ITEM 1. BUSINESS
Duke Realty Investments, Inc. (the "Company") is a self-administered, self- managed and fully integrated UPREIT ("Umbrella Partnership Real Estate Investment Trust") engaged in the long term ownership and operation of high quality real estate. It began operations through a predecessor in 1972. As of December 31, 1994, the Company owned a diversified portfolio of 128 income- producing industrial, office and retail properties (the "Properties"), encompassing approximately 12.9 million square feet leased to approximately 1,100 tenants located primarily in eight states, and 9 buildings encompassing approximately 2.4 million square feet currently under development. The Company also owns approximately 930 acres of unencumbered land for future development, of which approximately 80% is zoned for industrial use. The land is primarily located adjacent to the Properties. The Company provides leasing, management, construction, development and other tenant-related services for the Properties and certain properties owned by other third parties which total approximately 12.0 million square feet. The Company is one of the largest real estate companies in the midwest and has the largest commercial real estate operations in Indianapolis and Cincinnati. The Company's Midwest properties benefit from above-average economic growth in the region and high occupancy levels.
The Company has developed almost 40 million square feet of commercial property since its founding. The Company is one of the most active developers of industrial properties in the United States, based on square footage under construction. During the last five years, the Company developed an average of approximately 2.0 million square feet per year. The Company was reorganized in October 1993 (the "Reorganization"). From the completion of its Reorganization through December 31, 1994, the Company completed development of 1.3 million square feet and acquired 900,000 square feet of commercial properties. Also, the Company has under development approximately 2.4 million square feet of commercial space that is 82% pre-leased which is expected to be completed in 1995.
The Company manages approximately 27 million square feet of property, including 12 million square feet owned by third parties. In addition to providing services to approximately 1,100 tenants in the Properties, the Company provides such services to over 1,200 tenants in approximately 150 properties owned by others.
For additional information regarding the Company's investments and operations, see Item 7, Management's Discussion and Analysis of Financial Condition and results of Operations and Item 8, Financial Statements and Supplementary Data.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns a diversified portfolio of 137 commercial properties encompassing approximately 15.3 million net rentable square feet located primarily in eight states and approximately 930 acres of land for future development. (See Notes 4 and 5 to Financial Statements, Item 8 hereof.) The properties are described below.
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(1) Includes space leased, even if not occupied, as of December 31, 1994.
(2) These buildings are owned by a partnership in which the Company is a joint venture partner. The Company owns a 10% capital interest in the partnership and will receive a 50% interest in the residual cash flow after payment of a preferred return to the other partner on its capital interest.
(3) The Company owns a 10% interest in this building as a limited partner and shares in the cash flow from the building in accordance with such ownership interest.
(4) This building is owned by a limited partnership in which the Company has a 1% general partnership interest and a 39% limited partnership interest. The Company shares in the cash flow from such building in accordance with the Company's ownership interest.
(5) The Company owns a 33.33% interest in this building as a limited partner and shares in the cash flow from the building in accordance with such ownership interest.
(6) The Company owns a 50% general partnership interest in this building with the other 50% being owned by the tenant in the building. The Company shares in the cash flow from the building in accordance with such partnership interest.
(7) This building is owned by Parkwood Crossing Joint Venture, a partnership in which the Company is a joint venture partner. The Company has a 50% general partnership interest and shares in the cash flow from such building in accordance with such ownership interest after payment of a cumulative preferred return to the other partner.
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(8) The Company owns a 66.67% general partnership interest in the partnership owning this building. The remaining interest is owned by a former tenant in the building. The Company shares in the cash flow of this building in accordance with the Company's partnership interest.
(9) The Company has a leasehold interest in the land underlying this building with a lease term expiring October 31, 2067.
(10) The Company has a leasehold interest in the land underlying this building with a lease term expiring May 9, 2006.
(11) The Company owns these buildings and has a leasehold interest in the land underlying these buildings, with the lease term expiring November 16, 2043.
(12) The Company has a leasehold interest in the building and the underlying land with a lease term expiring December 31, 2020. The Company has an option to purchase the fee interest in the property at any time.
(13) This building was renovated in 1986.
(14) A portion of the land underlying this building is held by the Company as a leasehold interest, with the lease term expiring March 31, 2021.
(15) These buildings are owned by Kenwood Office Associates, a partnership in which the Company has a 50% general partnership interest. The Company shares in the cash flow from such buildings in accordance with the Company's ownership interest.
(16) This building was renovated in 1985.
(17) Tri-County Office Park has four buildings. One was built in 1971, two were built in 1973, and one was built in 1982.
(18) The Company has a leasehold interest in the land underlying these buildings, with a lease term expiring May 31, 2057, and the Company owns the buildings.
(19) The Company holds the land under this building under a long-term lease with the lease term expiring May 31, 2057 and subleases the land to the tenant with the sublease term expiring on August 31, 2009. In the event of a default by the tenant under the sublease, the Company would acquire title to the building upon termination of the sublease.
(20) Subsequent to December 31, 1994, a lease to occupy 100% of the property was executed.
(21) The Company will hold a leasehold interest in the land underlying this owned building upon completion for a term of 50 years commencing when the building is completed, with two 20-year options.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1994.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's Common Shares are listed for trading on the New York Stock Exchange, symbol DRE. Set forth below are the high and low reported sales prices on the New York Stock Exchange and the cash dividends per share declared during each quarter. Comparable cash dividends are expected in the future. As of March 7, 1995, there were 2,397 record holders of Common Shares. All such information prior to the quarter ended December 31, 1993 has been adjusted for the 1 for 4.2 reverse stock split effected prior to completion of the 1993 Common Stock offering (the "1993 Offering").
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On January 26, 1995, the Company declared a quarterly cash dividend of $0.47 per share payable on February 28, 1995 to shareholders of record on February 14, 1995.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
The Company was formed in 1985 and qualifies as a real estate investment trust ("REIT") under the provisions of the Internal Revenue Code. The Company is an open-ended, perpetual-life REIT which owns and operates a portfolio of commercial properties in the Midwest.
REORGANIZATION AND OFFERINGS
In October 1993, the Company acquired substantially all of the properties and businesses of Duke Associates, a full-service commercial real estate firm operating primarily in the Midwest (the "Reorganization"). In connection with the Reorganization, the Company effected a 1 for 4.2 reverse stock split relating to its existing shares and subsequently issued an additional 14,000,833 shares of Common Stock through an offering (the "Offering"). Substantially all of the approximately $309.3 million of net proceeds of the Offering were used to repay indebtedness of the reorganized company. As a result of the Reorganization, the Company's properties are owned through Duke Realty Limited Partnership, an Indiana limited partnership ("DRLP"), of which the Company is the sole general partner and was the owner of 78% of the partnership interests ("Units") as of October 1993.
In 1994, the Company issued an additional 3,887,300 common shares through an additional offering ("1994 Offering") and received net proceeds of approximately $92.1 million. The proceeds of the 1994 Offering were contributed to DRLP in exchange for additional Units and were used by DRLP to fund current development and acquisition costs.
In 1994, as a result of Unitholders exchanging their Units for shares of the Company pursuant to the DRLP Partnership Agreement, the Company also acquired an additional interest in DRLP through the issuance of 456,375 common shares for a like number of Units. The acquired additional interest in DRLP was recorded at the fair market value of the Company's common stock on the date of acquisition. The acquisition amount of $11.5 million was allocated to rental property, undeveloped land and investments in unconsolidated companies based on their estimated fair values. As a result of these transactions, the Company owns an 83.62% interest in DRLP as of December 31, 1994.
RESULT OF OPERATIONS - HISTORICAL AND PRO FORMA
The historical results of operations changed dramatically in all respects from 1992 to 1993 and 1994 as a result of the Reorganization and Offerings discussed above. All operating categories of revenues and expenses reflect significant increases because of the addition of properties and businesses purchased in connection with the Reorganization.
Following is a summary of the Company's operating results for each of the years in the three-year period ended December 31, 1994:
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Earnings from rental operations for the year ended December 31, 1994 were $24.5 million. This $4.1 million increase over pro forma earnings from rental operations for the year ended December 31, 1993 results from an $8.5 million increase in rental revenue related to the expansion of the property portfolio through acquisition and development of additional properties offset by a $2.8 million increase in operating expenses related to these additional properties. This increase was also offset by a $1.6 million increase in interest expense on borrowings used to fund the acquisition and development of the additional properties. The pro forma earnings from rental operations increased from $15.7 million for the year ended December 31, 1992 to $20.4 million for the year ended December 31, 1993. This $4.7 million increase is primarily attributed to a $5.4 million increase in rental revenue resulting from expansion of the property portfolio and growth in the average occupancy of the properties, offset by additional depreciation, amortization and operating expenses related to the portfolio expansion.
The following table sets forth information regarding the Company's portfolio of rental properties as of December 31, 1994:
Management expects occupancy to remain stable because (i) only 7.7% and 10.4% of the Company's occupied square footage is subject to leases expiring in 1995 and 1996, respectively and (ii) the Company's renewal percentage averaged 73% and 65% in 1994 and 1993, respectively. The following table reflects the Company's lease expiration schedule as of December 31, 1994, including properties under development, by product type indicating square footage and annualized base rents:
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This stable occupancy, along with firm rental rates in each of the Company's markets, will allow the in-service portfolio to continue to provide a comparable level of earnings from rental operations in the future. The Company expects to also realize growth in earnings from rental operations as the 2.4 million square feet of properties under development at December 31, 1994 are placed in service over the next four quarters.
Earnings from service operations for the year ended December 31, 1994 were $6.3 million. This $2.8 million increase in earnings from service operations compared to pro forma earnings from service operations for the year ended 1993 is primarily the result of increased construction management fees related to a 20% increase in third party construction volume combined with increased margins on 38% of the 1994 construction volume. In addition, the significant growth and development of Company-owned properties resulted in an increased allocation of operating costs to such properties, thereby reducing the proportionate amount of such costs attributable to third party fee services.
The pro forma earnings from service operations increased from $2.5 million for the year ended December 31, 1992 to $3.5 million for the year ended December 31, 1993. This $1.0 million increase resulted primarily from increased management and maintenance fees realized through expansion of the managed properties portfolio and lower operating expenses resulting from reduced payroll and overhead costs offset by a decrease in revenues from leasing fees resulting from the recognition of significant leasing fees on two large third-party projects in 1992.
Net income for the year ended December 31, 1994 was $26.2 million compared to pro forma net income of $19.1 million for the year ended December 31, 1993 and $14.3 million for the year ended December 31, 1992. These increases are primarily due to the operating result fluctuations explained above.
In September 1994, the Company exercised an option to purchase a mortgage loan to a consolidated subsidiary of the Company from an affiliate. As a result of the exercise of this option, the Company recognized an approximate $2 million gain. This gain is reflected as a component of earnings from property sales.
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FUNDS FROM OPERATIONS
Management believes that Funds From Operations ("FFO"), which is defined by the National Association of Real Estate Investment Trusts as net income or loss excluding gains or losses from debt restructuring and sales of property plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures (adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis), is the industry standard for reporting the operations of real estate investment trusts.
The following table reflects the calculation of the Company's FFO for each of the years in the three-year period ended December 31, 1994:
Management anticipates continued growth in FFO. The following table indicates such growth for the three-year period ended December 31, 1994:
While management believes that FFO is the most relevant and widely used measure of the Company's operating performance, such amount does not represent cash flow from operations as defined by generally accepted accounting principles, should not be considered as an alternative to net income as an indicator of the Company's operating performance, and is not indicative of cash available to fund all cash flow needs.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaling $51.9 million for the year ended December 31, 1994, represents the primary source of liquidity to fund distributions to shareholders, unitholders and the minority interests and to fund recurring costs associated with the renovation and re-leasing of the Company's properties.
The investing activities of the Company for the year ended December 31, 1994 of $116.2 million were primarily the result of costs incurred for the acquisition and development of 16 properties placed in service during the year and nine properties and two major building expansions under construction as of December 31, 1994. The estimated remaining development costs for these nine properties and two expansions as of December 31, 1994 total $68.7 million.
The Company owns approximately 930 acres of unencumbered land for future development of which, approximately 80% is zoned for industrial use. This land is primarily located adjacent to the Company's existing properties. The Company intends to use this land to expand its build-to-suit business (development projects substantially pre-leased to a single tenant).
The recurring capital needs of the Company are funded primarily through the undistributed net cash provided by operating activities. Following is an analysis of the Company's recurring capital expenditures:
New property development and acquisition costs are funded through a combination of debt and equity proceeds. In March 1994, the Company obtained a $60 million revolving credit facility which is available to fund existing and new development costs and to provide working capital as needed. In August 1994, the Company closed a seven-year, $60 million mortgage loan which bears interest at 8.72%. In September 1994, the Company received $92.1 million of net proceeds from the 1994 Offering. A portion of the proceeds of the mortgage loan and the 1994 Offering were used to retire the outstanding balance of the line of credit and to fund costs on projects under construction. The remaining proceeds will be used to fund additional costs on projects under construction, costs related to projects for which construction will commence subsequent to December 31, 1994 and costs of anticipated acquisitions. In the interim, the excess proceeds are invested in interest-bearing cash equivalents.
During 1994, the Company obtained investment grade ratings from Standard & Poor's, Moody's and Duff & Phelps. The Company currently has on file a Form S-3 Registration Statement with the Securities and Exchange Commission which has remaining availability as of December 31, 1994 of approximately $222 million to issue additional common stock, preferred stock or unsecured debt securities as the Company requires additional capital.
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The Company has obtained a commitment for a $100 million unsecured line of credit which will replace the existing $60 million secured line of credit. The facility is expected to be available in April 1995.
The Company intends to limit its debt to no more than 50% of its total market capitalization (defined as the total market value of all shares and units outstanding plus the outstanding mortgage and construction indebtedness). The Company's debt to total market capitalization ratio at December 31, 1994 was 30.2% compared to 35.3% at December 31, 1993.
The mortgage debt outstanding at December 31, 1994 consists of notes totaling $298.6 million with a weighted average interest rate of 7.30% maturing at various dates through 2018. Scheduled principal amortization of mortgage debt totaled $1.5 million for the year ended December 31, 1994. Following is a summary of the scheduled future amortization and maturities of the Company's mortgage debt:
The Company intends to pay regular quarterly dividends with a general policy of distributing no more than 90% of FFO. The dividend declared on January 26, 1995 represented 81.0% of fourth quarter FFO.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are included under Item 14 of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item for Directors and certain Executive Officers is incorporated by reference in the Company's Proxy Statement dated March 17, 1995, for its annual Meeting of Shareholders to be held on April 27, 1995, under the heading "Proposal No. 1: Election of Directors" on pages 3-5.
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The following information is provided regarding the executive officers of the Company who do not serve as Directors of the Company:
DAVID R. MENNEL Age 40, General Manager of Services Operations and President of Duke Services, Inc.- Mr. Mennel was with the accounting firm of Peat Marwick Mitchell and Company and the property development firm of Melvin Simon & Associates before joining the Company in 1978. He was previously the Treasurer of the Company.
GARY A. BURK Age 43, President of Construction Services - Mr. Burk joined the Company in 1979, and has been responsible for the Company's construction management operations since 1986.
JOHN NEMECEK Age 39, President of Asset and Property Management - Mr. Nemecek joined the Company in 1994. Prior to joining the Company, Mr. Nemecek was the Senior Vice President/Florida Division of Compass Real Estate.
MICHAEL COLETTA Age 44, Vice President of Asset and Property Management - Mr. Coletta joined the Company in 1981 and was awarded the Certified Property Manager designation by the Institute of Real Estate Management in 1989.
DAYLE M. EBY Age 43, Vice President, General Counsel and Secretary - Ms. Eby joined the Company in 1989. Prior to that time, Ms. Eby was with the law firm of Bose McKinney & Evans.
DENNIS D. OKLAK Age 41, Vice President and Treasurer - Mr. Oklak joined the Company in 1986 and has served as the Tax Manager and Controller of Development. Prior to joining the Company, Mr. Oklak was a Senior Manager with the public accounting firm of Deloitte Haskins + Sells.
STEVEN R. KENNEDY Age 38, Vice President of Construction Services - Mr. Kennedy joined the Company in 1986. Prior to that time, Mr. Kennedy was a Project Manager for Charles Pankow Builders, Inc.
RICHARD HORN Age 37, Vice President of Acquisitions - Mr. Horn joined the Company in 1984. He has served in leasing and development for the Company and has overseen the Nashville and Michigan operations of the Company since 1988 and 1990, respectively.
ROBERT FESSLER Age 37, Vice President, Ohio Industrial Group - Mr. Fessler joined the Company in 1987 and is responsible for the Cincinnati industrial development and leasing activities. Prior to joining the Company, Mr. Fessler was a leasing representative with Trammel Crow.
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JIM GRAY Age 34, Assistant Vice President, Ohio Office Group - Mr. Gray joined the Company in 1989 and is responsible for the Cincinnati office development and leasing activities. Prior to joining the Company, Mr. Gray was Vice President and General Counsel for Brian Properties, Inc., a Chicago area commercial real estate developer.
DONALD HUNTER Age 35, Vice President, Columbus Group - Mr. Hunter joined the Company in 1989 and is responsible for the Columbus development and management activities of the Company. Prior to joining the Company, Mr. Hunter was with Cushman and Wakefield, a national real estate firm.
WAYNE LINGAFELTER Age 35, Vice President, Indiana Office Group - Mr. Lingafelter joined the Company in 1987 and is responsible for the Indiana office leasing and development activities. Prior to that time, Mr. Lingafelter was with the management consulting firm of DRI, Inc.
WILLIAM E. LINVILLE Age 40, Vice President, Indiana Industrial Group - Mr. Linville joined the Company in 1987. Prior to that time, Mr. Linville was Vice President and Regional Manager of the CB Commercial Brokerage Office in Indianapolis.
FRANCIS B. QUINN Age 40, Vice President, Retail Group - Mr. Quinn joined the Company in 1982. Prior to that time, Mr. Quinn was with F.C. Tucker, an Indiana real estate firm.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors, and persons who own more than 10% of the Company's Common Stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% shareholders are required by Securities and Exchange Commission regulation to furnish the Company with copies of all Section 16(a) forms they file. Information regarding Section 16(a) filings is incorporated by reference in the Company's Proxy Statement dated March 17, 1995, for its Annual Meeting of shareholders to be held on April 27, 1995, under the headings "Compliance with Section 16(a) of the Securities Exchange Act of 1934" on page 11.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference in the Company's Proxy Statement dated March 17, 1995, for its Annual Meeting of shareholders to be held on April 27, 1995, under the heading "Executive Compensation" on pages 6-9.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference in the Company's Proxy Statement dated March 17, 1995, for its Annual Meeting of shareholders to be held on April 27, 1995, under the headings "Voting Securities and Beneficial Owners" on pages 1-3.
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ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference in the Company's Proxy Statement dated March 17, 1995, for its Annual Meeting of shareholders to be held on April 27, 1995, under the heading "Certain Transactions" on pages 9-10.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT.
1. CONSOLIDATED FINANCIAL STATEMENTS:
INDEX
Independent Auditors' Report Consolidated Balance Sheets, December 31, 1994 and 1993 Consolidated Statements of Operations, Years Ended December 31, 1994, 1993 and 1992 Consolidated Statements of Cash Flows, Years Ended December 31, 1994, 1993 and 1992 Consolidated Statements of Shareholders' Equity, Years Ended December 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
INDEX
Schedule III - Real Estate and Accumulated Depreciation
EDGAR FINANCIAL DATA SCHEDULE
Exhibit 27 - Financial Data Schedule for year ended December 31, 1994 (EDGAR filing only)
Other schedules are omitted for the reasons that they are not required, are not applicable, or the required information is set forth in the financial statements or notes thereto.
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INDEPENDENT AUDITORS' REPORT
The Shareholders and Directors Duke Realty Investments, Inc.:
We have audited the consolidated financial statements of Duke Realty Investments, Inc. and Subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Duke Realty Investments, Inc. and Subsidiaries as of December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP Indianapolis, Indiana January 25, 1995 - 18 -
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying Notes to Consolidated Financial Statements.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying Notes to Consolidated Financial Statements.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying Notes to Consolidated Financial Statements.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying Notes to Consolidated Financial Statements.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) THE COMPANY
Duke Realty Investments, Inc. (the "Company") was formed in 1985 and qualifies as a real estate investment trust ("REIT") under the provisions of the Internal Revenue Code. The Company is an open-ended, perpetual-life REIT which owns and operates a portfolio of commercial properties in the Midwest.
On October 4, 1993, the Company completed the acquisition of substantially all of the properties and businesses of Duke Associates, a full-service commercial real estate firm operating primarily in the Midwest. In connection with the acquisition, the Company effected a 1 for 4.2 reverse stock split of its existing common shares and issued an additional 14,000,833 shares through an offering ("the Offering"). All of the share and per share amounts have been restated to reflect the reverse split.
The acquisition was accounted for under the purchase method. The value of $466.0 million assigned to the acquired properties and businesses was equal to the property debt and other net liabilities assumed, of which $302.0 million was repaid with the proceeds of the Offering. The operating results of the acquired properties and businesses have been included in the consolidated operating results subsequent to the date of acquisition. The Company contributed all of its properties and related assets and liabilities along with the net proceeds from the Offering to Duke Realty Limited Partnership ("DRLP") in exchange for a 78.36% general partnership interest represented by 16,046,144 partnership units in DRLP ("Units"). Duke Associates contributed its properties to DRLP subject to their existing liabilities in exchange for a 21.64% limited partnership minority interest represented by 4,432,109 Units in DRLP. Limited partnership Units are exchangeable for shares of the Company's common stock on a one-for-one basis commencing October 4, 1994.
In 1994, the Company issued an additional 3,887,300 common shares through an additional offering ("1994 Offering") and received net proceeds of approximately $92.1 million. The proceeds of the 1994 Offering were contributed to DRLP in exchange for additional Units and were used by DRLP to fund current development and acquisition costs.
In 1994, the Company also acquired an additional interest in DRLP through the issuance of 456,375 common shares for a like number of Units. The acquired additional interest in DRLP was recorded at the fair market value of the Company's common stock on the date of acquisition. The acquisition amount of $11.5 million was allocated to rental property, undeveloped land and investments in unconsolidated companies based on their estimated fair values. As a result of these transactions, the Company owns an 83.62% interest in DRLP as of December 31, 1994.
The related service businesses are conducted through Duke Realty Services Limited Partnership ("DRSLP") and Duke Construction Limited Partnership ("DCLP"), in which the Company's wholly-owned subsidiary, Duke Services, Inc., is the sole general partner. The following unaudited pro forma information has been prepared assuming the Offering and the acquisition of the Duke Associates' properties and businesses had occurred at the beginning of the periods presented:
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries. The equity interests in these majority-owned or controlled subsidiaries not owned by the Company are reflected as minority interests in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
REAL ESTATE INVESTMENTS
Real estate investments are recorded at cost and are depreciated on the straight-line method over 40 years. Properties constructed by the Company are recorded at cost which includes all fees, interest and related costs incurred during the development of properties. These costs are classified as construction in progress until the property is placed in service. Maintenance and repairs are charged to expense as incurred. Tenant improvement costs are depreciated on the straight-line method over the term of the related leases.
INVESTMENTS IN UNCONSOLIDATED COMPANIES
The equity method of accounting is used for investments in non-majority owned partnerships and joint ventures in which the Company has the ability to exercise significant influence over operating and financial policies. The cost method of accounting is used for non-majority owned joint ventures over which the Company does not have the ability to exercise significant influence. Management believes that the difference between the cost method and the equity method does not significantly affect the financial position or results of operations of the Company.
CASH EQUIVALENTS
Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
DEFERRED COSTS
Costs incurred in connection with financing or leasing are amortized on the straight-line method over the term of the related loan or lease. Unamortized costs are charged to expense upon the early termination of the lease or upon early payment of the financing.
Prepaid interest is amortized to interest expense using the effective interest method over the term of the related loan.
REVENUES
Rental income from leases with scheduled rental increases during their terms is recognized for financial reporting purposes on a straight-line basis.
Management fees are based on a percentage of rental receipts of properties managed and are recognized as the rental receipts are collected. Maintenance fees are based upon established hourly rates and are recognized as the services are performed. Leasing fees are based on the gross value of leases signed and are generally recognized upon lease execution. Construction management and development fees are generally based on a percentage of costs and are recognized as the project costs are incurred. Fees earned on construction contracts are recognized on the percentage of completion method based upon the ratio of costs incurred to total estimated costs.
Earnings from property sales are recorded upon closing using the full accrual method. Cost of land sales is generally determined based on the percentage of land sold within a particular development.
PROJECT COSTS
All direct and indirect costs clearly associated with the acquisition, development, construction and rental of real estate projects owned by the Company are capitalized. Capitalized costs associated with acquisition, development and construction of real estate projects are included in real estate investments and costs associated with the rental of real estate projects are included in deferred costs.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated using the weighted average number of shares outstanding during the year. Common stock equivalents (consisting entirely of stock options) that in the aggregate dilute income per share by less than 3% are not considered in computing average shares outstanding. Exchanges of the DRLP partnership units for the Company's common shares do not affect net income per share.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
FEDERAL INCOME TAXES
The Company qualifies and intends to continue to qualify as a REIT under the Internal Revenue Code. As a REIT, the Company is allowed to reduce taxable income by all or a portion of its distributions to shareholders. As distributions have exceeded taxable income, no provision for federal income taxes has been made in the accompanying consolidated financial statements.
Earnings and profits, which determine the taxability of dividends to shareholders, differ from net income reported for financial reporting purposes primarily because of different depreciable lives and bases of rental properties and differences in the timing of recognition of earnings upon disposition of properties.
Of the total distributions for 1994 of $1.84 per share, 78.18% was taxable to shareholders as ordinary income and 21.82% was a return of capital to shareholders. Distributions for 1993 of $1.68 per share were 100% taxable to the shareholders as ordinary income. Of the total distributions for 1992 of $1.68 per share, 33.93% was taxable to the shareholders as ordinary income and 66.07% was a return of capital to shareholders.
(3) RELATED PARTY TRANSACTIONS
The Company provides management, leasing, construction and other tenant related services to partnerships in which certain executive officers have continuing ownership interests. The Company was paid fees totaling $2,271,000 and $885,000 for such services in 1994 and 1993, respectively. Management believes the terms for such services are equivalent to those available in the market. The Company has an option to purchase the executive officers' interest in each of these properties.
(4) INVESTMENTS IN UNCONSOLIDATED COMPANIES
The Company has equity interests ranging from 10% to 50% in unconsolidated partnerships and joint ventures which own and operate commercial properties and hold land for development. The Company acquired the equity interests of two of its unaffiliated joint venture partners in 1994. As part of the purchase of one of the joint venture interests, the Company assumed a $4.5 million mortgage loan. In addition, a joint venture which owned undeveloped land was dissolved with the Company obtaining direct ownership of undeveloped land. The Company recorded the land at the balance of its investments in and advances to the joint venture prior to dissolution, approximately $4.4 million. The operating results of the acquired properties have been included in the consolidated operating results subsequent to the date of acquisition.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Combined summarized financial information of the companies which are accounted for by the equity method as of December 31, 1994 and December 31, 1993 and for the year ended December 31, 1994 and the three months ended December 31, 1993 are as follows:
Investments in unconsolidated companies include $6.4 million and $6.2 million at December 31, 1994 and 1993, respectively, related to joint ventures on the cost method. Included in equity in earnings of unconsolidated companies are distributions from a joint venture accounted for on the cost method totaling $837,000 and $166,000 in 1994 and 1993, respectively.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) PROPERTY INDEBTEDNESS
Property indebtedness at December 31 consists of the following:
The Company has entered into an interest rate swap agreement on $35.2 million of the Company's outstanding mortgage debt to effectively fix the interest rate on the majority of its floating rate debt. Under the interest rate swap, the Company pays or receives the difference between a fixed rate of 4.38% and a floating rate of LIBOR + .75% based on the notional principal amount of $35.2 million. The amount paid or received on the swap agreement is included in interest expense on a monthly basis. The swap matures along with the related mortgage loan in October 1996. The fair value of the interest rate swap agreement at December 31, 1994 was $1.9 million. The fair value was estimated by discounting the expected cash flows to be received under the swap agreement using rates currently available for interest rate swaps of similar terms and maturities.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has a $6.4 million letter of credit which secures $6.3 million of mortgage notes. The letter of credit requires a 2% annual fee and matures in September 1999. The Company has guaranteed fifty percent of an $8.2 million letter of credit obligation of one of its unconsolidated companies which matures in September 1997.
At December 31, 1994, scheduled amortization and maturities of all property indebtedness for the next five years are as follows: 1995, $3.2 million; 1996, $65.4 million; 1997, $3.9 million; 1998, $83.4 million; and 1999, $2.4 million.
Cash paid for interest in 1994, 1993, and 1992 was $20.3 million, $10.5 million, and $7.6 million, respectively. Total interest capitalized in 1994 was $1.7 million.
In 1994, the Company obtained a $60 million revolving line of credit which is available to fund development costs and provide working capital. The revolving line of credit matures on March 31, 1996, and bears interest payable monthly at LIBOR + 2% (an average effective rate of 6.45% for 1994). The maximum and average amounts outstanding during 1994 were $60,000,000 and $17,980,000, respectively. The Company had no borrowings under the line at December 31, 1994.
(6) LEASING ACTIVITY
Future minimum rents due to the Company under non-cancelable operating leases at December 31, 1994 are scheduled as follows:
Rental income for 1992 includes $921,000 of non-recurring income from lease terminations, which represents the excess of the cash received from three termination agreements over the carrying value of the assets relating specifically to the terminating tenants.
In addition to minimum rents, certain leases require reimbursements of specified operating expenses which amounted to $10.0 million, $3.6 million, and $1.8 million for the years ended December 31, 1994, 1993 and 1992, respectively. Certain of the leases also provide for the payment of additional rent based on a percentage of the tenant's revenues.
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DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) EMPLOYEE BENEFIT PLANS
In October 1993, the Company established a profit sharing and salary deferral plan. The Company matches the employees' contributions up to two percent of the employees' salary and may also make annual discretionary contributions to the plan. Total expense recognized by the Company was $370,000 and $74,000 for 1994 and 1993, respectively.
In October 1993, the Company also established a contributory health and welfare plan. The Company makes contributions to the plan throughout the year as necessary to fund claims not covered by employee contributions. Total expense recognized by the Company related to this plan was $766,000 and $204,000 for 1994 and 1993, respectively.
(8) STOCK OPTION PLAN
In October 1993, the Company established a stock option plan under which 1,315,000 shares of common stock were reserved for the exercise of options which may be issued to the executive officers and certain key employees. The term of these options is ten years from the date of grant. The options vest 20% per year over a five-year period with initial vesting one year from the date of grant.
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DUKE REALTY INVESTMENTS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION SCHEDULE III DECEMBER 31, 1994
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DUKE REALTY INVESTMENTS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION SCHEDULE III DECEMBER 31, 1994
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DUKE REALTY INVESTMENTS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION SCHEDULE III DECEMBER 31, 1994
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3. EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Articles of Incorporation of Registrant are incorporated herein by reference to Exhibit 3.3 to the registration statement on Form S-2, as amended, filed on June 8, 1993, as File No. 33-64038 (the "Registration Statement").
3.2 By-Laws of Registrant are incorporated herein by reference to Exhibit 3.4 to the Registration Statement.
4. Instruments Defining Rights of Security Holders, including Indentures, are incorporated herein by reference to Articles V, VI, VIII, IX and X of Registrant's Articles of Incorporation.
10.1 Agreement of Limited Partnership of Duke Realty Limited Partnership (the "Operating Partnership") is incorporated herein by reference to Exhibit 10.1 to the Registration Statement.
10.2 Agreement of Limited Partnership of Duke Realty Services Limited Partnership (the "Services Partnership") is incorporated herein by reference to Exhibit 10.2 to the Registration Statement.
10.3 Promissory Note of the Services Partnership is incorporated herein by reference to Exhibit 10.3 to the Registration Statement.
10.4 Duke Realty Services Partnership 1993 Stock Option Plan is incorporated herein by reference to Exhibit 10.4 to the Registration Statement.
10.5 Acquisition Option Agreement relating to certain properties not contributed to the Operating Partnership by Duke Associates (the "Excluded Properties") is incorporated herein by reference to Exhibit 10.5 to the Registration Statement.
10.6 Management Agreement relating to the Excluded Properties is incorporated herein by reference to Exhibit 10.6 to the Registration Statement.
10.7 Contribution Agreement for certain properties and land contributed by Duke Associates and Registrant to the Operating Partnership is incorporated herein by reference to Exhibit 10.7 to the Registration Statement.
10.8 Contribution Agreement for certain assets and contracts contributed by Duke Associates to the Service Partnership is incorporated herein by reference to Exhibit 10.8 to the Registration Statement.
10.9 Contribution Agreement for certain contracts contributed by Duke Associates to the Operating Partnership is incorporated herein by reference to Exhibit 10.9 to the Registration Statement.
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10.10 Stock Purchase Agreement is incorporated herein by reference to Exhibit 10.10 to the Registration Statement.
10.11 Indemnification Agreement is incorporated herein by reference to Exhibit 10.11 to the Registration Statement.
21. List of Subsidiaries of Registrant.
24. Executed powers of attorney of certain directors.
27. Financial Data Schedule
99.1 Selected Quarterly Financial Information
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The Company will furnish to any security holder, upon written request, copies of any exhibit incorporated by reference, for a fee of 15 cents per page, to cover the costs of furnishing the exhibits. Written request should include a representation that the person making the request was the beneficial owner of securities entitled to vote at the 1995 Annual Meeting of Shareholders.
(b) REPORTS ON FORM 8-K
A report on Form 8-K dated August 26, 1994 was filed to report under Item 5 the unaudited financial statements of Duke Associates for the nine months ended September 30, 1993.
A report on Form 8-K dated October 13, 1994 was filed to report under Item 5 the exercise of a favorable option to purchase an asset of an affiliated company.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DUKE REALTY INVESTMENTS, INC.
March 28 , 1995 By: /s/ Thomas L. Hefner ------------------------- -------------------------------------- Thomas L. Hefner President and Chief Executive Officer
By: /s/ Darell E. Zink, Jr. -------------------------------------- Darell E. Zink, Jr. Executive Vice President and Chief Financial Officer
By: /s/ Dennis D. Oklak -------------------------------------- Dennis D. Oklak Vice President and Treasurer (Chief Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Date Title --------- ---- -----
/s/ John W. Wynne 3/28/95 Chairman of the Board ------------------------- ---------- John W. Wynne
/s/ Thomas L. Hefner 3/28/95 President and Chief Executive ------------------------- ---------- Officer and Director Thomas L. Hefner
/s/ Daniel C. Staton 3/28/95 Executive Vice President and Chief ------------------------- ---------- Operating Officer and Director Daniel C. Staton
/s/ Darell E. Zink, Jr. 3/28/95 Executive Vice President and Chief ------------------------- ---------- Financial Officer and Director Darell E. Zink, Jr.
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/s/ Geoffrey Button 3/28/95 Director ------------------------- ---------- Geoffrey Button
/s/ John D. Peterson 3/28/95 Director ------------------------- ---------- John D. Peterson
/s/ Dr. Sydney C. Reagan 3/28/95 Director ------------------------- ---------- Dr. Sydney C. Reagan
/s/ Lee Stanfield 3/28/95 Director ------------------------- ---------- Lee Stanfield
/s/ Jay J. Strauss 3/28/95 Director ------------------------- ---------- Jay J. Strauss
/s/ Howard L. Feinsand 3/28/95 Director ------------------------- ---------- Howard L. Feinsand
/s/ James E. Rogers 3/28/95 Director ------------------------- ---------- James E. Rogers
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