
Noncontrolling
Interests
 
Total Equity
Balance at March 31, 2018
$
4,533,505

 
$
46,706

 
$
4,580,211

 
$
973

 
$
4,581,184

Net income
193,845

 
1,824

 
195,669

 
2

 
195,671

Capital contribution from the General Partner
670

 

 
670

 

 
670

Stock-based compensation plan activity
1,943

 
1,592

 
3,535

 

 
3,535

Conversion of Limited Partner Units
1,938

 
(1,938
)
 

 

 

Distributions to common unitholders ($0.20 per Common Unit)
(71,409
)
 
(681
)
 
(72,090
)
 

 
(72,090
)
Balance at June 30, 2018
$
4,660,492

 
$
47,503

 
$
4,707,995

 
$
975

 
$
4,708,970

Balance at December 31, 2017
$
4,532,844

 
$
40,563

 
$
4,573,407

 
$
971

 
$
4,574,378

Net income
266,808

 
2,507

 
269,315

 
4

 
269,319

Capital contribution from the General Partner
1,376

 

 
1,376

 

 
1,376

Stock-based compensation plan activity
333

 
7,732

 
8,065

 

 
8,065

Conversion of Limited Partner Units
1,938

 
(1,938
)
 

 

 

Distributions to common unitholders ($0.40 per Common Unit)
(142,807
)
 
(1,361
)
 
(144,168
)
 

 
(144,168
)
Balance at June 30, 2018
$
4,660,492

 
$
47,503

 
$
4,707,995

 
$
975

 
$
4,708,970




See accompanying Notes to Consolidated Financial Statements

10


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    General Basis of Presentation
The interim consolidated financial statements included herein have been prepared by the General Partner and the Partnership. The 2018 year-end consolidated balance sheet data included in this Report was derived from the audited financial statements in the combined Annual Report on Form 10-K of the General Partner and the Partnership for the year ended December 31, 2018 (the "2018 Annual Report"), but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). The financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP 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. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenue and expenses during the reporting period. Our actual results could differ from those estimates and assumptions. These financial statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included herein and the consolidated financial statements and notes thereto included in the 2018 Annual Report.
The General Partner was formed in 1985, and we believe that it qualifies as a REIT under the provisions of the Internal Revenue Code of 1986, as amended (the "Code"). The Partnership was formed on October 4, 1993, when the General Partner contributed all of its properties and related assets and liabilities, together with the net proceeds from an offering of additional shares of its common stock, to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest whose operations began in 1972.
The General Partner is the sole general partner of the Partnership, owning approximately 99.1% of the Common Units at June 30, 2019. The remaining 0.9% of the Common Units are owned by limited partners. As the sole general partner of the Partnership, the General Partner has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Partnership. The General Partner and the Partnership are operated as one enterprise. The management of the General Partner consists of the same members as the management of the Partnership. As the sole general partner with control of the Partnership, the General Partner consolidates the Partnership for financial reporting purposes, and the General Partner does not have any significant assets other than its investment in the Partnership. Therefore, the assets and liabilities of the General Partner and the Partnership are substantially the same.
Limited partners have the right to redeem their Limited Partner Units, subject to certain restrictions. Pursuant to the Fifth Amended and Restated Agreement of Limited Partnership, as amended (the "Partnership Agreement"), the General Partner is obligated to redeem the Limited Partner Units in shares of its common stock, unless it determines in its reasonable discretion that the issuance of shares of its common stock could cause it to fail to qualify as a REIT. Each Limited Partner Unit shall be redeemed for one share of the General Partner's common stock, or, in the event that the issuance of shares could cause the General Partner to fail to qualify as a REIT, cash equal to the fair market value of one share of the General Partner's common stock at the time of redemption, in each case, subject to certain adjustments described in the Partnership Agreement. The Limited Partner Units are not required, per the terms of the Partnership Agreement, to be redeemed in registered shares of the General Partner.
As of June 30, 2019, we owned and operated a portfolio primarily consisting of industrial properties and provided real estate services to third-party owners. Substantially all of our Rental Operations (see Note 11) are conducted through the Partnership. We conduct our Service Operations (see Note 11) through Duke Realty Services, LLC, Duke Realty Services Limited Partnership and Duke Construction Limited Partnership ("DCLP"), which are consolidated entities that are 100% owned by a combination of the General Partner and the Partnership. DCLP is owned through a taxable REIT subsidiary. The consolidated financial statements include our accounts and the accounts of our majority-owned or controlled subsidiaries.  

11


2.    New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Leases
On January 1, 2019, we adopted Accounting Standards Codification ("ASC") 842, Leases ("ASC 842"), utilizing the available election to adopt on a prospective basis. ASC 842 has superseded all previous GAAP guidance for accounting for leases.
As part of adoption, we elected the package of practical expedients available for implementation, which included: (i) relief from re-assessing whether an expired or existing contract meets the definition of a lease, (ii) relief from re-assessing the classification of expired or existing leases at the adoption date and (iii) allowing previously capitalized initial direct leasing costs to continue to be amortized. Due in large part to electing these practical expedients, the adoption of ASC 842 did not result in recording a cumulative adjustment to the opening balance of distributions in excess of net income.
Lessor Accounting
Our primary business is the development, acquisition, and operation of industrial real estate properties that are held for investment and leased to tenants. Due to electing the package of practical expedients that allow for relief from re-assessing the classification of existing leases at the adoption date, as well as based on the characteristics of our underlying assets and leases, all of our leases are classified as operating leases. We manage residual risk through investing in properties that we believe will appreciate in value over time. We also perform a credit analysis for tenants prior to leases being executed, and on an ongoing basis, to ensure collectability is probable prior to recognizing lease revenues on an accrual basis. For lessors, the accounting under ASC 842 remains largely unchanged with the notable exception that ASC 842 requires that lessors expense certain initial direct costs, which were capitalizable under prior leasing standards, as incurred. Under the new standard, only the incremental costs of signing a lease are capitalizable. As the result of this change, we recognized $3.4 million and $5.6 million of expense for internal costs related to successful leases for the three months and six months ended June 30, 2019, presented separately in the line item "Non-Incremental Costs Related to Successful Leases" on the Consolidated Statements of Operations and Comprehensive Income, which previously would have been capitalized. For the three and six months ended June 30, 2018, we capitalized $2.6 million and $7.2 million of internal lease related costs which would have been expensed had ASC 842 been effective.
ASC 842 also provides lessors an additional practical expedient to not separate rental recovery revenue related to lease-related services from the associated rental revenue related to the lease when certain criteria are met. The lease-related services provided to our tenants include property management, common area maintenance ("CAM") and utilities. We assessed the applicable criteria, concluding that the timing and straight-line pattern of transfer to the lessees for rental recovery revenue from our lease-related services and revenue from the underlying leases are the same and that lease classification does not change, and elected to apply this additional practical expedient.
Our leases generally include scheduled rent increases, but do not include variable payments based on indexes. Our rental revenue is primarily based on fixed, non-cancelable leases. Our variable rental revenue primarily consists of amounts recovered from lessees for property tax, insurance and CAM.

12


All revenues related to lease and lease-related services are included in, and comprise substantially all of, the caption "Rental and Related Revenue" on the Consolidated Statements of Operations and Comprehensive Income. The components of Rental and Related Revenue are as follows (in thousands):
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Rental revenue - fixed payments
$
161,483

 
$
318,157

Rental revenue - variable payments (1)
51,624

 
104,915

Rental and related revenue
$
213,107

 
$
423,072

(1) Primarily includes tenant recoveries for real estate taxes, insurance and CAM.
The future minimum rents due to us under non-cancelable operating leases are as follows (in thousands):
Year
June 30, 2019
 
December 31, 2018
2019
$
312,844

 
$
600,385

2020
624,674

 
586,609

2021
587,383

 
529,961

2022
521,164

 
463,462

2023
450,616

 
397,150

Thereafter
1,999,848

 
1,582,598

 
$
4,496,529

 
$
4,160,165


Lessee Accounting
ASC 842 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification determines whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use ("ROU") asset and a lease liability for all leases with a term of greater than 12 months regardless of classification.
As of June 30, 2019, our lease arrangements primarily consisted of office and ground leases. Adoption of the practical expedients resulted in the continued classification of our leases as operating leases. Expense recognized on these leases for the six months ended June 30, 2019 was not material.
For these arrangements, we recognized a ROU asset and a corresponding lease liability at the January 1, 2019 adoption date of ASC 842, representing the discounted value of future lease payments required under our lease arrangements. A $37.8 million ROU asset, net of pre-existing lease related accruals, was included in Other Escrow Deposits and Other Assets, and a corresponding lease liability of $43.7 million was included in Other Liabilities on our Consolidated Balance Sheets as of June 30, 2019. In determining these amounts we elected an available practical expedient that allows us, as a lessee, to not separate lease and non-lease components.
The following table summarizes the future operating lease payments (in thousands) to be made under our non-cancellable lease arrangements:

13


Year
June 30, 2019
 
December 31, 2018
2019
$
2,990

 
$
6,487

2020
7,673

 
7,594

2021
3,069

 
2,987

2022
2,339

 
2,255

2023
2,034

 
1,949

Thereafter
85,559

 
85,523

Total undiscounted operating lease payments
$
103,664

 
$
106,795

Less: imputed interest
(59,969
)
 
 
Present value of operating lease payments
$
43,695

 
 

The weighted average remaining lease term for our lease arrangements, on a combined basis as of June 30, 2019, was 33.4 years. The weighted average discount rate for our lease arrangements as of June 30, 2019 was 4.61%. As the discount rates implied in our lease arrangements are not readily determinable, we utilized our current credit ratings and credit yields observed from market traded securities with similar credit ratings to form a reasonable basis to establish secured borrowing rates when determining the present value of future lease payments.
3.    Reclassifications
Certain amounts in the accompanying consolidated financial statements for 2018 have been reclassified to conform to the 2019 consolidated financial statement presentation.
4.    Restricted Cash
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"). ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows. As a result, entities will no longer present transfers between cash, cash equivalents and restricted cash in the statement of cash flows. We adopted this standard on January 1, 2018, on a retrospective basis, and the adoption did not have a material impact on our consolidated financial statements.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows (in thousands):
 
June 30, 2019
 
December 31, 2018
Cash and cash equivalents
$
8,664

 
$
17,901

Restricted cash included in other escrow deposits and other assets
8,363

 
7,616

Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows
$
17,027

 
$
25,517


5.    Variable Interest Entities
Partnership
Due to the fact that the Limited Partners do not have kick out rights, or substantive participating rights, the Partnership is a variable interest entity ("VIE"). Because the General Partner holds majority ownership and exercises control over every aspect of the Partnership's operations, the General Partner has been determined as the primary beneficiary and, therefore, consolidates the Partnership.


14


The assets and liabilities of the General Partner and the Partnership are substantially the same, as the General Partner does not have any significant assets other than its investment in the Partnership. All of the Company's debt is an obligation of the Partnership.

Joint Ventures

We have equity interests in unconsolidated joint ventures that primarily own and operate rental properties or hold land for development. We consolidate those joint ventures that are considered to be VIEs where we are the primary beneficiary. We analyze our investments in joint ventures to determine if the joint venture is considered a VIE and would require consolidation. We (i) evaluate the sufficiency of the total equity investment at risk, (ii) review the voting rights and decision-making authority of the equity investment holders as a group and whether there are limited partners (or similar owning entities) that lack substantive participating or kick out rights and (iii) establish whether or not activities within the venture are on behalf of an investor with disproportionately few voting rights in making this VIE determination.

To the extent that we own interests in a VIE and we (i) are the sole entity that has the power to direct the activities of the VIE and (ii) have the obligation or rights to absorb the VIE's losses or receive its benefits, then we would be determined to be the primary beneficiary and would consolidate the VIE. To the extent we own interests in a VIE, then at each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary beneficiary. Consolidated joint ventures that are VIEs are not significant in any period presented in these consolidated financial statements.

To the extent that our joint ventures do not qualify as VIEs, they are consolidated if we control them through majority ownership interests or if we are the managing entity (general partner or managing member) and the other partner does not have substantive participating rights. Control is further demonstrated by our ability to unilaterally make significant operating decisions, refinance debt and sell the assets of the joint venture without the consent of the non-managing entity and the inability of the non-managing entity to remove us from our role as the managing entity. Consolidated joint ventures that are not VIEs are not significant in any period presented in these consolidated financial statements.

There were no unconsolidated joint ventures, in which we have any recognized assets or liabilities or have retained any economic exposure to loss at June 30, 2019, that met the criteria to be considered VIEs. Our maximum loss exposure for guarantees of unconsolidated joint venture indebtedness, none of which relate to VIEs, totaled $150.8 million at June 30, 2019.

6.    Acquisitions and Dispositions

Acquisitions and dispositions for the periods presented were completed in accordance with our strategy to reposition our investment concentration among the markets in which we operate and to increase our overall investments in quality industrial projects. Transaction costs related to asset acquisitions are capitalized and transaction costs related to business combinations and dispositions are expensed.

Acquisitions

We paid cash of $108.2 million and $208.9 million for asset acquisitions during the six months ended June 30, 2019 and 2018, respectively.

We acquired three properties during the six months ended June 30, 2019. We determined that these three properties did not meet the definition of a business and, accordingly, we accounted for them as asset acquisitions as opposed to business combinations.

The following table summarizes amounts recognized for each major class of assets (in thousands) for these acquisitions during the six months ended June 30, 2019:

15


Real estate assets
$
104,880

Lease related intangible assets
5,331

Fair value of acquired net assets
$
110,211


The leases in the acquired properties had a weighted average remaining life at acquisition of approximately 5.2 years.

Fair Value Measurements
     
We determine the fair value of the individual components of real estate asset acquisitions primarily through calculating the "as-if vacant" value of a building, using an income approach, which relies significantly upon internally determined assumptions. We have determined that these estimates primarily rely upon level 3 inputs, which are unobservable inputs based on our own assumptions. The most significant assumptions used in calculating the "as-if vacant" value for acquisition activity during the six months ended June 30, 2019 are as follows: 
 
Low
High
Exit capitalization rate
4.23%
5.26%
Net rental rate per square foot
$5.90
$15.60

Capitalized acquisition costs were insignificant and the fair value of the three properties acquired during the six months ended June 30, 2019 was substantially the same as the cost of acquisition.
Dispositions
Dispositions of buildings and undeveloped land generated net cash proceeds of $97.5 million and $433.6 million during the six months ended June 30, 2019 and 2018, respectively. Additionally, during the six months ended June 30, 2019, we collected $130.0 million of principal on notes receivable primarily related to the sale of our medical office portfolio (the "Medical Office Portfolio Disposition") during 2017. The number of buildings sold, as well as their classification between continuing and discontinued operations, is disclosed in Note 12.

7. Indebtedness
All debt is issued directly or indirectly by the Partnership. The General Partner does not have any indebtedness, but does guarantee some of the unsecured debt of the Partnership. The following table summarizes the book value and changes in the fair value of our debt (in thousands):
 
Book Value at 12/31/2018
 
Book Value at 6/30/2019
 
Fair Value at 12/31/2018
 
Issuances and
Assumptions
 
Payments/Payoffs
 
Adjustments
to Fair Value
 
Fair Value at 6/30/2019
Fixed rate secured debt
$
77,601

 
$
34,042

 
$
80,238

 
$

 
$
(43,502
)
 
$
(268
)
 
$
36,468

Variable rate secured debt
2,200

 
2,200

 
2,200

 

 

 

 
2,200

Unsecured debt
2,575,000

 
2,575,000

 
2,549,963

 

 

 
133,712

 
2,683,675

Unsecured line of credit
30,000

 
252,000

 
30,000

 
222,000

 

 

 
252,000

Total
$
2,684,801

 
$
2,863,242

 
$
2,662,401

 
$
222,000

 
$
(43,502
)
 
$
133,444

 
$
2,974,343

Less: Deferred financing costs
26,300

 
24,267

 
 
 
 
 
 
 
 
 
 
Total indebtedness as reported on the consolidated balance sheets
$
2,658,501

 
$
2,838,975

 
 
 
 
 
 
 
 
 
 


Secured Debt

Because our fixed rate secured debt is not actively traded in any marketplace, we utilized a discounted cash flow methodology to determine its fair value. Accordingly, we calculated fair value by applying an estimate of the current

16


market rate to discount the debt's remaining contractual cash flows. Our estimate of a current market rate, which is the most significant input in the discounted cash flow calculation, is intended to replicate debt of similar maturity and loan-to-value relationship. The estimated rates ranged from 3.40% to 3.70%, depending on the attributes of the specific loans. The current market rates we utilized were internally estimated; therefore, we have concluded that our determination of fair value for our fixed rate secured debt was primarily based upon level 3 inputs.

During the six months ended June 30, 2019, we repaid three fixed rate secured loans, totaling $41.7 million, which had a weighted average stated interest rate of 7.76%.

Unsecured Debt

At June 30, 2019, all of our unsecured debt bore interest at fixed rates and primarily consisted of unsecured notes that are publicly traded. We utilized broker estimates in estimating the fair value of our fixed rate unsecured debt. Our unsecured notes are thinly traded and, in certain cases, the broker estimates were not based upon comparable transactions. The broker estimates took into account any recent trades within the same series of our fixed rate unsecured debt, comparisons to recent trades of other series of our fixed rate unsecured debt, trades of fixed rate unsecured debt from companies with profiles similar to ours, as well as overall economic conditions. We reviewed these broker estimates for reasonableness and accuracy, considering whether the estimates were based upon market participant assumptions within the principal and most advantageous market and whether any other observable inputs would be more accurate indicators of fair value than the broker estimates. We concluded that the broker estimates were representative of fair value. We have determined that our estimation of the fair value of our fixed rate unsecured debt was primarily based upon level 3 inputs. The estimated trading values of our fixed rate unsecured debt, depending on the maturity and coupon rates, ranged from 102.00% to 129.00% of face value.
The indentures (and related supplemental indentures) governing our outstanding series of unsecured notes also require us to comply with financial ratios and other covenants regarding our operations. We were in compliance with all such financial covenants at June 30, 2019.

Unsecured Line of Credit
Our unsecured line of credit at June 30, 2019 is described as follows (in thousands):
Description
Borrowing
Capacity
 
Maturity Date
 
Outstanding Balance at June 30, 2019
Unsecured Line of Credit - Partnership
$
1,200,000

 
January 30, 2022
 
$
252,000



The Partnership's unsecured line of credit has an interest rate on borrowings of LIBOR plus 0.875% (equal to 3.29% for our outstanding borrowings at June 30, 2019) and has a maturity date of January 30, 2022, with options to extend until January 30, 2023. Subject to certain conditions, the terms also include an option to increase the facility by up to an additional $800.0 million, for a total of up to $2.00 billion. This line of credit provides us with an option to obtain borrowings from financial institutions that participate in the line at rates that may be lower than the stated interest rate, subject to certain restrictions.
This line of credit contains financial covenants that require us to meet certain financial ratios and defined levels of performance, including those related to fixed charge coverage, unsecured interest expense coverage and debt-to-asset value (with asset value being defined in the Partnership's unsecured line of credit agreement). At June 30, 2019, we were in compliance with all financial covenants under this line of credit.
We utilize a discounted cash flow methodology in order to estimate the fair value of outstanding borrowings on our unsecured line of credit. To the extent that credit spreads have changed since the origination of the line of credit, the net present value of the difference between future contractual interest payments and future interest payments based on our estimate of a current market rate would represent the difference between the book value and the fair value. Our estimate of a current market rate is based upon the rate, considering current market conditions and our specific credit profile, at which we estimate we could obtain similar borrowings. As our credit spreads have not changed

17


appreciably, we believe that the contractual interest rate and the current market rate on the line of credit are the same. The current market rate is internally estimated and therefore is primarily based upon a level 3 input.
      
8.    Shareholders' Equity of the General Partner and Partners' Capital of the Partnership
General Partner
The General Partner has an at the market ("ATM") equity program that allows it to issue and sell its common shares through sales agents from time to time. Actual sales under the ATM equity program depend on a variety of factors to be determined by the General Partner, including, among others, market conditions, the trading price of the General Partner’s common stock, determinations by the General Partner of the appropriate sources of funding and potential uses of funding available.
During the six months ended June 30, 2019, the General Partner issued 1.1 million common shares pursuant to its ATM equity program, generating gross proceeds of $36.1 million and, after deducting commissions and other costs, net proceeds of $35.7 million. The proceeds from these offerings were contributed to the Partnership and used to fund development activities.
Partnership
For each common share or preferred share that the General Partner issues, the Partnership issues a corresponding General Partner Unit or Preferred Unit, as applicable, to the General Partner in exchange for the contribution of the proceeds from the stock issuance. Similarly, when the General Partner redeems or repurchases common shares or preferred shares, the Partnership redeems the corresponding General Partner Units or Preferred Units held by the General Partner at the same price.
9.    Related Party Transactions
We provide property management, asset management, leasing, construction and other tenant-related services to unconsolidated joint ventures in which we have equity interests. We recorded the corresponding fees based on contractual terms that approximate market rates for these types of services and have eliminated our ownership percentage of these fees in the consolidated financial statements. The following table summarizes the fees earned from these joint ventures, prior to the elimination of our ownership percentage (in thousands): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Management fees
$
443

 
$
455

 
$
865

 
$
897

Leasing fees
408

 
890

 
556

 
1,192

Construction and development fees
1,742

 
978

 
3,938

 
1,675


10.    Net Income per Common Share or Common Unit
Basic net income per common share or Common Unit is computed by dividing net income attributable to common shareholders or common unitholders, less dividends or distributions on share-based awards expected to vest (referred to as "participating securities" and primarily composed of unvested restricted stock units), by the weighted average number of common shares or Common Units outstanding for the period.

18


Diluted net income per common share is computed by dividing the sum of net income attributable to common shareholders and the noncontrolling interest in earnings allocable to Limited Partner Units (to the extent the Limited Partner Units are dilutive), less dividends or distributions on participating securities that are anti-dilutive, by the sum of the weighted average number of common shares outstanding and, to the extent they are dilutive, weighted average number of Limited Partner Units outstanding and any potential dilutive securities for the period. Diluted net income per Common Unit is computed by dividing the net income attributable to common unitholders, less dividends or distributions on participating securities that are anti-dilutive, by the sum of the weighted average number of Common Units outstanding and any potential dilutive securities for the period. The following table reconciles the components of basic and diluted net income per common share or Common Unit (in thousands): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
General Partner
 
 
 
 
 
 
 
Net income attributable to common shareholders
$
71,053

 
$
193,845

 
$
115,604

 
$
266,808

Less: dividends on participating securities
(388
)
 
(418
)
 
(777
)
 
(855
)
Basic net income attributable to common shareholders
$
70,665

 
$
193,427

 
$
114,827

 
$
265,953

Add back dividends on dilutive participating securities

 
418

 

 
855

Noncontrolling interest in earnings of common unitholders
621

 
1,824

 
1,003

 
2,507

Diluted net income attributable to common shareholders
$
71,286

 
$
195,669

 
$
115,830

 
$
269,315

Weighted average number of common shares outstanding
359,681

 
357,054

 
359,412

 
356,898

Weighted average Limited Partner Units outstanding
3,145

 
3,393

 
3,105

 
3,374

Other potential dilutive shares
100

 
2,294

 
98

 
2,279

Weighted average number of common shares and potential dilutive securities
362,926

 
362,741

 
362,615

 
362,551

 
 
 
 
 
 
 
 
Partnership
 
 
 
 
 
 
 
Net income attributable to common unitholders
$
71,674

 
$
195,669

 
$
116,607

 
$
269,315

Less: distributions on participating securities
(388
)
 
(418
)
 
(777
)
 
(855
)
Basic net income attributable to common unitholders
$
71,286

 
$
195,251

 
$
115,830

 
$
268,460

Add back distributions on dilutive participating securities

 
418

 

 
855

Diluted net income attributable to common unitholders
$
71,286

 
$
195,669

 
$
115,830

 
$
269,315

Weighted average number of Common Units outstanding
362,826

 
360,447

 
362,517

 
360,272

Other potential dilutive units
100

 
2,294

 
98

 
2,279

Weighted average number of Common Units and potential dilutive securities
362,926

 
362,741

 
362,615

 
362,551


The following table summarizes the data that is excluded from the computation of net income per common share or Common Unit as a result of being anti-dilutive (in thousands): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
General Partner and Partnership
 
 
 
 
 
 
 
Other potential dilutive shares or units:
 
 
 
 
 
 
 
Anti-dilutive outstanding potential shares or units under fixed stock option and other stock-based compensation plans

 

 

 

Anti-dilutive outstanding participating securities
1,960

 

 
1,960

 



19


11.    Segment Reporting
Reportable Segments
As of June 30, 2019, we had two reportable operating segments, the first consisting of the ownership and rental of industrial real estate investments. Our ongoing investments in new real estate investments are determined largely upon anticipated geographic trends in supply and demand for industrial buildings, as well as the real estate needs of our major tenants that operate on a national level. Our strategic initiatives and our allocation of resources have been historically based upon allocation among product types, which was consistent with our designation of reportable segments, and after having sold nearly all of our office and medical office properties we intend to increase our investment in industrial properties and treat them as a single operating and reportable segment. Properties not included in our reportable segments, because they are not industrial properties and do not by themselves meet the quantitative thresholds for separate presentation as a reportable segment, are generally referred to as non-reportable Rental Operations. Our non-reportable Rental Operations primarily include our remaining office properties and medical office property at June 30, 2019. The operations of our industrial properties, as well as our non-reportable Rental Operations, are collectively referred to as "Rental Operations."

Our second reportable segment consists of various real estate services such as property management, asset management, maintenance, leasing, development, general contracting and construction management to third-party property owners and joint ventures, and is collectively referred to as "Service Operations." The Service Operations segment is identified as one single operating segment because the lowest level of financial results reviewed by our chief operating decision maker are the results for the Service Operations segment in total. Further, our reportable segments are managed separately because each segment requires different operating strategies and management expertise.

Revenues by Reportable Segment

The following table shows the revenues for each of the reportable segments, as well as a reconciliation to consolidated revenues (in thousands): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
Rental Operations:
 
 
 
 
 
 
 
Industrial
$
211,004

 
$
190,629

 
$
419,407

 
$
379,944

Non-reportable Rental Operations
1,478

 
1,366

 
2,930

 
4,819

Service Operations
23,919

 
18,465

 
78,883

 
59,566

Total segment revenues
236,401

 
210,460

 
501,220

 
444,329

Other revenue
625

 
98

 
735

 
786

Consolidated revenue from continuing operations
237,026

 
210,558

 
501,955

 
445,115

Discontinued operations

 
27

 

 
32

Consolidated revenue
$
237,026

 
$
210,585

 
$
501,955

 
$
445,147




20


Supplemental Performance Measure

Property-level net operating income on a cash basis ("PNOI") is the non-GAAP supplemental performance measure that we use to evaluate the performance of, and to allocate resources among, the real estate investments in the reportable and operating segments that comprise our Rental Operations. PNOI for our Rental Operations segments is comprised of rental revenues from continuing operations less rental expenses and real estate taxes from continuing operations, along with certain other adjusting items (collectively referred to as "Rental Operations revenues and expenses excluded from PNOI," as shown in the following table). Additionally, we do not allocate interest expense, depreciation expense and certain other non-property specific revenues and expenses (collectively referred to as "Non-Segment Items," as shown in the following table) to our individual operating segments.

We evaluate the performance of our Service Operations reportable segment using net income or loss, as allocated to that segment ("Earnings from Service Operations").

The most comparable GAAP measure to PNOI is income from continuing operations before income taxes. PNOI excludes expenses that materially impact our overall results of operations and, therefore, should not be considered as a substitute for income from continuing operations before income taxes or any other measures derived in accordance with GAAP. Furthermore, PNOI may not be comparable to other similarly titled measures of other companies.
The following table shows a reconciliation of our segment-level measures of profitability to consolidated income from continuing operations before income taxes (in thousands and excluding discontinued operations): 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
PNOI
 
 
 
 
 
 
 
 
Industrial
 
$
154,934

 
$
136,316

 
$
303,840

 
$
264,463

Non-reportable Rental Operations
 
862

 
1,361

 
1,740

 
2,881

PNOI, excluding all sold properties
 
155,796

 
137,677

 
305,580

 
267,344

PNOI from sold properties included in continuing operations
 
387

 
3,117

 
355

 
9,848

PNOI, continuing operations
 
$
156,183

 
$
140,794

 
$
305,935

 
$
277,192

 
 
 
 
 
 
 
 
 
Earnings from Service Operations
 
730

 
3,212

 
3,108

 
3,904

 
 

 

 

 

Rental Operations revenues and expenses excluded from PNOI:
 
 
 
 
 
 
 
 
Straight-line rental income and expense, net
 
4,762

 
4,642

 
10,466

 
10,931

Revenues related to lease buyouts
 

 

 
19

 
23

Amortization of lease concessions and above and below market rents
 
1,542

 
461

 
2,804

 
1,006

Intercompany rents and other adjusting items
 
60

 
(20
)
 
103

 
(6
)
Non-Segment Items:
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated joint ventures
 
4,143

 
1,682

 
8,858

 
9,969

Interest expense
 
(23,510
)
 
(20,675
)
 
(45,642
)
 
(40,675
)
Depreciation and amortization expense
 
(83,004
)
 
(75,832
)
 
(158,996
)
 
(153,361
)
Gain on sale of properties
 
30,592

 
149,962

 
30,429

 
194,848

Interest and other income, net
 
2,534

 
4,727

 
5,292

 
9,190

General and administrative expenses
 
(13,420
)
 
(13,459
)
 
(35,403
)
 
(34,482
)
Gain on land sales
 
1,950

 
357

 
2,700

 
3,306

Other operating expenses
 
(1,518
)
 
(1,529
)
 
(3,641
)
 
(2,798
)
Loss on extinguishment of debt
 

 
(151
)
 
(13
)
 
(151
)
Gain on involuntary conversion
 

 

 
2,259

 

Non-incremental costs related to successful leases
 
(3,447
)
 

 
(5,603
)
 

Other non-segment revenues and expenses, net
 
588

 
(1,357
)
 
663

 
(2,229
)
Income from continuing operations before income taxes
 
$
78,185

 
$
192,814

 
$
123,338

 
$
276,667



21


12.    Real Estate Assets, Discontinued Operations and Assets Held-for-Sale
Real Estate Assets
Real estate assets, excluding assets held-for-sale, consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Buildings and tenant improvements
$
5,259,725

 
$
4,980,003

Land and improvements
2,410,190

 
2,268,343

Real estate assets
$
7,669,915

 
$
7,248,346


Discontinued Operations
The following table illustrates the number of sold or held-for-sale properties in this report, all of which were excluded from discontinued operations:
 
Held-for-Sale at June 30, 2019
 
Sold Year-to-Date in 2019
 
Sold in 2018
 
Total
 
 
 
 
 
 
 
 
 Properties sold or classified as held-for-sale
2
 
1
 
15
 
18

 
The following table illustrates the operational results of the buildings reflected in discontinued operations (in thousands):  
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$

 
$
27

 
$

 
$
32

Operating expenses

 
4

 

 
(9
)
Operating income

 
31

 

 
23

Gain on sale of properties
99

 
2,889

 
254

 
3,021

Income from discontinued operations
$
99

 
$
2,920

 
$
254

 
$
3,044


The amounts classified in discontinued operations for the three and six months ended June 30, 2019 and 2018 were comprised of true-up activity related to properties sold in previous years that were classified as discontinued operations.
Allocation of Noncontrolling Interests - General Partner
The following table illustrates the General Partner's share of the income attributable to common shareholders from continuing operations and discontinued operations, reduced by the allocation of income between continuing and discontinued operations to the noncontrolling interests (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Income from continuing operations attributable to common shareholders
$
70,955

 
$
190,952

 
$
115,352

 
$
263,792

Income from discontinued operations attributable to common shareholders
98

 
2,893

 
252

 
3,016

Net income attributable to common shareholders
$
71,053

 
$
193,845

 
$
115,604

 
$
266,808


Allocation of Noncontrolling Interests - Partnership
Substantially all of the income from discontinued operations for all periods presented in the Partnership's Consolidated Statements of Operations and Comprehensive Income is attributable to the common unitholders.

22


Assets Held-for-Sale
The following table illustrates aggregate balance sheet information for assets held-for-sale (in thousands):
 
Held-for-Sale Properties Included in Continuing Operations
 
June 30, 2019
 
December 31, 2018
Land and improvements
$
5,956

 
$

Buildings and tenant improvements
16,681

 

Undeveloped land
4,849

 
1,966

Accumulated depreciation
(7,949
)
 
(884
)
Deferred leasing and other costs, net
318

 

Other assets
617

 

Total assets held-for-sale
$
20,472

 
$
1,082

 
 
 
 
Accrued expenses
$
556

 
$

Other liabilities
77

 

Total liabilities related to assets held-for-sale
$
633

 
$


13.    Financial Instruments
We are exposed to capital market risk, such as changes in interest rates. In an effort to manage interest rate risk, we may enter into interest rate hedging arrangements from time to time. We do not utilize derivative financial instruments for trading or speculative purposes.

As of June 30, 2019 and December 31, 2018, the following forward-starting interest rate swaps designated as cash flow hedges (in thousands) were outstanding:
 
 
 
 
Asset (Liability) Fair Value
Notional Amount
 
Maturity Date
 
June 30, 2019
 
December 31, 2018
$
125,000

 
10/1/2019
 
$
(11,811
)
 
$
(2,914
)
$
75,000

 
10/1/2019
 
(7,101
)
 
(1,762
)
$
75,000

 
10/1/2019
 
(5,072
)
 

$
50,000

 
10/1/2019
 
(3,388
)
 

$
25,000

 
10/1/2019
 
(1,345
)
 

 
 
 
 
$
(28,717
)
 
$
(4,676
)


We have recorded the fair values of our interest rate swap contracts, which totaled $28.7 million and $4.7 million as of June 30, 2019 and December 31, 2018, respectively, as liabilities, included in Other Liabilities and Accumulated Other Comprehensive Loss on our Consolidated Balance Sheets.

14.    Subsequent Events
Declaration of Dividends/Distributions
The General Partner's board of directors declared the following dividends/distributions at its regularly scheduled board meeting held on July 31, 2019:
Class of stock/units
Quarterly Amount per Share or Unit
 
Record Date
 
Payment Date
Common - Quarterly
$0.215
 
August 15, 2019
 
August 30, 2019


23


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand our operations and our present business environment. Management's Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the notes thereto contained in Part I, Item 1 of this Report, and the consolidated financial statements and notes thereto contained in Part IV, Item 15 of our 2018 Annual Report.
Cautionary Notice Regarding Forward-Looking Statements
Certain statements contained in or incorporated by reference into this Report, including, without limitation, those related to our future operations, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "believe," "estimate," "expect," "anticipate," "intend," "plan," "strategy," "continue," "seek," "may," "could" and similar expressions or statements regarding future periods are intended to identify forward-looking statements, although not all forward-looking statements may contain such words.
These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any predictions of future results, performance or achievements that we express or imply in this Report or in the information incorporated by reference into this Report. Some of the risks, uncertainties and other important factors that may affect future results include, among others:
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;
Our ability to successfully dispose of properties on terms that are favorable to us, including, without limitation, through one or more transactions that are consistent with our previously disclosed strategic plans;
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, cyber security attacks and new system implementation;
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 (the "SEC").
Although we presently believe that the plans, expectations and anticipated results expressed in or suggested by the forward-looking statements contained in or incorporated by reference into this Report are reasonable, all forward-looking statements are inherently subjective, uncertain and subject to change, as they involve substantial risks and uncertainties, including those beyond our control. New factors emerge from time to time, and it is not possible for us to predict the nature, or assess the potential impact, of each new factor on our business. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any of our forward-looking statements for events or circumstances that arise after the statement is made, except as otherwise may be required by law.


24


The above list of risks and uncertainties is only a summary of some of the most important factors and is not intended to be exhaustive. Additional information regarding risk factors that may affect us is included in our 2018 Annual Report. The risk factors contained in our Annual Report are updated by us from time to time in Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings that we make with the SEC. 
 
 
Business Overview
The General Partner and Partnership collectively specialize in the ownership, management and development of industrial real estate.
The General Partner is a self-administered and self-managed REIT that began operations in 1986 and is the sole general partner of the Partnership. The Partnership is a limited partnership formed in 1993, at which time all of the properties and related assets and liabilities of the General Partner, as well as proceeds from a secondary offering of the General Partner's common shares, were contributed to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest whose operations began in 1972. We operate the General Partner and the Partnership as one enterprise, and therefore, our discussion and analysis refers to the General Partner and its consolidated subsidiaries, including the Partnership, collectively. A more complete description of our business, and of management's philosophy and priorities, is included in our 2018 Annual Report.
At June 30, 2019, we:
Owned or jointly controlled 538 primarily industrial properties, of which 519 properties with 151.6 million square feet were in service and 19 properties with 6.4 million square feet were under development. The 519 in-service properties were comprised of 476 consolidated properties with 138.7 million square feet and 43 unconsolidated joint venture properties with 12.9 million square feet. The 19 properties under development consisted entirely of consolidated properties.
Owned directly, or through ownership interests in unconsolidated joint ventures (with acreage not adjusted for our percentage ownership interest), approximately 1,700 acres of land and controlled approximately 1,000 acres through purchase options.
Our overall strategy is to continue to increase our investment in quality industrial properties primarily through development, on both a speculative and build-to-suit basis, supplemented with acquisitions in higher barrier markets with the highest growth potential.

Key Performance Indicators
Our operating results depend primarily upon rental income from our Rental Operations. The following discussion highlights the areas of Rental Operations that we consider to be critical drivers of future revenues.

25


Occupancy Analysis
Our ability to maintain high occupancy rates is a principal driver of maintaining and increasing rental revenue. The following table sets forth percent leased and average net effective rent information regarding our in-service portfolio of rental properties at June 30, 2019 and 2018, respectively:
 
Total Square Feet
(in thousands)
 
Percent of
Total Square Feet
 
Percent Leased*
 
Average Annual Net Effective Rent**
Type
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Industrial
138,504

 
127,024

 
99.8
%
 
99.7
%
 
95.8
%
 
97.6
%
 
$4.82
 
$4.61
Non-reportable Rental Operations
211

 
399

 
0.2
%
 
0.3
%
 
77.3
%
 
58.9
%
 
$24.75
 
$19.84
Total Consolidated
138,715

 
127,423

 
100.0
%
 
100.0
%
 
95.7
%
 
97.5
%
 
$4.85
 
$4.64
Unconsolidated Joint Ventures
12,867

 
11,467

 
 
 
 
 
90.8
%
 
93.8
%
 
$4.12
 
$4.14
Total Including Unconsolidated Joint Ventures
151,582

 
138,890

 
 
 
 
 
95.3
%
 
97.2
%
 
 
 
 
 * Represents the percentage of total square feet leased based on executed leases and without regard to whether the leases have commenced.
**Average annual net effective rent represents average annual base rental payments per leased square foot, on a straight-line basis for the term of each lease, from space leased to tenants at the end of the most recent reporting period. This amount excludes additional amounts paid by tenants as reimbursement for operating expenses.
The lower leased percentage in our industrial portfolio at June 30, 2019, compared to June 30, 2018, resulted from new speculative developments being placed in service, partially offset by net absorptions of previously vacant space.
Vacancy Activity
The following table sets forth vacancy activity, shown in square feet, from our in-service rental properties for the six months ended June 30, 2019 (in thousands):
 
Consolidated Properties
 
Unconsolidated Joint Venture Properties
 
Total Including Unconsolidated Joint Venture Properties
Vacant square feet at December 31, 2018
4,847

 
591

 
5,438

  Acquisitions
162

 

 
162

  Vacant space in completed developments
2,407

 
645

 
3,052

  Expirations
2,154

 
44

 
2,198

  Early lease terminations
212

 
24

 
236

  Property structural changes/other
6

 

 
6

  Leasing of previously vacant space
(3,885
)
 
(115
)
 
(4,000
)
Vacant square feet at June 30, 2019
5,903

 
1,189

 
7,092


26


Total Leasing Activity
The initial leasing of development projects or vacant space in acquired properties is referred to as first generation lease activity. Our ability to maintain and improve occupancy rates and net effective rents primarily depends upon our continuing ability to re-lease expiring space. The leasing of such space that we have previously held under lease to a tenant is referred to as second generation lease activity. Second generation lease activity may be in the form of renewals of existing leases or new second generation leases of previously leased space. The total leasing activity for our consolidated and unconsolidated rental properties, expressed in square feet of leases signed, is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
New Leasing Activity - First Generation Industrial
3,707

 
3,160
 
4,664
 
5,680

New Leasing Activity - Second Generation Industrial
554

 
690
 
857
 
3,323

Renewal Leasing Activity - Industrial
3,083

 
2,035
 
4,586
 
3,512

Non-reportable Rental Operations Leasing Activity

 
4
 
1
 
4

Total Consolidated Leasing Activity
7,344

 
5,889
 
10,108
 
12,519
Unconsolidated Joint Venture Leasing Activity
137

 
1,904
 
210
 
2,224
Total Including Unconsolidated Joint Venture Leasing Activity
7,481

 
7,793
 
10,318
 
14,743
Second Generation Leases
The following table sets forth the estimated costs of tenant improvements and leasing commissions, on a per square foot basis, that we are obligated to fulfill under the second generation industrial leases signed for our rental properties during the three and six months ended June 30, 2019 and 2018:

27


 
Square Feet of Leases
(in thousands)
 
Percent of Expiring Leases Renewed
 
Average Term in Years
 
Estimated Tenant Improvement Cost per Square Foot
 
Leasing Costs per Square Foot
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Three Months
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated - New Second Generation
554

 
690

 
 
 
 
 
5.0

 
4.0
 
$1.43
 
$1.13
 
$1.32
 
$1.59
Unconsolidated Joint Ventures - New Second Generation
70

 
50

 
 
 
 
 
6.7

 
5.0
 
$1.87
 
$0.95
 
$2.41
 
$1.61
Total - New Second Generation
624

 
740

 
 
 
 
 
5.2

 
4.1
 
$1.47
 
$1.12
 
$1.44
 
$1.60
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated - Renewal
3,083

 
2,035

 
82.3
%
 
77.3
%
 
4.8

 
4.3
 
$0.83
 
$0.93
 
$1.57
 
$1.15
Unconsolidated Joint Ventures - Renewal
67

 
50

 
60.6
%
 
31.1
%
 
6.3

 
6.0
 
$0.48
 
$1.02
 
$2.65
 
$1.96
Total - Renewal
3,150

 
2,085

 
81.7
%
 
74.7
%
 
4.9

 
4.4
 
$0.83
 
$0.93
 
$1.59
 
$1.17
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated - New Second Generation
857

 
3,323

 
 
 
 
 
5.8

 
6.5
 
$3.37
 
$1.55
 
$2.36
 
$1.85
Unconsolidated Joint Ventures - New Second Generation
115

 
178

 
 
 
 
 
6.1

 
9.2
 
$1.12
 
$1.95
 
$1.98
 
$3.05
Total - New Second Generation
972

 
3,501

 
 
 
 
 
5.8

 
6.7
 
$3.10
 
$1.57
 
$2.31
 
$1.91
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated - Renewal
4,586

 
3,512

 
82.4
%
 
73.6
%
 
4.5

 
4.4
 
$0.88
 
$1.00
 
$1.41
 
$1.25
Unconsolidated Joint Ventures - Renewal
95

 
112

 
68.4
%
 
39.1
%
 
6.0

 
6.2
 
$0.78
 
$1.15
 
$2.43
 
$2.03
Total - Renewal
4,681

 
3,624

 
82.1
%
 
71.7
%
 
4.5

 
4.5
 
$0.88
 
$1.00
 
$1.43
 
$1.28
Growth in average annual net effective rents for new second generation and renewal leases, on a combined basis, for our consolidated and unconsolidated rental properties, is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Ownership Type
2019
 
2018
 
2019
 
2018
Consolidated properties
28.0
%
 
21.1
%
 
26.5
%
 
23.7
%
Unconsolidated joint venture properties
37.6
%
 
51.8
%
 
28.9
%
 
33.7
%

28


Lease Expirations
The table below reflects our consolidated in-service portfolio lease expiration schedule at June 30, 2019 (in thousands, except percentage data and number of leases):
 
Total Consolidated Portfolio
 
Industrial
 
Non-reportable
Year of
Expiration
Square
Feet
 
Annual Rental
Revenue*
 
Number of Leases
 
Square
Feet
 
Annual Rental
Revenue*
 
Square
Feet
 
Annual Rental
Revenue*
Remainder of 2019
3,365

 
$
15,187

 
36
 
3,360

 
$
15,126

 
5

 
$
61

2020
11,557

 
52,754

 
140
 
11,551

 
52,680

 
6

 
74

2021
13,701

 
61,822

 
151
 
13,701

 
61,822

 

 

2022
19,089

 
79,768

 
145
 
19,077

 
79,640

 
12

 
128

2023
13,102

 
65,627

 
136
 
13,086

 
65,406

 
16

 
221

2024
13,599

 
67,554

 
122
 
13,594

 
67,492

 
5

 
62

2025
11,806

 
57,831

 
67
 
11,806

 
57,831

 

 

2026
9,864

 
46,174

 
50
 
9,864

 
46,174

 

 

2027
6,380

 
27,964

 
20
 
6,380

 
27,964

 

 

2028
7,761

 
51,368

 
27
 
7,642

 
47,881

 
119

 
3,487

2029 and Thereafter
22,588

 
117,632

 
61
 
22,588

 
117,632

 

 

Total Leased
132,812

 
$
643,681

 
955
 
132,649

 
$
639,648

 
163

 
$
4,033

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Portfolio Square Feet
138,715

 
 
 
 
 
138,504

 
 
 
211

 
 
Percent Leased
95.7
%
 
 
 
 
 
95.8
%
 
 
 
77.3
%
 
 
* Annualized rental revenue represents average annual base rental payments, on a straight-line basis for the term of each lease, from space leased to tenants at the end of the most recent reporting period. Annualized rental revenue excludes additional amounts paid by tenants as reimbursement for operating expenses.
Building Acquisitions
Our decision process in determining whether or not to acquire a property or portfolio of properties involves several factors, including expected rent growth, multiple yield metrics, property locations and expected demographic growth in each location, current occupancy of the properties, tenant profile and remaining terms of the in-place leases in the properties. We pursue both brokered and non-brokered acquisitions, and it is difficult to predict which markets may present acquisition opportunities that align with our strategy. Because of the numerous factors considered in our acquisition decisions, we do not establish specific target yields for future acquisitions.
We acquired three buildings during the six months ended June 30, 2019, and nine buildings during the year ended December 31, 2018. The following table summarizes the acquisition price, percent leased at time of acquisition and in-place yields, by product type, for these acquisitions (in thousands, except percentage data):
 
Year-to-Date 2019 Acquisitions
 
Full Year 2018 Acquisitions
Type
Acquisition Price*
 
In-Place Yield**
 
Percent Leased at Acquisition Date***
 
Acquisition Price*
 
In-Place Yield**
 
Percent Leased at Acquisition Date***
Industrial
$
110,211

 
3.7
%
 
76.4
%
 
$
352,617

 
4.2
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
* Includes fair value of real estate assets and net acquired lease-related intangible assets, including above or below market leases, but excludes other acquired working capital assets and liabilities.
** In-place yields of completed acquisitions are calculated as the current annualized net rental payments from space leased to tenants at the date of acquisition, divided by the acquisition price of the acquired real estate. Annualized net rental payments are comprised of base rental payments, excluding additional amounts payable by tenants as reimbursement for operating expenses, less current annualized operating expenses not recovered through tenant reimbursements.
*** Represents percentage of total square feet leased based on executed leases and without regard to whether the leases have commenced, at the date of acquisition.

29


Building Dispositions
We regularly work to identify, consider and pursue opportunities to dispose of properties on an opportunistic basis and on a basis that is generally consistent with our strategic plans.
We sold one consolidated building during the six months ended June 30, 2019 and 15 consolidated buildings during the year ended December 31, 2018. The following table summarizes the sales prices, in-place yields and percent leased, by product type, of these buildings (in thousands, except percentage data):
 
Year-to-Date 2019 Dispositions
 
Full Year 2018 Dispositions
Type
Sales Price
 
In-Place Yield*
 
Percent Leased**
 
Sales Price
 
In-Place Yield*
 
Percent Leased**
Industrial
$
95,500

 
5.3
%
 
100.0
%
 
$
384,137

 
5.8
%
 
97.3
%
Non-reportable Rental Operations

 
%
 
%
 
121,077

 
4.2
%
 
80.1
%
Total
$
95,500

 
5.3
%
 
100.0
%
 
$
505,214

 
5.4
%
 
95.8
%
 
 
 
 
 
 
 
 
 
 
 
 
*   In-place yields of completed dispositions are calculated as annualized net operating income from space leased to tenants at the date of sale on a lease-up basis, including full rent from all executed leases, even if currently in a free rent period, divided by the sales price. Annualized net operating income is comprised of base rental payments, excluding reimbursement of operating expenses, less current annualized operating expenses not recovered through tenant reimbursements.
** Represents percentage of total square feet leased based on executed leases and without regard to whether the leases have commenced, at the date of sale.
Development
At June 30, 2019, we had 6.4 million square feet of property under development with total estimated costs upon completion of $835.0 million compared to 12.3 million square feet with total estimated costs upon completion of $1.01 billion at June 30, 2018. The square footage and estimated costs include both consolidated properties and unconsolidated joint venture development activity, to the extent applicable, at 100%.
There were no unconsolidated joint venture properties under development at June 30, 2019. The following table summarizes our consolidated properties under development at June 30, 2019 (in thousands, except percentage data): 
Ownership Type
Square
Feet
 
Percent
Leased
 
Total
Estimated
Project Costs
 
Total
Incurred
to Date
 
Amount
Remaining
to be Spent
Consolidated properties
6,423
 
46
%
 
$
835,028

 
$
394,881

 
$
440,147


30


Results of Operations
A summary of our operating results and property statistics is as follows (in thousands, except number of properties and per share or Common Unit data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Rental and related revenue from continuing operations
$
213,107

 
$
192,093

 
$
423,072

 
$
385,549

General contractor and service fee revenue
23,919

 
18,465

 
78,883

 
59,566

Operating income
99,161

 
208,913

 
161,442

 
308,303

General Partner
 
 
 
 
 
 
 
Net income attributable to common shareholders
$
71,053

 
$
193,845

 
$
115,604

 
$
266,808

Weighted average common shares outstanding
359,681

 
357,054

 
359,412

 
356,898

Weighted average common shares and potential dilutive securities
362,926

 
362,741

 
362,615

 
362,551

Partnership
 
 
 
 
 
 
 
Net income attributable to common unitholders
$
71,674

 
$
195,669

 
$
116,607

 
$
269,315

Weighted average Common Units outstanding
362,826

 
360,447

 
362,517

 
360,272

Weighted average Common Units and potential dilutive securities
362,926

 
362,741

 
362,615

 
362,551

General Partner and Partnership
 
 
 
 
 
 
 
Basic income per common share or Common Unit:
 
 
 
 
 
 
 
Continuing operations
$
0.20

 
$
0.53

 
$
0.32

 
$
0.74

Discontinued operations
$

 
$
0.01

 
$

 
$
0.01

Diluted income per common share or Common Unit:
 
 
 
 
 
 
 
Continuing operations
$
0.20

 
$
0.53

 
$
0.32

 
$
0.73

Discontinued operations
$

 
$
0.01

 
$

 
$
0.01

Number of in-service consolidated properties at end of period:
476

 
450

 
476

 
450

In-service consolidated square footage at end of period
138,715

 
127,423

 
138,715

 
127,423

Number of in-service unconsolidated joint venture properties at end of period
43

 
41

 
43

 
41

In-service unconsolidated joint venture square footage at end of period
12,867

 
11,467

 
12,867

 
11,467

Supplemental Performance Measures
In addition to net income computed in accordance with GAAP, we assess and measure the overall operating results of the General Partner and the Partnership using certain non-GAAP supplemental performance measures, which include (i) Funds From Operations ("FFO"), (ii) PNOI and (iii) Same-Property Net Operating Income - Cash Basis ("SPNOI").
These non-GAAP metrics are commonly used by industry analysts and investors as supplemental operating performance measures of REITs and are viewed by management to be useful indicators of operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry analysts and investors have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Management believes that the use of FFO, PNOI and SPNOI, combined with net income (which remains the primary measure of performance), improves the understanding of operating results of REITs among the investing public and makes comparisons of REIT operating results more meaningful.
The most comparable GAAP measure to FFO is net income (loss) attributable to common shareholders or common unitholders, while the most comparable GAAP measure to PNOI and SPNOI is income (loss) from continuing operations before income taxes.

31


FFO, PNOI and SPNOI each exclude expenses that materially impact our overall results of operations and, therefore, should not be considered as a substitute for net income (loss) attributable to common shareholders or common unitholders, income (loss) from continuing operations before income taxes, or any other measures derived in accordance with GAAP. Furthermore, these metrics may not be comparable to other similarly titled measures of other companies.
Funds From Operations
The National Association of Real Estate Investment Trusts ("NAREIT") created FFO as a non-GAAP supplemental measure of REIT operating performance. FFO, as defined by NAREIT, represents GAAP net income (loss), excluding gains or losses from sales of real estate assets (including real estate assets incidental to our business) and related taxes, gains and losses from change in control, impairment charges related to real estate assets (including real estate assets incidental to our business) plus certain non-cash items such as real estate asset depreciation and amortization, and after similar adjustments for unconsolidated partnerships and joint ventures. We calculate FFO in accordance with the definition that was adopted by the Board of Governors of NAREIT.
Management believes that the use of FFO as a performance measure enables investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT's activity and assists them in comparing these operating results between periods or between different companies that use the NAREIT definition of FFO.
The following table shows a reconciliation of net income attributable to common shareholders or common unitholders to the calculation of FFO attributable to common shareholders or common unitholders (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income attributable to common shareholders of the General Partner
$
71,053

 
$
193,845

 
$
115,604

 
$
266,808

Add back: Net income attributable to noncontrolling interests - common limited partnership interests in the Partnership
621

 
1,824

 
1,003

 
2,507

Net income attributable to common unitholders of the Partnership
71,674

 
195,669

 
116,607

 
269,315

Adjustments:
 
 
 
 
 
 
 
Depreciation and amortization
83,004

 
75,832

 
158,996

 
153,361

Company share of unconsolidated joint venture depreciation, amortization and other adjustments
2,417

 
2,119

 
4,770

 
4,280

Gain on sale of properties
(30,691
)
 
(152,851
)
 
(30,683
)
 
(197,869
)
Gain on land sales
(1,950
)
 
(357
)
 
(2,700
)
 
(3,306
)
Income tax expense triggered by sales of real estate assets
6,616

 
63

 
7,001

 
10,392

Gains on sales of real estate assets - share of unconsolidated joint ventures
(2,028
)
 
38

 
(4,527
)
 
(6,179
)
FFO attributable to common unitholders of the Partnership
$
129,042

 
$
120,513

 
$
249,464

 
$
229,994

Additional General Partner Adjustments:
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests - common limited partnership interests in the Partnership
(621
)
 
(1,824
)
 
(1,003
)
 
(2,507
)
        Noncontrolling interest share of adjustments
(496
)
 
707

 
(1,138
)
 
369

FFO attributable to common shareholders of the General Partner
$
127,925

 
$
119,396

 
$
247,323

 
$
227,856

Property-Level Net Operating Income - Cash Basis
PNOI is comprised of rental revenues from continuing operations less rental expenses and real estate taxes from continuing operations, along with certain other adjusting items. As a performance metric that consists of only the cash-based revenues and expenses directly related to ongoing real estate rental operations, PNOI is narrower in scope than NAREIT FFO.

32


PNOI, as we calculate it, may not be directly comparable to similarly titled, but differently calculated, measures for other REITs. We believe that PNOI is another useful supplemental performance measure, as it is an input in many REIT valuation models and it provides a means by which to evaluate the performance of the properties within our Rental Operations segments. The operations of our industrial properties, as well as our non-reportable Rental Operations (our residual non-industrial properties that have not yet been sold, referred to throughout as "Non-Reportable"), are collectively referred to as "Rental Operations."
The major factors influencing PNOI are occupancy levels, acquisitions and sales, development properties that achieve stabilized operations, rental rate increases or decreases, and the recoverability of operating expenses.
Note 11 to the consolidated financial statements included in Part I, Item 1 of this Report shows a calculation of our PNOI for the three and six months ended June 30, 2019 and 2018 and provides a reconciliation of PNOI for our Rental Operations segments to income from continuing operations before income taxes.
Same Property Net Operating Income - Cash Basis
We also evaluate the performance of our properties, including our share of properties we jointly control, on a "same property" basis, using a metric referred to as SPNOI. We view SPNOI as a useful supplemental performance measure because it improves comparability between periods by eliminating the effects of changes in the composition of our portfolio.
On an individual property basis, SPNOI is generally computed in a consistent manner as PNOI.
Effective January 1, 2018, we define our "same property" population once a year at the beginning of the current calendar year and include buildings that were stabilized (the term "stabilized" means properties that have reached 90% leased or that have been in-service for at least one year since development completion or acquisition) as of January 1 of the prior calendar year. The "same property" pool is also adjusted to remove properties that were sold subsequent to the beginning of the current calendar year. As such, the "same property" population for the period ended June 30, 2019 includes all properties that we owned or jointly controlled at January 1, 2019, which had both been owned or jointly controlled and had reached stabilization by January 1, 2018, and have not been sold.
A reconciliation of income from continuing operations before income taxes to SPNOI is presented as follows (in thousands, except percentage data):
 
Three Months Ended June 30,
Percent
 
Six Months Ended June 30,
Percent
 
2019
 
2018
Change
 
2019
 
2018
Change
Income from continuing operations before income taxes
$
78,185

 
$
192,814


 
$
123,338

 
$
276,667

 
  Share of SPNOI from unconsolidated joint ventures
4,256

 
3,941

 
 
8,415

 
7,947

 
  PNOI excluded from the "same property" population
(24,406
)
 
(11,251
)
 
 
(44,027
)
 
(19,164
)
 
  Earnings from Service Operations
(730
)
 
(3,212
)
 
 
(3,108
)
 
(3,904
)
 
  Rental Operations revenues and expenses excluded from PNOI
(6,751
)
 
(8,200
)
 
 
(13,747
)
 
(21,802
)
 
  Non-Segment Items
85,092

 
(44,117
)
 
 
199,097

 
15,508

 
SPNOI
$
135,646

 
$
129,975

4.4
%
 
$
269,968

 
$
255,252

5.8
%
The composition of the line items titled "Rental Operations revenues and expenses excluded from PNOI" and "Non-Segment Items" from the table above are shown in greater detail in Note 11 to the consolidated financial statements included in Part I, Item 1 of this Report.


33


We believe that the factors that impact SPNOI are generally the same as those that impact PNOI. The following table details the number of properties, square feet, average commencement occupancy and average cash rental rates for the properties included in SPNOI for the respective periods:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Number of properties
450
 
450
 
450
 
450
Square feet (in thousands) (1)
120,896
 
120,896
 
120,896
 
120,896
Average commencement occupancy percentage (2)
98.5%
 
98.1%
 
98.5%
 
97.9%
Average rental rate - cash basis (3)
$4.50
 
$4.37
 
$4.49
 
$4.36
(1) Includes the total square feet of the consolidated properties that are in the "same property" population as well as 4.5 million square feet of space for unconsolidated joint ventures, which represents our ratable share of the 9.1 million total square feet of space for buildings owned by unconsolidated joint ventures that are in the "same property" population.
(2) Commencement occupancy represents the percentage of total square feet where the leases have commenced.
(3) Represents the average annualized contractual rent per square foot for tenants in occupancy in properties in the "same property" population. Cash rent does not include the tenant's obligation to pay property operating expenses and real estate taxes. If a tenant was within a free rent period, its rent would equal zero for purposes of this metric.
Comparison of Three Months Ended June 30, 2019 to Three Months Ended June 30, 2018
Rental and Related Revenue
The following table sets forth rental and related revenue from continuing and discontinued operations (in thousands): 
 
Three Months Ended June 30,
 
2019
 
2018
Rental and related revenue:
 
 
 
Industrial
$
211,004

 
$
190,629

Non-reportable Rental Operations and non-segment revenues
2,103

 
1,464

Total rental and related revenue from continuing operations
$
213,107

 
$
192,093

Rental and related revenue from discontinued operations

 
27

Total rental and related revenue from continuing and discontinued operations
$
213,107

 
$
192,120

The primary reasons for the increase in rental and related revenue from continuing operations were:
We acquired 12 properties and placed 29 developments in service from January 1, 2018 to June 30, 2019, which provided incremental revenues from continuing operations of $16.9 million during the three months ended June 30, 2019, as compared to the same period in 2018.
Increases in occupancy and rental rates within our "same property" portfolio, as well as within 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.
The sale of 16 in-service properties since January 1, 2018, which did not meet the criteria to be classified within discontinued operations, resulted in a decrease of $3.6 million to rental and related revenue from continuing operations in the three months ended June 30, 2019, as compared to the same period in 2018, which partially offset the aforementioned increases to rental and related revenue from continuing operations.

34


Rental Expenses and Real Estate Taxes
The following table sets forth rental expenses and real estate taxes from continuing and discontinued operations (in thousands):
 
Three Months Ended June 30,
 
2019
 
2018
Rental expenses:
 
 
 
Industrial
$
17,190

 
$
15,289

Non-reportable Rental Operations and non-segment expenses
407

 
1,088

Total rental expenses from continuing operations
$
17,597

 
$
16,377

Rental expenses from discontinued operations

 
(4
)
Total rental expenses from continuing and discontinued operations
$
17,597

 
$
16,373

Real estate taxes:
 
 
 
Industrial
$
32,220

 
$
30,621

Non-reportable Rental Operations and non-segment expenses
155

 
575

Total real estate tax expense from continuing operations
$
32,375

 
$
31,196

Real estate tax expense from discontinued operations

 

Total real estate tax expense from continuing and discontinued operations
$
32,375

 
$
31,196


Rental expenses from continuing operations increased by $1.2 million during the three months ended June 30, 2019, compared to the same period in 2018. The increase to rental expenses was primarily the result of acquisitions and developments placed in service from January 1, 2018 to June 30, 2019, partially offset by the impact of property sales that did not meet the criteria to be classified within discontinued operations.

Real estate tax expense from continuing operations increased by $1.2 million during the three months ended June 30, 2019, compared to the same period in 2018. The increase to real estate tax expense was mainly the result of acquisitions and developments placed in service from January 1, 2018 to June 30, 2019, partially offset by the impact of property sales that did not meet the criteria to be classified within discontinued operations.

Depreciation and Amortization
Depreciation and amortization expense from continuing operations increased from $75.8 million for the three months ended June 30, 2018 to $83.0 million for the same period in 2019. The change was mainly the result of the timing of developments, acquisitions and dispositions.
Gain on Sale of Properties - Continuing Operations
The $30.6 million recognized as gain on sale of properties in continuing operations for the three months ended June 30, 2019 was primarily the result of the sale of one property that did not meet the criteria for inclusion in discontinued operations.
The $150.0 million recognized as gain on sale of properties in continuing operations for the three months ended June 30, 2018 was primarily the result of the sale of seven properties that did not meet the criteria for inclusion in discontinued operations.
Non-Incremental Costs Related to Successful Leases
As the result of adoption of the new lease standard on January 1, 2019 (see Note 2), $3.4 million of non-incremental costs related to successful leases were expensed for the three months ended June 30, 2019. As we have adopted the standard on a prospective basis, there was no adjustment to non-incremental costs previously capitalized for the three months ended June 30, 2018.

35


General and Administrative Expenses
General and administrative expenses consist of two components. The first component includes general corporate expenses, and the second component represents the indirect operating costs not allocated to, or absorbed by, either the development, leasing and operation of our wholly owned properties or our Service Operations. Such indirect operating costs are primarily comprised of employee compensation, including related costs such as benefits and wage-related taxes, but also include other ancillary costs such as travel and information technology support. Total indirect operating costs, prior to any allocation or absorption, and general corporate expenses are collectively referred to as our overall pool of overhead costs.
Those indirect costs not allocated to or absorbed by these operations are charged to general and administrative expenses. We regularly review our total overhead cost structure relative to our leasing, development and construction volume and adjust the level of total overhead, generally through changes in our level of staffing in various functional departments, as necessary, in order to control overall general and administrative expense.
General and administrative expenses decreased from $13.5 million for the three months ended June 30, 2018 to $13.4 million for the same period in 2019. The following table sets forth the factors that led to the decreased general and administrative expenses (in millions):
General and administrative expenses - three-month period ended June 30, 2018
$
13.5

  Decrease to overall pool of overhead costs
(0.6
)
  Decreased absorption of costs by wholly owned leasing and development activities (1)
0.1

  Decreased allocation of costs to Service Operations and Rental Operations
0.4

General and administrative expenses - three-month period ended June 30, 2019
$
13.4

(1) We capitalized $2.6 million and $6.0 million of our total overhead costs to leasing and development, respectively, for consolidated properties during the three months ended June 30, 2019, compared to capitalizing $4.9 million and $7.3 million of such costs, respectively, for the three months ended June 30, 2018. Combined overhead costs capitalized to leasing and development totaled 25.6% and 35.7% of our overall pool of overhead costs for the three months ended June 30, 2019 and 2018, respectively. The decrease in overhead costs capitalized to leasing was primarily due to $3.4 million of previously capitalizable internal costs that were immediately expensed due to the adoption of ASC 842 (see Note 2) and presented separately in the line item "Non-Incremental Costs Related to Successful Leases" on the Consolidated Statements of Operations.

Interest Expense
Interest expense allocable to continuing operations increased from $20.7 million for the three months ended June 30, 2018 to $23.5 million for the three months ended June 30, 2019. The increase to interest expense from continuing operations was primarily due to increased borrowings on our unsecured line of credit.
We capitalized $7.2 million and $6.2 million of interest costs for the three months ended June 30, 2018 and 2019, respectively.
Discontinued Operations
The property-specific components of earnings that are classified as discontinued operations include rental revenues, rental expenses, real estate taxes, allocated interest expense and depreciation expense, as well as the net gain or loss on the disposition of the properties.
We had no buildings classified as discontinued operations for the three months ended June 30, 2019 and 2018. The amounts classified in discontinued operations for the three months ended June 30, 2019 and 2018 were comprised of true-up activity related to properties sold in previous years that were classified as discontinued operations. 




36


Comparison of Six Months Ended June 30, 2019 to Six Months Ended June 30, 2018
Rental and Related Revenue
The following table sets forth rental and related revenue from continuing and discontinued operations (in thousands): 
 
Six Months Ended June 30,
 
2019
 
2018
Rental and related revenue:
 
 
 
Industrial
$
419,407

 
$
379,944

Non-reportable Rental Operations and non-segment revenues
3,665

 
5,605

Total rental and related revenue from continuing operations
$
423,072

 
$
385,549

Rental and related revenue from discontinued operations

 
32

Total rental and related revenue from continuing and discontinued operations
$
423,072

 
$
385,581

The following factors contributed to the increase in rental and related revenue from continuing operations:

We acquired 12 properties and placed 29 developments in service from January 1, 2018 to June 30, 2019, which provided incremental revenues from continuing operations of $32.9 million in the six months ended June 30, 2019, as compared to the same period in 2018.

Increased occupancy and rental rates within our "same property" portfolio, as well as within 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 commencement occupancy and rental rates in our "same property" portfolio both increased from the six months ended June 30, 2018.

The sale of 16 in-service properties, since January 1, 2018, which did not meet the criteria for inclusion within discontinued operations, resulted in a decrease of $10.9 million to rental and related revenue from continuing operations in the six months ended June 30, 2019, as compared to the same period in 2018, which partially offset the aforementioned increases to rental and related revenue from continuing operations.


37


Rental Expenses and Real Estate Taxes
The following table sets forth rental expenses and real estate taxes from continuing and discontinued operations (in thousands):
 
Six Months Ended June 30,
 
2019
 
2018
Rental expenses:
 
 
 
Industrial
$
37,411

 
$
33,983

Non-reportable Rental Operations and non-segment expenses
854

 
2,307

Total rental expenses from continuing operations
$
38,265

 
$
36,290

Rental expenses from discontinued operations

 
(8
)
Total rental expenses from continuing and discontinued operations
$
38,265

 
$
36,282

Real estate taxes:
 
 
 
Industrial
$
64,528

 
$
61,039

Non-reportable Rental Operations and non-segment expenses
289

 
1,303

Total real estate tax expense from continuing operations
$
64,817

 
$
62,342

Real estate tax expense from discontinued operations

 
17

Total real estate tax expense from continuing and discontinued operations
$
64,817

 
$
62,359

Overall, rental expenses from continuing operations increased by $2.0 million in the six months ended June 30, 2019, compared to the same period in 2018. The increase to rental expenses from continuing operations was primarily the result of acquisitions and developments placed in service from January 1, 2018 to June 30, 2019, partially offset by the impact of property sales that did not meet the criteria to be classified within discontinued operations.
Overall, real estate tax expense from continuing operations increased by $2.5 million in the six months ended June 30, 2019, compared to the same period in 2018. The increase to real estate tax expense was mainly the result of acquisitions and developments placed in service from January 1, 2018 to June 30, 2019, partially offset by the impact of property sales that did not meet the criteria to be classified within discontinued operations.
Depreciation and Amortization
Depreciation and amortization expense increased from $153.4 million during the six months ended June 30, 2018 to $159.0 million for the same period in 2019. The change was mainly the result of the timing of developments, acquisitions and dispositions.
Equity in Earnings of Unconsolidated Joint Ventures
Equity in earnings of unconsolidated joint ventures represents our ownership share of net income from investments in unconsolidated joint ventures that generally own and operate rental properties. Equity in earnings from unconsolidated joint ventures decreased from $10.0 million during the six months ended June 30, 2018 to $8.9 million for the same period in 2019 due to the timing of property dispositions within certain of our unconsolidated joint ventures.
Gain on Sale of Properties - Continuing Operations
The $30.4 million recognized as gain on sale of properties in continuing operations for the six months ended June 30, 2019 was primarily the result of the sale of one property that did not meet the criteria for inclusion in discontinued operations.
The $194.8 million recognized as gain on sale of properties in continuing operations for the six months ended June 30, 2018 was primarily comprised of the gains from the sale of 13 properties that did not meet the criteria for inclusion in discontinued operations.

38


Non-Incremental Costs Related to Successful Leases
As the result of adoption of the new lease standard on January 1, 2019 (see Note 2), $5.6 million of non-incremental costs related to successful leases were expensed for the six months ended June 30, 2019. As we have adopted the standard on a prospective basis, there was no adjustment to non-incremental costs previously capitalized for the six months ended June 30, 2018.
General and Administrative Expense
General and administrative expenses increased from $34.5 million for the six months ended June 30, 2018 to $35.4 million for the same period in 2019. The following table sets forth the factors that led to the increased general and administrative expenses (in millions):
General and administrative expenses - six months ended June 30, 2018
$
34.5

Decrease to overall pool of overhead costs
(4.5
)
Decreased absorption of costs by wholly owned leasing and development activities (1)
5.2

Decreased allocation of costs to Service Operations and Rental Operations
0.2

General and administrative expenses - six months ended June 30, 2019
$
35.4

(1) We capitalized $3.3 million and $11.0 million of our total overhead costs to leasing and development, respectively, for consolidated properties during the six months ended June 30, 2019, compared to capitalizing $13.1 million and $12.0 million of such costs, respectively, for the six months ended June 30, 2018. Combined overhead costs capitalized to leasing and development totaled 11.9% and 32.8% of our overall pool of overhead costs for the six months ended June 30, 2019 and 2018, respectively. The decrease in overhead costs capitalized to leasing was primarily due to lower leasing activity as well as $5.6 million of previously capitalizable internal costs that were immediately expensed due to the adoption of ASC 842 (see Note 2) and presented separately in the line item "Non-Incremental Costs Related to Successful Leases" on the Consolidated Statements of Operations.
Interest Expense
Interest expense allocable to continuing operations increased from $40.7 million for the six months ended June 30, 2018 to $45.6 million for the six months ended June 30, 2019. The increase to interest expense from continuing operations was primarily due to increased borrowings on our unsecured line of credit.
We capitalized $15.3 million and $12.9 million of interest costs during the six months ended June 30, 2018 and 2019, respectively.
Discontinued Operations
We had no buildings classified as discontinued operations for the six months ended June 30, 2019 and 2018. The amounts classified in discontinued operations for the six months ended June 30, 2019 and 2018 were comprised of true-up activity related to properties sold in previous years that were classified as discontinued operations. 
Liquidity and Capital Resources

Sources of Liquidity
We expect to meet our short-term liquidity requirements over the next 12 months including payments of dividends and distributions and the capital expenditures needed to maintain our current real estate assets, primarily through working capital and net cash provided by operating activities. We had $252.0 million of outstanding borrowings on the Partnership's $1.20 billion unsecured line of credit and $8.7 million of cash on hand at June 30, 2019.

In addition to our existing sources of liquidity, we expect to meet long-term liquidity requirements, such as scheduled mortgage and unsecured debt maturities, property acquisitions, financing of development activities and other capital improvements, through multiple sources of capital including operating cash flow, proceeds from property dispositions and accessing the public debt and equity markets. At June 30, 2019, we also held $125.0 million of notes receivable from the various entities that purchased our medical office properties in 2017, as part of the Medical Office Portfolio Disposition, which are scheduled to mature at various points through January 2020.

39



Rental Operations

Cash flows from Rental Operations is our primary source of liquidity and provides a stable source of cash flow to fund operational expenses. We believe that this cash-based revenue stream is substantially aligned with revenue recognition (except for items such as periodic straight-line rental income accruals and amortization of above or below market rents) as cash receipts from the leasing of rental properties are generally received in advance of, or a short time following, the actual revenue recognition.

We are subject to a number of risks related to general economic conditions, including reduced occupancy, tenant defaults and bankruptcies and potential reduction in rental rates upon renewal or re-letting of properties, any of which would result in reduced cash flow from operations.

Unsecured Debt and Equity Securities

We use the Partnership's unsecured line of credit (which is guaranteed by the General Partner) as a temporary source of capital to fund development activities, acquire additional rental properties and provide working capital.

The Partnership has issued debt securities pursuant to certain indentures and related supplemental indentures, which also require us to comply with financial ratios and other covenants regarding our operations. We were in compliance with all such covenants, as well as applicable covenants under our unsecured line of credit, at June 30, 2019.

In 2017, the Alternative Reference Rates Committee ("ARRC") proposed that the Secured Overnight Funding Rate ("SOFR") replace LIBOR. Also ARRC proposed that the transition to SOFR from LIBOR take place by the end of 2021. As the Partnership's unsecured line of credit agreement has provisions that allow for automatic transition to a new rate, the Partnership has no other material debt arrangements that are indexed to LIBOR, and all of our outstanding interest rate swaps will have matured by end of 2019, we believe that the transition will not have a material impact on our consolidated financial statements.

At June 30, 2019, we had on file with the SEC an automatic shelf registration statement on Form S-3 relating to the offer and sale, from time to time, of an indeterminate amount of debt and equity securities (including guarantees of the Partnership's debt securities by the General Partner). Equity securities are offered and sold by the General Partner, and the net proceeds of such offerings are contributed to the Partnership in exchange for additional General Partner Units or Preferred Units. From time to time, we expect to issue additional securities under this automatic shelf registration statement to fund the repayment of long-term debt upon maturity and for other general corporate purposes.

The General Partner has an ATM equity program that allows it to issue new common shares from time to time, with an aggregate offering price of up to $200.0 million. During the six months ended June 30, 2019, the General Partner issued 1.1 million common shares pursuant to its ATM equity program for net proceeds of $35.7 million. On July 31, 2019, the General Partner and the Partnership provided notice to the managers of the ATM equity program that the General Partner and the Partnership were terminating the equity distribution agreement for the ATM equity program (the “Previous Equity Distribution Agreement”), effective as of 5:00 p.m. on August 1, 2019.  Prior to termination, including sales in early July 2019, the General Partner sold a total of approximately $177.7 million of its common stock pursuant to the Previous Equity Distribution Agreement.  The General Partner and the Partnership expect to enter into a new equity distribution agreement on or about August 2, 2019 to sell shares of the General Partner’s common stock, $0.01 par value per share, from time to time, up to an aggregate offering price of $400.0 million.


40


Sale of Real Estate Assets
We regularly work to identify, consider and pursue opportunities to dispose of non-strategic properties on an opportunistic basis and on a basis that is generally consistent with our strategic plans. Our ability to dispose of such properties on favorable terms, or at all, is dependent upon a number of factors including the availability of credit to potential buyers to purchase properties at prices that we consider acceptable. Although we believe that we have demonstrated our ability to generate significant liquidity through the disposition of non-strategic properties, potential future adverse changes to general market and economic conditions could negatively impact our further ability to dispose of such properties.
Sales of land and depreciable properties provided $97.5 million in net proceeds during the six months ended June 30, 2019.
Transactions with Unconsolidated Joint Ventures
Transactions with unconsolidated joint ventures also provide a source of liquidity. From time to time we will sell properties to unconsolidated joint ventures, while retaining a continuing interest in that entity, and receive proceeds commensurate to those interests that we do not own. Additionally, unconsolidated joint ventures will from time to time obtain debt financing or sell properties and will then distribute to us, and our joint venture partners, all or a portion of the proceeds from such transactions. During the six months ended June 30, 2019, we had no capital distributions from unconsolidated joint ventures. During the six months ended June 30, 2018, our share of sale and capital distributions from unconsolidated joint ventures totaled $17.4 million.
Uses of Liquidity
Our principal uses of liquidity include the following:
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.
Property Investment
Our overall strategy is to continue to increase our investment in quality industrial properties, primarily through development, on both a speculative and build-to-suit basis, supplemented with acquisitions in higher barrier markets with the highest growth potential. Pursuant to this strategy, we evaluate development and acquisition opportunities based upon our market outlook, including general economic conditions, supply and long-term growth potential. Our ability to make future property investments is dependent upon identifying suitable acquisition and development opportunities, and our continued access to our longer-term sources of liquidity, including issuances of debt or equity securities as well as generating cash flow by disposing of selected properties.
  
Leasing/Capital Costs
Tenant improvements and lease-related costs pertaining to our initial leasing of newly completed space, or vacant space in acquired properties, are referred to as first generation expenditures. Such first generation expenditures for tenant improvements are included within "development of real estate investments" in our Consolidated Statements of Cash Flows, while such expenditures for capitalizable lease-related costs are included within "other deferred leasing costs."
Cash expenditures related to the construction of a building's shell, as well as the associated site improvements, are also included within "development of real estate investments" in our Consolidated Statements of Cash Flows.

41


Tenant improvements and leasing costs to renew or re-let rental space that we previously leased to tenants for new second generation leases are referred to as second generation expenditures. Building improvements that are not specific to any tenant but serve to improve integral components of our real estate properties are also second generation expenditures. One of the principal uses of our liquidity is to fund the second generation leasing/capital expenditures of our real estate investments.
The following table summarizes our second generation capital expenditures by type of expenditure, as well as capital expenditures for the development of real estate investments and for other deferred leasing costs (in thousands):
 
Six Months Ended June 30,
 
2019
 
2018
Second generation tenant improvements
$
6,999

 
$
9,358

Second generation leasing costs
11,511

 
15,968

Building improvements
1,953

 
1,011

Total second generation capital expenditures
$
20,463

 
$
26,337

Development of real estate investments
$
205,315

 
$
227,186

Other deferred leasing costs
$
11,152

 
$
20,787

The capital expenditures in the table above include the capitalization of internal overhead costs. We capitalized $3.3 million and $13.1 million of overhead costs related to leasing activities, including both first and second generation leases, during the six months ended June 30, 2019 and 2018, respectively. We capitalized $11.0 million and $12.0 million of overhead costs related to development activities, including both development and tenant improvement projects on first and second generation space, during the six months ended June 30, 2019 and 2018, respectively. Combined overhead costs capitalized to leasing and development totaled 11.9% and 32.8% of our overall pool of overhead costs for the six months ended June 30, 2019 and 2018, respectively. The decrease in the overhead costs capitalized to leasing for the six months ended June 30, 2019 was primarily due to lower leasing activity and the expense impact of internal costs related to successful leasing which was not capitalizable as a result of the adoption of the new lease standard on January 1, 2019 (see Note 2) and was included in the line item "Non-Incremental Costs Related to Successful Leases" on the Consolidated Statement of Operations and Comprehensive Income for the six months ended June 30, 2019.

Further discussion of the capitalization of overhead costs can be found herein, in the quarter-to-quarter and year-to-year comparisons of general and administrative expenses of this Item 2 as well as in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report.

In addition to the capitalization of overhead costs, the totals for development of real estate assets in the table above include the capitalization of $12.9 million and $15.3 million of interest costs during the six months ended June 30, 2019 and 2018, respectively.
Both our first and second generation expenditures vary significantly between leases on a per square foot basis, dependent upon several factors including the product type, the nature of a tenant's operations, the specific physical characteristics of each individual property and the market in which the property is located.

Dividend and Distribution Requirements
The General Partner is required to meet the distribution requirements of the Code in order to maintain its REIT status. We paid regular dividends or distributions of $0.215 per common share or Common Unit in the first and second quarters of 2019, and the General Partner's board of directors declared dividends or distributions of $0.215 per common share or Common Unit for the third quarter of 2019.

42


We expect to continue to distribute at least an amount equal to our taxable earnings, to meet the requirements to maintain the General Partner's REIT status, and additional amounts as determined by the General Partner's board of directors. Distributions are declared at the discretion of the General Partner's board of directors and are subject to actual cash available for distribution, our financial condition, capital requirements and such other factors as the General Partner's board of directors deems relevant.
Debt Maturities
Debt outstanding at June 30, 2019 had a face value totaling $2.86 billion with a weighted average interest rate of 3.89% and maturities at various dates through 2028. Of this total amount, we had $2.58 billion of unsecured debt, $36.1 million of secured debt and $252.0 million of outstanding borrowings on our unsecured line of credit at June 30, 2019. Scheduled principal amortization, maturities and early repayments of such debt totaled $43.5 million for the six months ended June 30, 2019.
The following table is a summary of the scheduled future amortization and maturities of our indebtedness at June 30, 2019 (in thousands, except percentage data):
 
 
Future Repayments
 
 
Year
Scheduled
Amortization
 
Maturities
 
Total
 
Weighted Average Interest Rate of
Future Repayments
Remainder of 2019
$
2,013

 
$

 
$
2,013

 
5.38
%
2020
3,883

 

 
3,883

 
5.67
%
2021
3,416

 
259,047

 
262,463

 
3.99
%
2022
3,611

 
600,000

 
603,611

 
4.20
%
2023
3,817

 
502,000

 
505,817

 
3.52
%
2024
4,036

 
300,000

 
304,036

 
3.92
%
2025
3,938

 

 
3,938

 
5.63
%
2026
2,029

 
375,000

 
377,029

 
3.37
%
2027
358

 
300,000

 
300,358

 
3.40
%
2028

 
500,000

 
500,000

 
4.45
%
Thereafter

 

 

 
N/A

 
$
27,101

 
$
2,836,047

 
$
2,863,148

 
3.89
%

The Partnership’s unsecured line of credit is reflected in the table above as maturing in January 2023, based on the ability to exercise the two six-month extension options from its stated maturity date of January 2022 (see Note 7). We anticipate generating capital to fund our debt maturities by using undistributed cash generated from our Rental Operations and property dispositions and by raising additional capital from future debt or equity transactions.

Repayments of Outstanding Debt

To the extent that it supports our overall capital strategy, we may purchase or redeem some of our outstanding unsecured notes prior to their stated maturities.

During the six months ended June 30, 2019, we repaid three fixed rate secured loans, totaling $41.7 million, which had a weighted average stated interest rate of 7.76%.

Contractual Obligations

Aside from repayments of long-term debt, there have been no other material changes in our outstanding commitments since December 31, 2018, as previously discussed in our 2018 Annual Report.


43


Historical Cash Flows
Cash, cash equivalents and restricted cash were $17.0 million and $242.6 million at June 30, 2019 and 2018, respectively. The following table highlights significant changes in net cash associated with our operating, investing and financing activities (in millions): 
 
Six Months Ended June 30,
 
2019
 
2018
General Partner
 
 
 
Net cash provided by operating activities
$
257.8

 
$
230.6

Net cash (used for) provided by investing activities
$
(331.7
)
 
$
12.0

Net cash provided by (used for) financing activities
$
65.4

 
$
(193.6
)
 
 
 
 
Partnership
 
 
 
Net cash provided by operating activities
$
257.8

 
$
230.6

Net cash (used for) provided by investing activities
$
(331.7
)
 
$
12.0

Net cash provided by (used for) financing activities
$
65.4

 
$
(193.6
)

Operating Activities

Cash flows from operating activities provide the cash necessary to meet our operational requirements and the receipt of rental income from Rental Operations continues to be our primary source of operating cash flows. The increase to net cash provided by operating activities from the six months ended June 30, 2018 was due to the timing of cash receipts on third party construction projects as well as increased cash flows from our Rental Operations.

Investing Activities

Highlights of significant cash sources and uses are as follows:
During the six months ended June 30, 2019, we paid cash of $108.2 million and $200.9 million, respectively, for real estate and undeveloped land acquisitions, compared to $208.9 million and $98.5 million, respectively, for real estate and undeveloped land acquisitions in the same period in 2018.
Real estate development costs were $205.3 million during the six months ended June 30, 2019, compared to $227.2 million for the same period in 2018.
Sales of land and depreciated properties provided $97.5 million in net proceeds for the six months ended June 30, 2019, compared to $433.6 million for the same period in 2018.
During the six months ended June 30, 2019, we received repayments of $130.0 million on notes receivable from property sales, compared to $149.9 million on notes receivable from property sales for the same period in 2018.
Second generation tenant improvements, leasing costs and building improvements totaled $20.5 million for the six months ended June 30, 2019 compared to $26.3 million for the same period in 2018.
For the six months ended June 30, 2019, we received no capital distributions from unconsolidated joint ventures, compared to $17.4 million received during the same period in 2018, primarily related to our share of distributions from the sale of properties owned by unconsolidated joint ventures.
For the six months ended June 30, 2019, we made capital contributions of $6.0 million to unconsolidated joint ventures, compared to $2.6 million during the same period in 2018.

44


Financing Activities
The following items highlight significant capital transactions:
During the six months ended June 30, 2019, the Partnership repaid three secured loans for $41.7 million.
For the six months ended June 30, 2019, we increased borrowings on the Partnership's unsecured line of credit by $222.0 million. There were no net borrowings or repayments on the Partnership's unsecured line of credit for the same period in 2018.
During the six months ended June 30, 2018, the Partnership repaid $1.3 million of senior unsecured notes. We did not make payments on senior unsecured notes during the six months ended June 30, 2019.
We paid regular cash dividends totaling $154.6 million and $142.8 million for the six months ended June 30, 2019 and 2018, respectively.
Changes in book cash overdrafts are classified as financing activities within our Consolidated Statements of Cash Flows. Book cash overdrafts were $30.2 million and $1.1 million at June 30, 2019 and 2018, respectively.
During the six months ended June 30, 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 the six months ended June 30, 2018.

Off Balance Sheet Arrangements - Investments in Unconsolidated Joint Ventures
We analyze our investments in unconsolidated joint ventures to determine if they meet the criteria for classification as a VIE and would require consolidation. We (i) evaluate the sufficiency of the total equity at risk, (ii) review the voting rights and decision-making authority of the equity investment holders as a group and whether there are limited partners (or similar owning entities) that lack substantive participating or kick out rights and (iii) establish whether or not activities within the venture are on behalf of an investor with disproportionately few voting rights in making this VIE determination. To the extent that we (i) are the sole entity that has the power to direct the activities of the VIE and (ii) have the obligation or rights to absorb the VIE's losses or receive its benefits, then we would be determined to be the primary beneficiary of the VIE and would consolidate it. At the end of each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary beneficiary. To the extent that our joint ventures do not qualify as VIEs, we further assess each joint venture partner's substantive participating rights to determine if the venture should be consolidated. There were no unconsolidated joint ventures that met the criteria to be a VIE at June 30, 2019.
We have equity interests in unconsolidated partnerships and limited liability companies that primarily own and operate rental properties and hold land for development. These unconsolidated joint ventures are primarily engaged in the operation and development of industrial real estate properties. These investments provide us with increased market share and tenant and property diversification. The equity method of accounting is used for these investments in which we have the ability to exercise significant influence, but not control, over operating and financial policies. As a result, the assets and liabilities of these entities are not included on our balance sheet. Our investments in and advances to unconsolidated joint ventures represented approximately 1% of our total assets at June 30, 2019 and December 31, 2018. Total assets of our unconsolidated joint ventures were $513.8 million and $489.5 million at June 30, 2019 and December 31, 2018, respectively. The combined revenues of our unconsolidated joint ventures totaled $30.0 million and $29.1 million for the six months ended June 30, 2019 and 2018.
We have guaranteed the repayment of certain secured and unsecured loans of our unconsolidated joint ventures. The outstanding balances on the guaranteed portion of these loans totaled $150.8 million and $115.0 million at June 30, 2019 and 2018, respectively.

45


Item 3.    Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate changes primarily as a result of our line of credit and our long-term borrowings. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we borrow primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, from time to time, in order to mitigate our interest rate risk. We do not enter into derivative or interest rate transactions for speculative purposes.
Our interest rate risk is monitored using a variety of techniques. The table below provides information about our financial instruments that are sensitive to changes in interest rates, including long-term debt and interest rate swaps. For long-term debt, the table presents the principal amounts (in thousands) of the expected annual maturities, weighted average interest rates for the average debt outstanding in the specified period and fair values (in thousands). For interest rate swaps, the table presents notional amount and fair value (in thousands).
 
Remainder of 2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Face Value
 
Fair Value
Long-Term Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
secured debt
$
1,713

 
$
3,583

 
$
12,163

 
$
3,311

 
$
3,517

 
$
9,661

 
$
33,948

 
$
36,468

Weighted average
interest rate
5.98
%
 
5.98
%
 
5.73
%
 
6.06
%
 
6.06
%
 
6.07
%
 
5.93
%
 
 
Variable rate
secured debt
$
300

 
$
300

 
$
300

 
$
300

 
$
300

 
$
700

 
$
2,200

 
$
2,200

Weighted average
interest rate
1.96
%
 
1.96
%
 
1.96
%
 
1.96
%
 
1.96
%
 
1.96
%
 
1.96
%
 
 
Fixed rate
unsecured debt
$

 
$

 
$
250,000

 
$
600,000

 
$
250,000

 
$
1,475,000

 
$
2,575,000

 
$
2,683,675

Weighted average
interest rate
N/A

 
N/A

 
3.91
%
 
4.20
%
 
3.72
%
 
3.84
%
 
3.92
%
 
 
Variable rate unsecured line of credit*
$

 
$

 
$

 
$

 
$
252,000

 
$

 
$
252,000

 
$
252,000

Rate at June 30, 2019
N/A

 
N/A

 
N/A

 
N/A

 
3.29
%
 
N/A

 
3.29
%
 
 
Interest Rate Swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed to variable
$
350,000

 
$

 
$

 
$

 
$

 
$

 
$
350,000

 
$
(28,717
)
*The Partnership’s unsecured line of credit is reflected in the table above as maturing in January 2023, based on the ability to exercise the two six-month extension options from its stated maturity date of January 2022 (see Note 7).
As the above table incorporates only those exposures that existed at June 30, 2019, it does not consider those exposures or positions that could arise after that date. As a result, the ultimate impact of interest rate fluctuations will depend on future exposures that arise, our hedging strategies at that time, to the extent we are party to interest rate derivatives, and interest rates. Interest expense on our unsecured line of credit, to the extent we have outstanding borrowings, will be affected by fluctuations in the LIBOR indices or applicable replacement rates as well as changes in our credit rating. The interest rate at such point in the future as we may renew, extend or replace our unsecured line of credit will be heavily dependent upon the state of the credit environment.
As of June 30, 2019, we held an aggregate $350.0 million notional amount of five forward-starting interest rate swaps with a weighted average pay rate of 2.87% to hedge interest rates on an anticipated debt offering in late 2019. The fair value of these swaps was $28.7 million in a liability position at June 30, 2019.



46


Item 4.    Controls and Procedures
Controls and Procedures (General Partner)
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures are further designed to ensure that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon the foregoing, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Controls and Procedures (Partnership)

(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures are further designed to ensure that such information is accumulated and communicated to management, including the General Partner's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of management, including the General Partner's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon the foregoing, the General Partner's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

47


Part II - Other Information
 
Item 1. Legal Proceedings
From time to time, we are parties to a variety of legal proceedings and claims arising in the ordinary course of our businesses. While these matters generally are covered by insurance, there is no assurance that our insurance will cover any particular proceeding or claim. We are not subject to any material pending legal proceedings other than routine litigation arising in the ordinary course of business. We presently believe that all of the proceedings to which we were subject as of June 30, 2019, taken as a whole, will not have a material adverse effect on our liquidity, business, financial condition or results of operations.
Item 1A. Risk Factors
In addition to the information set forth in this Report, you also should carefully review and consider the information contained in our other reports and periodic filings that we make with the SEC, including, without limitation the information contained under the caption "Item 1A. Risk Factors" in our 2018 Annual Report. The risks and uncertainties described in our 2018 Annual Report are not the only risks that we face. Additional risks and uncertainties not currently known to us, or that we presently deem to be immaterial, also may materially adversely affect our business, financial condition and results of operations. There have not been any material changes to the risk factors that we face since our 2018 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities
None
(b) Use of Proceeds
None
(c) Issuer Purchases of Equity Securities
From time to time, we repurchase our securities under a repurchase program that initially was approved by the General Partner's board of directors and publicly announced in October 2001 (the "Repurchase Program").
On January 30, 2019, the General Partner's board of directors adopted a resolution that amended and restated the Repurchase Program and delegated authority to management to repurchase a maximum of $300.0 million of the General Partner's common shares, $500.0 million of the Partnership's debt securities and $500.0 million of the General Partner's preferred shares, subject to the prior notification of the Chairman of the Finance Committee of the board of directors of planned repurchases within these limits. We did not repurchase any equity securities through the Repurchase Program during the three months ended June 30, 2019.
Item 3. Defaults upon Senior Securities

During the period covered by this Report, we did not default under the terms of any of our material indebtedness.

Item 4. Mine Safety Disclosures

Not applicable. 
Item 5. Other Information

During the period covered by this Report, there was no information required to be disclosed by us in a Current Report on Form 8-K that was not so reported, nor were there any material changes to the procedures by which our security holders may recommend nominees to the General Partner's board of directors.




48


Item 6. Exhibits
(a) Exhibits
 
 
 
3.1

 
 
 
 
3.2

 
 
 
 
3.3

 
 
 
 
3.4 (i)

 
 
 
 
3.4 (ii)

 
 
 
 
3.4 (iii)

 
 
 
 
3.4 (iv)

 
 
 
 
3.4 (v)

 
 
 
 
3.4 (vi)

 
 
 
 
11.1

 
Statement Regarding Computation of Earnings.***
 
 
 
31.1

 
 
 
 
31.2

 
 
 
 
31.3

 
 
 
 
31.4

 
 
 
 
32.1

 
 
 
 
32.2

 
 
 
 
32.3

 
 
 
 
32.4

 
 
 
 
101.Def

 
Definition Linkbase Document
 
 
 
101.Pre

 
Presentation Linkbase Document
 
 
 
101.Lab

 
Labels Linkbase Document
 
 
 
101.Cal

 
Calculation Linkbase Document
 
 
 
101.Sch

 
Schema Document
 
 
 
101.Ins

 
Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
*
Filed herewith.

49


**
The certifications attached as Exhibits 32.1, 32.2, 32.3 and 32.4 accompany this Quarterly Report on Form 10-Q and are "furnished" to the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by the General Partner or the Partnership, respectively, for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
***
Data required by Financial Accounting Standards Board Auditing Standards Codification No. 260 is provided in Note 10 to the Consolidated Financial Statements included in this Report.


50


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 CORPORATION
 
 
 
 
/s/ James B. Connor
 
 
James B. Connor
 
 
Chairman and Chief Executive Officer
 
 
 
 
/s/ Mark A. Denien
 
 
Mark A. Denien
 
 
Executive Vice President and Chief Financial Officer
 
 

 
 
 
 
 
DUKE REALTY LIMITED PARTNERSHIP
 
 
By: DUKE REALTY CORPORATION, its general partner
 
 
 
 
/s/ James B. Connor
 
 
James B. Connor
 
 
Chairman and Chief Executive Officer of the General Partner
 
 
 
 
/s/ Mark A. Denien
 
 
Mark A. Denien
 
 
Executive Vice President and Chief Financial Officer of the General Partner
 
 
 
 
 
Date:
August 2, 2019
 
 
 
 


51