**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

| **ý**                          | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                        |
|-------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |       |                                                                                                                                                                                                                      |
|                                |       | **For the quarterly period ended  June 30, 2004**                                                                                                                                                                    |
|                                |       |                                                                                                                                                                                                                      |
| **OR**                              |
|                                |       |                                                                                                                                                                                                                      |
| **o**                               | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                       |
|                                |       |                                                                                                                                                                                                                      |
|                                |       | **For the transition period from                  to                 **. |
|                                |       |                                                                                                                                                                                                                      |
| **Commission File Number: 0-20625** |

 

**DUKE REALTY LIMITED PARTNERSHIP**

 

| State of Incorporation: |       | IRS Employer Identification Number: |
|-------------------------|------------|-------------------------------------|
| **Indiana**             | ** ** | **35-1898425**                      |

 

**600 East 96th Street, Suite 100**

**Indianapolis, Indiana  46240**

 

**Telephone: (317) 808-6000**

(Address, including zip code and telephonenumber, including area code, of principalexecutive offices)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

| Yes  ý |   | No  o |
|-----------------------|--------|-----------------|

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Securities Exchange Act).

 

| Yes  o |   | No  ý |
|------------------|--------|----------------------|

 

The number of Common Units outstanding as of August 2, 2004 was156,118,658.

 

 

----

 

**DUKE REALTY LIMITED PARTNERSHIP**

 

**INDEX**

 
| **Part I - Financial Information** |                                                                                                                         |
|------------------------------------|------------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                         |   |
| **Item 1.**                        | **  Financial Statements**                                                                                         |   |
|                               |                                                                                                                         |   |
|                               | Condensed Consolidated Balance Sheets as of  June 30, 2004 (Unaudited) and December 31, 2003                       |   |
|                               |                                                                                                                         |   |
|                               | Condensed Consolidated Statements of  Operations (Unaudited) for the three and six months ended June 30, 2004  and 2003 |   |
|                               |                                                                                                                         |   |
|                               | Condensed Consolidated Statements of Cash  Flows (Unaudited) for the six months ended June 30, 2004 and 2003            |   |
|                               |                                                                                                                         |   |
|                               | Condensed Consolidated Statement of  Partners’ Equity (Unaudited) for the six months ended June 30, 2004           |   |
|                               |                                                                                                                         |   |
|                               | Notes to Condensed Consolidated Financial  Statements (Unaudited)                                                            |   |
|                               |                                                                                                                         |   |
|                               | Report of Independent Registered Public  Accounting Firm                                                                     |   |
|                               |                                                                                                                         |   |
| **Item 2.**                        | **  Management’s Discussion and  Analysis of Financial Condition and Results of Operations**                  |   |
|                               |                                                                                                                         |   |
| **Item 3.**                        | **  Quantitative and Qualitative Disclosures  About Market Risk**                                                  |   |
|                               |                                                                                                                         |   |
| **Item 4.**                        | **  Controls and Procedures**                                                                                      |   |
|                               |                                                                                                                         |   |
| **Part II - Other Information**    |                                                                                                                         |
|                               |                                                                                                                         |   |
|                               | Item 1.                                                                                                                      | Legal Proceedings |   |
|                               | Item 2.                                                                                                                      | Changes in Securities |   |
|                               | Item 3.                                                                                                                      | Defaults Upon Senior Securities |   |
|                               | Item 4.                                                                                                                      | Submission of Matters to a Vote of Security  Holders |   |
|                               | Item 5.                                                                                                                      | Other Information |   |
|                               | Item 6.                                                                                                                      | Exhibits and Reports on Form 8-K |   |

 

----

 

**PART I - FINANCIAL INFORMATION**

**Item 1.****  Financial Statements**

**DUKE REALTY LIMITED PARTNERSHIP ANDSUBSIDIARIES**

**Condensed Consolidated Balance Sheets**

**(in thousands)**

 
| ** **                                                                                | ** ** | **June 30,  2004** | ** **    | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------|---------------|-----------------------------|------------|
|                                                                                      |       | **(Unaudited)**         | ** **    |                        |       |
| **ASSETS**                                                                                |       | ** **              | ** **    |                        |       |
|                                                                                      |       | ** **              | ** **    |                        |       |
| Real estate investments:                                                                  |       | ** **              | ** **    |                        |       |
| Land and improvements                                                                     |       | **$**                   | **681,905**   | ** **                  | $          | 641,544 |   |
| Buildings and tenant improvements                                                         |       | **4,564,660**           | ** **    | 4,452,624                   |       |
| Construction in progress                                                                  |       | **89,189**              | ** **    | 119,441                     |       |
| Investments in unconsolidated companies                                                   |       | **290,785**             | ** **    | 295,837                     |       |
| Land held for development                                                                 |       | **334,096**             | ** **    | 314,446                     |       |
|                                                                                      |       | **5,960,635**           |          | 5,823,892                   | ** ** |
| Accumulated depreciation                                                                  |       | **(741,633**            | **)**         | (677,357                    | )          |
|                                                                                      |       | ** **              | ** **    |                        |       |
| Net real estate investments                                                               |       | **5,219,002**           | ** **    | 5,146,535                   |       |
|                                                                                      |       | ** **              | ** **    |                        |       |
| Cash and cash equivalents                                                                 |       | **10,791**              | ** **    | 12,695                      |       |
| Accounts receivable, net of allowance of  $2,014 and $2,430                               |       | **13,752**              | ** **    | 16,215                      |       |
| Straight-line rent receivable, net of  allowance of $1,240 and $1,240                     |       | **80,544**              | ** **    | 71,049                      |       |
| Receivables on construction contracts                                                     |       | **55,631**              | ** **    | 44,905                      |       |
| Deferred financing costs, net of  accumulated amortization of $9,694 and $10,703          |       | **15,438**              | ** **    | 13,358                      |       |
| Deferred leasing and other costs, net of  accumulated amortization of $76,711 and $67,317 |       | **173,253**             | ** **    | 158,562                     |       |
| Escrow deposits and other assets                                                          |       | **164,856**             | ** **    | 95,392                      |       |
|                                                                                      |       | **$**                   | **5,733,267** | ** **                  | $          | 5,558,711 |   |
| **LIABILITIES AND  PARTNERS’ EQUITY**                                                |       | ** **              | ** **    |                        |       |
|                                                                                      |       | ** **              | ** **    |                        |       |
| Indebtedness:                                                                             |       | ** **              | ** **    |                        |       |
| Secured debt                                                                              |       | **$**                   | **187,919**   | ** **                  | $          | 208,649 |   |
| Unsecured notes                                                                           |       | **1,965,755**           | ** **    | 1,775,887                   |       |
| Unsecured lines of credit                                                                 |       | **376,000**             | ** **    | 351,000                     |       |
|                                                                                      |       | **2,529,674**           |          | 2,335,536                   | ** ** |
|                                                                                      |       | ** **              | ** **    |                        |       |
| Construction payables and amounts due  subcontractors                                     |       | **67,729**              | ** **    | 60,789                      |       |
| Accounts payable                                                                          |       | **1,042**               | ** **    | 2,268                       |       |
| Accrued expenses:                                                                         |       | ** **              | ** **    |                        |       |
| Real estate taxes                                                                         |       | **60,817**              | ** **    | 52,955                      |       |
| Interest                                                                                  |       | **34,609**              | ** **    | 33,259                      |       |
| Other                                                                                     |       | **35,704**              | ** **    | 49,029                      |       |
| Other liabilities                                                                         |       | **100,862**             | ** **    | 107,321                     |       |
| Tenant security deposits and prepaid rents                                                |       | **36,899**              | ** **    | 37,975                      |       |
| Total liabilities                                                                         |       | **2,867,336**           | ** **    | 2,679,132                   |       |
|                                                                                      |       | ** **              | ** **    |                        |       |
| Minority interest                                                                         |       | **10**                  | ** **    | 1,259                       |       |
|                                                                                      |       | ** **              | ** **    |                        |       |
| Partners’ equity:                                                                    |       | ** **              | ** **    |                        |       |
| General Partner                                                                           |       | ** **              | ** **    |                        |       |
| Common equity                                                                             |       | **2,241,861**           | ** **    | 2,153,844                   |       |
| Preferred equity (liquidation preference of  ($457,250)                                   |       | **423,444**             | ** **    | 511,785                     |       |
|                                                                                      |       | **2,665,305**           |          | 2,665,629                   | ** ** |
| Limited Partners’ common equity                                                      |       | **203,081**             | ** **    | 212,691                     |       |
| Accumulated other comprehensive income                                                    |       | **(2,465**              | **)**         | —                      |       |
|                                                                                      |       | **2,865,921**           |          | 2,878,320                   | ** ** |
|                                                                                      |       | **$**                   | **5,733,267** |                        | $          | 5,558,711 | ** ** |

 

See accompanying Notes to CondensedConsolidated Financial Statements

 

2

----

 

**DUKE REALTY LIMITED PARTNERSHIPANDSUBSIDIARIES**

**Condensed Consolidated Statements ofOperations**

**For the three and six months endedJune 30,**

**(in thousands,except per unit amounts)**

**(Unaudited)**

 
| ** **                                                                                                   | ** ** | **Three Months Ended** | ** **  | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|----------------------|------------|
| ** **                                                                                                   | ** ** | **2004**               | ** **  | **2003**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **RENTAL  OPERATIONS:**                                                                                      |       |                   |        |                 |       |   |   |   |   |
| Revenues:                                                                                                    |       |                   |        |                 |       |   |   |   |   |
| Rental income                                                                                                | ** ** | **$**                  | **181,960** |                 | $          | 168,532 | ** ** | **$** | **365,251** |   | $ | 341,395 |   |
| Equity in earnings of unconsolidated  companies                                                              | ** ** | **5,770**              |        | 6,693                | ** ** | **10,295** |   | 10,962 |   |
|                                                                                                         |       | **187,730**            |        | 175,225              | ** ** | **375,546** |   | 352,357 |   |
|                                                                                                         |       |                   |        |                 |       |   |   |   |   |
| Operating expenses:                                                                                          |       |                   |        |                 |       |   |   |   |   |
| Rental expenses                                                                                              | ** ** | **36,717**             |        | 32,053               | ** ** | **76,339** |   | 70,930 |   |
| Real estate taxes                                                                                            | ** ** | **21,499**             |        | 20,614               | ** ** | **42,701** |   | 40,288 |   |
| Interest expense                                                                                             | ** ** | **32,682**             |        | 33,300               | ** ** | **65,169** |   | 64,493 |   |
| Depreciation and amortization                                                                                | ** ** | **51,264**             |        | 44,629               | ** ** | **102,419** |   | 90,154 |   |
|                                                                                                         |       | **142,162**            |        | 130,596              | ** ** | **286,628** |   | 265,865 |   |
| Earnings from rental operations                                                                              | ** ** | **45,568**             |        | 44,629               | ** ** | **88,918** |   | 86,492 |   |
|                                                                                                         |       |                   |        |                 |       |   |   |   |   |
| **SERVICE  OPERATIONS**                                                                                      |       |                   |        |                 |       |   |   |   |   |
| Revenues:                                                                                                    |       |                   |        |                 |       |   |   |   |   |
| General contractor gross revenue                                                                             | ** ** | **89,733**             |        | 67,519               | ** ** | **172,456** |   | 117,661 |   |
| General contractor costs                                                                                     | ** ** | **(83,242**            | **)**       | (60,554              | )          | **(159,278** | **)** | (105,434 | ) |
| Net general contractor revenue                                                                               | ** ** | **6,491**              |        | 6,965                | ** ** | **13,178** |   | 12,227 |   |
| Property management, maintenance and  leasing fees                                                           | ** ** | **3,855**              |        | 3,448                | ** ** | **7,790** |   | 7,542 |   |
| Construction management and development  activity income                                                     | ** ** | **4,051**              |        | 910                  | ** ** | **4,630** |   | 717 |   |
| Other income                                                                                                 | ** ** | **342**                |        | 98                   | ** ** | **576** |   | 117 |   |
| Total revenue                                                                                                | ** ** | **14,739**             |        | 11,421               | ** ** | **26,174** |   | 20,603 |   |
|                                                                                                         |       |                   |        |                 |       |   |   |   |   |
| Operating expenses                                                                                           | ** ** | **10,016**             |        | 6,731                | ** ** | **19,409** |   | 14,031 |   |
| Total earnings from service operations                                                                       | ** ** | **4,723**              |        | 4,690                | ** ** | **6,765** |   | 6,572 |   |
|                                                                                                         |       |                   |        |                 |       |   |   |   |   |
| General and administrative expense                                                                           | ** ** | **(5,629**             | **)**       | (4,928               | )          | **(13,951** | **)** | (10,842 | ) |
| Operating income                                                                                             | ** ** | **44,662**             |        | 44,391               | ** ** | **81,732** |   | 82,222 |   |
|                                                                                                         |       |                   |        |                 |       |   |   |   |   |
| **OTHER  INCOME (EXPENSE)**                                                                                  |       |                   |        |                 |       |   |   |   |   |
| Interest income                                                                                              | ** ** | **1,564**              |        | 878                  | ** ** | **3,074** |   | 1,854 |   |
| Earnings from sale of land and ownership  interest in unconsolidated companies, net of impairment adjustment | ** ** | **1,104**              |        | 1,747                | ** ** | **5,733** |   | 11,165 |   |
| Other revenue (expense)                                                                                      | ** ** | **(71**                | **)**       | (9                   | )          | **(74** | **)** | (559 | ) |
| Other minority interest in earnings of  subsidiaries                                                         | ** ** | **(425**               | **)**       | (449                 | )          | **(732** | **)** | (472 | ) |
| Income from continuing operations                                                                            | ** ** | **46,834**             |        | 46,558               | ** ** | **89,733** |   | 94,210 |   |
|                                                                                                         |       |                   |        |                 |       |   |   |   |   |
| Discontinued operations:                                                                                     |       |                   |        |                 |       |   |   |   |   |
| Net income from discontinued operations                                                                      | ** ** | **(89**                | **)**       | 1,730                | ** ** | **439** |   | 3,686 |   |
| Gain on sale of discontinued operations and  net of impairment adjustment                                    | ** ** | **695**                |        | 125                  | ** ** | **4,704** |   | 2,463 |   |
| Income from discontinued operations                                                                          | ** ** | **606**                |        | 1,855                | ** ** | **5,143** |   | 6,149 |   |
| Net income                                                                                                   | ** ** | **47,440**             |        | 48,413               | ** ** | **94,876** |   | 100,359 |   |
| Dividends on preferred units                                                                                 | ** ** | **(8,401**             | **)**       | (10,154              | )          | **(16,001** | **)** | (20,308 | ) |
| Adjustment for redemption of preferred  units                                                                | ** ** | **(31**                | **)**       | —               | ** ** | **(3,645** | **)** | — |   |
| Net income available for common unitholders                                                                  | ** ** | **$**                  | **39,008**  | ** **           | **$**      | 38,259 | ** ** | **$** | **75,230** | ** ** | $ | 80,051 |   |
| Basic net income per common unit:                                                                            |       | ** **             |        |                 |       | ** ** | ** ** |   |   |
| Continuing operations                                                                                        | ** ** | **$**                  | **.25**     | ** **           | **$**      | .24 | ** ** | **$** | **.46** | ** ** | $ | .49 |   |
| Discontinued operations                                                                                      | ** ** | **—**             |        | .01                  | ** ** | **.03** | ** ** | .04 |   |
| Total                                                                                                        | ** ** | **$**                  | **.25**     | ** **           | **$**      | .25 | ** ** | **$** | **.49** | ** ** | $ | .53 |   |
| Diluted net income per common unit:                                                                          |       | ** **             |        |                 |       | ** ** | ** ** |   |   |
| Continuing operations                                                                                        | ** ** | **$**                  | **.25**     | ** **           | **$**      | .24 | ** ** | **$** | **.45** | ** ** | $ | .49 |   |
| Discontinued operations                                                                                      | ** ** | **—**             |        | .01                  | ** ** | **.03** | ** ** | .04 |   |
| Total                                                                                                        | ** ** | **$**                  | **.25**     | ** **           | **$**      | .25 | ** ** | **$** | **.48** | ** ** | $ | .53 |   |
| Weighted average number of common units  outstanding                                                         | ** ** | **156,045**            |        | 150,141              | ** ** | **154,244** | ** ** | 150,057 |   |
| Weighted average number of common and  dilutive potential common units                                       | ** ** | **156,828**            |        | 151,019              | ** ** | **156,871** | ** ** | 150,823 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

3

----

 

**DUKE REALTY LIMITED PARTNERSHIP ANDSUBSIDIARIES**

**Condensed Consolidated Statements of CashFlows**

**For the six months ended June 30**

**(in thousands)**

**(Unaudited)**

 
| ** **                                                                                       | ** ** | **2004**     |        | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------|-------------|----------|------------|
| Cash flows from operating activities:                                                            |       | ** **   |        |     |       |
| Net income                                                                                       |       | **$**        | **94,876**  |     | $          | 100,359 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:               |       | ** **   |        |     |       |
| Depreciation of buildings and tenant  improvements                                               |       | **87,634**   |        | 82,915   |       |
| Amortization of deferred leasing and other  costs                                                |       | **18,014**   |        | 11,374   |       |
| Amortization of deferred financing costs                                                         |       | **2,068**    |        | 1,960    |       |
| Minority interest in earnings                                                                    |       | **732**      |        | 472      |       |
| Straight-line rent adjustment                                                                    |       | **(10,856**  | **)**       | (11,453  | )          |
| Earnings from land and depreciated property  sales                                               |       | **(10,437**  | **)**       | (13,628  | )          |
| Build-for-sale operations, net                                                                   |       | **(3,436**   | **)**       | (20,027  | )          |
| Construction contracts, net                                                                      |       | **(7,742**   | **)**       | 524      |       |
| Other accrued revenues and expenses, net                                                         |       | **(12,418**  | **)**       | 2,291    |       |
| Operating distributions received in excess  of equity and earnings from unconsolidated companies |       | **6,770**    |        | 7,022    |       |
| **Net cash provided  by operating activities**                                                   |       | **165,205**  |        | 161,809  |       |
| ** **                                                                                       |       | ** **   |        |     |       |
| Cash flows from investing activities:                                                            |       | ** **   |        |     |       |
| Development of real estate investments                                                           |       | **(63,544**  | **)**       | (68,714  | )          |
| Acquisition of real estate investments                                                           |       | **(45,616**  | **)**       | (33,145  | )          |
| Acquisition of land held for development  and infrastructure costs                               |       | **(39,186**  | **)**       | (36,935  | )          |
| Recurring tenant improvements                                                                    |       | **(28,485**  | **)**       | (17,777  | )          |
| Recurring leasing costs                                                                          |       | **(13,202**  | **)**       | (9,217   | )          |
| Recurring building improvements                                                                  |       | **(8,305**   | **)**       | (6,883   | )          |
| Other deferred leasing costs                                                                     |       | **(8,782**   | **)**       | (11,836  | )          |
| Other deferred costs and other assets                                                            |       | **(9,648**   | **)**       | (3,439   | )          |
| Tax deferred exchange escrow, net                                                                |       | **(2,448**   | **)**       | (10,506  | )          |
| Proceeds from land and depreciated property  sales, net                                          |       | **37,155**   |        | 63,255   |       |
| Investment in secured mortgage loan                                                              |       | **(65,000**  | **)**       | —   |       |
| Advances to unconsolidated companies                                                             |       | **(1,918**   | **)**       | (1,366   | )          |
| **Net cash used by  investing activities**                                                       |       | **(248,979** | **)**       | (136,563 | )          |
| ** **                                                                                       |       | ** **   |        |     |       |
| Cash flows from financing activities:                                                            |       | ** **   |        |     |       |
| Contribution from General Partner’s common  units, net                                      |       | **9,262**    |        | 6,821    |       |
| Contribution from General Partner’s  preferred units, net                                   |       | **144,975**  |        | —   |       |
| Payments for redemption of General  Partner’s preferred equity                              |       | **(102,651** | **)**       | (20      | )          |
| Redemption of warrants of General Partner                                                        |       | **(2,881**   | **)**       | (4,692   | )          |
| Proceeds from unsecured debt issuance                                                            |       | **125,000**  |        | 325,000  |       |
| Payments on unsecured debt                                                                       |       | **—**   |        | (175,000 | )          |
| Proceeds from term loan                                                                          |       | **65,000**   |        | —   |       |
| Proceeds from debt refinancing                                                                   |       | **—**   |        | 38,340   |       |
| Payments on secured indebtedness including  principal amortization                               |       | **(20,543**  | **)**       | (64,968  | )          |
| Borrowing on lines of credit, net                                                                |       | **25,000**   |        | 5,554    |       |
| Distributions to common unitholders                                                              |       | **(141,504** | **)**       | (136,515 | )          |
| Distributions to preferred unitholders                                                           |       | **(15,188**  | **)**       | (20,308  | )          |
| Distributions to minority interest                                                               |       | **(449**     | **)**       | (1,032   | )          |
| Deferred financing costs                                                                         |       | **(4,151**   | **)**       | (4,092   | )          |
| **Net cash used for  financing activities**                                                      |       | **81,870**   |        | (30,912  | )          |
| **Net increase  (decrease) in cash and cash equivalents**                                        |       | **(1,904**   | **)**       | (5,666   | )          |
| ** **                                                                                       |       | ** **   |        |     |       |
| Cash and cash equivalents at beginning of  period                                                |       | **12,632**   |        | 17,129   |       |
| Cash and cash equivalents at end of period                                                       |       | **$**        | **10,791**  |     | $          | 11,463 |   |
| Other non-cash items:                                                                            |       | ** **   |        |     |       |
| Conversion of Limited Partner Units to  common shares of General Partner                         |       | **$**        | **3,047**   |     | $          | 1,749 |   |
| Conversion of Series D Preferred Shares to  common shares                                        |       | **$**        | **130,665** |     | $          | — |   |

 

See accompanying Notes to CondensedConsolidated Financial Statements

 

4

----

 

**DUKE REALTY LIMITED PARTNERSHIP ANDSUBSIDIARIES**

**Condensed Consolidated Statement of Partners’Equity**

**For the six months ended June 30, 2004**

**(in thousands,except per unit data)**

**(Unaudited)**

 
| ** **                                                               | ** ** | **General Partner**   | ** **    | **Partners’  Common  Equity** | ** ** | **Other  Comprehensive  Income (Loss)** | ** ** | **Total**  | ** **  |
|--------------------------------------------------------------------------|------------|-----------------------|---------------|------------------------------------|------------|-----------------------------------------|------------|------------|-------------|
| **Common  Equity**                                                       | ** ** | **Preferred  Equity** |
|                                                                     | ** ** | ** **            | ** **    | ** **                         | ** ** | ** **                              | ** ** | ** ** | ** **  | ** ** | ** ** |
| **Balance at  December 31, 2003**                                   | ** ** | **$**                 | **2,153,844** | ** **                         | **$**      | **511,785**                             | ** ** | **$**      | **212,691** | ** ** | **$** | **—** | ** ** | **$** | **2,878,320** | ** ** |
|                                                                     | ** ** | ** **            | ** **    | ** **                         | ** ** | ** **                              | ** ** | ** ** | ** **  | ** ** | ** ** |
| Comprehensive income:                                                    |       |                  |          |                               |       |                                    |       |       |        |   |   |
| Net income                                                               |       | 71,335                |          | 16,001                             |       | 7,540                                   |       | —     |        | 94,876 |   |
| Distributions to preferred unitholders                                   |       | —                |          | (16,001                            | )          | —                                  |       | —     |        | (16,001 | ) |
| Gains (losses) on derivative instruments                                 |       | —                |          | —                             |       | —                                  |       | (2,465     | )           | (2,465 | ) |
|                                                                     |       |                  |          |                               |       |                                    |       |       |        |   |   |
| Comprehensive income available for common  unitholders                   |       |                  |          |                               |       |                                    |       |       |        | 76,410 |   |
|                                                                     |       |                  |          |                               |       |                                    |       |       |        |   |   |
| Capital contribution from General Partner                                |       | 9,349                 |          | 144,975                            |       | —                                  |       | —     |        | 154,324 |   |
|                                                                     |       |                  |          |                               |       |                                    |       |       |        |   |   |
| Acquisition of Partnership interest for  common stock of General Partner |       | 7,309                 |          | —                             |       | (4,262                                  | )          | —     |        | 3,047 |   |
|                                                                     |       |                  |          |                               |       |                                    |       |       |        |   |   |
| General Partner’s redemption of Series E                            |       |                  |          |                               |       |                                    |       |       |        |   |   |
| Preferred Units                                                          |       | —                |          | (100,028                           | )          | —                                  |       | —     |        | (100,028 | ) |
|                                                                     |       |                  |          |                               |       |                                    |       |       |        |   |   |
| General Partner’s redemption of Series D  Preferred Units           |       | —                |          | (2,623                             | )          | —                                  |       | —     |        | (2,623 | ) |
|                                                                     |       |                  |          |                               |       |                                    |       |       |        |   |   |
| General Partner’s conversion of Series D  Preferred Units           |       | 130,665               |          | (130,665                           | )          | —                                  |       | —     |        | — |   |
|                                                                     |       |                  |          |                               |       |                                    |       |       |        |   |   |
| Tax benefits from employee stock plans                                   |       | 675                   |          | —                             |       | —                                  |       | —     |        | 675 |   |
|                                                                     |       |                  |          |                               |       |                                    |       |       |        |   |   |
| Exercise of General Partner warrants                                     |       | (2,881                | )             | —                             |       | —                                  |       | —     |        | (2,881 | ) |
|                                                                     |       |                  |          |                               |       |                                    |       |       |        |   |   |
| FASB 123 compensation expense                                            |       | 201                   |          | —                             |       | —                                  |       | —     |        | 201 |   |
|                                                                     |       |                  |          |                               |       |                                    |       |       |        |   |   |
| Distribution to General Partner                                          |       | (20                   | )             | —                             |       | —                                  |       | —     |        | (20 | ) |
|                                                                     |       |                  |          |                               |       |                                    |       |       |        |   |   |
| Distributions to partners ($.92 per Common  Unit)                        |       | (128,616              | )             | —                             |       | (12,888                                 | )          | —     |        | (141,504 | ) |
|                                                                     |       |                  |          |                               |       |                                    |       |       |        |   |   |
| **Balance  at June 30, 2004**                                       | ** ** | **$**                 | **2,241,861** | ** **                         | **$**      | **423,444**                             | ** ** | **$**      | **203,081** | ** ** | **$** | **(2,465** | **)** | **$** | **2,865,921** | ** ** |

 

See accompanying Notes to CondensedConsolidated Financial Statements

 

5

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**DUKE REALTY LIMITED PARTNERSHIP**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**1.**              **Financial Statements**

 

The interim condensed consolidated financial statements included hereinhave been prepared by Duke Realty Limited Partnership (the “Partnership”)without audit (except for the Balance Sheet as of December 31, 2003). Thefinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and in accordance with Rule 10-01 of Regulation S-X ofthe Securities Exchange Act of 1934. Accordingly, they do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements. Inthe opinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have been included.These financial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Partnership’s AnnualReport on Form 10-K for the year ended December 31, 2003.

 

**The Partnership**

 

Duke Realty Limited Partnership (the “Partnership”) was formed onOctober 4, 1993, when Duke Realty Corporation (the “General Partner”)contributed all of its properties and related assets and liabilities, alongwith the net proceeds from the issuance of additional shares of the GeneralPartner through an offering, to the Partnership. Simultaneously, thePartnership completed the acquisition of Duke Associates, a full-servicecommercial real estate firm operating in the Midwest. The General Partner wasformed in 1985 and qualifies as a Real Estate Investment Trust (“REIT”) underprovisions of the Internal Revenue Code. The General Partner is the solegeneral partner of the Partnership, owning 91.1% of the common partnershipinterests as of June 30, 2004 (“General Partner Units”). The remaining8.9% of the Partnership’s common interest is owned by limited partners(“Limited Partner Units” and, together with the General Partner Units, the“Common Units”). The Limited Partner Units are exchangeable for shares of theGeneral Partner’s common stock on a one-for-one basis subject generally to aone-year holding period. The General Partner also owns preferred partnershipinterests in the Partnership (“Preferred Units”).

 

The Partnership owns and operates a portfolio of industrial, office andretail properties in the midwestern and southeastern United States and providesreal estate services to third-party owners. The Partnership conducts ServiceOperations through Duke Realty Services Limited Partnership (“DRSLP”) and DukeConstruction Limited Partnership (“DCLP”).

 

**2.****              Lines of Credit**

 

The Partnership has one unsecured line of credit available atJune 30, 2004, described as follows (in thousands):

 
| **Description**          | ** ** | **Borrowing  Capacity** | ** ** | **Maturity  Date** | ** **        | **Interest  Rate** | ** **  | **Outstanding  at June 30, 2004** | ** ** |
|--------------------------|------------|-------------------------|------------|--------------------|-------------------|--------------------|-------------|----------------------------------------|------------|
| Unsecured Line of Credit |       | $                       | 500,000    |               | January 2007 |               | LIBOR + .60 | %                                      | $          | 376,000 |   |
|                          |            |                         |            |                    |                   |                    |             |                                        |            |  |  |

 

The line of credit is used to fund development activities, acquireadditional rental properties and provide working capital.

 

The line of credit provides the Partnership with an option to obtainborrowings from financial institutions that participate in the line, at rateslower than the stated interest rate, subject to certain restrictions. Amountsoutstanding on the unsecured line of credit at June 30, 2004, range fromLIBOR + .225% to .60% (1.36% to 1.92% at June 30, 2004).

 

6

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The line of credit also contains financial covenants that require thePartnership to meet defined levels of performance. As of June 30, 2004,the Partnership is in compliance with all covenants and expects to remain incompliance for the foreseeable future.

 

**3.****              Related PartyTransactions**

 

The Partnership provides property management, leasing, construction, andother tenant related services to properties in which former executive officersand current Board Members of the General Partner have ownership interests. ThePartnership received fees totaling approximately $354,000 and $755,000 forservices provided to these properties for the six months ended June 30,2004 and 2003, respectively. The fees charged by the Partnership for suchservices are equivalent to those charged to third-party owners for similarservices.

 

The Partnership provides property management, leasing, construction andother tenant related services to unconsolidated companies in which thePartnership has an equity interest. For the six months ended June 30, 2004and 2003, respectively, the Partnership received management fees of $2.4 millionand $2.4 million, leasing fees of $1.4 million and $682,000 and constructionand development fees of $673,000 and $752,000 from these unconsolidatedcompanies. These fees were recorded at market rates and the Partnershipeliminates its ownership percentage of these fees in the consolidated financialstatements.

 

The Partnership has other related party transactions that areinsignificant and are at terms that management considers tobe at arm’s-length and equal to those negotiated with independentparties.

 

**4.****              Net Income Per Common Unit**

 

Basic net income per common unit is computed by dividing net incomeavailable for common units by the weighted average number of common unitsoutstanding for the period. Diluted net income per common unit is computed bydividing net income available for common unitholders by the sum of the weightedaverage number of common units outstanding, including any dilutive potentialCommon Units for the period.

 

The following table reconciles the components of basic and diluted netincome per Common Unit for the three and six months ended June 30 (inthousands):

 
| ** **                                                                   | ** ** | **Three months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                         |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted net income available for  common unitholders               |       | **$**                                 | **39,008** |                                | $          | 38,259 |   | **$** | **75,230** |   | $ | 80,051 |   |
|                                                                         |       | ** **                            |       |                                |       | ** ** |   |   |   |
| Weighted average number of common units  outstanding                         |       | **156,045**                           |       | 150,141                             |       | **154,244** |   | 150,057 |   |
| Weighted average conversion of Series D  preferred units (1)                 |       | **—**                            |       | —                              |       | **1,755** |   | — |   |
| Dilutive shares for stock based compensation  plans                          |       | **783**                               |       | 878                                 |       | **872** |   | 766 |   |
| Weighted average number of common units and  dilutive potential common units |       | **156,828**                           |       | 151,019                             |       | **156,871** |   | 150,823 |   |
|                                                                              |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 

(1) The General Partner called for the redemption of the Series D unitsas of March 16, 2004. Prior to the redemption date, nearly 5.3 millionSeries D units were converted into 4.9 million common units. These unitsrepresent the weighted effect, assuming the Series D units had been convertedon January 1, 2004.

 

**5.****              Segment Reporting**

 

The Partnership is engaged in four operating segments, the first threeof which consist of the ownership and rental of office, industrial and retailreal estate investments (collectively, “Rental Operations”). The fourth segmentconsists of the Partnership’s build-to-suit for sale operations and theproviding of various real estate services such as property management,maintenance, leasing, development and constructionmanagement to

 

7

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third-partyproperty owners and joint ventures (“Service Operations”). The Partnership’sreportable segments offer different products or services and are managedseparately because each requires different operating strategies and managementexpertise. There are no material intersegment sales or transfers.

 

Non-segment revenue consists mainly of equity in earnings ofunconsolidated companies. Non-segment assets consist of corporate assetsincluding cash, deferred financing costs and investments in unconsolidatedcompanies. Interest expense and other non-property specific revenues andexpenses are not allocated to individual segments in determining thePartnership’s performance measure.

 

The Partnership assesses and measures segment operating results basedupon an industry performance measure referred to as Funds FromOperations (“FFO”), which management believes is a useful indicator of thePartnership’s operating performance. Funds FromOperations is used by industry analysts and investors as a supplementaloperating performance measure of an equity real estate investment trust(“REIT”). FFO is calculated in accordance with the definition that was adoptedby the Board of Governors of the National Association of Real Estate InvestmentTrusts (“NAREIT”). FFO, as defined by NAREIT, represents net income (loss)determined in accordance with accounting principles generally accepted in theUnited States of America (“GAAP”), excluding extraordinary items as definedunder GAAP and gains or losses from sales of previously depreciated operatingreal estate assets, plus certain non-cash items such as real estate assetdepreciation and amortization, and after similar adjustments for unconsolidatedpartnerships and joint ventures.

 

The revenues and FFO for each of the reportable segments for the threeand six months ended June 30, 2004, and 2003, and the assets for each ofthe reportable segments as of June 30, 2004, and December 31, 2003,are summarized as follows (in thousands):

 
| ** **             | ** **                                       | ** ** | **Three Months Ended  June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|------------------------|--------------------------------------------------|------------|---------------------------------------|-------------|------------------------------------|------------|
| ** **             | ** **                                       | ** ** | **2004**                              | ** **  | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues               |                                             |       |                                  |        |                               |       |   |   |   |
|                   | Rental Operations:                               |       |                                  |        |                               |       |   |   |   |   |
|                   | Office                                           |       | **$**                                 | **112,580** | ** **                         | $          | 101,805 |   | **$** | **224,986** | ** ** | $ | 207,812 |   |
|                   | Industrial                                       |       | **66,974**                            | ** **  | 64,222                             |       | **135,361** | ** ** | 128,174 |   |
|                   | Retail                                           |       | **1,213**                             | ** **  | 1,609                              |       | **2,553** | ** ** | 3,361 |   |
|                   | Service  Operations                              |       | **14,739**                            | ** **  | 11,421                             |       | **26,174** | ** ** | 20,603 |   |
|                   | Total Segment  Revenues                          |       | **195,506**                           | ** **  | 179,057                            |       | **389,074** | ** ** | 359,950 |   |
|                   | Non-Segment  Revenue                             |       | **6,963**                             | ** **  | 7,589                              |       | **12,646** | ** ** | 13,010 |   |
|                   | Consolidated  Revenue from continuing operations |       | **202,469**                           | ** **  | 186,646                            |       | **401,720** | ** ** | 372,960 |   |
|                   | Discontinued  Operations                         |       | **3,633**                             | ** **  | 7,716                              |       | **7,443** | ** ** | 16,104 |   |
|                   | Consolidated  Revenue                            |       | **$**                                 | **206,102** | ** **                         | $          | 194,362 |   | **$** | **409,163** | ** ** | $ | 389,064 |   |
|                   |                                             |       | ** **                            | ** **  |                               |       | ** ** | ** ** |   |   |
| Funds From  Operations |                                             | ** ** | ** **                            |        |                               | ** ** | ** ** |   |   |
|                   | Rental Operations:                               |       | ** **                            | ** **  |                               |       | ** ** | ** ** |   |   |
|                   | Office                                           |       | **$**                                 | **72,434**  | ** **                         | $          | 66,082 |   | **$** | **143,716** | ** ** | $ | 133,916 |   |
|                   | Industrial                                       |       | **50,018**                            | ** **  | 48,622                             |       | **99,962** | ** ** | 94,343 |   |
|                   | Retail                                           |       | **960**                               | ** **  | 1,323                              |       | **2,006** | ** ** | 2,702 |   |
|                   | Services  Operations                             |       | **4,723**                             | ** **  | 4,690                              |       | **6,765** | ** ** | 6,572 |   |
|                   | Total Segment  FFO                               |       | **128,135**                           | ** **  | 120,717                            |       | **252,449** | ** ** | 237,533 |   |
|                   |                                             |       | ** **                            | ** **  |                               |       | ** ** | ** ** |   |   |
|                   | Non-Segment  FFO:                                |       | ** **                            | ** **  |                               |       | ** ** | ** ** |   |   |
|                   | Interest expense                                 |       | **(32,682**                           | **)**       | (33,300                            | )          | **(65,169** | **)** | (64,493 | ) |
|                   | Interest  income                                 |       | **1,564**                             | ** **  | 878                                |       | **3,074** | ** ** | 1,854 |   |
|                   | General and administrative expense               |       | **(5,629**                            | **)**       | (4,928                             | )          | **(13,951** | **)** | (10,842 | ) |
|                   | Gain on land sales                               |       | **1,054**                             | ** **  | 1,767                              |       | **5,683** | ** ** | 4,910 |   |
|                   | Impairment charges on depreciable property       |       | **—**                            | ** **  | (500                               | )          | **—** | ** ** | (500 | ) |
|                   | Other expenses                                   |       | **261**                               | ** **  | (72                                | )          | **454** | ** ** | (1,343 | ) |
|                   | Minority interest in earnings of  subsidiaries   |       | **(425**                              | **)**       | (449                               | )          | **(732** | **)** | (472 | ) |
|                   | Joint venture FFO                                |       | **10,379**                            | ** **  | 11,368                             |       | **19,491** | ** ** | 20,739 |   |
|                   | Dividends on preferred units                     |       | **(8,401**                            | **)**       | (10,154                            | )          | **(16,001** | **)** | (20,308 | ) |
|                   | Adjustment for redemption of preferred  stock    |       | **(31**                               | **)**       | —                             |       | **(3,645** | **)** | — |   |
|                   | Discontinued operations                          |       | **1,898**                             | ** **  | 3,718                              |       | **3,668** | ** ** | 7,821 |   |
|                   | Consolidated FFO                                 |       | **96,123**                            | ** **  | 89,045                             |       | **185,321** | ** ** | 174,899 |   |

 

8

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| ** **                                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                                                                  | ** ** | **2004**                              | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Depreciation and amortization on continuing  operations                     |       | **(51,264**                           | **)**      | (44,629                            | )          | **(102,419** | **)** | (90,154 | ) |
| Depreciation and amortization on  discontinued operations                   |       | **(1,987**                            | **)**      | (1,988                             | )          | **(3,229** | **)** | (4,135 | ) |
| Share of joint venture adjustments                                          |       | **(4,609**                            | **)**      | (4,774                             | )          | **(9,197** | **)** | (9,777 | ) |
| Earnings  (loss) from joint venture property sales on continuing operations |       | **50**                                | ** ** | (20                                | )          | **50** | ** ** | 6,255 |   |
| Earnings from  depreciated property sales on discontinued operations        |       | **695**                               | ** ** | 625                                |       | **4,704** | ** ** | 2,963 |   |
| Net Income  Available for Common Unitholders                                |       | **$**                                 | **39,008** | ** **                         | $          | 38,259 |   | **$** | **75,230** | ** ** | $ | 80,051 |   |
|                                                                             |            |                                       |            |                                    |            |  |  |  |  |  |  |  |  |

 
| ** **           | ** ** | **June 30,  2004** | ** **    | **December 31,  2003** | ** ** |
|----------------------|------------|-------------------------|---------------|-----------------------------|------------|
| Assets               |       |                    |          |                        |       |
| Rental Operations:   |       |                    |          |                        |       |
| Office               |       | **$**                   | **2,999,068** |                        | $          | 2,884,834 |   |
| Industrial           |       | **2,204,964**           |          | 2,177,483                   |       |
| Retail               |       | **64,133**              |          | 47,293                      |       |
| Service Operations   |       | **124,516**             |          | 111,318                     |       |
| Total Segment Assets |       | **5,392,681**           |          | 5,220,928                   |       |
| Non-Segment Assets   |       | **340,586**             |          | 337,783                     |       |
| Consolidated Assets  |       | **$**                   | **5,733,267** |                        | $          | 5,558,711 |   |

 

In addition to revenues and FFO, the Partnership also reviews itsrecurring capital expenditures in measuring the performance of its individualRental Operations segments. These recurring capital expenditures consist oftenant improvements, leasing commissions and building improvements. Theseexpenditures are reviewed by the Partnership to determine the costs associatedwith re-leasing vacant space. The Partnership’s recurring capital expendituresby segment are summarized as follows for the six months ended June 30,2004 and 2003, respectively (in thousands):

 
| ** **                     | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|
| Recurring Capital Expenditures |       |       |       |       |       |
| Office                         |       | **$**      | **31,070** | ** ** | $          | 19,270 |   |
| Industrial                     |       | **18,903** | ** ** | 14,508     |       |
| Retail                         |       | **19**     | ** ** | 99         |       |
| Total                          |       | **$**      | **49,992** | ** ** | $          | 33,877 |   |

 

**6.****             ****Real Estate Investments**

 

The Partnership adopted SFAS No. 144, *Accountingfor the Impairment or Disposal of Long Lived Assets*(“SFAS 144”), onJanuary 1, 2002. SFAS 144 requires the Partnership to report indiscontinued operations the results of operations of a property which has eitherbeen disposed or is classified as held-for-sale, unless certain conditions aremet.

 

The Partnership has classified operations of eighty-two buildings asdiscontinued operations in accordance with SFAS 144. These eighty-two buildingsconsist of seventy industrial, eight office and four retail properties. As aresult, the Partnership classified net income (loss) of ($89,000) and $1.7million as discontinued operations for the three months ended June 30,2004 and 2003, respectively, and $439,000 and $3.7 million as discontinuedoperations for the six months ended June 30, 2004 and 2003, respectively.Six of the properties classified in discontinued operations were sold duringthe first six months of 2004 and nine properties were sold during the first sixmonths of 2003; therefore, the gains on disposal of these properties of$695,000 and $125,000 for the three months ended June 30, 2004 and 2003,respectively, and $4.7 million and $2.5 million for the six months endedJune 30, 2004 and 2003, respectively, are also reported in discontinuedoperations. The remaining sixty-seven properties consist of thirty-threeproperties sold during the last six months of 2003 and thirty-four depreciableproperties are classified as held-for-sale at June 30, 2004.

 

9

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The following table illustrates the major classes of assets andoperations affected by the eighty-two buildings identified as discontinuedoperations at June 30, 2004 (in thousands):

 
| ** **                                                | ** ** | **Three months ended June 30,** | ** ** | **Six Months ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Statement of Operations:                                  |       |                                 |       |                               |       |   |   |   |   |
| Revenues                                                  |       | **$**                                | **3,633**  | ** **                         | $          | 7,716 |   | **$** | **7,443** | ** ** | $ | 16,104 |   |
| Expenses:                                                 |       | ** **                           | ** ** |                               |       | ** ** | ** ** |   |   |
| Operating                                                 |       | **995**                              | ** ** | 2,386                              |       | **2,172** | ** ** | 5,055 |   |
| Interest                                                  |       | **767**                              | ** ** | 1,611                              |       | **1,627** | ** ** | 3,237 |   |
| Depreciation and Amortization                             |       | **1,987**                            | ** ** | 1,988                              |       | **3,229** | ** ** | 4,135 |   |
| General and Administrative                                |       | **3**                                | ** ** | 5                                  |       | **4** | ** ** | 11 |   |
| Operating Income                                          |       | **(119**                             | **)**      | 1,726                              |       | **411** | ** ** | 3,666 |   |
| Other Income                                              |       | **30**                               | ** ** | 4                                  |       | **28** | ** ** | 20 |   |
|                                                      |       | ** **                           | ** ** |                               |       | ** ** | ** ** |   |   |
| Income from discontinued operations, before  gain on sale |       | **(89**                              | **)**      | 1,730                              |       | **439** | ** ** | 3,686 |   |
| Gain on sale of property, net of impairment  adjustment   |       | **695**                              | ** ** | 125                                |       | **4,704** | ** ** | 2,463 |   |
| Income from discontinued operations                       |       | **$**                                | **606**    | ** **                         | $          | 1,855 |   | **$** | **5,143** | ** ** | $ | 6,149 |   |

 
| ** **                   | ** ** | **June 30, 2004** | ** **  |
|------------------------------|------------|------------------------|-------------|
| Balance Sheet:               |       |                   |        |
| Real estate investments, net |       | **$**                  | **95,069**  | ** ** |
| Other Assets                 |       | **32,169**             | ** **  |
| Total Assets                 |       | **$**                  | **127,238** | ** ** |
| Accrued Expenses             |       | **$**                  | **663**     | ** ** |
| Other Liabilities            |       | **539**                | ** **  |
| Equity                       |       | **126,036**            | ** **  |
| Total Liabilities and Equity |       | **$**                  | **127,238** | ** ** |

 

The Partnership allocates interest expense to discontinued operationsas permitted under EITF 87-24, *“Allocationof Interest to Discontinued Operations,”*and has included suchinterest expense in computing net income from discontinued operations. Interestexpense allocable to discontinued operations includes interest on any debt onsecured properties included in discontinued operations and an allocable shareof the Partnership’s consolidated unsecured interest expense for unencumberedproperties. The allocation of unsecured interest expense to discontinuedoperations was based upon the gross book value of the discontinued operationsunencumbered population relative to the gross book value of the Partnership’sentire unencumbered population.

 

At June 30, 2004, the Partnership had five office properties,thirty-four industrial properties and two retail properties comprisingapproximately 3.6 million square feet classified as held-for-sale. Theseforty-one properties consist of thirty-four depreciable properties and sevenmerchant building developments. Net operating income (defined as total propertyrevenues, less property expenses, which include real estate taxes, repairs andmaintenance, property management, utilities, insurance and other expenses) ofthe properties held-for-sale for the six months ended June 30, 2004 and2003, was approximately $6.2 million and $5.3 million, respectively. The netbook value of the properties held-for-sale at June 30, 2004, wasapproximately $167.1 million. There can be no assurance that such propertiesheld for sale will be sold.

 

For the six months ended June 30, 2004 and 2003, the Partnershiprecorded $100,000 and $1.1 million, respectively, of impairment adjustments.The $100,000 of impairment reflects the write-down of the carrying value of aheld-for-sale land parcel to its projected sales price, less selling expenses.In 2003, the Partnership recorded $1.1 million of impairment adjustments forone industrial building and three land parcels that were held-for-sale. Theseadjustments reflected the write-down of the carrying value of the properties totheir projected sales price, less selling expenses. Each of these properties were later sold in 2003.

 

**7.****             ****Partners’ Equity**

 

The General Partner periodically accesses the public equity markets tofund the development and acquisition of additional rental properties or to paydown debt. The proceeds of these offerings are contributed to the Partnershipin exchange for an additional interest in the Partnership.

 

10

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The following series of Preferred Units are outstanding as ofJune 30, 2004 (in thousands, except percentages):

 
| **Description**    | ** ** | **Units  Outstanding** | ** ** | **Dividend  Rate** | ** ** | **Initial Optional  Redemption  Date** | ** ** | **Liquidation  Preference** | ** ** | **Convertible** | ** ** |
|--------------------|------------|------------------------|------------|--------------------|------------|----------------------------------------|------------|-----------------------------|------------|-----------------|------------|
| Series B Preferred |       | 265                    |       | 7.990              | %          | September 30, 2007                |       | $                           | 132,250    |            | No         |   |
| Series I Preferred |       | 300                    |       | 8.450              | %          | February 6, 2006                  |       | $                           | 75,000     |            | No         |   |
| Series J Preferred |       | 400                    |       | 6.625              | %          | August 25, 2008                   |       | $                           | 100,000    |            | No         |   |
| Series K Preferred |       | 600                    |       | 6.500              | %          | February 13, 2009                 |       | $                           | 150,000    |            | No         |   |

 

All series of Preferred Units require cumulative distributions, have nostated maturity date (although the Partnership may redeem them on or followingtheir initial optional redemption dates) and may be redeemed only at thePartnership’s option, in whole or in part.

 

The dividend rate on the Series B Preferred Units increases to 9.99%after September 12, 2012.

 

The Partnership redeemed its $100.0 million Series E Preferred Units onJanuary 20, 2004, at par value.

 

The Partnership called for the redemption of its Series D ConvertiblePreferred Units as of March 16, 2004. Prior to the redemption date, 5,242,635 Series D Convertible PreferredUnits were converted into 4,911,143 Common Shares. The remaining 103,695 SeriesD Convertible Preferred Units outstanding on March 16, 2004 were redeemed.

 

The General Partner issued $150 million of Series K Preferred Units onFebruary 13, 2004, at a dividend rate of 6.50%.

 

**8.****              Other Matters**

 

**Reclassifications**

 

Certain 2003 balances have been reclassified to conform to 2004presentation.

 

**9.****              Derivative Instruments**

 

The Partnership is exposed to capital market risk, such as changes ininterest rates. In order to manage the volatility relating to interest raterisk, the Partnership may enter into interest rate hedging arrangements fromtime to time. The Partnership does not utilize derivative financial instrumentsfor trading or speculative purposes. The Partnership accounts for derivativeinstruments under Statement of Financial Accounting Standard No. 133,“Accounting for Derivative Instruments and Hedging Activities” as amended(“SFAS 133”).

 

During the first quarter of 2004, the Partnership funded a $65 millionnote receivable secured by a first mortgage on a portfolio of office propertiesowned by a third party located in Atlanta, Georgia. As a lender, thePartnership is subject to customary non-payment and default risk with respectto this secured loan. The note receivable has a maximum two-year term with aninterest rate of 5.5% for the first 6 months and 6.5% thereafter. In order tofund the note receivable, the Partnership borrowed $65 million under a variableinterest rate term loan. The interest rate on the loan is LIBOR + 75 basispoints with a maturity date of January 2005 and two six month renewaloptions. To hedge its variable interest rate risk on the loan, the Partnershipentered into two interest rate swaps totaling $65 million that effectivelyfixed the rate at 2.184% through maturity.

 

The hedge accounting rules are being used for the swaps, which allowsfor the change in market value of the swaps to be recorded through OtherComprehensive Income (“OCI”) in equity versus the Statement of Operations. Asof June 30, 2004, the inherent value of the hedge was $209,000, which wasreflected through an increase in other assets and OCI on the balance sheet.

 

In June 2004, the Partnership simultaneously entered into threeforward-starting interest rate swaps aggregating $144.3 million, as a hedge toeffectively fix the rate on financing expected in 2004 at 5.346%, plus the

 

11

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Partnership’s credit spread over the swap rate. The Partnership expectsand intends that the financing will be a ten-year fixed-rate semi-annualfinancing, pricing between August 1, 2004 and September 1, 2004. Theswaps qualify for hedge accounting under SFAS 133; therefore, changes in fairvalue are recorded in OCI. The inherent value of the swaps was a negative $2.7million as of June 30, 2004, and was recorded as an increase to otherliabilities and a decrease to OCI in the accompanying balance sheet.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity* (“SFAS 150”). SFAS 150 establishesstandards for classifying and measuring as liabilities certain financialinstruments that embody obligations of the issuer and have characteristics ofboth liabilities and equity. SFAS 150 is effective for all financialinstruments created or modified after May 31, 2003, and otherwise is effectiveJuly 1, 2003. The Partnership includes the operations of one joint venturein its consolidated financial statements at June 30, 2004. This jointventure is partially owned by unaffiliated parties that have noncontrollinginterests. SFAS 150 requires the disclosure of the estimated settlement valueof these noncontrolling interests. As of June 30, 2004, the estimatedsettlement value of the noncontrolling interest in this consolidated jointventure was approximately $1.1 million as compared to the negative minorityinterest liability recorded on the Partnership’s books for this joint ventureof $77,000.

 

**10.****       Stock Based Compensation**

 

Under the limited partnership agreement ofthe Partnership, the Partnership is required to issue one Common Unit to theGeneral Partner for each share of common stock issued by the General Partner.Accordingly, the issuance of common shares by the General Partner under itsstock based compensation plans requires the issuance of a corresponding numberof Common Units by the Partnership to the General Partner.

 

For all issuances prior to 2002, thePartnership applies the recognition and measurement provisions ofAPB Opinion No. 25, *Accounting for StockIssued to Employees*, and related Interpretations in accounting forits stock based compensation. Effective January 1, 2002, the Partnershipprospectively adopted the fair value recognition provisions of FASB StatementNo. 123, *Accounting for Stock-BasedCompensation*, to all awards granted after January 1, 2002.

 

The following table illustrates the effect on net income and earningsper share if the fair value method had been applied to all outstanding andunvested awards in each period.

 
| ** **                                                                                                       | ** ** | **Three Months ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                             |       |                                  |       |                                |       |   |   |   |   |
| Net income, as reported                                                                                          | ** ** | **$**                                 | **39,008** |                                | $          | 38,259 | ** ** | **$** | **75,230** |   | $ | 80,051 |   |
| Add:   Stock-based employee compensation expense included in net income  determined under fair value method | ** ** | **100**                               |       | 22                                  | ** ** | **201** |   | 32 |   |
| Deduct:   Total stock based compensation expense determined under fair value  method for all awards         | ** ** | **(220**                              | **)**      | (197                                | )          | **(440** | **)** | (382 | ) |
| Proforma Net Income                                                                                              | ** ** | **$**                                 | **38,888** |                                | $          | 38,084 | ** ** | **$** | **74,991** |   | $ | 79,701 |   |

 
| ** **                   | ** ** | ** **  | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|------------------------------|------------|-------------|------------|------------|------------|------------|------------|------------|------------|----------|------------|
|                         |       |        |       |       |       |       |       |       |       |     |       |
| Basic net income per share   |       | As reported |       | **$**      | **.25**    | ** ** | $          | .25        |       | **$**    | **.49**    | ** ** | $ | .53 |   |
|                         |       | Pro forma   |       | **$**      | **.25**    | ** ** | $          | .25        |       | **$**    | **.49**    | ** ** | $ | .53 |   |
|                         |       |        |       | ** ** | ** ** |       |       | ** ** | ** ** |     |       |
| Diluted net income per share |       | As reported |       | **$**      | **.25**    | ** ** | $          | .25        |       | **$**    | **.48**    | ** ** | $ | .53 |   |
|                         |       | Pro forma   |       | **$**      | **.25**    | ** ** | $          | .25        |       | **$**    | **.48**    | ** ** | $ | .53 |   |

 

12

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**11.****       Subsequent Events**

 

*Declaration of Dividends*

 

The Board of Directors of the General Partner declared the followingdistributions at its July 28, 2004, regularly scheduled Board meeting:

 
| **Class**                        | ** ** | **Quarterly  Amount/Unit** | ** ** | **Record Date** | ** **              | **Payment Date** | ** **              |
|----------------------------------|------------|----------------------------|------------|-----------------|-------------------------|------------------|-------------------------|
| Common                           |       | $                          | 0.465      |            | August 13, 2004    |             | August 31, 2004    |   |
| Preferred (per depositary unit): |       |                       |       |            |                    |             |                    |
| Series B                         |       | $                          | 0.99875    |            | September 16, 2004 |             | September 30, 2004 |   |
| Series I                         |       | $                          | 0.52813    |            | September 16, 2004 |             | September 30, 2004 |   |
| Series J                         |       | $                          | 0.41406    |            | August 17, 2004    |             | August 31, 2004    |   |
| Series K                         |       | $                          | 0.40625    |            | August 17, 2004    |             | August 31, 2004    |   |

 

13

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Partners

**Duke Realty Limited Partnership:**

 

We have reviewed the condensed consolidated balance sheet of DukeRealty Limited Partnership and subsidiaries as of June 30, 2004, therelated condensed consolidated statements of operations for the three and sixmonths ended June 30, 2004 and 2003, the related condensed consolidatedstatements of cash flows for the six months ended June 30, 2004 and 2003,and the related condensed consolidated statement of partners’ equity for thesix months ended June 30, 2004. These condensed consolidated financialstatements are the responsibility of the Partnership’s management.

 

We conducted our review in accordance with standards established by thePublic Company Accounting Oversight Board (United States). A review of interimfinancial information consists principally of applying analytical procedures tofinancial data and making inquiries of persons responsible for financial andaccounting matters. It is substantially less in scope than an audit conductedin accordance with the standards of the Public Company Accounting OversightBoard (United States), the objective of which is the expression of an opinionregarding the financial statements taken as a whole. Accordingly, we do notexpress such an opinion.

 

Based on our review, we are not aware of any material modificationsthat should be made to the condensed consolidated financial statements referredto above for them to be in conformity with accounting principles generallyaccepted in the United States of America.

 

We have previously audited, in accordance with standards established bythe Public Company Accounting Oversight Board (United States), the consolidatedbalance sheet of Duke Realty Limited Partnership and subsidiaries as ofDecember 31, 2003, and the related consolidated statements of operations,partners’ equity and cash flows for the year then ended (not presented herein);and in our report dated January 29, 2004, we expressed an unqualifiedopinion on those consolidated financial statements. In our opinion, theinformation set forth in the accompanying condensed consolidated balance sheetas of December 31, 2003, is fairly presented, in all material respects, inrelation to the consolidated balance sheet from which it has been derived.

 

 

KPMG LLP

Indianapolis, Indiana

August 9, 2004

 

14

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**Item 2.****  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Cautionary Statement Regarding Forward Looking Statements**

 

Certain statements in this quarterly report, including those related tothe Partnership’s future operations, constitute “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended. These forward-looking statements involve known and unknown risks, uncertaintiesand other important factors that could cause the actual results, performance orachievements of the Partnership, or industry results, to differ materially fromany predictions of future results, performance or achievements that we expressor imply in this report. Some of the risks, uncertainties and other importantfactors that may affect future results include, among others:

 

•                  General economicand business conditions;

•                  The GeneralPartner’s continued qualification as a real estate investment trust;

•                  Competition fortenants and decrease in property occupancy;

•                  Potentialdecreases in market rental rates;

•                  Potentialincreases in real estate construction costs;

•                  Potentialchanges in interest rates;

•                  Continuingability to favorably raise debt and equity in the capital markets; and

•                  Other risksinherent in the real estate business including tenant defaults, potentialliability relating to environmental matters and liquidity of real estateinvestments.

 

This list of risks and uncertainties, however, is not intended to beexhaustive. The Partnership has on file with the Securities and ExchangeCommission (“SEC”) a Current Report on Form 8K dated September 5, 2003,which contains additional risk factor information.

 

The words “believe,” “estimate,” “expect” and similar expressions orstatements regarding future periods are intended to identify forward-lookingstatements. Although we believe that the plans, expectations and resultsexpressed in or suggested by the forward-looking statements are reasonable, allforward-looking statements are inherently uncertain as they involve substantialrisks and uncertainties beyond the Partnership’s control. New factors emergefrom time to time, and it is not possible for us to predict the nature orassess the potential impact of each new factor on the Partnership’s business.Given these uncertainties, we caution you not to place undue reliance on theseforward-looking statements. The Partnership undertakes no obligation to updateor revise any of its forward-looking statements for events or circumstancesthat arise after the statement is made.

 

**Business Overview**

 

As of June 30, 2004, the Partnership:

 

•                 Owned orcontrolled 904 industrial, office and retail properties (including propertiesunder development), consisting of approximately 112.5 million square feetlocated in 13 operating platforms; and

•                 Owned orcontrolled approximately 3,700 acres of land with an estimated futuredevelopment potential of approximately 57 million square feet of industrial,office and retail properties.

 

The Partnership provides the following services for its properties andfor certain properties owned by third parties and joint ventures:

 

•                 leasing;

•                 management;

•                 construction;

•                 development; and

•                 other tenant-related services.

 

15

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The Partnership’s operating results depend primarily upon income fromthe Rental Operations of its properties. This rental income is substantiallyinfluenced by the supply and demand for the Partnership’s rental space. ThePartnership’s continued growth is dependent upon its ability to maintainoccupancy rates and increase rental rates of its in-service portfolio. ThePartnership’s strategy for growth also includes developing and acquiringadditional rental properties.

 

The following highlights the areas of Rental Operations that thePartnership considers critical for future revenue growth (all square footagetotals and occupancy percentages reflect 100% of both wholly-owned propertiesand properties in joint ventures):

 

***Same PropertyPerformance:*** The Partnership tracks same propertyperformance, which measures the performance of properties that were in-servicefor all reported portions of a two-year period by comparing the results of thesecond year with the results of the first year. For the three and six monthsended June 30, 2004, net operating income from the same property portfolioincreased .8% and .3%, respectively, from the same period in 2003.

 

***Occupancy Analysis:***As discussed above, the ability to maintain occupancy rates is a principaldriver of the Partnership’s results of operations. The following table setsforth occupancy information regarding the Partnership’s in-service portfolio ofrental properties as of June 30, 2004 and 2003 (square feet in thousands):

 
| ** **      | ** ** | **Total  Square Feet** | ** ** | **Percent of  Total Square Feet** | ** ** | **Percent Occupied** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------------------|------------|----------------------|------------|
| **Type**        | ** ** | **2004**               | ** ** | **2003**                          | ** ** | **2004**             | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Industrial**  |       |                   |       |                              |       |                 |       |   |   |   |   |   |   |
| Service Centers | ** ** | **13,200**             |       | 13,694                            | ** ** | **12.2**             | %          | 13.0 | **%** | **85.7** | % | 86.8 | % |
| Bulk            | ** ** | **67,574**             |       | 66,011                            | ** ** | **62.2**             | %          | 62.5 | **%** | **91.4** | % | 88.5 | % |
| **Office**      | ** ** | **27,106**             |       | 25,039                            | ** ** | **24.9**             | %          | 23.7 | **%** | **87.4** | % | 85.3 | % |
| **Retail**      | ** ** | **765**                |       | 837                               | ** ** | **.7**               | %          | .8 | **%** | **97.8** | % | 98.8 | % |
| Total           | ** ** | **108,645**            |       | 105,581                           | ** ** | **100.0**            | **%**      | **100.0** | **%** | **89.7** | % | 87.6 | % |

 

***Lease Expiration:***Thefollowing table reflects the Partnership’s in-service portfolio leaseexpiration schedule as of June 30, 2004, by property type indicatingsquare footage and annualized net effective rents under expiring leases (inthousands, except per square foot amounts):

 
| ** **               | ** ** | **Total  Portfolio** | ** ** | **Industrial**         | ** ** | **Office**              | ** ** | **Retail**       | ** ** |
|--------------------------|------------|----------------------|------------|------------------------|------------|-------------------------|------------|------------------|------------|
| **Year  of  Expiration** | ** ** | **Square  Feet**     | ** ** | **Ann. Rent  Revenue** | ** ** | **Percent of  Revenue** | ** ** | **Square  Feet** | ** ** | **Ann. Rent  Revenue** | ** ** | **Square  Feet** | ** ** | **Ann. Rent  Revenue** | ** ** | **Square  Feet** | ** ** | **Ann. Rent  Revenue** | ** ** |
| 2004                     |       | 5,431                |       | $                      | 39,743     |                    | 6          | %                | 3,964      |   | $ | 18,919 |   | 1,467 |   | $ | 20,824 |   | — |   | $ | — |   |
| 2005                     |       | 12,409               |       | 85,680                 |       | 13                      | %          | 9,747            |       | 48,460 |   | 2,626 |   | 36,721 |   | 36 |   | 499 |   |
| 2006                     |       | 11,177               |       | 77,931                 |       | 12                      | %          | 8,758            |       | 45,370 |   | 2,417 |   | 32,528 |   | 2 |   | 33 |   |
| 2007                     |       | 12,721               |       | 80,861                 |       | 12                      | %          | 10,071           |       | 46,427 |   | 2,625 |   | 34,157 |   | 25 |   | 277 |   |
| 2008                     |       | 13,091               |       | 79,476                 |       | 12                      | %          | 10,564           |       | 46,526 |   | 2,506 |   | 32,587 |   | 21 |   | 363 |   |
| 2009                     |       | 11,463               |       | 76,765                 |       | 11                      | %          | 8,522            |       | 38,254 |   | 2,921 |   | 38,123 |   | 20 |   | 388 |   |
| 2010                     |       | 7,811                |       | 58,534                 |       | 9                       | %          | 5,758            |       | 28,581 |   | 2,039 |   | 29,721 |   | 14 |   | 232 |   |
| 2011                     |       | 4,755                |       | 36,944                 |       | 5                       | %          | 3,354            |       | 15,916 |   | 1,385 |   | 20,786 |   | 16 |   | 242 |   |
| 2012                     |       | 4,682                |       | 29,295                 |       | 4                       | %          | 3,575            |       | 13,862 |   | 1,100 |   | 15,100 |   | 7 |   | 333 |   |
| 2013                     |       | 3,978                |       | 41,612                 |       | 6                       | %          | 1,726            |       | 8,122 |   | 2,195 |   | 32,659 |   | 57 |   | 831 |   |
| 2014 and Thereafter      |       | 9,979                |       | 65,936                 |       | 10                      | %          | 7,023            |       | 27,157 |   | 2,406 |   | 34,896 |   | 550 |   | 3,883 |   |
| Total Leased             |       | 97,497               |       | $                      | 672,777    |                    | 100        | %                | 73,062     |   | $ | 337,594 |   | 23,687 |   | $ | 328,102 |   | 748 |   | $ | 7,081 |   |
|                     |       |                 |       |                   |       |                    |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Portfolio          |       |                 |       |                   |       |                    |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Square Feet              |       | 108,645              |       |                   |       |                    |       | 80,774           |       |   |   | 27,106 |   |   |   | 765 |   |   |   |
| Percent Occupied         |       | 89.7                 | %          |                   |       |                    |       | 90.5             | %          |   |   | 87.4 | % |   |   | 97.8 | % |   |   |

 

16

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***Future Development:***ThePartnership expects to realize growth in earnings from Rental Operationsthrough the development and acquisition of additional rental properties in itsprimary markets. Specifically, the Partnership has 3.8 million square feet ofproperties under development at June 30, 2004. These properties shouldprovide

 

future earnings through Service Operationsincome upon sale or from Rental Operations growth as they are placed inservice. A summary of the properties under development as of June 30,2004, follows (in thousands, except percent leased and stabilized returns):

 
| **Anticipated  In-Service  Date** | ** ** | **Square  Feet** | ** ** | **Percent  Leased** | ** ** | **Project  Costs** | ** ** | **Estimated  Stabilized  Return** | ** ** |
|-----------------------------------|------------|------------------|------------|---------------------|------------|--------------------|------------|-----------------------------------|------------|
| Held For Rental:                  |       |             |       |                |       |               |       |                              |       |
| 3rd Quarter 2004                  |       | 763              |       | 68                  | %          | 27,063             |       | 9.8                               | %          |
| 4th Quarter 2004                  |       | 846              |       | 50                  | %          | 28,894             |       | 10.1                              | %          |
| 1st Quarter 2005                  |       | 1,217            |       | 25                  | %          | 32,882             |       | 10.0                              | %          |
| Thereafter                        |       | —           |       | —              |       | —             |       | —                            |       |
|                              |       | 2,826            |       | 44                  | %          | $                  | 88,839     |                              | 10.0       | % |
| Build-to-Suit for Sale:           |       |             |       |                |       |               |       |                              |       |
| 3rd Quarter 2004                  |       | 195              |       | 100                 | %          | 19,553             |       | 9.6                               | %          |
| 4th Quarter 2004                  |       | 98               |       | 100                 | %          | 11,925             |       | 11.3                              | %          |
| 1st Quarter 2005                  |       | 688              |       | 100                 | %          | 20,297             |       | 7.5                               | %          |
| Thereafter                        |       | 21               |       | 100                 | %          | 2,356              |       | 10.2                              | %          |
|                              |       | 1,002            |       | 100                 | %          | $                  | 54,131     |                              | 9.2        | % |
| Total                             |       | 3,828            |       | 59                  | %          | $                  | 142,970    |                              | 9.7        | % |

 

***Lease Renewals:***ThePartnership renewed 71.5% and 72.5% of leases up for renewal in the three andsix months ended June 30, 2004, totaling 2.1 million and 5.1 millionsquare feet, respectively.  This comparesto renewals of 70.1% and 66.2% for the three and six months ended June 30,2003, totaling 1.5 million and 2.6 million square feet.  The average term of renewals for the threesix months ended June 30, 2004, increased to 3.4 and 4.0 years from anaverage term of 2.8 and 2.9 years for first three and six months endedJune 30, 2003.

 

**Funds From Operations**

 

Funds From Operations (“FFO”) is used byindustry analysts and investors as a supplemental operating performance measureof an equity real estate investment trust (“REIT”). FFO is calculated inaccordance with the definition that was adopted by the Board of Governors ofthe National Association of Real Estate Investment Trusts (“NAREIT”). FFO, asdefined by NAREIT, represents net income (loss) determined in accordance withaccounting principles generally accepted in the United States of America(“GAAP”), excluding extraordinary items as defined under GAAP and gains orlosses from sales of previously depreciated operating real estate assets, pluscertain non-cash items such as real estate asset depreciation and amortization,and after similar adjustments for unconsolidated partnerships and jointventures.

 

Historical cost accounting for real estate assets in accordance withGAAP implicitly assumes that the value of real estate assets diminishespredictably over time. Since real estate values instead have historically risenor fallen with market conditions, many industry investors and analysts haveconsidered presentation of operating results for real estate companies that usehistorical cost accounting to be insufficient by themselves. Thus, NAREITcreated FFO as a supplemental measure of REIT operating performance thatexcludes historical cost depreciation, among other items, from GAAP net income.Management believes that the use of FFO, combined with the required primaryGAAP presentations, has improved the understanding of operating results ofREITs among the investing public and made comparisons of REIT operating resultsmore meaningful. Management considers FFO to be a useful measure for reviewingcomparative operating and financial performance (although FFO should bereviewed in conjunction with net income which remains the primary measure ofperformance) because by excluding gains or losses related to sales ofpreviously depreciated operating real estate assets and excluding real estateasset depreciation and amortization, FFO assists in comparing the operatingperformance of a company’s real estate between periods or as compared todifferent companies.

 

17

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The following table summarizes the calculation of FFO for the three andsix months ended June 30, 2004  and 2003 (in thousands):

 
| ** **                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                         | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income available for common unitholders        |       | **$**                                | **39,008** | ** **                         | $          | 38,259 |   | **$** | **75,230** | ** ** | $ | 80,051 |   |
| Add back (deduct):                                 |       | ** **                           | ** ** |                               |       | ** ** | ** ** |   |   |
| Depreciation and amortization                      |       | **53,251**                           | ** ** | 46,617                             |       | **105,648** | ** ** | 94,289 |   |
| Share of joint venture adjustments                 |       | **4,609**                            | ** ** | 4,774                              |       | **9,197** | ** ** | 9,777 |   |
| (Earnings) from depreciable property  dispositions |       | **(745**                             | **)**      | (605                               | )          | **(4,754** | **)** | (9,218 | ) |
| **Funds From  Operations**                         |       | **$**                                | **96,123** | ** **                         | $          | 89,045 |   | **$** | **185,321** | ** ** | $ | 174,899 |   |

 

**Results of Operations**

 

A summary of the Partnership’s operating results and propertystatistics for the three and six months ended June 30, 2004 and 2003, is as follows (in thousands, except number ofproperties and per unit amounts):

 

| ** **                                                   | ** ** | **Three Months Ended June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|-------------|------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                             | ** **  | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Rental Operations revenue from continuing  operations        |       | **$**                                | **187,730** | ** **                         | $          | 175,225 |   | **$** | **375,546** | ** ** | $ | 352,357 |   |
| Service Operations revenues                                  |       | **14,739**                           | ** **  | 11,421                             |       | **26,174** | ** ** | 20,603 |   |
| Earnings from Rental Operations                              |       | **45,568**                           | ** **  | 44,629                             |       | **88,919** | ** ** | 86,492 |   |
| Earnings from Service Operations                             |       | **4,723**                            | ** **  | 4,690                              |       | **6,765** | ** ** | 6,572 |   |
| Operating income                                             |       | **44,662**                           | ** **  | 44,391                             |       | **81,732** | ** ** | 82,222 |   |
| Net income available for common unitholders                  |       | **$**                                | **39,008**  | ** **                         | $          | 38,259 |   | **$** | **75,230** | ** ** | $ | 80,051 |   |
| Weighted average common units outstanding                    |       | **156,045**                          | ** **  | 150,141                            |       | **154,244** | ** ** | 150,057 |   |
| Weighted average common and dilutive  potential common units |       | **156,828**                          | ** **  | 151,019                            |       | **156,871** | ** ** | 150,823 |   |
| Basic income per common unit:                                |       | ** **                           | ** **  |                               |       | ** ** | ** ** |   |   |
| Continuing operations                                        |       | **$**                                | **.25**     | ** **                         | $          | .24 |   | **$** | **.46** | ** ** | $ | .49 |   |
| Discontinued operations                                      |       | **$**                                | **—**  | ** **                         | $          | .01 |   | **$** | **.03** | ** ** | $ | .04 |   |
| Diluted income per common unit:                              |       | ** **                           | ** **  |                               |       | ** ** | ** ** |   |   |
| Continuing operations                                        |       | **$**                                | **.25**     | ** **                         | $          | .24 |   | **$** | **.45** | ** ** | $ | .49 |   |
| Discontinued operations                                      |       | **$**                                | **—**  | ** **                         | $          | .01 |   | **$** | **.03** | ** ** | $ | .04 |   |
| Number of in-service properties at end of  period            |       | **889**                              | ** **  | 908                                |       | **889** | ** ** | 908 |   |
| In-service square footage at end of period                   |       | **108,645**                          | ** **  | 105,581                            |       | **108,645** | ** ** | 105,581 |   |
| Under development square footage at end of  period           |       | **3,828**                            | ** **  | 3,769                              |       | **3,828** | ** ** | 3,769 |   |

 

**Comparison of Three Months Ended June 30, 2004 to Three MonthsEnded June 30, 2003**

 

Rental Income From Continuing Operations

 

Overall, rental income from continuing operations forthe three months ended June 30, 2004, increased from $168.5 million in2003 to $182.0 million in 2004. The following table reconciles rental income byreportable segment to the Partnership’s total reported rental income fromcontinuing operations for the three months ended June 30, 2004 and 2003(in 000’s):

 
| ** **  | ** ** | **Three Months Ended June 30,** | ** **  |
|-------------|------------|--------------------------------------|-------------|
| ** **  | ** ** | **2004**                             | ** **  | **2003** | ** ** |
| Office      |       | **$**                                | **112,580** | ** ** | $ | 101,805 |   |
| Industrial  |       | **66,974**                           | ** **  | 64,222 |   |
| Retail      |       | **1,213**                            | ** **  | 1,609 |   |
| Non-segment |       | **1,193**                            | ** **  | 896 |   |
| Total       |       | **$**                                | **181,960** | ** ** | $ | 168,532 |   |

 

Although the Partnership’s three reportable segmentscomprising Rental Operations (office, industrial and retail) are all within thereal estate industry, they are not necessarily affected by the same economicand industry conditions. The primary causes of the increase in rental incomefrom continuing operations, with specific references to a particular segmentwhen applicable, are summarized below:

 

18

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•                  The Partnership’s in-service occupancyincreased to 89.7% at June 30, 2004, from 87.6% at June 30,2003.  Increases in the bulk industrialand office portfolio occupancies were the main reasons for the Partnership’soverall occupancy increase.

•                  During the last two quarters of 2003 and thefirst two quarters of 2004, the Partnership acquired fifteen new properties,placed twelve development projects in-service and acquired an additional threeproperties through acquisitions of its joint venture partner’s interest. Theseacquisitions and developments are the primary factors in the overall $13.4million increase in rental revenue for the three months ended June 30,2004, compared to the same period in 2003. Twelve of the fifteen propertyacquisitions, five development projects and all of the joint venture acquisitionswere office properties. These office acquisitions and developments were theprimary reasons for the $10.8 million increase in office rental income. Duringthe last two quarters of 2003 and in the first two quarters of 2004, thePartnership acquired three and developed six industrial buildings.

•                  Straight-line rental income for the secondquarter of 2004 decreased slightly to $5.0 million compared to $6.9 million in2003. Even though straight-line rental income decreased, the Partnership hascontinued the use of free rent concessions as an incentive to attract qualitytenants in competitive markets. The effect of these concessions is reflected instraight-line rental income over the life of the leases.

•                  Lease termination fees totaled $2.3 millionfor the second quarter 2004, compared to $1.2 million for the same period in2003.  Most of these termination feeswere realized in the office portfolio, which had termination fees of $2.0million during the second quarter of 2004 compared to $1.5 million for the secondquarter of 2003.

 

Rental Expenses and Real Estate Taxes

 

The following table reconciles rental expenses and real estate taxes byreportable segment to the Partnership’s total reported amounts in the statementof operations for the three months ended June 30, 2004 and 2003 (in000’s):

 
| ** **         | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------|------------|--------------------------------------|------------|
| ** **         | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Rental Expenses:   |       |                                 |       |   |   |
| Office             |       | **$**                                | **27,753** | ** ** | $ | 24,031 |   |
| Industrial         |       | **8,701**                            | ** ** | 7,721 |   |
| Retail             |       | **118**                              | ** ** | 159 |   |
| Non-segment        |       | **145**                              | ** ** | 142 |   |
| Total              |       | **$**                                | **36,717** | ** ** | $ | 32,053 |   |
|               |       | ** **                           | ** ** |   |   |
| Real Estate Taxes: |       | ** **                           | ** ** |   |   |
| Office             |       | **$**                                | **12,244** | ** ** | $ | 11,580 |   |
| Industrial         |       | **8,105**                            | ** ** | 7,829 |   |
| Retail             |       | **138**                              | ** ** | 127 |   |
| Non-segment        |       | **1,012**                            | ** ** | 1,078 |   |
| Total              |       | **$**                                | **21,499** | ** ** | $ | 20,614 |   |

 

The overall increase in rental expenses and real estate taxes is theresult of the Partnership’s increased real estate assets associated with theacquisitions and developments.

 

Interest Expense

 

The decrease in interest expense from $33.3 million for the secondquarter of 2003, to $32.7 million for the same period in 2004 was primarilyattributable to a decrease of $1.8 million in secured debt interest expense,which reflects net paydowns of secured debt of nearly $86 million sinceJune 30, 2003.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased from $44.6 million duringthe three months ended June 30, 2003 to $51.3 million for the same periodin 2004.

 

19

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The following highlights the significant changes in expense for thesetime periods:

 

•                  Depreciationexpense on tenant improvements increased by $2.8 million, which is reflectiveof increased leasing activity over the past twelve month period.

•                  Amortizationexpense of in place lease intangible assets associated with acquisitionsincreased by $2.5 million, which reflects the acquisition activity in thesecond half of 2003.

•                  Amortizationexpense as a result of tenants terminating leases early increased by $860,000.

 

Service Operations

 

Service Operations primarily consist of the Partnership’s build-to-suitfor sale operations and the leasing, management, construction and developmentservices for joint venture properties and properties owned by third parties.Service Operations revenues increased from $11.4 million for the three monthsended June 30, 2003, to $14.7 million for the three months endedJune 30, 2004, primarily as a result of the following :

 

•                  Net revenue fromwork performed as general contractor for third-party construction jobsdecreased from $7.0 million for the three months ended June 30, 2003, to$6.5 million for the three months ended June 30, 2004. The slight decreaseis reflective of the realization of lower profit margins on third partyconstruction contracts in 2004, despite volume increases in 2004 over 2003. ThePartnership has been successful in increasing the volume of its third partyconstruction contracts in 2004, but has realized lower margins on its contractsin order to generate the additional volume.

•                  ThePartnership’s merchant building development and sales program, whereby abuilding is developed by the Partnership and then sold, is the primarycomponent of Construction and Development income. During the second quarter of2004, the Partnership sold one such property for a gain of nearly $4.0 millionas compared to one such sale in the second quarter of 2003 for a gain of$860,000.  Profit margins on these typesof building sales fluctuate by sale depending on the type of property beingsold, the strength of the underlying tenant and nature of the sale, such as apre-contracted purchase price for a primary tenant versus a sale on the openmarket.

 

Service Operations expenses increased from $6.7 million for the threemonths ended June 30, 2003, to $10.0 million for the three months endedJune 30, 2004. This increase reflects increased costs associated with theincreased third party construction volume and income tax expense on themerchant building sale noted above.

 

General and Administrative Expense

 

General and administrative expenses increased slightly from $4.9million to $5.6 million for the three months ended June 30, 2003, comparedto the same period in 2004. The relatively small change is the result of higheremployee compensation costs for 2004, offset by more overhead costs beingallocated into Service Operations (because of increased third partyconstruction volume).

 

Other Income and Expenses

 

Earnings from sale of land and ownership interests in unconsolidatedcompanies is comprised of the following amounts forthe three months ended June 30, 2004 and 2003:

 
| ** **                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
|                                           |       |     |       |     |       |
| Gain on land sales                             |       | **$**    | **1,054**  |     | $          | 1,767 |   |
| Gain (loss) on sale of joint venture  interest |       | **50**   |       | (20      | )          |
| Total                                          |       | **$**    | **1,104**  |     | $          | 1,747 |   |

 

Gain on land sales represents sales of undeveloped land owned by thePartnership. The Partnership pursues opportunities to dispose of land inmarkets with a high concentration of undeveloped land and those markets wherethe land no longer meets strategic development plans of the Partnership.

 

20

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Discontinued Operations

 

The Partnership has classified operations of eighty-two buildings asdiscontinued operations at June 30, 2004. These eighty-two buildingsconsist of seventy industrial, eight office and four retail properties. As aresult, the Partnership classified net income (loss) from operations of($89,000) and $1.7 million as net income from discontinued operations for thethree months ended June 30, 2004 and 2003, respectively. In addition, twoof the properties classified in discontinued operations were sold during the secondquarter of 2004 and four properties were sold during the second quarter of2003; therefore, the gains on disposal of these properties of $695,000 and$125,000, respectively, are also reported in discontinued operations. Theremaining seventy-six properties consist of thirty-eight properties sold in 2003, four properties sold during the first quarter of 2004and thirty-four properties are classified as held-for-sale at June 30,2004.

 

**Comparison of Six Months Ended June 30, 2004 to Six Months EndedJune 30, 2003**

 

Rental Income From Continuing Operations

 

Overall, rental income from continuing operations increased from $341.4million in 2003 to $365.3 million in 2004. The following table reconcilesrental income by reportable segment to the Partnership’s total reported rentalincome from continuing operations for the six months ended June 30, 2004and 2003 (in 000’s):

 
| ** **  | ** ** | **Six Months Ended June 30,** | ** **  |
|-------------|------------|------------------------------------|-------------|
| ** **  | ** ** | **2004**                           | ** **  | **2003** | ** ** |
| Office      |       | **$**                              | **224,986** |   | $ | 207,812 |   |
| Industrial  |       | **135,361**                        |        | 128,174 |   |
| Retail      |       | **2,553**                          |        | 3,361 |   |
| Non-segment |       | **2,351**                          |        | 2,048 |   |
| Total       |       | **$**                              | **365,251** |   | $ | 341,395 |   |

 

Although the Partnership’s three reportable segmentscomprising Rental Operations (office, industrial and retail) are all within thereal estate industry, they are not necessarily affected by the same economicand industry conditions. The primary causes of the increase in rental incomefrom continuing operations, with specific references to a particular segmentwhen applicable, are summarized below:

 

•                  During the lasthalf of 2003 and the first six months of 2004, the Partnership acquired fifteennew properties, placed twelve development projects in-service and acquired anadditional three properties through acquisitions of its joint venture partner’sinterest. These acquisitions and developments are the primary factor in theoverall $23.9 million increase in rental revenue for the six months endedJune 30, 2004, compared to the same period in 2003. The office segmentreceived twelve of the fifteen property acquisitions, five development projectsand all of the joint venture acquisitions. These office acquisitions and developments were the primary reason forthe $17.2 million increase in office rental income. During 2003 and in thesecond quarter 2004, the Partnership acquired three and developed six industrialbuildings, which was one of the factors causing the $7.2 million increase inindustrial rental income.

•                  The increase in the Partnership’s rentalincome was also the result of the Partnership’s in-service occupancy increasingto 89.7% at June 30, 2004, from 87.6% at June 30, 2003.

•                  Straight-line rental income for the sixmonths ended June 30, 2004, totaled approximately $10.9 million comparedto $11.5 million in 2003, which reflects the Partnership’s continued use offree rent concessions as an incentive to attract quality tenants in competitivemarkets primarily on office leases. The effect of these concessions isreflected in straight-line rental income over the life of the leases.

•                  The rental income shown above includes leasetermination fees. The termination fee component of rental income totaled $6.4million for the six months ended June 30, 2004, compared to $10.6 millionfor the same period in 2003. The office portfolio had termination fees of $5.3million during the six months ended

 

21

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•                  June 30, 2004, compared to $9.7 millionfor the same period in 2003. In 2003, $5.9 million of the $9.7 million ofoffice termination fees was associated with a single tenant.

 

Rental Expenses and Real Estate Taxes

 

The following table reconciles rental expenses and real estate taxes byreportable segment to the Partnership’s total reported amounts in the statementof operations for the six months ended June 30, 2004 and 2003 (in 000’s):

 
| ** **         | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------|------------|------------------------------------|------------|
| ** **         | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| Rental Expenses:   |       |                               |       |   |   |
| Office             |       | **$**                              | **56,661** | ** ** | $ | 51,561 |   |
| Industrial         |       | **19,048**                         | ** ** | 18,270 |   |
| Retail             |       | **305**                            | ** ** | 409 |   |
| Non-segment        |       | **325**                            | ** ** | 690 |   |
| Total              |       | **$**                              | **76,339** | ** ** | $ | 70,930 |   |
|               |       | ** **                         | ** ** |   |   |
| Real Estate Taxes: |       | ** **                         | ** ** |   |   |
| Office             |       | **$**                              | **24,160** | ** ** | 22,264 |   |
| Industrial         |       | **16,202**                         | ** ** | 15,607 |   |
| Retail             |       | **243**                            | ** ** | 250 |   |
| Non-segment        |       | **2,096**                          | ** ** | 2,167 |   |
| Total              |       | **$**                              | **42,701** | ** ** | $ | 40,288 |   |

 

The overall rental expense increase is the result of the Partnership’sincreased real estate assets associated with acquisitions and developments asnoted above. The increase in rental expenses associated with the acquisitionsand developments for the six month period ended June 30, 2004, wassomewhat offset by the decrease in snow removal and other weather relatedexpenses that the Partnership experienced for the same period in 2003.

 

Interest Expense

 

The increase in interest expense from $64.5 million in 2003, to $65.2million for the same period in 2004 is in part due to the allocation ofinterest expense to discontinued operations being greater in 2003 versus 2004due to the significant amount of properties classified in discontinuedoperations at June 30, 2004.  Asnoted in Footnote 6, the Partnership allocates a portion of unsecured interestexpense to properties classified as discontinued operations.

 

The Partnership manages its leverage and related interest expense priorto the allocation to discontinued operations in order to understand the effectsof financing decisions. Interest expense including discontinued operationstotaled $67.7 million for the six months ended June 30, 2003, compared to$66.8 million for the same period in 2004. Although the Partnership’s averageoutstanding indebtedness for the six month period ending June 30, 2004,was higher than the comparable period for 2003, the Partnership’s interestexpense decreased in 2004 because the interest rates on newly issued debt waslower than the rates on debt that was repaid since the second quarter of 2003.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased from $90.2 millionduring the six months ended June 30, 2003 to $102.4 million for the sameperiod in 2004.

 

The following highlights the significant changes in expense during thisperiod:

 

22

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•                  Depreciationexpense on tenant improvements increased by $3.3 million, which is reflectiveof increased leasing activity over the past twelve month period.

•                  Amortizationexpense of in place lease intangible assets associated with acquisitionsincreased by $5.2 million, which reflects the increased acquisition activitysince the second half of 2003 and first six months of 2004.

•                  Depreciationexpense on buildings increased by $1.7 million, which is reflective of the netincrease in the held for investment portfolio over the past twelve monthsresulting from acquisition and development activity outpacing dispositions.

 

Service Operations

 

Service Operations primarily consist of the Partnership’s build-to-suitfor sale operations and the leasing, management, construction and developmentservices for joint venture properties and properties owned by third parties.Service Operations revenues increased from $20.6 million for the six monthsended June 30, 2003, to $26.2 million for the six months endedJune 30, 2004, primarily as a result of the following :

•                  Revenue fromwork performed as general contractor for third-party construction jobsincreased from $12.2 million to $13.2 million for the six months endedJune 30, 2003 and 2004, respectively. The increase is reflective ofhealthy volume increases in 2004 over 2003, despite overall lower profitmargins. The Partnership has noted an increase in margins on new deals signedduring the second quarter of 2004; however, margins are driven by specifics ofeach deal and may not reflect future pricing increases.

•                  ThePartnership’s merchant building development and sales program whereby abuilding is developed by the Partnership and then sold is the primary componentof Construction and Development income. During 2004, the Partnership sold twosuch properties for a gain of nearly $4.5 million as compared to one such salein 2003 for a gain of just over $600,000. Profit margins on these types of building sales fluctuate by saledepending on the type of property being sold, the strength of the underlyingtenant and nature of the sale, such as a pre-contracted purchase price for aprimary tenant versus a sale on the open market.

 

Service Operations expenses increased from $14.0 million to $19.4million for the six months ended June 30, 2003 and 2004, respectively.This increase reflects increased costs associated with the increased thirdparty construction volume and income tax expense on the merchant building salenoted above.

 

General and Administrative Expense

 

General and administrative expenses increased from $10.8 million forthe six months ended June 30, 2003, to $14.0 million for the same periodin 2004. The increase is primarily attributable to an overall increase incompensation costs of the Partnership’s associates.

 

Other Income and Expenses

 

Earnings from sale of land and ownership interests in unconsolidatedcompanies is comprised of the following amounts forthe six months ended June 30, 2004 and 2003:

 
| ** **                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Gain on land sales                     |       | **$**    | **5,783**  |     | $          | 5,470 |   |
| Gain on sale of joint venture interest |       | **50**   |       | 6,255    |       |
| Impairment adjustment for land         |       | **(100** | )          | (560     | )          |
| Total                                  |       | **$**    | **5,733**  |     | $          | 11,165 |   |

 

23

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Gain on land sales represents sales of undeveloped land owned by thePartnership. The Partnership pursues opportunities to dispose of land inmarkets with a high concentration of undeveloped land and those markets wherethe land no longer meets strategic development plans of the Partnership.

 

In the first quarter 2003, the Partnership sold its interest in a jointventure that owned and operated depreciable investment property. ThePartnership was a 50% partner in this joint venture. The joint venturedeveloped and operated real estate assets; thus, the gain was not included inoperating income.

 

The Partnership recorded $100,000 and $560,000 of impairment charges onland parcels for the six months ended June 30, 2004 and 2003,respectively.

 

Discontinued Operations

 

The Partnership has classified operations of eighty-two buildings asdiscontinued operations as of June 30, 2004. These eighty-two buildingsconsist of seventy industrial, eight office and four retail properties. As aresult, the Partnership classified net income from operations of $439,000 and$3.7 million as net income from discontinued operations for the six monthsended June 30, 2004 and 2003, respectively. In addition, six of theproperties classified in discontinued operations were sold during the first sixmonths of 2004 and nine properties were sold during the first six months of2003; therefore, the gains on disposal of these properties of $4.7 million and$2.5 million, respectively, are also reported in discontinued operations. Theremaining sixty-seven properties consist of thirty-three properties soldthroughout the last six months of 2003 and thirty-four properties areclassified as held-for-sale at June 30, 2004.

 

**Liquidity and Capital Resources**

 

Sources of Liquidity

 

The Partnership expects to meet its short-term liquidity requirementsover the next twelve months, including payments of dividends and distributionsas well as recurring capital expenditures relating to maintaining thePartnership’s current real estate assets, primarily through the following:

 

•                 working capital; and

•                 net cash provided by operating activities.

 

The Partnership historically has not used any other sources of funds topay for recurring capital expenditures on its current real estate investments.However, as a result of the recent significant increases in occupancy and theamount of tenant improvements and leasing commissions associated with the highleasing volume, the Partnership has temporarily supplemented these sources witha relatively small amount of property disposition proceeds.

 

The Partnership expects to meet long-term liquidity requirements, suchas scheduled mortgage debt maturities, refinancing of long-term debt, preferredstock redemptions, the retirement of unsecured notes and amounts outstandingunder the unsecured credit facility, property acquisitions, financing of developmentactivities and other non-recurring capital improvements, primarily through thefollowing sources:

 

•                 issuance of additional unsecured notes;

•                 issuance of additional General Partner preferred equity;

•                 undistributed cash provided by operating activities, if any;and

•                 proceeds received from real estate dispositions.

 

24

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### ***Rental Operations***

 

The Partnership believesthat its principal source of liquidity, cash flows from Rental Operations,provides a stable source of cash to fund operational expenses. The Partnershipbelieves that this cash-based revenue stream is substantially aligned withrevenue recognition (except for periodic straight-line rental income accruals)as cash receipts from the leasing of rental properties are generally receivedin advance of or in a short time following the actual revenue recognition. ThePartnership is subject to risks of decreased occupancy through marketconditions as well as tenant defaults and bankruptcies, and potential reductionin rental rates upon renewal or re-letting of properties, which would result inreduced cash flow from operations. However, management believes that theserisks are mitigated by the Partnership’s strong market presence in most of itslocations and the fact that the Partnership performs in-house credit review andanalysis on major tenants and all significant leases before they are executed.

 

*Credit Facilities*

 

The Partnership has the following line of credit available (inthousands):

 
| **Description**          | ** ** | **Borrowing  Capacity** | ** ** | **Maturity  Date** | ** **        | **Interest  Rate** | ** **  | **Amount Outstanding  at June 30, 2004** | ** ** |
|--------------------------|------------|-------------------------|------------|--------------------|-------------------|--------------------|-------------|-----------------------------------------------|------------|
| Unsecured Line of Credit |       | $                       | 500,000    |               | January 2007 |               | LIBOR + .60 | %                                             | $          | 376,000 |   |
|                          |            |                         |            |                    |                   |                    |             |                                               |            |  |  |

 

The line of credit is used to fund developmentactivities, acquire additional rental properties and provide working capital.

 

The line of credit provides the Partnership with anoption to obtain borrowings from financial institutions that participate in theline, at rates lower than the stated interest rate, subject to certainrestrictions. Amounts outstanding on the unsecured line of credit atJune 30, 2004, range from LIBOR + .225% to .60% (1.36% to 1.92% atJune 30, 2004).

 

The line of credit also contains financial covenantsthat require the Partnership to meet defined levels of performance.  As of June 30, 2004, the Partnership isin compliance with all covenants and expects to remain in compliance for theforeseeable future.

 

*Debt and Equity Securities*

 

The Partnership currently has on file with the SEC an effective shelfregistration statement that permits the Partnership to sell up to an additional$545 million of unsecured debt securities as of June 30, 2004. Inaddition, the General Partner has on file with the SEC an effective shelfregistration statement that permits the General Partner to sell up to anadditional $250.7 million of common and preferred stock. From time-to-time, thePartnership and General Partner expect to issue additional securities underthese registration statements to fund development and acquisition of additionalrental properties and to fund the repayment of the credit facilities and otherlong-term debt upon maturity.

 

The indenture governing the Partnership’s unsecurednotes also requires the Partnership to comply with financial ratios and othercovenants regarding the operations of the Partnership. The Partnership iscurrently in compliance with all such covenants as of June 30, 2004 andexpects to remain in compliance for the foreseeable future.

 

In January 2004, the Partnership completed a $125 million unsecureddebt offering at an effective interest rate of 3.4%, due January 2008.

 

In February 2004, the Partnership issued Series K Preferred Unitstotaling $150 million at a dividend rate of 6.50%.

 

25

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*Sale of Real Estate Assets*

 

The Partnership utilizes sales of real estate assets as an additionalsource of liquidity. During the first six months of 2004, the Partnership’ssale of real estate assets were minimal, but the Partnership continues topursue opportunities to sell real estate assets and prune its older portfolioproperties when beneficial and inline with the Partnership’s long-termstrategy.

 

Uses of Liquidity

 

The Partnership’s principal uses of liquidity includethe following:

 

•                 Property investments;

•                 Recurring leasing/capital costs;

•                 Dividends and distributions toshareholders and unitholders;

•                 Long-term debt maturities; and

•                 Other contractual obligations.

 

*Property Investments and OtherCapital Expenditures*

 

One of the Partnership’s principal uses of its liquidity is for thedevelopment, acquisition and recurring leasing/capital expenditures of its realestate investments.

 

A summary of the Partnership’s recurring capital expenditures for thesix months ended June 30, 2004 and 2003, is asfollows (in thousands):

 
| ** **            | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------|------------|------------|------------|------------|------------|
|                  |       |       |       |       |       |
| Tenant improvements   |       | **$**      | **28,485** | ** ** | $          | 17,777 |   |
| Leasing costs         |       | **13,202** | ** ** | 9,217      |       |
| Building improvements |       | **8,305**  | ** ** | 6,883      |       |
| Totals                |       | **$**      | **49,992** | ** ** | $          | 33,877 |   |

 

The large increase in these expenditures in 2004 coincides with thePartnership’s increase in occupancy and the related increased leasing volume.

 

*Debt Maturities*

 

Debt outstanding at June 30, 2004, totaled $2.5 billion with aweighted average interest rate of 5.38% maturing at various dates through 2028.The Partnership had $2.3 billion of unsecured debt and approximately $188.0million of secured debt outstanding at June 30, 2004. Scheduled principalamortization of such debt totaled $3.4 million for the six months endedJune 30, 2004.

 

Following is a summary of the scheduled future amortization andmaturities of the Partnership’s indebtedness at June 30, 2004 (inthousands):

 
| **Year**                    | ** ** | **Future Repayments** | ** ** | **Weighted****Average  Interest Rate of  Future Repayments** | ** ** |
|-----------------------------|------------|-----------------------|------------|--------------------------------------------------------------|------------|
| **Scheduled  Amortization** | ** ** | **Maturities**        | ** ** | **Total**                                                    |
|                        |       |                  |       |                                                         |       |   |   |   |   |
| 2004                        |       | $                     | 4,036      |                                                         | $          | 150,000 |   | $ | 154,036 |   | 7.27 | % |
| 2005                        |       | 7,749                 |       | 270,980                                                      |       | 278,729 |   | 6.04 | % |
| 2006                        |       | 7,326                 |       | 180,186                                                      |       | 187,512 |   | 6.11 | % |
| 2007                        |       | 5,842                 |       | 590,615                                                      |       | 596,457 |   | 3.06 | % |
| 2008                        |       | 4,922                 |       | 259,028                                                      |       | 263,950 |   | 4.91 | % |
| 2009                        |       | 4,694                 |       | 275,000                                                      |       | 279,694 |   | 7.38 | % |
| 2010                        |       | 4,076                 |       | 175,000                                                      |       | 179,076 |   | 5.38 | % |
| 2011                        |       | 3,334                 |       | 175,000                                                      |       | 178,334 |   | 6.94 | % |
| 2012                        |       | 1,944                 |       | 200,000                                                      |       | 201,944 |   | 5.85 | % |
| 2013                        |       | 1,581                 |       | 150,000                                                      |       | 151,581 |   | 4.62 | % |
| Thereafter                  |       | 8,361                 |       | 50,000                                                       |       | 58,361 |   | 6.64 | % |
|                        |       | $                     | 53,865     |                                                         | $          | 2,475,809 |   | $ | 2,529,674 |   | 5.38 | % |

 

26

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Historical Cash Flows

 

Cash and cash equivalents were $10.8 and $11.5 million at June 30,2004 and 2003, respectively. The following highlights significant changes innet cash, associated with the Partnership’s operating, investing and financingactivities (amounts in thousands):

 
| ** **                                            | ** ** | **Six months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| Net cash provided by Operating Activities             |       | **$**                              | **165.2**  | ** ** | $ | 161.8 |   |
|                                                  |       | ** **                         | ** ** |   |   |
| Net Cash Used by Investing Activities                 |       | **$**                              | **(249.0** | **)** | $ | (136.6 | ) |
|                                                  |       | ** **                         | ** ** |   |   |
| Net Cash Provided by (Used for) Financing  Activities |       | **$**                              | **81.9**   | ** ** | $ | (30.9 | ) |

 

*Operating Activities*

 

Cash flows from operating activities provide the cash necessary to meetnormal, operational requirements of the Partnership’s rental operations and itsbuild-for-sale activities. The receipt of rental income from rental operationscontinues to provide the primary source of revenues and operating cash flowsfor the Partnership. In addition, the Partnership also develops buildings withthe intent to sell, which provides another significant source of operating cashflow activity.

 

•                  During the sixmonths ended June 30, 2004, the Partnership incurred build-for-saledevelopment costs of $17.8 million as compared to $24.8 million for the sixmonths ended June 30, 2003. The difference is reflective of the timing ofactivity in the held for sale pipeline as the Partnership had significant salesof held for sale properties during the fourth quarter of 2003, thus, thedevelopment costs were much higher for the first six months of 2003.  The 2004 pipeline is presently beingreplenished as evidenced by the June 30, 2004 backlog of projects withanticipated costs of $84.8 million.

•                  The Partnershipsold two build-for-sale properties in the first six months of 2004 for a gainof $4.5 million as compared to one small sale in the first six months of 2003.

 

*Investing Activities*

 

Investing activities are one of the primary uses of the Partnership’sliquidity. Development and acquisition activity is necessary to generateadditional rental revenues and provide cash flows for operational requirements.Highlights of significant cash uses are as follows:

 

•                  Developmentcosts decreased to $63.5 million for the six months ended June 30, 2004from $68.7 million for the same period in 2003. The decrease reflects fewerdevelopment opportunities in 2003 as a result of continued relatively highvacancy rates in the Partnership’s markets and the Partnership focusing itsefforts on leasing-up existing properties. However, the development startsduring the second quarter of 2004 increased significantly which will lead to anincrease in development costs in the near future.

•                  The Partnership acquired  $45.6million of real estate in the first six months of 2004 as compared to $33.1million for the same period in 2003. These modest amounts reflect the lack ofavailable properties meeting the Partnership’s investment criteria during thoseperiods.

•                  Recurring costsfor tenant improvements, lease commissions and building improvements havecontinued to increase. Management anticipates these costs to remain high withthe improving and releasing of existing space as occupancy trends upward,particularly in the office segment.

•                  Proceeds fromthe sale of land and depreciated property provided $37.2 million in netproceeds for the six months ended June 30, 2004, compared to $63.3 millionin 2003. As noted above, the Partnership continues to pursue opportunities tosell real estate assets, in particular its older properties, when beneficial andconsistent with the Partnership’s long-term strategy. Sales of

 

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property willcontinue to be utilized as part of the Partnership’s capital recycling programto fund acquisitions and new development.

•                  InJanuary 2004, the Partnership funded a $65 million mortgage loan securedby a portfolio of office properties owned by a third party located in Atlanta,Georgia. The Partnership received a one-year option to purchase the propertiesas part of the transaction. This two year first mortgage loan has an initialinterest rate of 5.5% for the first six months and 6.5% thereafter.

 

*Financing Activities*

 

In the first six months of 2004, the Partnership raised capital byborrowing from the public debt markets and issuing Preferred Units to theGeneral Partner. The following significant items highlight fluctuations in netcash provided by (used for) financing activities:

 

•                  During the sixmonths ended June 30, 2004, the Partnership received approximately $145.0million in net proceeds from the issuance of Series K Preferred Units to theGeneral Partner. This preferred equity was issued at a favorable dividend yieldof 6.5%. The Series K preferred equity issuance corresponded with theredemption of $102.6 million of the General Partner’s Series E preferred sharesin January 2004, which carried an 8.25% dividend rate.

•                  InFebruary 2004, the General Partner called for the redemption of all itsSeries D convertible preferred equity as of March 16, 2004. The redemptionprice of each depository share of the Series D stock was $25, whereas eachdepository share was convertible into .93677 shares of the General Partner’scommon stock. Since the value of the General Partner’s common stock was well inexcess of the $26.68 strike price per share during the redemption period, thevast majority of the Series D shareholders elected to convert their shares intothe General Partner’s common stock. Prior to the redemption date, 5,242,635Series D convertible preferred depositary shares were converted into 4,911,143common shares of the General Partner, with the remaining 103,695 Series Dconvertible preferred depositary shares redeemed for cash on March 16,2004. The General Partner’s equity issuances are directly related with correspondingequity issuances by the Partnership to the General Partner. The Partnershipissued one Common Unit for each common share issued by the General Partner, andcancelled one Series D Preferred Unit for each Series D share converted orredeemed by the General Partner.

•                  The Partnershiptook advantage of the low interest rate environment in January when itissued $125.0 million of four year unsecured debt at 3.35%. The net proceedsfrom this unsecured offering were used to decrease the amounts outstanding underthe Partnership’s line of credit.

•                  The Partnershippaid $2.9 million in cash to a group of warrant holders in exchange for thecancellation of their warrants in March 2004. The price paid representedthe “in-the money” value of the warrants based upon the difference between theexercise price of the warrants and the price of the General Partner’s commonstock at the exercise date.

•                  In associationwith the funding of the $65 million third party mortgage loan receivable notedabove in Investing Activities, the Partnership borrowed $65 million under avariable rate bank term loan with a one year term and two six month renewaloptions. In order to mitigate its interest rate risk on the term loan, thePartnership fixed the interest rate on the loan for a one year period with twointerest rate swaps. For information on the swaps see the Financial Instrumentssection below.

 

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*FinancialInstruments*

 

The Partnership is exposed to capital market risk, such as changes ininterest rates. In order to manage the volatility relating to interest raterisk, the Partnership may enter into interest rate hedging arrangements fromtime to time. The Partnership does not utilize derivative financial instrumentsfor trading or speculative purposes. The Partnership accounts for derivativeinstruments under Statement of Financial Accounting Standard No. 133,“Accounting for Derivative Instruments and Hedging Activities” as amended(“SFAS 133”).

 

During the first quarter of 2004, the Partnership funded a $65 millionnote receivable secured by a first mortgage on a portfolio of office propertiesowned by a third party located in Atlanta, Georgia. As a lender, thePartnership is subject to customary non-payment and default risk with respectto this secured loan. The note receivable has a maximum two-year term with aninterest rate of 5.5% for the first 6 months and 6.5% thereafter. In order tofund the note receivable, the Partnership borrowed $65 million under a variableinterest rate term loan. The interest rate on the loan is LIBOR + 75 basispoints with a maturity date of January 2005 and two six month renewaloptions. To hedge its variable interest rate risk on the loan, the Partnershipentered into two interest rate swaps totaling $65 million that effectivelyfixed the rate at 2.184% through maturity. The hedge accounting rules are beingused for the swaps, which allows for the change in market value of the swaps tobe recorded through Other Comprehensive Income (“OCI”) in equity versus theStatement of Operations. As of June 30, 2004, the inherent value of thehedge was Partnership$209,000, which was reflected through an increase in otherassets and OCI on the balance sheet.

 

In June 2004, the Partnership simultaneously entered into threeforward-starting interest rate swaps aggregating $144.3 million, as a hedge toeffectively fix the rate on financing expected in 2004 at 5.346%, plus thePartnership’s credit spread over the swap rate. The Partnership expects andintends that the financing will be a ten-year fixed-rate semi-annual financing,pricing between August 1, 2004 and September 1, 2004. The swapsqualify for hedge accounting under SFAS 133; therefore, changes in fair valueare recorded in OCI. The inherent value of the swaps was a negative $2.7million as of June 30, 2004, and was recorded as an increase to otherliabilities and a decrease to OCI in the accompanying balance sheet.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity* (“SFAS 150”). SFAS 150 establishesstandards for classifying and measuring as liabilities certain financialinstruments that embody obligations of the issuer and have characteristics ofboth liabilities and equity. SFAS 150 is effective for all financialinstruments created or modified after May 31, 2003, and otherwise is effectiveJuly 1, 2003. The Partnership includes the operations of one joint venturein its consolidated financial statements at June 30, 2004. This jointventure is partially owned by unaffiliated parties that have noncontrollinginterests. SFAS 150 requires the disclosure of the estimated settlement valueof these noncontrolling interests. As of June 30, 2004, the estimatedsettlement value of the noncontrolling interest in this consolidated jointventure was approximately $1.1 million as compared to the negative minorityinterest liability recorded on the Partnership’s books for this joint ventureof $77,000.

 

**Investments in Unconsolidated Companies**

 

The Partnership has equity interests in unconsolidated partnerships andjoint ventures that own and operate rental properties and hold land fordevelopment. The equity method of accounting is used for these investments inwhich the Partnership has the ability to exercise significant influence, butnot control, over operating and financial policies. As a result, the assets andliabilities of these joint ventures are not included on the Partnership’sbalance sheet. The Partnership’s investment in unconsolidated companiesrepresents less than 6% of the Partnership’s total assets as of June 30,2004. These investments provide several benefits to the Partnership includingincreased market share and an additional source of capital to fund real estateprojects. The Partnership has determined that these entities are either notvariable interest entities under FIN 46R or the Partnership is not a primarybeneficiary under FIN 46R, thus consolidation is not required.

 

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**Item 3.**** Quantitative and Qualitative Disclosure AboutMarket Risks**

 

The Partnership is exposed to interest rate changes primarily as aresult of its line of credit and long-term debt used to maintain liquidity andfund capital expenditures and expansion of the Partnership’s real estateinvestment portfolio and operations. The Partnership’s interest rate riskmanagement objective is to limit the impact of interest rate changes onearnings and cash flows and to lower its overall borrowing costs. To achieveits objectives the Partnership borrows primarily at fixed rates and may enterinto derivative financial instruments such as interest rate swaps, caps andtreasury locks in order to mitigate its interest rate risk on a relatedfinancial instrument. The Partnership does not enter into derivative orinterest rate transactions for speculative purposes.

 

**Item 4.**** Controls and Procedures**

 

The Partnership maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in annual and periodic reports filed with the SEC is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms. These disclosure controls and procedures are furtherdesigned to ensure that such information is accumulated and communicated to thePartnership’s management, including the chief executive officer of the GeneralPartner and the chief financial officer of the General Partner to allow timelydecisions regarding required disclosure.

 

Based on the most recent evaluation, which wascompleted as of June 30, 2004, the chief executive officer of the GeneralPartner and the chief financial officer of the General Partner believe that thePartnership’s disclosure controls and procedures are effective. There have beenno significant changes in the internal controls or in other factors that couldsignificantly affect the internal controls subsequent to the date of thecompleted evaluation.

 

**Part II - Other Information**

 

Item 1. Legal Proceedings

 

Broadband Office, Inc. and Official Committee of Unsecured Creditors ofBroadband Office, Inc. filed a complaint against a group of real estateinvestment trusts and real estate operating companies and certain affiliatedentities and individuals in connection with the formation and management ofBroadband Office. Among the defendants are the General Partner, the Partnershipand Mr. Dennis Oklak, the General Partner’s chief executive officer. Thecomplaint alleges various breaches of purported fiduciary duties by thedefendants, seeks recharacterization or equitable subordination of debt, seeksrecovery of alleged avoidable transfers, appears to seek to hold them liablefor, among other things, the debt of Broadband Office under alter-ego,veil-piercing and partnership theories, and seeks other relief under othertheories. During the second quarter of 2004, the General Partner and thePartnership reached a tentative settlement with the plaintiffs whereby itagreed to pay $175,014 in full settlement of the lawsuit. The amount wasaccrued at June 30, 2004. There can be no assurance that the tentativeoffer will be accepted as the General Partner and the Partnership are awaitingfinal acceptance from the Bankruptcy Court.

 

Item 2.  Changes in Securities

 

None

 

Item 3. Defaults upon Senior Securities

 

None

 

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Item 4. Submission of Matters to a Vote of Security Holders

 

On April 28, 2004,the General Partner held its annual meeting of shareholders (the “Annual Meeting”).The shareholders of the General Partner were asked to take action to (a) electdirectors to serve on the Board of Directors until the General Partner’s annualmeeting of shareholders in 2005, (b) ratify the appointment of KPMG LLP toserve as the General Partner’s and the Partnership’s independent auditors forthe fiscal year ending December 31, 2004, and (c) approve a shareholderproposal to separate the positions of Chairman of the Board and Chief ExecutiveOfficer.

 

At that Annual Meeting, the General Partner’sshareholders elected Barrington H. Branch, Gary A. Burk, Geoffrey Button,William Cavanaugh, III, Ngaire E. Cuneo, Charles R. Eitel, Thomas L. Hefner, L.Ben Lytle, William O. McCoy, John W. Nelley, Jr., Dennis D. Oklak, James E.Rogers, Jack R. Shaw, Robert J. Woodward, Jr., and Darrell E. Zink, Jr. toserve as directors for a one-year term. The number of votes cast for andagainst each of the director nominees was as follows:

 
| **NOMINEE**             | ** ** | **FOR**     | ** ** | **AGAINST** | ** ** |
|-------------------------|------------|-------------|------------|-------------|------------|
| Barrington H. Branch    |       | 122,554,567 |       | 590,955     |       |
| Gary A. Burk            |       | 121,826,956 |       | 1,318,566   |       |
| Geoffrey Button         |       | 121,388,774 |       | 1,756,748   |       |
| William Cavanaugh, III  |       | 122,546,212 |       | 599,310     |       |
| Ngaire E. Cuneo         |       | 121,937,887 |       | 1,207,635   |       |
| Charles R. Eitel        |       | 122,515,147 |       | 630,375     |       |
| Thomas L. Hefner        |       | 121,864,735 |       | 1,280,787   |       |
| L. Ben Lytle            |       | 122,544,070 |       | 601,452     |       |
| William O. McCoy        |       | 121,898,556 |       | 1,246,966   |       |
| John W. Nelley, Jr.     |       | 121,376,824 |       | 1,768,698   |       |
| Dennis D. Oklak         |       | 122,387,359 |       | 1,758,163   |       |
| James E. Rogers         |       | 122,531,366 |       | 614,156     |       |
| Jack R. Shaw            |       | 122,502,062 |       | 643,460     |       |
| Robert J. Woodward, Jr. |       | 122,521,801 |       | 623,721     |       |
| Darrell E. Zink, Jr.    |       | 121,924,272 |       | 1,221,250   |       |

 

The holders of121,792,168 shares voted **FOR** theratification of the appointment of KPMG LLP to serve as the General Partner’sand the Partnership’s independent auditors for the fiscal year endingDecember 31, 2004, the holders of 970,276 shares voted **AGAINST** such appointment and the holders of383,078 shares **ABSTAINED**.

 

The holders of 28,726,633shares voted **FOR** the approval ofthe General Partner’s shareholder proposal to separate the positions of theGeneral Partner’s Chairman of the Board of Directors and Chief ExecutiveOfficer, the holders of 62,571,335 shares voted **AGAINST** such approval, the holders of 1,376,142 shares **ABSTAINED** and the broker non-vote was30,471,412.  As a result, thisshareholder proposal was not approved.

 

At the Annual Meeting, the holders of 123,145,522 shares **GRANTED** authority to act on such otherbusiness as may properly come before the meeting or any adjournment thereof andthe holders of  -0-  shares **WITHHELD**such authority.

 

Item 5. Other Information

 

None

 

Item 6. Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits

 

Exhibit 11.1 Ratio of Earnings to CombinedFixed Charges and Preferred Stock Distributions.

 

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Exhibit 11.2 Ratio of Earnings to FixedCharges.

 

Exhibit 15 Letter regarding unaudited interimfinancial information.

 

Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-OxleyAct of 2002

 

Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-OxleyAct of 2002

 

Exhibit 32.1 Certification Pursuant to 18 U.S. C. Section 13.50, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2 Certification Pursuant to 18 U.S. C. Section 13.50, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 (b)                              Reportson Form 8-K

 

None

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                             | By:                                                                                   |  Duke Realty Corporation |
|----------------------------------|---------------------------------------------------------------------------------------|-------------------------------|
|                             |                                                                                  | Its General Partner           |
|                             |                                                                                  |                          |
|                             |                                                                                  |                          |
| Date:  August 11, 2004 |  /s/          Dennis  D. Oklak |                          |
|                             | Dennis D. Oklak                                                                       |
|                             | President and Chief Executive Officer  of the General Partner                         |
|                             |                                                                                  |                          |
|                             |                                                                                  |                          |
|                             | /s/          Matthew  A. Cohoat     |                          |
|                             | Matthew A. Cohoat                                                                     |
|                             | Executive Vice President  and Chief Financial Officer of  the General Partner         |
|                                  |                                                                                       |                               |  |  |

 

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