Exhibit 99.1

 

Audited Financial Statements and Schedule of Duke Realty Corporation

 

(a)

The following documents are filed as part of this Exhibit 99.1:

1.Consolidated Financial Statements

The following Consolidated Financial Statements, together with the Management's Report on Internal Control and the Report of Independent Registered Public Accounting Firm are listed below:

 

Duke Realty Corporation:

 

Management's Report on Internal Control

 

Report of Independent Registered Public Accounting Firm

 

Duke Realty Limited Partnership:

 

Management's Report on Internal Control

 

Report of Independent Registered Public Accounting Firm

 

Duke Realty Corporation:

 

Consolidated Balance Sheets, December 31, 2021 and 2020

 

Consolidated Statements of Operations and Comprehensive Income, Years Ended December 31, 2021, 2020 and 2019

 

Consolidated Statements of Cash Flows, Years Ended December 31, 2021, 2020 and 2019

 

Consolidated Statements of Changes in Equity, Years Ended December 31, 2021, 2020 and 2019

 

Duke Realty Limited Partnership:

 

Consolidated Balance Sheets, December 31, 2021 and 2020

 

Consolidated Statements of Operations and Comprehensive Income, Years Ended December 31, 2021, 2020 and 2019

 

Consolidated Statements of Cash Flows, Years Ended December 31, 2021, 2020 and 2019

 

Consolidated Statements of Changes in Equity, Years Ended December 31, 2021, 2020 and 2019

 

Duke Realty Corporation and Duke Realty Limited Partnership:

 

Notes to Consolidated Financial Statements

 

2.Consolidated Financial Statement Schedules

Duke Realty Corporation and Duke Realty Limited Partnership:

Schedule III – Real Estate and Accumulated Depreciation

 

 

 

-1-


 

 

Management's Report on Internal Control

We, as management of Duke Realty Corporation and its subsidiaries (the "General Partner"), are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

 

 

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

 

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

 

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

Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2021 based on the control criteria established in a report entitled Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that, as of December 31, 2021, our internal control over financial reporting is effective based on these criteria.

The independent registered public accounting firm of KPMG LLP, as auditors of the General Partner's consolidated financial statements, has also issued an audit report on the General Partner's internal control over financial reporting.

 

/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

 

 

-2-


 

 

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

Duke Realty Corporation:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Duke Realty Corporation and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedule III - real estate and accumulated depreciation (collectively, the consolidated financial statements). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.    

-3-


 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Assessment of certain values assigned to acquired assets and liabilities in certain asset acquisitions

As discussed in Notes 2 and 5 to the consolidated financial statements, the Company acquired approximately $571 million of real estate assets in 2021. For asset acquisitions, the Company records the purchase price to the tangible and identified intangible assets based on its “as-if vacant” fair value and other valuation techniques.

 

We identified the assessment of the fair value of land and the below market component of in-place leases in certain asset acquisitions as a critical audit matter. There is a high degree of subjective auditor judgment in determining the fair value of land and market rents used to determine the below market component of in-place leases.

 

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s asset allocation process, including controls to identify and select publicly available comparable land sales and market rents used to estimate the fair value of land and the below market component of in-place leases, respectively. We involved valuation professionals with specialized skills and knowledge, who assisted in comparing:

 

 

the Company’s estimated fair value of land to a range of independently developed estimates based on publicly available and comparable land sales: and

 

the market rents used in the Company’s estimated fair value of the below market component of in-place leases to publicly available market data for similar properties.

 

 

 

/s/ KPMG LLP

 

We have served as the Company’s auditor since 1986.

 

 

Indianapolis, Indiana

February 18, 2022

 

 

-4-


 

 

Management's Report on Internal Control

We, as management of Duke Realty Limited Partnership and its subsidiaries (the "Partnership"), are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of the principal executive and principal financial officers, or persons performing similar functions, of Duke Realty Corporation (the "General Partner"), and effected by the General Partner's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

 

 

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

 

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

 

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

Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2021 based on the control criteria established in a report entitled Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that, as of December 31, 2021, our internal control over financial reporting is effective based on these criteria.

The independent registered public accounting firm of KPMG LLP, as auditors of the Partnership's consolidated financial statements, has also issued an audit report on the Partnership's internal control over financial reporting.

 

/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

 

 

 

-5-


 

 

Report of Independent Registered Public Accounting Firm

To the Unitholders of Duke Realty Limited Partnership and the Board of Directors of Duke Realty Corporation:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Duke Realty Limited Partnership and subsidiaries (the  Partnership) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedule III - real estate and accumulated depreciation (collectively, the consolidated financial statements). We also have audited the Partnership's internal control over financial reporting as of December 31, 2021,  based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Partnership as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Basis for Opinions

The Partnership’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control. Our responsibility is to express an opinion on the Partnership’s consolidated financial statements and an opinion on the Partnership’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.    

-6-


 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Assessment of certain values assigned to acquired assets and liabilities in certain asset acquisitions

As discussed in Notes 2 and 5 to the consolidated financial statements, the Partnership acquired approximately $571 million of real estate assets in 2021. For asset acquisitions, the Partnership records the purchase price to the tangible and identified intangible assets based on its “as-if vacant” fair value and other valuation techniques.

 

We identified the assessment of the fair value of land and the below market component of in-place leases in certain asset acquisitions as a critical audit matter. There is a high degree of subjective auditor judgment in determining the fair value of land and market rents used to determine the below market component of in-place leases.

 

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Partnership’s asset allocation process, including controls to identify and select publicly available comparable land sales and market rents used to estimate the fair value of land and the below market component of in-place leases, respectively. We involved valuation professionals with specialized skills and knowledge, who assisted in comparing:

 

 

the Partnership’s estimated fair value of land to a range of independently developed estimates based on publicly available and comparable land sales: and

 

the market rents used in the Partnership’s estimated fair value of the below market component of in-place leases to publicly available market data for similar properties.

 

 

 

 

 

 

 

 

/s/ KPMG LLP

 

We have served as the Partnership’s auditor since 1994.

 

Indianapolis, Indiana

February 18, 2022

 

 

-7-


 

 

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

As of December 31,

(in thousands, except per share amounts)

 

 

2021

 

2020

ASSETS

 

 

 

Real estate investments:

 

 

 

Real estate assets

$9,616,076

 

$8,745,155

Construction in progress

744,871

 

695,219

Investments in and advances to unconsolidated joint ventures

168,336

 

131,898

Undeveloped land

473,317

 

291,614

 

11,002,600

 

9,863,886

Accumulated depreciation

(1,684,413)

 

(1,659,308)

Net real estate investments

9,318,187

 

8,204,578

 

 

 

 

Real estate investments and other assets held-for-sale

144,651

 

67,946

 

 

 

 

Cash and cash equivalents

69,752

 

6,309

Accounts receivable

13,449

 

15,204

Straight-line rent receivable

172,225

 

153,943

Receivables on construction contracts, including retentions

57,258

 

30,583

Deferred leasing and other costs, net of accumulated amortization of $209,975 and $204,122

337,936

 

329,765

Restricted cash held in escrow for like-kind exchange

 

47,682

Other escrow deposits and other assets

332,197

 

255,384

 

$10,445,655

 

$9,111,394

LIABILITIES AND EQUITY

 

 

 

Indebtedness:

 

 

 

Secured debt, net of deferred financing costs of $304 and $343

$59,418

 

$64,074

Unsecured debt, net of deferred financing costs of $45,136 and $32,763

3,629,864

 

3,025,977

Unsecured line of credit

 

295,000

 

3,689,282

 

3,385,051

 

 

 

 

Liabilities related to real estate investments held-for-sale

6,278

 

7,740

 

 

 

 

Construction payables and amounts due subcontractors, including retentions

107,009

 

62,332

Accrued real estate taxes

77,464

 

76,501

Accrued interest

20,815

 

18,363

Other liabilities

339,023

 

269,806

Tenant security deposits and prepaid rents

66,823

 

57,153

Total liabilities

4,306,694

 

3,876,946

Shareholders' equity:

 

 

 

Common shares ($0.01 par value); 600,000 shares authorized; 382,513  and 373,258 shares issued and outstanding, respectively

3,825

 

3,733

Additional paid-in capital

6,143,147

 

5,723,326

Accumulated other comprehensive loss

(28,011)

 

(31,568)

Distributions in excess of net income

(75,210)

 

(532,519)

Total shareholders' equity

6,043,751

 

5,162,972

Noncontrolling interests

95,210

 

71,476

Total equity

6,138,961

 

5,234,448

 

$10,445,655

 

$9,111,394

See accompanying Notes to Consolidated Financial Statements.

 

-8-


 

 

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income

For the Years Ended December 31,

(in thousands, except per share amounts)

 

2021

 

2020

 

2019

Revenues:

 

 

 

 

 

Rental and related revenue

$1,025,663

 

$929,194

 

$855,833

General contractor and service fee revenue

80,260

 

64,004

 

117,926

 

1,105,923

 

993,198

 

973,759

Expenses:

 

 

 

 

 

Rental expenses

85,782

 

76,639

 

75,584

Real estate taxes

159,580

 

149,295

 

129,520

General contractor and other services expenses

68,118

 

57,976

 

111,566

Depreciation and amortization

362,148

 

353,013

 

327,223

 

675,628

 

636,923

 

643,893

Other operating activities:

 

 

 

 

 

Equity in earnings of unconsolidated joint ventures

32,804

 

11,944

 

31,406

Gain on sale of properties

585,685

 

127,700

 

234,653

Gain on land sales

12,917

 

10,458

 

7,445

Other operating expenses

(3,607)

 

(8,209)

 

(5,318)

Impairment charges

 

(5,626)

 

Non-incremental costs related to successful leases

(13,302)

 

(12,292)

 

(12,402)

General and administrative expenses

(69,554)

 

(62,404)

 

(60,889)

 

544,943

 

61,571

 

194,895

Operating income

975,238

 

417,846

 

524,761

Other income (expenses):

 

 

 

 

 

Interest and other income, net

4,451

 

1,721

 

9,941

Interest expense

(84,843)

 

(93,442)

 

(89,756)

Loss on debt extinguishment

(17,901)

 

(32,900)

 

(6,320)

Gain on involuntary conversion

3,222

 

4,312

 

2,259

Income from continuing operations before income taxes

880,167

 

297,537

 

440,885

Income tax (expense) benefit

(18,549)

 

5,112

 

(8,686)

Income from continuing operations

861,618

 

302,649

 

432,199

Discontinued operations:

 

 

 

 

 

Gain on sale of properties

 

111

 

445

Income from discontinued operations

 

111

 

445

Net income

861,618

 

302,760

 

432,644

Net income attributable to noncontrolling interests

(8,723)

 

(2,845)

 

(3,672)

Net income attributable to common shareholders

$852,895

 

$299,915

 

$428,972

Basic net income per common share:

 

 

 

 

 

Continuing operations attributable to common shareholders

$2.25

 

$0.81

 

$1.18

Total

$2.25

 

$0.81

 

$1.18

Diluted net income per common share:

 

 

 

 

 

Continuing operations attributable to common shareholders

$2.25

 

$0.80

 

$1.18

Total

$2.25

 

$0.80

 

$1.18

Weighted average number of common shares outstanding

377,673

 

370,057

 

362,234

Weighted average number of common shares and potential dilutive securities

383,476

 

374,156

 

367,339

Comprehensive income:

 

 

 

 

 

Net income

$861,618

 

$302,760

 

$432,644

Other comprehensive income (loss):

 

 

 

 

 

Unrealized losses on interest rate swap contracts

 

 

(30,893)

Amortization of interest rate swap contracts

3,557

 

3,468

 

533

Total other comprehensive income (loss)

3,557

 

3,468

 

(30,360)

Comprehensive income

$865,175

 

$306,228

 

$402,284

See accompanying Notes to Consolidated Financial Statements.

 

-9-


 

 

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Years Ended December 31,

(in thousands)

 

 

2021

 

2020

 

2019

Cash flows from operating activities:

 

 

 

 

 

Net income

$861,618

 

$302,760

 

$432,644

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation of buildings and tenant improvements

304,935

 

297,158

 

272,422

Amortization of deferred leasing and other costs

57,213

 

55,855

 

54,801

Amortization of deferred financing costs

9,735

 

9,155

 

6,536

Straight-line rental income and expense, net

(32,081)

 

(25,865)

 

(21,197)

Impairment charges

 

5,626

 

Loss on debt extinguishment

17,901

 

32,900

 

6,320

Gain on involuntary conversion

(3,222)

 

(4,312)

 

(2,259)

Gain on land and property sales

(598,602)

 

(138,269)

 

(242,543)

Third-party construction contracts, net

(6,269)

 

(2,511)

 

9,254

Other accrued revenues and expenses, net

48,194

 

29,333

 

8,476

Equity in earnings (in excess of) less than operating distributions received from unconsolidated joint ventures

(16,996)

 

4,606

 

(18,556)

Net cash provided by operating activities

642,426

 

566,436

 

505,898

Cash flows from investing activities:

 

 

 

 

 

Development of real estate investments

(661,416)

 

(573,544)

 

(446,801)

Acquisition of buildings and related intangible assets

(447,584)

 

(383,672)

 

(210,224)

Acquisition of land and other real estate assets

(700,632)

 

(248,413)

 

(388,202)

Second generation tenant improvements, leasing costs and building improvements

(68,445)

 

(45,037)

 

(53,137)

Other deferred leasing costs

(42,214)

 

(41,607)

 

(32,921)

Other assets

(19,067)

 

(4,868)

 

(10,777)

Proceeds from the repayments of notes receivable from property sales

 

110,000

 

162,550

Proceeds from land and property sales, net

1,067,967

 

336,255

 

432,662

Capital distributions from unconsolidated joint ventures

61,616

 

876

 

26,272

Capital contributions and advances to unconsolidated joint ventures

(22,640)

 

(6,211)

 

(34,496)

Net cash used for investing activities

(832,415)

 

(856,221)

 

(555,074)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common shares, net

406,576

 

187,856

 

272,761

Proceeds from unsecured debt

940,749

 

663,123

 

582,284

Payments on unsecured debt

(390,900)

 

(546,972)

 

(255,812)

Proceeds from secured debt financings

 

18,400

 

Payments on secured indebtedness including principal amortization

(4,413)

 

(13,457)

 

(45,515)

(Repayments) borrowings on line of credit, net

(295,000)

 

295,000

 

(30,000)

Distributions to common shareholders

(394,487)

 

(355,287)

 

(318,702)

Distributions to noncontrolling interests, net

(4,352)

 

(3,347)

 

(2,648)

Tax payments on stock-based compensation awards

(5,132)

 

(4,360)

 

(6,825)

Change in book cash overdrafts

(12,453)

 

1,941

 

138

Cash settlement of interest rate swaps

 

 

(35,569)

Other financing activities

(357)

 

163

 

(10,183)

Deferred financing costs

(14,262)

 

(7,483)

 

(4,839)

Redemption of Limited Partner Units

(39)

 

 

Net cash provided by financing activities

225,930

 

235,577

 

145,090

Net increase (decrease) in cash, cash equivalents and restricted cash

35,941

 

(54,208)

 

95,914

Cash, cash equivalents and restricted cash at beginning of year

67,223

 

121,431

 

25,517

Cash, cash equivalents and restricted cash at end of year

$103,164

 

$67,223

 

$121,431

Non-cash activities:

 

 

 

 

 

Lease liabilities arising from right-of-use assets

$19,822

 

$20,883

 

$40,467

Assumption of indebtedness and other liabilities in real estate acquisitions

$128,639

 

$39,966

 

$—

Non-cash distribution of assets from unconsolidated joint ventures, net

$11,124

 

$—

 

$—

Contribution of properties to unconsolidated joint venture

$74,942

 

$—

 

$—

Conversion of Limited Partner Units to common shares

$5,099

 

$—

 

$1,624

Issuance of Limited Partner Units for acquisition

$11,603

 

$—

 

$—

-10-


 

 

See accompanying Notes to Consolidated Financial Statements.

 

-11-


 

 

DUKE REALTY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

(in thousands, except per share data)

 

 

Common Shareholders

 

 

 

 

 

Common

Stock

 

Additional

Paid-in

Capital

 

Accumulated

Other

Comprehensive

Income (Loss)

 

Distributions

in Excess of

Net Income

 

Non-

Controlling

Interests

 

Total

Balance at December 31, 2018

$3,589

 

$5,244,375

 

$(4,676)

 

$(585,087)

 

$55,042

 

$4,713,243

Net income

 

 

 

428,972

 

3,672

 

432,644

Other comprehensive loss

 

 

(30,360)

 

 

 

(30,360)

Issuance of common shares

83

 

272,678

 

 

 

 

272,761

Contributions from noncontrolling interests

 

 

 

 

312

 

312

Stock-based compensation plan activity

7

 

6,787

 

 

(1,175)

 

7,703

 

13,322

Conversion of Limited Partner Units

1

 

1,623

 

 

 

(1,624)

 

Distributions to common shareholders ($0.88 per share)

 

 

 

(318,702)

 

 

(318,702)

Distributions to noncontrolling interests

 

 

 

 

(2,960)

 

(2,960)

Balance at December 31, 2019

$3,680

 

$5,525,463

 

$(35,036)

 

$(475,992)

 

$62,145

 

$5,080,260

Net income

 

 

 

299,915

 

2,845

 

302,760

Other comprehensive income

 

 

3,468

 

 

 

3,468

Issuance of common shares

50

 

187,806

 

 

 

 

187,856

Contributions from noncontrolling interests

 

 

 

 

200

 

200

Stock-based compensation plan activity

3

 

10,057

 

 

(1,155)

 

9,833

 

18,738

Distributions to common shareholders ($0.96 per share)

 

 

 

(355,287)

 

 

(355,287)

Distributions to noncontrolling interests

 

 

 

 

(3,547)

 

(3,547)

Balance at December 31, 2020

$3,733

 

$5,723,326

 

$(31,568)

 

$(532,519)

 

$71,476

 

$5,234,448

Net income

 

 

 

852,895

 

8,723

 

861,618

Other comprehensive income

 

 

3,557

 

 

 

3,557

Issuance of common shares

82

 

406,494

 

 

 

 

406,576

Stock-based compensation plan activity

6

 

8,274

 

 

(1,099)

 

12,895

 

20,076

Issuance of Limited Partner Units

 

 

 

 

11,564

 

11,564

Conversion of Limited Partner Units

4

 

5,095

 

 

 

(5,099)

 

Redemption of Limited Partner Units

 

(42)

 

 

 

3

 

(39)

Distributions to common shareholders  ($1.045 per share)

 

 

 

(394,487)

 

 

(394,487)

Distributions to noncontrolling interests

 

 

 

 

(4,352)

 

(4,352)

Balance at December 31, 2021

$3,825

 

$6,143,147

 

$(28,011)

 

$(75,210)

 

$95,210

 

$6,138,961

See accompanying Notes to Consolidated Financial Statements.

 

-12-


 

 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Balance Sheets

As of December 31,

(in thousands)

 

 

2021

 

2020

ASSETS

 

 

 

Real estate investments:

 

 

 

Real estate assets

$9,616,076

 

$8,745,155

Construction in progress

744,871

 

695,219

Investments in and advances to unconsolidated joint ventures

168,336

 

131,898

Undeveloped land

473,317

 

291,614

 

11,002,600

 

9,863,886

Accumulated depreciation

(1,684,413)

 

(1,659,308)

Net real estate investments

9,318,187

 

8,204,578

 

 

 

 

Real estate investments and other assets held-for-sale

144,651

 

67,946

 

 

 

 

Cash and cash equivalents

69,752

 

6,309

Accounts receivable

13,449

 

15,204

Straight-line rent receivable

172,225

 

153,943

Receivables on construction contracts, including retentions

57,258

 

30,583

Deferred leasing and other costs, net of accumulated amortization of $209,975 and $204,122

337,936

 

329,765

Restricted cash held in escrow for like-kind exchange

 

47,682

Other escrow deposits and other assets

332,197

 

255,384

 

$10,445,655

 

$9,111,394

LIABILITIES AND EQUITY

 

 

 

Indebtedness:

 

 

 

Secured debt, net of deferred financing costs of $304 and $343

$59,418

 

$64,074

Unsecured debt, net of deferred financing costs of $45,136 and $32,763

3,629,864

 

3,025,977

Unsecured line of credit

 

295,000

 

3,689,282

 

3,385,051

 

 

 

 

Liabilities related to real estate investments held-for-sale

6,278

 

7,740

 

 

 

 

Construction payables and amounts due subcontractors, including retentions

107,009

 

62,332

Accrued real estate taxes

77,464

 

76,501

Accrued interest

20,815

 

18,363

Other liabilities

339,023

 

269,806

Tenant security deposits and prepaid rents

66,823

 

57,153

Total liabilities

4,306,694

 

3,876,946

Partners’ equity:

 

 

 

Common equity (382,513 and 373,258 General Partner Units issued and outstanding, respectively)

6,071,762

 

5,194,540

Limited Partners' common equity (3,663 and 3,326 Limited Partner Units issued and outstanding, respectively)

90,679

 

66,874

Accumulated other comprehensive loss

(28,011)

 

(31,568)

     Total partners' equity

6,134,430

 

5,229,846

Noncontrolling interests

4,531

 

4,602

     Total equity

6,138,961

 

5,234,448

 

$10,445,655

 

$9,111,394

 

See accompanying Notes to Consolidated Financial Statements.

 

 

-13-


 

 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income

For the Years Ended December 31,

(in thousands, except per unit amounts)

 

2021

 

2020

 

2019

Revenues:

 

 

 

 

 

Rental and related revenue

$1,025,663

 

$929,194

 

$855,833

General contractor and service fee revenue

80,260

 

64,004

 

117,926

 

1,105,923

 

993,198

 

973,759

Expenses:

 

 

 

 

 

Rental expenses

85,782

 

76,639

 

75,584

Real estate taxes

159,580

 

149,295

 

129,520

General contractor and other services expenses

68,118

 

57,976

 

111,566

Depreciation and amortization

362,148

 

353,013

 

327,223

 

675,628

 

636,923

 

643,893

Other operating activities:

 

 

 

 

 

Equity in earnings of unconsolidated joint ventures

32,804

 

11,944

 

31,406

Gain on sale of properties

585,685

 

127,700

 

234,653

Gain on land sales

12,917

 

10,458

 

7,445

Other operating expenses

(3,607)

 

(8,209)

 

(5,318)

Impairment charges

 

(5,626)

 

Non-incremental costs related to successful leases

(13,302)

 

(12,292)

 

(12,402)

General and administrative expenses

(69,554)

 

(62,404)

 

(60,889)

 

544,943

 

61,571

 

194,895

Operating income

975,238

 

417,846

 

524,761

Other income (expenses):

 

 

 

 

 

Interest and other income, net

4,451

 

1,721

 

9,941

Interest expense

(84,843)

 

(93,442)

 

(89,756)

Loss on debt extinguishment

(17,901)

 

(32,900)

 

(6,320)

Gain on involuntary conversion

3,222

 

4,312

 

2,259

Income from continuing operations before income taxes

880,167

 

297,537

 

440,885

Income tax (expense) benefit

(18,549)

 

5,112

 

(8,686)

Income from continuing operations

861,618

 

302,649

 

432,199

Discontinued operations:

 

 

 

 

 

Gain on sale of properties

 

111

 

445

Income from discontinued operations

 

111

 

445

Net income

861,618

 

302,760

 

432,644

Net (income) loss attributable to noncontrolling interests

(369)

 

(182)

 

6

Net income attributable to common unitholders

$861,249

 

$302,578

 

$432,650

Basic net income per Common Unit:

 

 

 

 

 

Continuing operations attributable to common unitholders

$2.25

 

$0.81

 

$1.18

Total

$2.25

 

$0.81

 

$1.18

Diluted net income per Common Unit:

 

 

 

 

 

Continuing operations attributable to common unitholders

$2.25

 

$0.80

 

$1.18

Total

$2.25

 

$0.80

 

$1.18

Weighted average number of Common Units outstanding

381,381

 

373,360

 

365,352

Weighted average number of Common Units and potential dilutive securities

383,476

 

374,156

 

367,339

Comprehensive income:

 

 

 

 

 

Net income

$861,618

 

$302,760

 

$432,644

Other comprehensive income (loss):

 

 

 

 

 

Unrealized losses on interest rate swap contracts

 

 

(30,893)

Amortization of interest rate swap contracts

3,557

 

3,468

 

533

Total other comprehensive income (loss)

3,557

 

3,468

 

(30,360)

Comprehensive income

$865,175

 

$306,228

 

$402,284

See accompanying Notes to Consolidated Financial Statements.

 

-14-


 

 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Years Ended December 31,

(in thousands)

 

 

2021

 

2020

 

2019

Cash flows from operating activities:

 

 

 

 

 

Net income

$861,618

 

$302,760

 

$432,644

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation of buildings and tenant improvements

304,935

 

297,158

 

272,422

Amortization of deferred leasing and other costs

57,213

 

55,855

 

54,801

Amortization of deferred financing costs

9,735

 

9,155

 

6,536

Straight-line rental income and expense, net

(32,081)

 

(25,865)

 

(21,197)

Impairment charges

 

5,626

 

Loss on debt extinguishment

17,901

 

32,900

 

6,320

Gain on involuntary conversion

(3,222)

 

(4,312)

 

(2,259)

Gain on land and property sales

(598,602)

 

(138,269)

 

(242,543)

Third-party construction contracts, net

(6,269)

 

(2,511)

 

9,254

Other accrued revenues and expenses, net

48,194

 

29,333

 

8,476

Equity in earnings (in excess of) less than operating distributions received from unconsolidated joint ventures

(16,996)

 

4,606

 

(18,556)

Net cash provided by operating activities

642,426

 

566,436

 

505,898

Cash flows from investing activities:

 

 

 

 

 

Development of real estate investments

(661,416)

 

(573,544)

 

(446,801)

Acquisition of buildings and related intangible assets

(447,584)

 

(383,672)

 

(210,224)

Acquisition of land and other real estate assets

(700,632)

 

(248,413)

 

(388,202)

Second generation tenant improvements, leasing costs and building improvements

(68,445)

 

(45,037)

 

(53,137)

Other deferred leasing costs

(42,214)

 

(41,607)

 

(32,921)

Other assets

(19,067)

 

(4,868)

 

(10,777)

Proceeds from the repayments of notes receivable from property sales

 

110,000

 

162,550

Proceeds from land and property sales, net

1,067,967

 

336,255

 

432,662

Capital distributions from unconsolidated joint ventures

61,616

 

876

 

26,272

Capital contributions and advances to unconsolidated joint ventures

(22,640)

 

(6,211)

 

(34,496)

Net cash used for investing activities

(832,415)

 

(856,221)

 

(555,074)

Cash flows from financing activities:

 

 

 

 

 

Contributions from the General Partner

406,576

 

187,856

 

272,761

Proceeds from unsecured debt

940,749

 

663,123

 

582,284

Payments on unsecured debt

(390,900)

 

(546,972)

 

(255,812)

Proceeds from secured debt financings

 

18,400

 

Payments on secured indebtedness including principal amortization

(4,413)

 

(13,457)

 

(45,515)

(Repayments) borrowings on line of credit, net

(295,000)

 

295,000

 

(30,000)

Distributions to common unitholders

(398,399)

 

(358,484)

 

(321,469)

(Distributions to) contributions from noncontrolling interests, net

(440)

 

(150)

 

119

Tax payments on stock-based compensation awards

(5,132)

 

(4,360)

 

(6,825)

Change in book cash overdrafts

(12,453)

 

1,941

 

138

Cash settlement of interest rate swaps

 

 

(35,569)

Other financing activities

(357)

 

163

 

(10,183)

Deferred financing costs

(14,262)

 

(7,483)

 

(4,839)

Redemption of Limited Partner Units

(39)

 

 

Net cash provided by financing activities

225,930

 

235,577

 

145,090

Net increase (decrease) in cash, cash equivalents and restricted cash

35,941

 

(54,208)

 

95,914

Cash, cash equivalents and restricted cash at beginning of year

67,223

 

121,431

 

25,517

Cash, cash equivalents and restricted cash at end of year

$103,164

 

$67,223

 

$121,431

Non-cash activities:

 

 

 

 

 

Lease liabilities arising from right-of-use assets

$19,822

 

$20,883

 

$40,467

Assumption of indebtedness and other liabilities in real estate acquisitions

$128,639

 

$39,966

 

$—

Non-cash distribution of assets from unconsolidated joint ventures, net

$11,124

 

$—

 

$—

Contribution of properties to unconsolidated joint venture

$74,942

 

$—

 

$—

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

$5,099

 

$—

 

$1,624

Issuance of Limited Partner Units for acquisition

$11,603

 

$—

 

$—

-15-


 

 

See accompanying Notes to Consolidated Financial Statements.

 

-16-


 

 

DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

(in thousands, except per unit data) 

 

Common Unitholders

 

 

 

 

 

General

 

Limited

 

Accumulated

 

 

 

 

 

 

 

Partner

 

Partners'

 

Other

 

Total

 

 

 

 

 

Common

 

Common

 

Comprehensive

 

  Partners'

 

Noncontrolling

 

Total

 

Equity

 

Equity

 

Income (Loss)

 

Equity

 

Interests

 

Equity

Balance at December 31, 2018

$4,662,877

 

$50,585

 

$(4,676)

 

$4,708,786

 

$4,457

 

$4,713,243

Net income

428,972

 

3,678

 

 

432,650

 

(6)

 

432,644

Other comprehensive loss

 

 

(30,360)

 

(30,360)

 

 

(30,360)

Capital contribution from the General Partner

272,761

 

 

 

272,761

 

 

272,761

Stock-based compensation plan activity

5,619

 

7,703

 

 

13,322

 

 

13,322

Contributions from noncontrolling interests

 

 

 

 

312

 

312

Conversion of Limited Partner Units

1,624

 

(1,624)

 

 

 

 

Distributions to Partners ($0.88 per Common Unit)

(318,702)

 

(2,767)

 

 

(321,469)

 

 

(321,469)

Distributions to noncontrolling interests

 

 

 

 

(193)

 

(193)

Balance at December 31, 2019

$5,053,151

 

$57,575

 

$(35,036)

 

$5,075,690

 

$4,570

 

$5,080,260

Net income

299,915

 

2,663

 

 

302,578

 

182

 

302,760

Other comprehensive income

 

 

3,468

 

3,468

 

 

3,468

Capital contribution from the General Partner

187,856

 

 

 

187,856

 

 

187,856

Stock-based compensation plan activity

8,905

 

9,833

 

 

18,738

 

 

18,738

Contributions from noncontrolling interests

 

 

 

 

200

 

200

Distributions to Partners ($0.96 per Common Unit)

(355,287)

 

(3,197)

 

 

(358,484)

 

 

(358,484)

Distributions to noncontrolling interests

 

 

 

 

(350)

 

(350)

Balance at December 31, 2020

$5,194,540

 

$66,874

 

$(31,568)

 

$5,229,846

 

$4,602

 

$5,234,448

Net income

852,895

 

8,354

 

 

861,249

 

369

 

861,618

Other comprehensive income

 

 

3,557

 

3,557

 

 

3,557

Capital contribution from the General Partner

406,576

 

 

 

406,576

 

 

406,576

Stock-based compensation plan activity

7,181

 

12,895

 

 

20,076

 

 

20,076

Issuance of Limited Partner Units

 

11,564

 

 

11,564

 

 

11,564

Conversion of Limited Partner Units

5,099

 

(5,099)

 

 

 

 

Redemption of Limited Partner Units

(42)

 

3

 

 

(39)

 

 

(39)

Distributions to Partners ($1.045 per Common Unit)

(394,487)

 

(3,912)

 

 

(398,399)

 

 

(398,399)

Distributions to noncontrolling interests

 

 

 

 

(440)

 

(440)

Balance at December 31, 2021

$6,071,762

 

$90,679

 

$(28,011)

 

$6,134,430

 

$4,531

 

$6,138,961

See accompanying Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

-17-


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

(1)The Company

 

The General Partner was formed in 1985, and we believe that it qualifies as a REIT under the provisions of 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 December 31, 2021. 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 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 December 31, 2021, we owned and operated a portfolio primarily consisting of industrial properties and provided real estate services to third-party owners, customers and joint ventures.

Substantially all of our Rental Operations (see Note 9) are conducted through the Partnership. We conduct our Service Operations (see Note 9) 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.

 

 

(2)Summary of Significant Accounting Policies

 

Principles of Consolidation

The consolidated financial statements include our accounts and the accounts of our majority-owned or controlled subsidiaries. The equity interests in these controlled subsidiaries not owned by us are reflected as noncontrolling interests in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. Investments in entities that we do not control, and variable interest entities ("VIEs") in which we are not the primary beneficiary (to the extent applicable), are not consolidated and are reflected as investments in unconsolidated joint ventures under the equity method of reporting.

Due to the fact that the Limited Partners do not have kick out rights, or substantive participating rights, the Partnership is a VIE.  Because the General Partner holds majority ownership and exercises control over every aspect

-18-


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

of the Partnership's operations, the General Partner has been determined as the primary beneficiary of the Partnership and, therefore, consolidates the Partnership.

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.

Reclassifications

Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the 2021 consolidated financial statement presentation.

Real Estate Investments

Rental real property, including land, land improvements, buildings and tenant improvements, are included in real estate investments and are generally stated at cost. Construction in process and undeveloped land are included in real estate investments and are stated at cost. Real estate investments also include our equity interests in unconsolidated joint ventures that own and operate rental properties and hold land for development.  

Depreciation

Buildings and land improvements are depreciated on the straight-line method over their estimated lives not to exceed 40 and 15 years, respectively, for properties that we develop, and not to exceed 30 and 10 years, respectively, for acquired properties. Tenant improvement costs are depreciated using the straight-line method over the shorter of the useful life of the asset or term of the related lease.

Cost Capitalization

Direct and certain indirect costs, including interest, clearly associated with the development, construction or expansion of real estate investments are capitalized as a cost of the property. Direct costs include all leasing commissions paid to third parties for new leases or lease renewals. We capitalize a portion of our indirect costs associated with our construction and development efforts. Costs that are incremental to executing a lease are capitalized. In assessing the amount of direct and indirect costs to be capitalized, allocations are made based on estimates of the actual amount of time spent in each activity. We do not capitalize any costs attributable to downtime or to unsuccessful projects.  

We capitalize interest and direct and indirect project costs during the period when we commence activities necessary to get the property ready for its intended use, including land entitlement and preconstruction activities, up to the time the property is substantially complete and ready for its intended use. In addition, we capitalize costs, including real estate taxes, insurance and utilities, that have been allocated to vacant space based on the square footage of the portion of the building not held available for immediate occupancy during the extended lease-up periods after construction of the building shell has been completed if costs are being incurred to ready the vacant space for its intended use. If costs and activities incurred to ready the vacant space cease, then cost capitalization is also discontinued until such activities are resumed. Once necessary work has been completed on a vacant space, project costs are no longer capitalized.

We cease capitalization of all project costs on extended lease-up periods when significant activities have ceased, which does not exceed the shorter of a one-year period after the completion of the building shell or when the property attains 90% occupancy.

Impairment

-19-


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

We evaluate our real estate assets, with the exception of those that are classified as held-for-sale, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If such an evaluation is considered necessary, we compare the carrying amount of that real estate asset, or asset group, with the expected undiscounted cash flows that are directly associated with, and that are expected to arise as a direct result of, the use and eventual disposition of that asset, or asset group. Our estimate of the expected future cash flows used in testing for impairment is based on, among other things, our estimates regarding future market conditions, rental rates, occupancy levels, costs of tenant improvements, leasing commissions and other tenant concessions, assumptions regarding the residual value of our properties at the end of our anticipated holding period and the length of our anticipated holding period and is, therefore, subjective by nature. These assumptions could differ materially from actual results. If our strategy changes or if market conditions otherwise dictate a reduction in the holding period and an earlier sale date, an impairment loss could be recognized and such loss could be material. To the extent the carrying amount of a real estate asset, or asset group, exceeds the associated estimate of undiscounted cash flows, an impairment loss is recorded to reduce the carrying value of the asset to its fair value.

The determination of the fair value of real estate assets is also highly subjective, especially in markets where there is a lack of recent comparable transactions. We primarily utilize the income approach to estimate the fair value of our income producing real estate assets. We utilize marketplace participant assumptions to estimate the fair value of a real estate asset when an impairment charge is required to be measured. The estimation of future cash flows, as well as the selection of the discount rate and exit capitalization rate used in applying the income approach, are highly subjective measures in estimating fair value.

Real estate assets classified as held-for-sale are reported at the lower of their carrying value or their fair value, less estimated costs to sell. Once a property is designated as held-for-sale, no further depreciation expense is recorded.

Asset Acquisitions

Our acquisitions of properties have been accounted for as asset acquisitions as they have not met the definition of a business. Transaction costs related to asset acquisitions are capitalized. To the extent that we gain control of real estate properties that are accounted for as asset acquisitions, as opposed to business combinations, we accumulate the costs of any pre-existing equity interests and consideration paid for additional interest acquired and we do not remeasure our pre-existing equity interest. Generally contingencies arising from an asset acquisition are only recognized when probable.

We allocate the purchase price of asset acquisitions to tangible and identified intangible assets based on their relative fair values, using all pertinent information available at the date of acquisition. Capitalized acquisition costs are also included in the total cost basis of acquired properties that are asset acquisitions. The allocation to tangible assets (buildings, tenant improvements and land) is based upon management's determination of the value of the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon internally determined assumptions that we believe are consistent with current market conditions for similar properties.  The most important assumptions in determining the allocation of the purchase price to tangible assets are the exit capitalization rate, estimated market rents and the fair value of the underlying land. The purchase price of real estate assets is also allocated to intangible assets consisting of the above or below market component of in-place leases and the value of in-place leases.

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

-20-


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

balance sheet and below market leases are included in other liabilities in the balance sheet; both are amortized to rental income over the remaining terms of the respective leases.

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

Joint Ventures

We have equity interests in unconsolidated joint ventures that are primarily engaged in the operation and development of industrial real estate properties.

We consolidate 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, guaranteed returns, protection against losses, or capping of residual returns within the group and (iii) establish whether 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) have the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) have the obligation or rights to absorb losses or receive benefits that could potentially be significant to the VIE, then we would be determined to be the primary beneficiary and would consolidate the VIE.  To the extent that 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 VIE's were 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 our 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.

We use the equity method of accounting for those joint ventures where we exercise significant influence but do not have control. Under the equity method of accounting, our investment in each joint venture is included on our balance sheet; however, the assets and liabilities of the joint ventures for which we use the equity method are not included on our balance sheet.

When we sell or contribute properties to unconsolidated joint ventures and retain a non-controlling ownership interest in such assets, we recognize the difference between the consideration received and the carrying amount of the asset sold or contributed when its derecognition criteria are met.  The equity method investment we retain in such partial sale transactions is noncash consideration and is measured at fair value.  As a result, the accounting for a partial sale results in the recognition of a full gain or loss.

When circumstances indicate there may have been a reduction in the value of an equity investment, we evaluate whether the loss in value is other than temporary.  If we conclude it is other than temporary, we recognize an impairment charge to reflect the equity investment at fair value.

-21-


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In July 2021, we entered into a 20%-owned unconsolidated joint venture with CBRE Global Investors ("CBREGI") with plans to contribute three tranches of properties. We contributed two separate tranches of properties to the joint venture during 2021 (see Note 5) while the third tranche was closed in January 2022 (see Note 14). The joint venture financed the acquisition of these properties with a combination of third party first mortgage loans and equity contributions from our partner in this joint venture.

There were no unconsolidated joint ventures, in which we have any recognized assets or liabilities or have retained any economic exposure to loss at December 31, 2021 that met the criteria to be considered VIEs. At December 31, 2021, we guaranteed the repayment of a loan associated with one of our unconsolidated joint ventures. The maximum guarantee exposure for the loan was approximately $4.8 million.

Cash Equivalents

Investments with an original maturity of three months or less are classified as cash equivalents.

Valuation of Receivables

Our determination of the adequacy of our allowances for tenant receivables includes a binary assessment of whether or not the amounts due under a tenant’s lease agreement are probable of collection. For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination.

Deferred Costs

Deferred Financing Costs

Costs incurred in connection with obtaining financing are deferred and are amortized to interest expense over the term of the related loan. The costs for issuing debt, other than lines of credit, are presented on the consolidated balance sheets as a direct deduction from the debt's carrying value, while debt issuance costs related to the Partnership's unsecured line of credit are presented as assets on the consolidated balance sheets, as part of other escrow deposits and other assets.

Lease Related Costs and Acquired Lease-Related Intangible Assets

Costs that are directly incremental to executing a lease are capitalized.

Acquired lease-related intangible assets consist of above market lease assets and the value allocable to in-place leases. Above market lease assets are amortized as a reduction to rental income over the remaining terms of the respective leases. In-place lease intangible assets are amortized on a straight-line basis and included within depreciation and amortization in the consolidated statements of operations and comprehensive income.

Deferred leasing costs and acquired lease-related intangible assets at December 31, 2021 and 2020, excluding amounts classified as held-for-sale, were as follows (in thousands):

-22-


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

2021

 

2020

Deferred leasing costs

$376,597

 

$359,646

Acquired lease-related intangible assets

171,314

 

174,241

 

$547,911

 

$533,887

 

 

 

 

Accumulated amortization - deferred leasing costs

$(122,789)

 

$(120,756)

Accumulated amortization - acquired lease-related intangible assets

(87,186)

 

(83,366)

Total

$337,936

 

$329,765

Amounts recorded related to amortization expense for in-place leases for the years ended December 31, 2021, 2020 and 2019 totaled $20.4 million, $19.5 million and $22.0 million, respectively. Charges to rental income related to the amortization of above market lease assets for the years ended December 31, 2021, 2020 and 2019 totaled $367,000, $639,000 and $703,000, respectively.

The expected future amortization, or charge to rental income, of acquired lease-related intangible assets is summarized in the table below (in thousands):

Year

Amortization Expense

 

Charge to Rental Income

2022

$18,168

 

$352

2023

15,271

 

353

2024

11,986

 

59

2025

9,789

 

2026

7,574

 

Thereafter

20,576

 

 

$83,364

 

$764

Noncontrolling Interests

Noncontrolling interests relate to the minority ownership interests in the Partnership and interests in consolidated property partnerships that are not wholly owned by the General Partner or the Partnership. Noncontrolling interests are subsequently adjusted for additional contributions, distributions to noncontrolling holders and the noncontrolling holders' proportionate share of the net earnings or losses of each respective entity. We report noncontrolling interests as a component of total equity.

When a Common Unit of the Partnership is redeemed (Note 1), the change in ownership is treated as an equity transaction by the General Partner and there is no effect on its earnings or net assets.

Revenue Recognition

Rental and Related Revenue

Rental income from leases to customers is recognized on a straight-line basis.  If a lease provides for tenant improvements, we determine whether we or the tenant is the owner of the tenant improvements. When we are the owner of the tenant improvements, any tenant improvements funded by the tenant are treated as lease payments which are deferred and amortized as revenue over the lease term. When the tenant is the owner of the tenant improvements, and we fund such improvements, we record such tenant improvement allowances as lease incentives and amortize as a reduction of revenue over the lease term.

We record lease termination fees when a tenant has executed a definitive termination agreement with us and the payment of the termination fee is not subject to any material conditions that must be met or waived before the fee is due to us.

-23-


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

General Contractor and Service Fee Revenue

General contractor and service fee revenues are comprised primarily of construction and development related revenues earned from third parties while acting in capacity of a developer, as a general contractor or a construction manager. We evaluate the goods and services provided in these construction arrangements to determine whether we are acting as principal or agent and, accordingly, recognize revenue on a gross or net basis based on that evaluation.  There are other ancillary streams of revenue included in general contractor and service fee revenues (see Note 9), such as management fees earned from unconsolidated joint ventures in accordance with the terms specific to each arrangement, which are not significant.

Our construction arrangements are typically structured with only one performance obligation, which generally represents an obligation either to construct a new building or to construct fixtures in an existing building, and these single performance obligations are satisfied over time as construction progresses. We recognize revenue as we satisfy such performance obligations using the percentage of completion method, which is an input method.  Using this method, profits are recorded based on our estimates of the percentage of completion of individual contracts, commencing when the work performed under the contracts reaches a point where the final costs can be estimated with reasonable accuracy. The percentage of completion estimates are based on a comparison of the contract expenditures incurred to the estimated final costs. We believe the percentage of completion method is a faithful depiction of the transfer of goods and services as changes in job performance and estimated profitability, which result in revisions to costs and income and are recognized in the period in which the revisions are determined, have not historically been significant. We typically receive regular progress payments on the majority of our construction arrangements and such arrangements generally have an original duration of less than one year. As the result of the relatively short duration of our construction arrangements, we apply the optional disclosure exemptions, related to our remaining performance obligations for our in-process construction projects, for which any future variable consideration is not material. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.  To the extent that a fixed-price contract is estimated to result in a loss, the loss is recorded immediately.

Opening and closing balances of construction receivables are presented separately on the Consolidated Balance Sheets. Under billed and over billed receivables on construction contracts totaled $45.8 million and $1.9 million, respectively, at December 31, 2021 and $16.6 million and $105,000, respectively, at December 31, 2020.  Over billed receivables are included in other liabilities in the Consolidated Balance Sheets. We generally do not have any contract assets associated with our construction arrangements.

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.

Property Sales

Only disposals representing a strategic shift in operations (for example, a disposal of a major geographic area or a major line of business) should be presented as discontinued operations in accordance with ASC 205-20, without consideration of significant continuing involvement.

We recognize gains on sales of properties, including partial sales, of non-financial assets (and in-substance non-financial assets) when the recognition criteria are met.  In the typical course of our business, sales of non-financial assets represent only one performance obligation and are recognized when an enforceable contract is in place, collectability is ensured and control is transferred to the buyer.

Leases

-24-


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As a lessor, our primary business is the development, acquisition, and operation of industrial real estate properties that are held for investment and leased to tenants. We manage residual risk through investing in properties that we believe will appreciate in value over time. We also evaluate the collectability of the cash flows of our leases prior to their execution, and on an ongoing basis, to ensure collectability is probable prior to recognizing lease revenues on an accrual basis.

We only capitalize the incremental costs of signing a lease. Non-incremental costs attributable to successful leases, as presented in the Consolidated Statements of Operations, represent internal costs allocable to successful leasing activities and exclude estimated costs related to downtime and/or unsuccessful deals.  These costs primarily consist of compensation and other benefits for internal leasing and legal personnel.  These costs are not capitalizable "incremental costs" in the context of the applicable lease accounting rules, but we believe separate presentation on the Consolidated Statements of Operations provides useful information for purposes of comparability with economically similar success-based costs incurred by other organizations that outsource their leasing functions, which are generally capitalizable.

We exclude certain lessor costs, such as real estate taxes and insurance, that are paid directly by lessees to third parties, from rental revenue and the associated rental expense. Lessor costs that are paid by the lessor and reimbursed by the lessee continue to be recorded through rental revenue and the associated rental expense.

The applicable lease accounting rules allow a practical expedient for lessors 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 we have consistently applied this practical expedient in all periods presented.

As a lessee, we 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. 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. In the capacity of a lessee, we 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.

See Note 3 for further disclosure on our leases as a lessor and lessee.

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.

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.

-25-


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table reconciles the components of basic and diluted net income per common share or Common Unit (in thousands): 

 

2021

 

2020

 

2019

General Partner

 

 

 

 

 

Net income attributable to common shareholders

$852,895

 

$299,915

 

$428,972

Less: Dividends on participating securities

(1,356)

 

(1,447)

 

(1,487)

Basic net income attributable to common shareholders

851,539

 

298,468

 

427,485

Add back dividends on dilutive participating securities

1,356

 

 

1,487

Noncontrolling interest in earnings of common unitholders

8,354

 

2,663

 

3,678

Diluted net income attributable to common shareholders

$861,249

 

$301,131

 

$432,650

Weighted average number of common shares outstanding

377,673

 

370,057

 

362,234

Weighted average Limited Partner Units outstanding

3,708

 

3,303

 

3,118

Other potential dilutive shares

2,095

 

796

 

1,987

Weighted average number of common shares and potential dilutive securities

383,476

 

374,156

 

367,339

 

 

 

 

 

 

Partnership

 

 

 

 

 

Net income attributable to common unitholders

$861,249

 

$302,578

 

$432,650

Less: Distributions on participating securities

(1,356)

 

(1,447)

 

(1,487)

Basic net income attributable to common unitholders

$859,893

 

$301,131

 

$431,163

Add back distributions on dilutive participating securities

1,356

 

 

1,487

Diluted net income attributable to common unitholders

$861,249

 

$301,131

 

$432,650

Weighted average number of Common Units outstanding

381,381

 

373,360

 

365,352

Other potential dilutive units

2,095

 

796

 

1,987

Weighted average number of Common Units and potential dilutive securities

383,476

 

374,156

 

367,339

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):

 

2021

 

2020

 

2019

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

 

1,621

 

Federal Income Taxes

General Partner

The General Partner has elected to be taxed as a REIT under the Code, as amended. To qualify as a REIT, the General Partner must meet a number of organizational and operational requirements, including a requirement to distribute at least 90% of its REIT taxable income to its shareholders. Management intends to continue to adhere to these requirements and to maintain the General Partner's REIT status. As a REIT, the General Partner is entitled to a tax deduction for the dividends it pays to shareholders. Accordingly, the General Partner generally will not be subject to federal income taxes as long as it currently distributes to shareholders an amount equal to or in excess of its taxable income. The General Partner is, however, generally subject to federal income taxes on any taxable income that is not currently distributed to its shareholders. If the General Partner fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes and may not be able to qualify as a REIT for four subsequent taxable years.

REIT qualification reduces, but does not eliminate, the amount of state and local taxes we pay. In addition, our financial statements include the operations of taxable corporate subsidiaries that are not entitled to a dividends paid deduction and are subject to federal, state and local income taxes.  As a REIT, the General Partner may also be subject to certain federal excise taxes if it engages in certain types of transactions.

-26-


DUKE REALTY CORPORATION AND DUKE REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table reconciles the General Partner's net income to taxable income before the dividends paid deduction, and subject to the 90% distribution requirement, for the years ended December 31, 2021, 2020 and 2019 (in thousands): 

 

2021

 

2020

 

2019

Net income

$861,618

 

$302,760

 

$432,644

Book/tax differences

(467,205)

 

63,838

 

(120,421)

Taxable income before the dividends paid deduction

394,413

 

366,598

 

312,223