**UNITED STATESSECURITIES 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 September  30, 2003** |
|                               |   |   |
| **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: 1-9044** |

 

**DUKE REALTY LIMITED PARTNERSHIP**

 

| State of Incorporation:                                                                                   |   | IRS Employer Identification Number: |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------------------------|
| **Indiana**                                                                                               |   | **35-1740409**                      |
|                                                                                                      |   |                                |
| **600 East 96th Street, Suite 100**                                                                       |
| **Indianapolis, Indiana  46240**                                                                     |
|                                                                                                      |   |                                |
| **Telephone:   (317) 808-6000**                                                                      |
| (Address, including zip code and telephone  number, including area code, of principal  executive 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 Act of1934 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 November 7, 2003 was$150,607,510      ($.01 par value).

 

 

----

 

**DUKEREALTY LIMITED PARTNERSHIP**

 

**INDEX**

 
| **Part I - Financial Information**                                                                             |                                                                                                                          |
|----------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                           |                                                                                                                          |
| **Item 1.  Financial Statements**                                                                         |                                                                                                                          |
|                                                                                                           |                                                                                                                          |
|                                                                                                           | Condensed Consolidated Balance Sheets as of  September 30, 2003 (Unaudited) and December 31, 2002                             |
|                                                                                                           |                                                                                                                          |
|                                                                                                           | Condensed Consolidated Statements of  Operations (Unaudited)  for the three and nine months ended September 30, 2003 and 2002 |
|                                                                                                           |                                                                                                                          |
|                                                                                                           | Condensed Consolidated Statements of Cash  Flows (Unaudited)  for the nine months ended September 30, 2003 and 2002           |
|                                                                                                           |                                                                                                                          |
|                                                                                                           | Condensed Consolidated Statement of  Partners’ Equity  (Unaudited) for the nine months ended September 30, 2003          |
|                                                                                                           |                                                                                                                          |
|                                                                                                           | Notes to Condensed Consolidated Financial  Statements  (Unaudited)                                                            |
|                                                                                                           |                                                                                                                          |
|                                                                                                           | Independent Accountants’ Review Report                                                                                   |
|                                                                                                           |                                                                                                                          |
| **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 - FINANCIALINFORMATION**

**Item 1.  Financial Statements**

**DUKEREALTY LIMITED PARTNERSHIP AND SUBSIDIARIES**

**CondensedConsolidated Balance Sheets**

**(inthousands)**

 
|                                                                                       |   | **September 30,  2003** |          | **December 31,  2002** |       |
|--------------------------------------------------------------------------------------------|--------|-------------------------|---------------|------------------------|------------|
|                                                                                       |   | **(Unaudited)**         |          |                   |       |
| **ASSETS**                                                                                 |   |                    | ** **    |                   |       |
|                                                                                       |   |                    |          |                   |       |
| Real estate  investments:                                                                  |   |                    | ** **    |                   |       |
| Land and  improvements                                                                     |   | **$**                   | **634,230**   | ** **             | $          | 608,995 |   |
| Buildings  and tenant improvements                                                         |   | **4,439,560**           | ** **    | 4,237,360              |       |
| Construction  in progress                                                                  |   | **126,626**             | ** **    | 85,756                 |       |
| Investments  in unconsolidated companies                                                   |   | **295,944**             | ** **    | 315,589                |       |
| Land held  for development                                                                 |   | **313,574**             | ** **    | 326,250                |       |
|                                                                                       |   | **5,809,934**           |          | 5,573,950              | ** ** |
| Accumulated  depreciation                                                                  |   | **(657,311**            | **)**         | (555,858               | )          |
|                                                                                       |   |                    | ** **    |                   |       |
| Net real  estate investments                                                               |   | **5,152,623**           | ** **    | 5,018,092              |       |
|                                                                                       |   |                    | ** **    |                   |       |
| Cash and  cash equivalents                                                                 |   | **706**                 | ** **    | 17,129                 |       |
| Accounts  receivable, net of allowance of $2,589 and $2,008                                |   | **17,727**              | ** **    | 15,415                 |       |
| Straight-line  rent receivable, net of allowance of $1,240 and $2,491                      |   | **66,844**              | ** **    | 52,062                 |       |
| Receivables  on construction contracts                                                     |   | **49,594**              | ** **    | 23,181                 |       |
| Deferred  financing costs, net of accumulated amortization of $9,833 and $15,390           |   | **12,603**              | ** **    | 11,431                 |       |
| Deferred  leasing and other costs, net of accumulated amortization of $60,427 and  $50,543 |   | **139,959**             | ** **    | 112,772                |       |
| Escrow  deposits and other assets                                                          |   | **112,905**             | ** **    | 96,973                 |       |
|                                                                                       |   | **$**                   | **5,552,961** |                   | $          | 5,347,055 |   |
| **LIABILITIES AND PARTNERS’ EQUITY**                                                  |   |                    | ** **    |                   |       |
|                                                                                       |   |                    | ** **    |                   |       |
| Indebtedness:                                                                              |   |                    | ** **    |                   |       |
| Secured debt                                                                               |   | **$**                   | **195,601**   | ** **             | $          | 299,147 |   |
| Unsecured  notes                                                                           |   | **1,675,951**           | ** **    | 1,526,138              |       |
| Unsecured  lines of credit                                                                 |   | **385,000**             | ** **    | 281,000                |       |
|                                                                                       |   | **2,256,552**           |          | 2,106,285              |       |
|                                                                                       |   |                    | ** **    |                   |       |
| Construction  payables and amounts due subcontractors                                      |   | **64,852**              | ** **    | 43,232                 |       |
| Accounts  payable                                                                          |   | **1,849**               | ** **    | 548                    |       |
| Accrued  expenses:                                                                         |   |                    | ** **    |                   |       |
| Real estate  taxes                                                                         |   | **72,441**              | ** **    | 51,472                 |       |
| Interest                                                                                   |   | **22,473**              | ** **    | 27,374                 |       |
| Other                                                                                      |   | **41,378**              | ** **    | 52,485                 |       |
| Other  liabilities                                                                         |   | **104,883**             | ** **    | 106,893                |       |
| Tenant  security deposits and prepaid rents                                                |   | **34,812**              | ** **    | 33,710                 |       |
| Total  liabilities                                                                         |   | **2,599,240**           | ** **    | 2,421,999              |       |
|                                                                                       |   |                    | ** **    |                   |       |
| Minority  interest                                                                         |   | **3,356**               | ** **    | 5,213                  |       |
|                                                                                       |   |                    | ** **    |                   |       |
| Partners’  equity:                                                                    |   |                    | ** **    |                   |       |
| General  Partner                                                                           |   |                    | ** **    |                   |       |
| Common  equity                                                                             |   | **2,146,099**           | ** **    | 2,203,060              |       |
| Preferred  equity (liquidation preference of ($540,802)                                    |   | **512,079**             | ** **    | 415,466                |       |
|                                                                                       |   | **2,658,178**           |          | 2,618,526              |       |
| Limited  Partners’ common equity                                                      |   | **224,232**             | ** **    | 235,473                |       |
| Limited  Partners’ preferred equity                                                   |   | **67,955**              | ** **    | 67,955                 |       |
| Accumulated  other comprehensive income                                                    |   | **—**              | ** **    | (2,111                 | )          |
|                                                                                       |   | **2,950,365**           |          | 2,919,843              |       |
|                                                                                       |   | **$**                   | **5,552,961** |                   | $          | 5,347,055 |   |

 

See accompanying Notes to CondensedConsolidated Financial Statements

 

2

----

 

**DUKEREALTY LIMITED PARTNERSHIPAND SUBSIDIARIES**

**CondensedConsolidated Statements of Operations**

**Forthe three and nine months ended September 30,**

**(inthousands, except per unit amounts)**

**(Unaudited)**

 
|                                                                                    |   | **Three  Months Ended** |        | **Nine  months Ended** |   |
|-----------------------------------------------------------------------------------------|--------|-------------------------|-------------|------------------------|--------|
|                                                                                    |   | **2003**                |        | **2002**               |   | **2003** |   | **2002** |   |
| **RENTAL OPERATIONS:**                                                                  |   |                    | ** **  |                   |   |   | ** ** |   |   |
| Revenues:                                                                               |   |                    | ** **  |                   |   |   | ** ** |   |   |
| Rental  income                                                                          |   | **$**                   | **176,763** | ** **             | $      | 171,949 |   | **$** | **531,851** | ** ** | $ | 511,620 |   |
| Equity in  earnings of unconsolidated companies                                         |   | **7,368**               | ** **  | 8,344                  |   | **18,330** | ** ** | 20,918 |   |
|                                                                                    |   | **184,131**             |        | 180,293                |   | **550,181** | ** ** | 532,538 |   |
| Operating  expenses:                                                                    |   |                    | ** **  |                   |   |   | ** ** |   |   |
| Rental  expenses                                                                        |   | **36,084**              | ** **  | 32,967                 |   | **109,824** | ** ** | 93,986 |   |
| Real estate  taxes                                                                      |   | **18,467**              | ** **  | 18,722                 |   | **60,415** | ** ** | 56,640 |   |
| Interest  expense                                                                       |   | **31,469**              | ** **  | 29,454                 |   | **98,764** | ** ** | 84,047 |   |
| Depreciation  and amortization                                                          |   | **48,159**              | ** **  | 44,627                 |   | **142,112** | ** ** | 129,182 |   |
|                                                                                    |   | **134,179**             |        | 125,770                |   | **411,115** | ** ** | 363,855 |   |
| Earnings  from rental operations                                                        |   | **49,952**              | ** **  | 54,523                 |   | **139,066** | ** ** | 168,683 |   |
|                                                                                    |   |                    | ** **  |                   |   |   | ** ** |   |   |
| **SERVICE OPERATIONS**                                                                  |   |                    | ** **  |                   |   |   | ** ** |   |   |
| Revenues:                                                                               |   |                    | ** **  |                   |   |   | ** ** |   |   |
| General  contractor gross revenue                                                       |   | **79,018**              | ** **  | 47,783                 |   | **196,679** | ** ** | 134,696 |   |
| General  contractor costs                                                               |   | **(71,420**             | **)**       | (42,426                | )      | **(176,854** | **)** | (119,303 | ) |
| Net general  contractor revenue                                                         |   | **7,598**               | ** **  | 5,357                  |   | **19,825** | ** ** | 15,393 |   |
| Property  management, maintenance and leasing fees                                      |   | **3,409**               | ** **  | 3,817                  |   | **10,951** | ** ** | 10,445 |   |
| Construction  and development activity income                                           |   | **122**                 | ** **  | 783                    |   | **839** | ** ** | 28,712 |   |
| Other income                                                                            |   | **1,324**               | ** **  | 1,616                  |   | **1,441** | ** ** | 1,908 |   |
| Total  revenue                                                                          |   | **12,453**              | ** **  | 11,573                 |   | **33,056** | ** ** | 56,458 |   |
|                                                                                    |   |                    | ** **  |                   |   |   | ** ** |   |   |
| Operating  expenses                                                                     |   | **8,137**               | ** **  | 8,311                  |   | **22,168** | ** ** | 30,495 |   |
| Total  earnings from service operations                                                 |   | **4,316**               | ** **  | 3,262                  |   | **10,888** | ** ** | 25,963 |   |
|                                                                                    |   |                    | ** **  |                   |   |   | ** ** |   |   |
| General and  administrative expense                                                     |   | **(4,627**              | **)**       | (6,621                 | )      | **(15,479** | **)** | (20,657 | ) |
| Operating  income                                                                       |   | **49,641**              | ** **  | 51,164                 |   | **134,475** | ** ** | 173,989 |   |
|                                                                                    |   |                    | ** **  |                   |   |   | ** ** |   |   |
| **OTHER INCOME (EXPENSE)**                                                              |   |                    | ** **  |                   |   |   | ** ** |   |   |
| Interest  income                                                                        |   | **809**                 | ** **  | 929                    |   | **2,680** | ** ** | 2,684 |   |
| Earnings  from land and depreciable property dispositions net of impairment adjustments |   | **1,393**               | ** **  | 4,795                  |   | **12,539** | ** ** | 8,882 |   |
| Other  revenue (expense)                                                                |   | **421**                 | ** **  | (93                    | )      | **(138** | **)** | 144 |   |
| Other  minority interest in earnings of subsidiaries                                    |   | **(296**                | **)**       | (247                   | )      | **(768** | **)** | (883 | ) |
| Income from  continuing operations                                                      |   | **51,968**              | ** **  | 56,548                 |   | **148,788** | ** ** | 184,816 |   |
|                                                                                    |   |                    | ** **  |                   |   |   | ** ** |   |   |
| Discontinued  operations:                                                               |   |                    | ** **  |                   |   |   | ** ** |   |   |
| Net income  from discontinued operations                                                |   | **175**                 | ** **  | 601                    |   | **1,232** | ** ** | 3,087 |   |
| Gain on sale  of discontinued operations                                                |   | **3,339**               | ** **  | 11                     |   | **5,821** | ** ** | 2,734 |   |
| Income from  discontinued operations                                                    |   | **3,514**               | ** **  | 612                    |   | **7,053** | ** ** | 5,821 |   |
| Net income                                                                              |   | **55,482**              | ** **  | 57,160                 |   | **155,841** | ** ** | 190,637 |   |
| Dividends on  preferred units                                                           |   | **(10,816**             | **)**       | (13,708                | )      | **(31,124** | **)** | (42,127 | ) |
| Adjustments  for redemption of preferred units                                          |   | —                  | ** **  | (645                   | )      | — | ** ** | (645 | ) |
| Net income  available for common unitholders                                            |   | **$**                   | **44,666**  | ** **             | $      | 42,807 |   | **$** | **124,717** | ** ** | $ | 147,865 |   |
| Basic net  income per common unit:                                                      |   |                    | ** **  |                   |   |   | ** ** |   |   |
| Continuing  operations                                                                  |   | **$**                   | **.28**     | ** **             | $      | .29 |   | **$** | **.78** | ** ** | $ | .95 |   |
| Discontinued  operations                                                                |   | **.02**                 | ** **  | —                 |   | **.05** | ** ** | .04 |   |
| Total                                                                                   |   | **$**                   | **.30**     | ** **             | $      | .29 |   | **$** | **.83** | ** ** | $ | .99 |   |
| Diluted net  income per common unit:                                                    |   |                    | ** **  |                   |   |   | ** ** |   |   |
| Continuing  operations                                                                  |   | **$**                   | **.28**     | ** **             | $      | .28 |   | **$** | **.78** | ** ** | $ | .94 |   |
| Discontinued  operations                                                                |   | **.02**                 | ** **  | —                 |   | **.05** | ** ** | .04 |   |
| Total                                                                                   |   | **$**                   | **.30**     | ** **             | $      | .28 |   | **$** | **.83** | ** ** | $ | .98 |   |
| Weighted  average number of common units outstanding                                    |   | **150,373**             | ** **  | 149,810                |   | **150,163** | ** ** | 149,267 |   |
| Weighted  average number of common and dilutive potential common units                  |   | **151,244**             | ** **  | 151,256                |   | **150,965** | ** ** | 150,880 |   |

 

Seeaccompanying Notes to Consolidated Financial Statements.

 

3

----

 

**DUKEREALTY LIMITED PARTNERSHIP AND SUBSIDIARIES**

**CondensedConsolidated Statements of Cash Flows**

**Forthe nine months ended September 30**

**(inthousands)**

**(Unaudited)**

 
|                                                                                            |   | **2003**     |        | **2002**   |   |
|-------------------------------------------------------------------------------------------------|--------|--------------|-------------|------------|--------|
| Cash flows from operating activities:                                                           |   |         | ** **  |       |   |
| Net income                                                                                      |   | **$**        | **155,841** | ** ** | $      | 190,637 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:              |   |         | ** **  |       |   |
| Depreciation of buildings and tenant  improvements                                              |   | **125,191**  | ** **  | 114,569    |   |
| Amortization of deferred leasing and other  costs                                               |   | **17,348**   | ** **  | 16,317     |   |
| Amortization of deferred financing costs                                                        |   | **2,756**    | ** **  | 2,815      |   |
| Minority interest in earnings                                                                   |   | **768**      | ** **  | 883        |   |
| Straight-line rent adjustment                                                                   |   | **(16,971**  | **)**       | (8,085     | )      |
| Earnings from land and depreciated property  sales                                              |   | **(18,360**  | **)**       | (10,340    | )      |
| Build-to-suit operations, net                                                                   |   | **(37,196**  | **)**       | 175,658    |   |
| Construction contracts, net                                                                     |   | **(6,924**   | **)**       | (16,584    | )      |
| Other accrued revenues and expenses, net                                                        |   | **5,596**    | ** **  | 8,451      |   |
| Operating distributions received in excess  of equity in earnings from unconsolidated companies |   | **6,974**    | ** **  | 3,044      |   |
| **Net cash provided by operating activities**                                                   |   | **235,023**  | ** **  | 477,365    |   |
|                                                                                            |   |         | ** **  |       |   |
| Cash flows from investing activities:                                                           |   |         | ** **  |       |   |
| Development of real estate investments                                                          |   | **(100,810** | **)**       | (111,223   | )      |
| Acquisition of real estate investments                                                          |   | **(108,074** | **)**       | (36,175    | )      |
| Acquisition of land held for development  and infrastructure costs                              |   | **(28,067**  | **)**       | (16,344    | )      |
| Recurring tenant improvements                                                                   |   | **(28,078**  | **)**       | (21,221    | )      |
| Recurring leasing costs                                                                         |   | **(15,993**  | **)**       | (12,216    | )      |
| Recurring building improvements                                                                 |   | **(12,736**  | **)**       | (8,895     | )      |
| Other deferred leasing costs                                                                    |   | **(14,848**  | **)**       | (12,728    | )      |
| Other deferred costs and other assets                                                           |   | **(18,437**  | **)**       | (29,956    | )      |
| Tax deferred exchange escrow, net                                                               |   | **(8,248**   | **)**       | 0          |   |
| Proceeds from land and depreciated property  sales, net                                         |   | **85,709**   | ** **  | 50,463     |   |
| Advances to unconsolidated companies                                                            |   | **(13,294**  | **)**       | (9,930     | )      |
| **Net cash used by investing activities**                                                       |   | **(262,876** | **)**       | (208,225   | )      |
|                                                                                            |   |         | ** **  |       |   |
| Cash flows from financing activities:                                                           |   |         | ** **  |       |   |
| Contribution from General Partner, common  units                                                |   | **9,691**    | ** **  | 21,907     |   |
| Contribution from General Partner,  preferred units                                             |   | **96,700**   | ** **  | —     |   |
| Payments for redemption of General  Partner’s preferred equity                             |   | **(20**      | **)**       | (52,953    | )      |
| Payments for exercise of warrants                                                               |   | **(4,692**   | **)**       | —     |   |
| Proceeds from indebtedness                                                                      |   | **325,000**  | ** **  | 200,000    |   |
| Payments on unsecured debt                                                                      |   | **(175,000** | **)**       | —     |   |
| Proceeds from debt refinancing                                                                  |   | **38,340**   | ** **  | —     |   |
| Payments on indebtedness including  principal amortization                                      |   | **(131,686** | **)**       | (62,943    | )      |
| (Repayments) on lines of credit, net                                                            |   | **95,109**   | ** **  | (94,124    | )      |
| Distributions to common unitholders                                                             |   | **(205,964** | **)**       | (202,614   | )      |
| Distributions to preferred unitholders                                                          |   | **(30,460**  | **)**       | (42,127    | )      |
| Distributions to minority interest                                                              |   | **(1,284**   | **)**       | (565       | )      |
| Deferred financing costs                                                                        |   | **(4,304**   | **)**       | (3,040     | )      |
| **Net cash used for financing activities**                                                      |   | **11,430**   | ** **  | (236,459   | )      |
| **Net increase (decrease) in cash and cash  equivalents**                                       |   | **(16,423**  | **)**       | 32,681     |   |
|                                                                                            |   |         | ** **  |       |   |
| Cash and cash equivalents at beginning of  period                                               |   | **17,129**   | ** **  | 10,453     |   |
| Cash and cash equivalents at end of period                                                      |   | **$**        | **706**     | ** ** | $      | 43,134 |   |
| Other non-cash items:                                                                           |   |         | ** **  |       |   |
| Assumption of debt for real estate  acquisitions                                                |   | **$**        | **—**  | ** ** | $      | 9,566 |   |
| Conversion of Limited Partner Units to  common shares of General Partner                        |   | **$**        | **4,299**   | ** ** | **$**  | 12,632 |   |
| Issuance of Limited Partner Units for real  estate acquisitions                                 |   | **$**        | **3,187**   | ** ** | **$**  | 5,439 |   |
| Transfer of debt in sale of depreciated  property                                               |   | **$**        | **—**  | ** ** | $      | 2,432 |   |
| Adjustments  for redemption of preferred units                                                  |   | **$**        | **—**  |       | $      | 645 |   |

 

See accompanying Notes to CondensedConsolidated Financial Statements

 

4

----

 

**DUKEREALTY LIMITED PARTNERSHIP AND SUBSIDIARIES**

**CondensedConsolidated Statement of Partners’ Equity**

**Forthe six months ended September 30, 2003**

**(inthousands,  except per unit data)**

**(Unaudited)**

 
|                                                                     |   | **General Partner**   |          | **Limited  Partners’  Common  Equity** |       | **Limited  Partners’  Preferred  Equity** |       | **Other  Comprehensive  Income (Loss)** |        | **Total**  |   |
|--------------------------------------------------------------------------|--------|-----------------------|---------------|---------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------|-------------|------------|--------|
| **Common  Equity**                                                       |   | **Preferred  Equity** |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| **Balance at December 31, 2002**                                         |   | **$**                 | **2,203,060** | ** **                                  | **$**      | **415,466**                                    | ** ** | **$**                                   | **235,473** | ** ** | **$**  | **67,955** | ** ** | **$** | **(2,111** | **)** | **$** | **2,919,843** | ** ** |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| Comprehensive income:                                                    |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| Net income                                                               |   | 112,470               |          | 26,919                                      |       | 12,247                                         |       | 4,205                                   |        | —     |   | 155,841 |   |
| Distributions to preferred unitholders                                   |   | —                |          | (26,919                                     | )          | —                                         |       | (4,205                                  | )           | —     |   | (31,124 | ) |
| Gains (losses) on derivative instruments                                 |   |                  |          |                                        |       |                                           |       |                                    |        | 2,111      |   | 2,111 |   |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| Comprehensive income available for common  unitholders                   |   | —                |          | —                                      |       | —                                         |       | —                                  |        | —     |   | 126,828 |   |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| Capital contribution from General Partner                                |   | 9,691                 |          | 96,700                                      |       | —                                         |       | —                                  |        | —     |   | 106,391 |   |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| Acquisition of Partnership interest for  common stock of General Partner |   | 10,736                |          | —                                      |       | (6,437                                         | )          | —                                  |        | —     |   | 4,299 |   |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| Acquisition of property in exchange for  Limited Partner units           |   | —                |          | —                                      |       | 3,187                                          |       | —                                  |        | —     |   | 3,187 |   |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| General Partner’s repurchase of Series D  Preferred Shares          |   | —                |          | (20                                         | )          | —                                         |       | —                                  |        | —     |   | (20 | ) |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| General Partner’s conversion of Series D  Preferred Shares          |   | 67                    |          | (67                                         | )          | —                                         |       | —                                  |        | —     |   | — |   |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| Tax benefits from employee stock plans                                   |   | 397                   |          | —                                      |       | —                                         |       | —                                  |        | —     |   | 397 |   |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| Exercise of General Partner warrants                                     |   | (4,692                | )             | —                                      |       | —                                         |       | —                                  |        | —     |   | (4,692 | ) |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| FASB 123 Compensation expense                                            |   | 96                    |          | —                                      |       | —                                         |       | —                                  |        | —     |   | 96 |   |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| Distributions to General Partner                                         |   | (220                  | )             | —                                      |       | —                                         |       | —                                  |        | —     |   | (220 | ) |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| Distributions to partners ($1.37 per Common  Unit)                       |   | (185,506              | )             | —                                      |       | (20,238                                        | )          | —                                  |        | —     |   | (205,744 | ) |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| **Balance at September 30, 2003**                                        |   | **$**                 | **2,146,099** | ** **                                  | **$**      | **512,079**                                    | ** ** | **$**                                   | **224,232** | ** ** | **$**  | **67,955** | ** ** | **$** | **—** | ** ** | **$** | **2,950,365** | ** ** |
|                                                                     |   |                  |          |                                        |       |                                           |       |                                    |        |       |   |   |   |
| **Common units outstanding at September 30,  2003**                      |   | **135,423**           | ** **    |                                        | ** ** | **14,740**                                     |       |                                    |        |       |   | **150,163** |   |

 

See accompanying Notes to CondensedConsolidated Financial Statements

 

5

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**DUKEREALTY LIMITED PARTNERSHIP**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****                                      FinancialStatements**

 

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, 2002). 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, 2002.

 

**ThePartnership**

 

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 of $309.2 million from the issuance of an additional14,000,833 shares of the General Partner through an offering to thePartnership. Simultaneously, the Partnership completed the acquisition of DukeAssociates, a full-service commercial real estate firm operating in theMidwest. The General Partner was formed in 1985 and qualifies as a Real EstateInvestment Trust (“REIT”) under provisions of the Internal Revenue Code.  The General Partner is the sole generalpartner of the Partnership, owning 90.3% of the common Partnership interests asof September 30, 2003 (“General Partner Units”). The remaining 9.7% of thePartnership’s common interests is owned by limited partners (“Limited PartnerUnits” and, together with the General Partner Units, the “Common Units”). TheLimited Partner Units are exchangeable for shares of the General Partner’scommon stock on a one-for-one basis subject generally to a one-year holdingperiod.

 

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”). The consolidated financialstatements include the accounts of the Partnership and its majority-owned orcontrolled subsidiaries.

 

**2.****                                      Linesof Credit**

 

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

 
| **Description**          |   | **Borrowing  Capacity** |    | **Maturity  Date** |          | **Interest  Rate** |         | **Outstanding  at September 30, 2003** |   |
|--------------------------|--------|-------------------------|---------|--------------------|---------------|--------------------|--------------|----------------------------------------|--------|
|                     |   | **(in 000’s)**     |    |               |          |               |         | **(in 000’s)**                    |   |
| Unsecured Line of Credit |   | $                       | 500,000 |               | February 2004 |               | LIBOR + .65% |                                   | $      | 385,000 |   |
| Secured Line of Credit   |   | 50,000                  |    | January 2006       |          | LIBOR + .60%       |         | 15,004                                 |   |
|                          |        |                         |         |                    |               |                    |              |                                        |        |  |  |

 

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

 

The $500 million line of credit provides the Partnership with an optionto obtain borrowings from the financial institutions that participate in theline of credit at rates lower than the stated interest rate, subject to certainrestrictions. Amounts outstanding on the unsecured line of credit at September30, 2003, are at LIBOR + .65% (1.77% at September 30, 2003).

 

6

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**3.****                                      RelatedParty Transactions**

 

The Partnership provides management, maintenance, leasing,construction, and other tenant-related services to properties in which certainof its executive officers have ownership interests. The Partnership has anoption to acquire these executive officers’ interest in these properties (the“Option Properties”). The Partnership received fees totaling approximately$997,000 and $1.1 million for services provided to the Option Properties forthe nine months ended September 30, 2003 and 2002, respectively. ThePartnership believes that the fees charged by the Partnership for such servicesare equivalent to those charged to third-party owners for similar services.

 

The Partnership has other related party transactions that areinsignificant and that include terms that are considered by the Partnership tobe at arm’s-length and equal to those negotiated with unaffiliated parties.

 

**4.****                                      NetIncome 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 units by the sum of the weightedaverage number of common units outstanding and dilutive potential common unitsfor the period.

 

The following table reconciles the components of basic and diluted netincome per common unit for the three and nine months ended September 30 (inthousands):

 
|                                                                         |   | **Three months  Ended September 30,** |       | **Nine months  Ended September 30,** |       |
|------------------------------------------------------------------------------|--------|---------------------------------------|------------|--------------------------------------|------------|
|                                                                         |   | **2003**                              |       | **2002**                             |       | **2003** |   | **2002** |   |
|                                                                         |   |                                  |       |                                 |       |   |   |   |   |
| Basic and  diluted net income available for common unitholders               |   | **$**                                 | **44,666** |                                 | $          | 42,807 | ** ** | **$** | **124,717** |   | $ | 147,865 |   |
|                                                                         |   |                                  |       |                                 |       |   |   |   |   |
| Weighted average  number of common units outstanding                         |   | **150,373**                           |       | 149,810                              | ** ** | **150,163** |   | 149,267 |   |
| Dilutive  shares for stock based compensation plans                          |   | **871**                               |       | 1,446                                | ** ** | **802** |   | 1,613 |   |
| Weighted  average number of common units and dilutive potential common units |   | **151,244**                           |       | 151,256                              | ** ** | **150,965** |   | 150,880 |   |
|                                                                              |        |                                       |            |                                      |            |  |  |  |  |  |  |  |  |

 

The Series D Convertible Preferred equity was anti-dilutive for thenine months ended September 30, 2003 and 2002; therefore, no conversion tocommon units is included in weighted dilutive potential common units.

 

**5.****                                      SegmentReporting**

 

The Partnership is engaged in four operating segments: the ownershipand rental of office, industrial and retail real estate investments(collectively, “Rental Operations”), and the providing of various real estateservices such as property management, maintenance, leasing, development andconstruction management to third-party property owners (“Service Operations”).The Partnership’s reportable segments offer different products or services andare managed separately because each requires different operating strategies andmanagement expertise. 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 From Operations(“FFO”), which management believes is a useful indicator of the

 

7

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Partnership’s operating performance. Funds From Operations (“FFO”) isused by industry analysts and investors as a supplemental operating performancemeasure of an equity real estate investment trust (“REIT”). FFO is calculatedin accordance 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 withgenerally accepted accounting principles (“GAAP”), excluding extraordinaryitems as defined under GAAP and gains or losses from sales of previouslydepreciated operating real estate assets, plus certain non-cash items such asreal estate asset depreciation and amortization, and after adjustment forunconsolidated partnerships and joint ventures.

 

The revenues and FFO for each of the reportable segments for the threeand nine months ended September 30, 2003 and 2002, and the assets for each ofthe reportable segments as of September 30, 2003 and December 31, 2002, aresummarized as follows (in thousands):

 
|                                                                 |   | **Three Months Ended September 30,** |        | **Nine months Ended September 30,** |   |
|----------------------------------------------------------------------|--------|--------------------------------------|-------------|-------------------------------------|--------|
|                                                                 |   | **2003**                             |        | **2002**                            |   | **2003** |   | **2002** |   |
| Revenues                                                             |   |                                 | ** **  |                                |   |   | ** ** |   |   |
| Rental Operations:                                                   |   |                                 | ** **  |                                |   |   | ** ** |   |   |
| Office                                                               |   | **$**                                | **106,010** | ** **                          | $      | 100,127 |   | **$** | **314,776** | ** ** | $ | 298,652 |   |
| Industrial                                                           |   | **68,603**                           | ** **  | 69,561                              |   | **209,067** | ** ** | 206,640 |   |
| Retail                                                               |   | **1,902**                            | ** **  | 1,966                               |   | **5,987** | ** ** | 5,187 |   |
| Service  Operations                                                  |   | **12,453**                           | ** **  | 11,573                              |   | **33,056** | ** ** | 56,458 |   |
| Total Segment  Revenues                                              |   | **188,968**                          | ** **  | 183,227                             |   | **562,886** | ** ** | 566,937 |   |
| Non-Segment  Revenue                                                 |   | **7,616**                            | ** **  | 8,639                               |   | **20,351** | ** ** | 22,059 |   |
| Consolidated  Revenue from continuing operations                     |   | **196,584**                          | ** **  | 191,886                             |   | **583,237** | ** ** | 588,996 |   |
| Discontinued  Operations                                             |   | **533**                              | ** **  | 1,874                               |   | **2,944** | ** ** | 9,189 |   |
| Consolidated  Revenue                                                |   | **$**                                | **197,117** | ** **                          | $      | 193,740 |   | **$** | **586,181** | ** ** | $ | 598,185 |   |
|                                                                 |   |                                 | ** **  |                                |   |   | ** ** |   |   |
| Funds From  Operations                                               |   |                                 | ** **  |                                |   |   | ** ** |   |   |
| Rental Operations:                                                   |   |                                 | ** **  |                                |   |   | ** ** |   |   |
| Office                                                               |   | **$**                                | **69, 437** | ** **                          | $      | 65,944 |   | **$** | **204,021** | ** ** | $ | 200,162 |   |
| Industrial                                                           |   | **52,151**                           | ** **  | 53,595                              |   | **154,533** | ** ** | 158,387 |   |
| Retail                                                               |   | **1,582**                            | ** **  | 1,702                               |   | **4,800** | ** ** | 4,457 |   |
| Services  Operations                                                 |   | **4,316**                            | ** **  | 3,262                               |   | **10,888** | ** ** | 25,963 |   |
| Total Segment  FFO                                                   |   | **127,486**                          | ** **  | 124,503                             |   | **374,242** | ** ** | 388,969 |   |
|                                                                 |   |                                 | ** **  |                                |   |   | ** ** |   |   |
| Non-Segment  FFO:                                                    |   |                                 | ** **  |                                |   |   | ** ** |   |   |
| Interest expense                                                     |   | **(31,469**                          | **)**       | (29,454                             | )      | **(98,764** | **)** | (84,047 | ) |
| Interest  income                                                     |   | **809**                              | ** **  | 929                                 |   | **2,680** | ** ** | 2,684 |   |
| General and administrative expense                                   |   | **(4,627**                           | **)**       | (6,621                              | )      | **(15,479** | **)** | (20,657 | ) |
| Gain on land sales                                                   |   | **1,383**                            | ** **  | 1,321                               |   | **6,293** | ** ** | 4,412 |   |
| Other expenses                                                       |   | **(537**                             | **)**       | (1,073                              | )      | **(1,880** | **)** | (1,868 | ) |
| Minority interest in earnings of  subsidiaries                       |   | **(296**                             | **)**       | (247                                | )      | **(768** | **)** | (883 | ) |
| Joint venture FFO                                                    |   | **11,827**                           | ** **  | 12,827                              |   | **32,566** | ** ** | 34,200 |   |
| Dividends on preferred units                                         |   | **(10,816**                          | **)**       | (13,708                             | )      | **(31,124** | **)** | (42,127 | ) |
| Adjustment for redemption of preferred  units                        |   | **—**                           | ** **  | (645                                | )      | **—** | ** ** | (645 | ) |
| Discontinued operations                                              |   | **266**                              | ** **  | 1,059                               |   | **1,659** | ** ** | 6,067 |   |
| Consolidated FFO                                                     |   | **94,026**                           | ** **  | 88,891                              |   | **269,425** | ** ** | 286,105 |   |
| Depreciation and amortization on continuing  operations              |   | **(48,159**                          | **)**       | (44,627                             | )      | **(142,112** | **)** | (129,182 | ) |
| Depreciation and amortization on  discontinued operations            |   | **(91**                              | **)**       | (447                                | )      | **(427** | **)** | (1,704 | ) |
| Share of joint venture adjustments                                   |   | **(4,459**                           | **)**       | (4,484                              | )      | **(14,236** | **)** | (13,282 | ) |
| Earnings from  depreciated property sales on continuing operations   |   | **10**                               | ** **  | 3,474                               |   | **6,246** | ** ** | 4,470 |   |
| Earnings from  depreciated property sales on discontinued operations |   | **3,339**                            | ** **  | —                              |   | **5,821** | ** ** | 1,458 |   |
|                                                                 |   |                                 | ** **  |                                |   |   | ** ** |   |   |
| Net Income  Available for Common Unitholders                         |   | **$**                                | **44,666**  | ** **                          | $      | 42,807 |   | **$** | **124,717** | ** ** | $ | 147,865 |   |

 

8

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|                  |   | **September 30,  2003** |          | **December 31,  2002** |   |
|-----------------------|--------|-------------------------|---------------|------------------------|--------|
| Assets                |   |                    |          |                   |   |
| Rental  Operations:   |   |                    |          |                   |   |
| Office                |   | **$**                   | **2,812,064** |                   | $      | 2,677,427 |   |
| Industrial            |   | **2,206,407**           |          | 2,144,686              |   |
| Retail                |   | **70,412**              |          | 71,072                 |   |
| Service  Operations   |   | **114,996**             |          | 91,399                 |   |
| Total Segment  Assets |   | **5,203,879**           |          | 4,984,584              |   |
| Non-Segment  Assets   |   | **349,082**             |          | 362,471                |   |
| Consolidated  Assets  |   | **$**                   | **5,552,961** |                   | $      | 5,347,055 |   |

 

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

 

The Partnership adopted Statement ofFinancial Accounting Standards No. 144, “*Accountingfor the Impairment or Disposal of Long Lived Assets*” (“SFAS 144”),on January 1, 2002. SFAS 144 requires the Partnership to report in discontinuedoperations the results of operations of a property which has either beendisposed or is classified as held for sale, unless certain conditions are met.

 

The Partnership has classified operations of 17 buildings asdiscontinued operations in accordance with SFAS 144. As a result, the Partnershipclassified net income of $175,000 and $601,000 as net income from discontinuedoperations for the three months ended September 30, 2003 and 2002,respectively, and $1.2 million and $3.1 million as net income from discontinuedoperations for the nine months ended September 30, 2003 and 2002, respectively.In addition, eleven of the properties classified in discontinued operationswere sold during the first nine months of 2003 and two properties were soldduring the first nine months of 2002; therefore, the gains on disposal of theseproperties of $3.3 million and $11,000 for the three months ended September 30,2003 and 2002, respectively, and $5.8 million and $2.7 million for the ninemonths ended September 30, 2003 and 2002, respectively, are also reported indiscontinued operations.

 

At September 30, 2003, the Partnership had 7 office, 5 retail and 4industrial properties comprising approximately 1.3 million square feet held forsale. Of these properties, 4 build-to-suit office, 2 industrial and 1 build-to-suitretail properties were under development. Net operating income (defined astotal property revenues, less property expenses, which include real estatetaxes, repairs and maintenance, property management, utilities, insurance andother expenses) of the properties held for sale for the nine months endedSeptember 30, 2003 and 2002 is approximately $3.7 million and $2.1 million,respectively. Net book value of the properties held for sale at September 30,2003, is approximately $84.5 million. There can be no assurance that suchproperties held for sale will be sold.

 

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

 

The General Partner periodically accesses the public equity markets tofund the development and acquisition of additional rental properties. Theproceeds of these offerings are contributed to Partnership in exchange foradditional interests in Partnership.

 

The following series of preferred equity are outstanding as ofSeptember 30, 2003 (in thousands, except percentages):

 
| **Description**     |   | **Shares  Outstanding** |   | **Dividend  Rate** |   | **Initial Optional  Redemption  Date** |   | **Liquidation  Preference** |    | **Convertible** |   |
|---------------------|--------|-------------------------|--------|--------------------|--------|----------------------------------------|--------|-----------------------------|---------|-----------------|--------|
| Series B  Preferred |   | 265                     |   | 7.990              | %      | September  30, 2007                    |   | $                           | 132,250 |            | No     |   |
| Series D  Preferred |   | 534                     |   | 7.375              | %      | December 31,  2003                     |   | $                           | 133,552 |            | Yes    |   |
| Series E  Preferred |   | 400                     |   | 8.250              | %      | January 20,  2004                      |   | $                           | 100,000 |            | 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     |   |

 

9

----

 

All series of preferred equity require cumulative distributions andhave no stated maturity date (although the General Partner may redeem them onor following their initial optional redemption dates).

 

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

 

The Series D Preferred equity are convertible at a conversion rate of..93677 common shares for each preferred unit outstanding.

 

The General Partner closed on its sale of $100 million of Series JPreferred Equity on August 25, 2003, at a dividend rate of 6.625% andcontributed all proceeds of $96.7 million to the Partnership.

 

**8.****                                      OtherMatters**

 

**Reclassifications**

 

Certain 2002 balances have been reclassified to conform to the 2003presentation.

 

**9.****                                      DerivativeInstruments**

 

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 (“SFAS133”).

 

In December 2002, the Partnership simultaneously entered into two $50million forward-starting interest rate swaps. The Partnership designated theaggregate $100 million swaps as a hedge to effectively fix the rate onunsecured debt financings expected in 2003. The swaps qualified for hedgeaccounting under SFAS 133; therefore, changes in fair value were recorded inother comprehensive income.

 

In February 2003, the Partnership simultaneously entered into two $25million forward-starting interest rate swaps. The Partnership designated theaggregate $50 million swaps as a hedge to effectively fix the rate on unsecureddebt financings expected in 2003. The swaps qualified for hedge accountingunder SFAS 133; therefore, changes in fair value were recorded in othercomprehensive income.

 

In July 2003, the Partnership terminated theswaps for a net gain of $643,000, which is included in other revenue in theStatement of Operations. The swaps were terminated as a result of thePartnership’s current capital needs being met through the General Partner’sissuance of the Series J Preferred Equity in lieu of the previouslycontemplated issuance of debt. The Partnership currently has no swaps or otherderivative instruments.

 

**10.****                               StockBased Compensation**

 

For all awards granted 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 plans. 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.

 

10

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|                                                                                                             |   | **Three  Months ended  September 30,** |       | **Nine  months Ended  September 30,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|--------|
|                                                                                                             |   | **2003**                               |       | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                                                             |   |                                   |       |                                  |   |   |   |   |   |
| Net income, as reported                                                                                          |   | **$**                                  | **44,666** | ** **                            | $      | 42,807 |   | **$** | **124,717** | ** ** | $ | 147,865 |   |
| Add:   Stock-based employee compensation expense included in net income  determined under fair value method |   | **178**                                | ** ** | 101                                   |   | **534** | ** ** | 303 |   |
| Deduct:   Total stock based compensation expense determined under fair value  method for all awards         |   | **(353**                               | **)**      | (333                                  | )      | **(1,059** | **)** | (999 | ) |
| Proforma Net Income                                                                                              |   | **$**                                  | **44,491** | ** **                            | $      | 42,575 |   | **$** | **124,192** | ** ** | $ | 147,169 |   |

 
|                         |        | **2003** |       | **2002** |       | **2003** | ** ** | **2002** | ** ** |
|------------------------------|-------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                         |        |     | ** ** |     |       |     | ** ** |     |       |
| Basic net income per share   | As reported |     | **$**      | **.30**  | ** ** | $        | .29        |     | **$**      | **.83** | ** ** | $ | .99 |   |
|                         | Pro forma   |     | **$**      | **.29**  | ** ** | $        | .28        |     | **$**      | **.83** | ** ** | $ | .99 |   |
|                         |        |     | ** ** |     |       |     | ** ** |     |       |
| Diluted net income per share | As reported |     | **$**      | **.30**  | ** ** | $        | .28        |     | **$**      | **.83** | ** ** | $ | .98 |   |
|                         | Pro forma   |     | **$**      | **.29**  | ** ** | $        | .28        |     | **$**      | **.82** | ** ** | $ | .98 |   |

 

**11.****                               RecentAccounting Pronouncements**

 

In July of 2003, the SEC issued a Staff Policy Statement that clarifiesthe application of FASB-EITF Topic D-42 (Topic D-42), “The Effect on theCalculation of Earnings per Share for the Redemption or Induced Conversion ofPreferred Stock.” The SEC clarified that for the purposes of applying TopicD-42 when calculating the excess of (1) fair value of the considerationtransferred to the holders of the preferred stock over (2) the carrying amountof the preferred stock in the registrant’s balance sheet, the carrying amountof the preferred stock should be reduced by the issuance costs of the preferredstock, regardless of where in the stockholders’ equity section those costs wereinitially classified on issuance. The Partnership has adopted this clarificationof Topic D-42 resulting in the following changes:

 
|                                          |   | **Three Months Ended September** |   | **Nine Months Ended September** |   |
|-----------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
|                                          |   | **2003**                         |   | **2002**                        |   | **2003** |   | **2002** |   |
| Net income available for common  unitholders: |   |                             |   |                            |   |   |   |   |   |
| Prior to Topic D-42                           |   | $                                | 44,666 |                            | $      | 43,452 |   | $ | 124,717 |   | $ | 148,510 |   |
| Post adoption of Topic D-42                   |   | $                                | 44,666 |                            | $      | 42,807 |   | $ | 124,717 |   | $ | 147,865 |   |
| Basic net income per common unit:             |   |                             |   |                            |   |   |   |   |   |
| Prior to Topic D-42                           |   | $                                | 0.30   |                            | $      | 0.29 |   | $ | 0.83 |   | $ | 1.00 |   |
| Post adoption of Topic D-42                   |   | $                                | 0.30   |                            | $      | 0.29 |   | $ | 0.83 |   | $ | 0.99 |   |
| Diluted net income per common unit:           |   |                             |   |                            |   |   |   |   |   |
| Prior to Topic D-42                           |   | $                                | 0.30   |                            | $      | 0.29 |   | $ | 0.83 |   | $ | 0.98 |   |
| Post adoption of Topic D-42                   |   | $                                | 0.30   |                            | $      | 0.28 |   | $ | 0.83 |   | $ | 0.98 |   |

 

**12.****                               SubsequentEvents**

 

*Declaration of Dividends*

The Board of Directors of the General Partner declared the followingdistributions at its October 29, 2003 regularly scheduled Board meeting:

 
| **Class**                         |   | **Quarterly****Amount/Unit** |    | **Record  Date** |              | **Payment  Date** |               |
|-----------------------------------|--------|------------------------------|---------|------------------|-------------------|-------------------|--------------------|
| Common                            |   | $                            | 0.46    |             | November 14, 2003 |              | November 28, 2003  |   |
| Preferred (per depositary share): |   |                         |    |             |              |              |               |
| Series B                          |   | $                            | 0.99875 |             | December 17, 2003 |              | September 30, 2003 |   |
| Series D                          |   | $                            | 0.46094 |             | December 17, 2003 |              | September 30, 2003 |   |
| Series E                          |   | $                            | 0.51563 |             | December 17, 2003 |              | September 30, 2003 |   |
| Series I                          |   | $                            | 0.52813 |             | December 17, 2003 |              | September 30, 2003 |   |
| Series J                          |   | $                            | 0.44167 |             | November 17, 2003 |              | December 1, 2003   |   |

 

*Issuance of Debt*

In October 2003, the Partnership issued $100.0 million of unsecureddebt bearing an effective interest rate of 3.63% due 2007.

 

11

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The Partners

**Duke Realty LimitedPartnership:**

 

We have reviewed the condensed consolidated balance sheet of DukeRealty Limited Partnership and subsidiaries as of September 30, 2003, therelated condensed consolidated statements of operations for the three and ninemonths ended September 30, 2003 and 2002, the related condensed consolidatedstatements of cash flows for the nine months ended September 30, 2003 and 2002,and the related condensed consolidated statement of partners’ equity for thenine months ended September 30, 2003. These condensed consolidated financialstatements are the responsibility of the Partnership’s management.

 

We conducted our review in accordance with standards established by theAmerican Institute of Certified Public Accountants. 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 auditing standards generally accepted in the United Statesof America, the objective of which is the expression of an opinion regardingthe financial statements taken as a whole. Accordingly, we do not express suchan 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 auditing standardsgenerally accepted in the United States of America, the consolidated balancesheet of Duke Realty Limited Partnership and subsidiaries as of December 31,2002, and the related consolidated statements of operations, shareholders’equity and cash flows for the year then ended (not presented herein); and inour report dated January 29, 2003, we expressed an unqualified opinion on thoseconsolidated financial statements. In our opinion, the information set forth inthe accompanying condensed consolidated balance sheet as of December 31, 2002is fairly presented, in all material respects, in relation to the consolidatedbalance sheet from which it has been derived.

 

 

KPMG LLP

Indianapolis, Indiana

October 29, 2003

 

12

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**CautionaryStatement 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, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended. Theseforward-looking statements involve known and unknown risks, uncertainties andother 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;

•                  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 General Partner and the Partnership have on file with theSecurities and Exchange Commission (“SEC”) a Current Report on Form 8-K datedJuly 24, 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**

 

The Partnership is a self-administered and self managed real estateinvestment trust that began operations through a related entity in 1972. As ofSeptember 30, 2003, the Partnership:

 

•                 Owned orcontrolled 924 industrial, office and retail properties (including propertiesunder development), consisting of approximately 110 million square feet locatedin 13 operating platforms; and

•                 Owned orcontrolled more than 3,900 acres of land with an estimated future developmentpotential of approximately 62 million square feet of industrial, office andretail properties.

 

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

•                 leasing;

•                 management;

•                 construction;

•                 development; and

•                 othertenant-related services.

 

13

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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 nine months endedSeptember 30, 2003, net operating income from the same property portfoliodecreased 4.7% and 4.6%, respectively, from the same periods in 2002. Thedecrease is primarily due to significant lease terminations included in the2002 results and significant rental expenses included in the 2003 amountsresulting from the effects of a prolonged winter in many of the Partnership’smarkets.

 

***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 information regarding the Partnership’s in-service portfolio of rentalproperties as of September 30, 2003 and 2002 (square feet in thousands):

 
|             |   | **Total  Square Feet** |   | **Percent of  Total Square Feet** |       | **Percent Occupied** |       |
|------------------|--------|------------------------|--------|-----------------------------------|------------|----------------------|------------|
| **Type**         |   | **2003**               |   | **2002**                          |       | **2003**             |       | **2002** |   | **2003** |   | **2002** |   |
| **Industrial**   |   |                   |   |                              |       |                 | ** ** |   |   |   |   |   |   |
| Service  Centers |   | **13,636**             |   | 13,686                            | ** ** | **12.9**             | **%**      | 13.2 | % | **88.2** | **%** | 87.9 | % |
|             |   |                   |   |                              |       |                 | ** ** |   |   |   | ** ** |   |   |
| Bulk             |   | **65,700**             |   | 65,304                            | ** ** | **62.0**             | **%**      | 62.8 | % | **89.6** | **%** | 88.0 | % |
|             |   |                   |   |                              |       |                 | ** ** |   |   |   | ** ** |   |   |
| **Office**       |   | **25,644**             |   | 24,171                            | ** ** | **24.2**             | **%**      | 23.2 | % | **85.7** | **%** | 85.4 | % |
|             |   |                   |   |                              |       |                 | ** ** |   |   |   | ** ** |   |   |
| **Retail**       |   | **934**                |   | 839                               | ** ** | **.9**               | **%**      | .8 | % | **98.0** | **%** | 99.4 | % |
|             |   |                   |   |                              |       |                 | ** ** |   |   |   | ** ** |   |   |
| Total            |   | **105,914**            |   | 104,000                           | ** ** | **100.0**            | **%**      | 100.0 | % | **88.6** | **%** | 87.5 | % |

 

***Lease Expiration:***Thefollowing table reflects the Partnership’s in-service portfolio leaseexpiration schedule as of September 30, 2003, by property typeindicating square footage and annualized net effective rents under expiringleases (in thousands, except per square foot amounts):

 

14

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|                         |   | **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** |   |
| 2003                         |   | 3,205                |   | $                      | 19,051  |                    | 3      | %                | 2,687  |   | $ | 12,124 |   | 518 |   | $ | 6,927 |   | — |   | $ | — |   |
| 2004                         |   | 10,902               |   | 74,278                 |    | 11                      | %      | 8,419            |   | 40,464 |   | 2,482 |   | 33,796 |   | 1 |   | 18 |   |
| 2005                         |   | 13,433               |   | 93,693                 |    | 14                      | %      | 10,611           |   | 53,663 |   | 2,786 |   | 39,530 |   | 36 |   | 500 |   |
| 2006                         |   | 11,045               |   | 77,480                 |    | 12                      | %      | 8,751            |   | 46,316 |   | 2,292 |   | 31,131 |   | 2 |   | 33 |   |
| 2007                         |   | 10,976               |   | 76,612                 |    | 12                      | %      | 8,279            |   | 40,563 |   | 2,667 |   | 35,692 |   | 30 |   | 357 |   |
| 2008                         |   | 12,502               |   | 75,619                 |    | 12                      | %      | 10,053           |   | 44,041 |   | 2,421 |   | 31,081 |   | 28 |   | 497 |   |
| 2009                         |   | 8,606                |   | 53,708                 |    | 8                       | %      | 6,818            |   | 29,593 |   | 1,767 |   | 23,714 |   | 21 |   | 401 |   |
| 2010                         |   | 6,875                |   | 51,594                 |    | 8                       | %      | 5,083            |   | 25,415 |   | 1,778 |   | 25,943 |   | 14 |   | 236 |   |
| 2011                         |   | 3,356                |   | 31,406                 |    | 5                       | %      | 2,061            |   | 11,004 |   | 1,269 |   | 19,958 |   | 26 |   | 444 |   |
| 2012                         |   | 4,342                |   | 27,475                 |    | 4                       | %      | 3,302            |   | 12,859 |   | 1,018 |   | 14,025 |   | 22 |   | 591 |   |
| 2013 and  Thereafter         |   | 8,552                |   | 74,011                 |    | 11                      | %      | 4,838            |   | 22,843 |   | 2,978 |   | 44,761 |   | 736 |   | 6,407 |   |
| Total Leased                 |   | 93,794               |   | $                      | 654,927 |                    | 100    | %                | 70,902 |   | $ | 338,885 |   | 21,976 |   | $ | 306,558 |   | 916 |   | $ | 9,484 |   |
|                         |   |                 |   |                   |    |                    |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Total  Portfolio Square Feet |   | 105,914              |   |                   |    |                    |   | 79,337           |   |   |   | 25,644 |   |   |   | 933 |   |   |   |
|                         |   |                 |   |                   |    |                    |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Percent  Occupied            |   | 88.56                | %      |                   |    |                    |   | 89.37            | %      |   |   | 85,69 | % |   |   | 98.00 | % |   |   |

 

***FutureDevelopment:***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 3.9 million square feet ofproperties under development at September 30, 2003. These propertiesshould provide future earnings through Service Operations income upon sale orfrom Rental Operations growth as they are placed in service as follows (inthousands, except percent leased and stabilized returns):

 
| **Anticipated  In-Service  Date** |   | **Square  Feet** |   | **Percent  Leased** |   | **Project  Costs** |    | **Estimated  Stabilized  Return** |   |
|-----------------------------------|--------|------------------|--------|---------------------|--------|--------------------|---------|-----------------------------------|--------|
| Held For  Rental:                 |   |             |   |                |   |               |    |                              |   |
| 4th Quarter  2003                 |   | 299              |   | 92                  | %      | $                  | 13,342  |                              | 10.2   | % |
| 1st Quarter  2004                 |   | 2,279            |   | 78                  | %      | 79,391             |    | 9.9                               | %      |
| 2nd Quarter  2004                 |   | 444              |   | 68                  | %      | 20,010             |    | 10.5                              | %      |
| Thereafter                        |   | 193              |   | 100                 | %      | 6,475              |    | 9.9                               | %      |
|                              |   | 3,215            |   | 79                  | %      | $                  | 119,218 |                              | 10.0   | % |
| Build-to-Suit  for Sale:          |   |             |   |                |   |               |    |                              |   |
| 4th Quarter  2003                 |   | 51               |   | 100                 | %      | $                  | 5,561   |                              | 11.1   | % |
| 1st Quarter  2004                 |   | 376              |   | 100                 | %      | 35,912             |    | 8.7                               | %      |
| 2nd Quarter  2004                 |   | 104              |   | 100                 | %      | 10,670             |    | 10.9                              | %      |
| Thereafter                        |   | 195              |   | 100                 | %      | 16,798             |    | 10.2                              | %      |
|                              |   | 726              |   | 100                 | %      | $                  | 68,941  |                              | 9.6    | % |
| Total                             |   | 3,941            |   | 83                  | %      | $                  | 188,159 |                              | 9.9    | % |

 

***Lease Renewals:***ThePartnership renewed 76.5% and 70.9% of leases up for renewal in the three andnine months ended September 30, 2003, totaling 2.4 million and 5.0 millionsquare feet, respectively. This compares to renewals of 75.0% and 72.6% for thethree and nine months ended September 30, 2002, totaling 2.3 million and6.4 million square feet, respectively. Overall leasing activity has started toincrease in the third quarter of 2003, but the growth in renewal rental ratescontinue to be lower than in prior years due to excess supply and competitivepricing.

 

15

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**Resultsof Operations**

 

A summary of the Partnership’s operating results and propertystatistics for the three and nine months ended September 30, 2003 and 2002,is as follows (in thousands, except number of properties and per unit amounts):

 
|                                                         |   | **Three  Months Ended September 30,** |        | **Nine  months Ended September 30,** |       |
|--------------------------------------------------------------|--------|--------------------------------------------|-------------|-------------------------------------------|------------|
|                                                         |   | **2003**                                   |        | **2002**                                  |       | **2003** |   | **2002** |   |
|                                                         |   |                                       |        |                                      |       |   |   |   |   |
| Rental  Operations revenue from continuing operations        |   | **$**                                      | **184,131** |                                      | $          | 180,293 | ** ** | **$** | **550,181** |   | $ | 532,538 |   |
| Service  Operations revenue from continuing operations       |   | **12,453**                                 |        | 11,573                                    | ** ** | **33,****056** |   | 56,458 |   |
| Earnings  from Rental Operations                             |   | **49,952**                                 |        | 54,523                                    | ** ** | **1****39,066** |   | 168,683 |   |
| Earnings  from Service Operations                            |   | **4,316**                                  |        | 3,262                                     | ** ** | **10,888** |   | 25,963 |   |
| Operating  income                                            |   | **49,641**                                 |        | 51,164                                    | ** ** | **134,475** |   | 173,989 |   |
| Net income  available for common unitholders                 |   | **$**                                      | **44,666**  |                                      | $          | 42,807 | ** ** | **$** | **124,717** |   | $ | 147,865 |   |
| Weighted  average common units outstanding                   |   | **150,373**                                |        | 149,810                                   | ** ** | **150,163** |   | 149,267 |   |
| Weighted  average common and dilutive potential common units |   | **151,244**                                |        | 151,256                                   | ** ** | **150,965** |   | 150,880 |   |
| Basic income  per common unit:                               |   |                                       |        |                                      |       |   |   |   |   |
| Continuing  operations                                       |   | **$**                                      | **.28**     | ** **                                | $          | .29 | ** ** | **$** | **.78** | ** ** | $ | .95 |   |
| Discontinued  operations                                     |   | **$**                                      | **.02**     | ** **                                | $          | — | ** ** | **$** | **.05** | ** ** | $ | .04 |   |
| Diluted  income per common unit:                             |   |                                       | ** **  |                                      | ** ** |   | ** ** |   |   |
| Continuing  operations                                       |   | **$**                                      | **.28**     | ** **                                | $          | .28 | ** ** | **$** | **.78** | ** ** | $ | .94 |   |
| Discontinued  operations                                     |   | **$**                                      | **.02**     | ** **                                | $          | — | ** ** | **$** | **.05** | ** ** | $ | .04 |   |
|                                                         |   |                                       |        |                                      |       |   |   |   |   |
| Number of  in-service properties at end of period            |   | **908**                                    |        | 904                                       | ** ** | **908** |   | 904 |   |
| In-service square  footage at end of period                  |   | **105,914**                                |        | 104,000                                   | ** ** | **105,914** |   | 104,000 |   |
| Under  development square footage at end of period           |   | **3,941**                                  |        | 3,357                                     | ** ** | **3,941** |   | 3,357 |   |

 

**Comparisonof Three Months Ended September 30, 2003 to Three Months EndedSeptember 30, 2002**

 

Rental Income from Continuing Operations

 

Overall, rental income from continuing operations increased from $171.9million in 2002 to $176.8 million in 2003. The following table reconcilesrental income by reportable segment to the Partnership’s total reported rentalincome from continuing operations for the three months ended September 30,2003 and 2002 (in 000’s):

 
|        |   | **2003** |    | **2002** |   |
|-------------|--------|----------|---------|----------|--------|
| Office      |   | $        | 106,010 |     | $      | 100,127 |   |
| Industrial  |   | 68,603   |    | 69,561   |   |
| Retail      |   | 1,902    |    | 1,966    |   |
| Non-segment |   | 248      |    | 295      |   |
| Total       |   | $        | 176,763 |     | $      | 171,949 |   |

 

The Partnership’s three reportable segments comprising RentalOperations (office, industrial and retail) are all within the real estateindustry and are therefore affected by the same economic and industryconditions. The results from operations for all three segments are driven bysimilar factors when analyzing performance for the three months endedSeptember 30, 2003 and 2002. The following significant fluctuations arethe primary causes of the increase in rental income from continuing operationsfor all three segments, with specific references to a particular segment whenapplicable:

 

•                  Straight-line rental income for the thirdquarter of 2003 totaled $5.5 million compared to $4.0 million in 2002 as thePartnership has increased the use of free rent concessions in 2002 and 2003 asincentives to attract quality tenants in the competitive markets. The effect ofthese concessions is reflected in straight-line rental income over the life ofthe leases.

 

16

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•                  Throughoutthe last quarter of 2002 and the first nine months of 2003 the Partnership hasacquired five new properties, placed sixteen development projects in serviceand acquired an additional seven properties through acquisitions of its jointventure partner’s interest. These acquisitions and developments are the primaryfactor in the overall $4.8 million increase in rental revenue for the threemonths ended September 30, 2003, compared to the same period in 2002. Fourout of the five property acquisitions, three development projects and all ofthe joint venture acquisitions were office properties. These officeacquisitions and developments resulted in the $5.9 million increase in officerental income.

•                  Lease termination fees totaled $1.2 millionfor the third quarter of 2003 compared to $6.4 million for the third quarter of2002. The office portfolio had termination fees of $621,000 for the thirdquarter of 2003 compared to $4.1 million for the third quarter of 2002. In2002, $3.2 million of the $4.1 million of termination fees was associated witha single office tenant. Lease termination fees for the industrial portfoliodecreased from $2.3 million for the third quarter 2002 to $544,000 for the sameperiod in 2003.

 

Equity in Earnings of Unconsolidated Companies

 

Equity in earnings decreased from $8.3 million for the third quarter of2002 to $7.4 million for the same period in 2003. This decrease is primarilythe result of the Partnership recognizing $1.8 million from a gain on sale of aproperty in a joint venture in which the Partnership had a 50% interest in2002. This decrease was offset by an increase in the combined occupancy of allthe Partnership’s investments in unconsolidated companies to 93.31% atSeptember 30, 2003 compared to 91.5% at September 30, 2002.

 

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 September 30, 2003 and 2002 (in000’s):

 
|             |   | **2003** |   | **2002** |   |
|------------------|--------|----------|--------|----------|--------|
| Rental Expenses: |   |     |   |     |   |
| Office           |   | $        | 26,744 |     | $      | 24,387 |   |
| Industrial       |   | 8,887    |   | 8,203    |   |
| Retail           |   | 185      |   | 146      |   |
| Non-segment      |   | 268      |   | 231      |   |
| Total            |   | $        | 36,084 |     | $      | 32,967 |   |

 
|               |   | **2003** | ** ** | **2002** | ** ** |
|--------------------|--------|----------|------------|----------|------------|
| Real Estate Taxes: |   |     |       |     |       |
| Office             |   | $        | 9,830      |     | $          | 9,796 |   |
| Industrial         |   | 7,564    |       | 7,753    |       |
| Retail             |   | 135      |       | 117      |       |
| Non-segment        |   | 938      |       | 1,056    |       |
| Total              |   | $        | 18,467     |     | $          | 18,722 |   |

 

The Partnership’s three reportable segments comprising RentalOperations (office, industrial and retail) are all within the real estateindustry and therefore affected by the same economic and industry conditions.The results from operations for all three segments are driven by similarfactors when analyzing performance for the three months ended September 30,2003 and 2002. The rental expense increases are the result of the Partnership’sincreased real estate assets associated with current year developments andacquisitions.

 

Interest Expense

 

The increase in interest expense from $29.5 million for the thirdquarter of 2002, to $31.5 million for the same period in 2003 is attributableto the following:

•                  Interestexpense on the Partnership’s unsecured debt (excluding the line of credit)increased by $2.0 million from $25.3 million for the three months endedSeptember 30, 2002 to $27.3 million for the

 

17

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same period in 2003. The increase is due tothe issuances of $325.0 million of unsecured debt during the first nine monthsof 2003, offset by the $175.0 million of unsecured debt paid off onJune 30, 2003.

•                  Capitalizedinterest on development projects decreased from $2.1 million for the threemonths ended September 30, 2002, to $1.7 million for the same period in2003 as a result of decreased development activity by the Partnership over thepast twelve months in response to soft demand in many of the Partnership’smarkets.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased from $44.6 millionduring the three months ended September 30, 2002 to $48.2 million for thesame period in 2003 as a result of the following trends:

 

•                  Thebasis of the Partnership held for investment property portfolio increased byapproximately $239.9 million from September 30, 2002 to September 30,2003, primarily through developments placed in-service throughout 2002 and2003, a $50 million building acquisition in December of 2002 and $108.1million of building acquisitions throughout 2003.

•                  Tenantimprovements increased from $345.4 million at September 30, 2002 to $408.0million at September 30, 2003 as the Partnership continues to incurcapital expenditures to lease-up vacant space.

 

Service Operations

 

Service Operations primarily consist of leasing, management,construction and development services for joint venture properties andproperties owned by third parties. Service Operations revenues increased from$11.6 million for the three months ended September 30, 2002, to $12.5million for the three months ended September 30, 2003 as a result of thefollowing significant fluctuations:

 

•                  Revenuefrom work performed as general contractor for third party construction jobsincreased from $6.1 million for the three months ended September 30, 2002,to $7.7 million for the three months ended September 30, 2003. ThePartnership has continued to experience an increase in volume for third partywork in 2003 as businesses decide to expand existing properties or constructnew buildings to take advantage of the current low interest rates and lowerfees in the market place.

 

Service Operations expenses decreased from $8.3 million for the threemonths ended September 30, 2002, to $8.1 million for the three monthsended September 30, 2003. For the quarter ended September 30, 2003,the Partnership experienced an increase in labor costs associated with theincrease in third party construction, but this increase was offset by adecrease in taxes associated with the Partnership’s held for sale inventory.

 

General and Administrative Expense

 

General and Administrative Expense decreased from $6.6 million for thethree months ended September 30, 2002 to $4.6 million for the same periodin 2003. The decrease is attributable to the following:

 

•                  Anincrease in levels of construction and leasing activity for the third quarter2003 compared to 2002, which allowed for more construction overhead costs to beapplied to projects versus expensed in general and administrative expenses.

 

Other Income and Expenses

 

Gain on sale of land and depreciable property dispositions is comprisedof the following amounts for the three months ended September 30, 2003 and2002:

 

18

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|                                    |   | **2003**  |      | **2002** |   |
|-----------------------------------------|--------|-----------|-----------|----------|--------|
| Gain on sales of depreciable properties |   | **$**     | **10**    |     | $      | 3,474 |   |
| Gain on land sales                      |   | **1,383** |      | 1,321    |   |
| Total                                   |   | **$**     | **1,393** |     | $      | 4,795 |   |

 

Gain on sales of depreciable properties represent sales of previouslyidentified held for sale rental properties prior to adoption of FASB 144. Allfuture sales of held for investment properties in 2003 and beyond will beclassified as discontinued operations.

 

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.

 

Discontinued Operations

 

The Partnership adopted Statement of Financial Accounting Standards No.144, “*Accounting for the Impairment orDisposal of Long Lived Assets*” (“SFAS 144”), on January 1,2002. SFAS 144 requires the Partnership to report in discontinued operationsthe results of operations of a property that has either been sold or isclassified as held for sale, unless certain conditions are met.

 

The Partnership has classified operations of seventeen buildings asdiscontinued operations in accordance with SFAS 144. As a result, thePartnership classified net income of $175,000 and $601,000 as net income fromdiscontinued operations for the three months ended September 30, 2003 and2002, respectively. In addition, two of the properties classified indiscontinued operations were sold during the third quarter of 2003; therefore,the gains on disposal for these properties of $3.3 million are also reported indiscontinued operations. The Partnership also reported gains of $11,000 indiscontinued operations associated with the sale of two properties in 2002.

 

**Comparisonof Nine Months Ended September 30, 2003 to Nine Months EndedSeptember 30, 2002**

 

Rental Income from Continuing Operations

 

Overall, rental income from continuing operations increased from $511.6million in 2002 to $531.9 million in 2003. The following table reconcilesrental income by reportable segment to the Partnership’s total reported rentalincome from continuing operations for the nine months ended September 30,2003 and 2002 (in 000’s):

 
|        |   | **2003** |    | **2002** |   |
|-------------|--------|----------|---------|----------|--------|
| Office      |   | $        | 314,776 |     | $      | 298,652 |   |
| Industrial  |   | 209,067  |    | 206,640  |   |
| Retail      |   | 5,987    |    | 5,187    |   |
| Non-segment |   | 2,021    |    | 1,141    |   |
| Total       |   | $        | 531,851 |     | $      | 511,620 |   |

 

The Partnership’s three reportable segments comprising RentalOperations (office, industrial and retail) are all within the real estateindustry and therefore affected by the same economic and industry conditions.The results from operations for all three segments are driven by similarfactors when analyzing performance for the nine months ended September 30,2003 and 2002. The following significant fluctuations are the primary causes ofthe increase in rental income from continuing operations for all threesegments, with specific references to a particular segment when applicable:

 

•                  Straight line rental income for 2003 totaledapproximately $17.0 million compared to $8.1 million in 2002 as the Partnershiphas continued the increased use of free rent concessions in 2002 and 2003 asincentives to attract quality tenants in the competitive markets. ThePartnership’s office and industrial portfolios

 

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experienced a $4.1 million and $1.2 millionincrease in straight line rental income for the nine months endedSeptember 30, 2003, compared to the same period in 2002. The effect of these concessions is reflectedin straight line rental income over the life of the leases.

•                  Lease termination fees totaled $12.1 millionin 2003 compared to $22.2 million in 2002. In 2002 the Partnership experienceda number of large individual termination fees, including the receipt of twoindividual termination fees totaling $9.1 million in the office portfolio.Lease termination fees from the office portfolio decreased from $18.1 millionfor the nine months ended September 30, 2002, compared to $10.3 millionfor 2003. The Partnership’s lease termination fees from the industrialportfolio also decreased from $4.0 million for September 30, 2002, to $1.7million for September 30, 2003.

•                  Duringthe nine months ended September 30, 2003 the Partnership recorded $4.5million more of recoverable expense revenue compared to 2002, mainly associatedwith recoverable costs attributable to the harsh and prolonged winter that manyof the Partnership’s markets experienced in 2003.

•                  Asdiscussed earlier, throughout the last quarter of 2002 and the first ninemonths of 2003, the Partnership acquired five new properties, placed sixteendevelopment projects in-service and acquired an additional seven propertiesthrough acquisitions of its joint venture partner’s interest. Theseacquisitions and developments are the primary factor in the overall $20.2million increase in rental revenue for the nine months ended September 30,2003, compared to 2002. Acquisitions and developments within the officeportfolio created a $16.1 million increase in rental income for the nine monthsended September 30, 2003, compared to the same period in 2002. Theindustrial portfolio rental income increased by approximately $2.4 million as aresult of acquisitions and developments placed in service over the last twelvemonths.

 

Equity in Earnings of Unconsolidated Companies

 

Equity in earnings decreased from $20.9 million in 2002 to $18.3million for the same period in 2003. This decrease is the result of thePartnership recognizing $1.8 million from a gain on sale of a property in ajoint venture in which the Partnership had a 50% interest in 2002. Theremaining decrease is due to the Partnership purchasing its partners’ interestsin seven joint ventures throughout 2002 and 2003. In addition to the sevenacquisitions, the Partnership also disposed of one joint venture during thecurrent year. Reflected in equity in earnings for the nine months endedSeptember 30, 2003 are lease termination fees of $1.2 million compared to$584,000 for the same period in 2002.

 

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 nine months ended September 30, 2003 and 2002 (in000’s):

 
|               |   | **2003**           |        | **2002** |   |
|--------------------|--------|--------------------|-------------|----------|--------|
| Rental Expenses:   |   |               |        |     |   |
| Office             |   | **$**              | **78,608**  |     | $      | 69,225 |   |
| Industrial         |   | **29,815**         |        | 24,144   |   |
| Retail             |   | **743**            |        | 378      |   |
| Non-segment        |   | **658**            |        | 239      |   |
| Total              |   | **$**              | **109,824** |     | $      | 93,986 |   |
|               |   |               |        |     |   |
| Real Estate Taxes: |   |               |        |     |   |
| Office             |   | **$**              | **32,147**  |     | $      | 29,265 |   |
| Industrial         |   | **24****,****719** |        | 24,110   |   |
| Retail             |   | **444**            |        | 352      |   |
| Non-segment        |   | **3****,105**      |        | 2,913    |   |
| Total              |   | **$**              | **60,415**  |     | $      | 56,640 |   |

 

20

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The Partnership’s three reportable segments comprising RentalOperations (office, industrial and retail) are all within the real estateindustry and therefore affected by the same economic and industry conditions.The results from operations for all three segments are driven by similarfactors when analyzing performance for the nine months ended September 30,2003 and 2002. The increase in rental expenses for both office and industrialis attributable to the first quarter expenses being inflated by approximately$6.5 million of snow removal costs. Many of the Partnership’s marketsexperienced increased amounts of snowfall and prolonged winter conditions. Theremaining increases in both rental and real estate expenses for all segmentsare attributable to an overall increase in the Partnership’s in-serviceportfolio from 904 properties at September 30, 2002 to 908 atSeptember 30, 2003, as well as normal anticipated increases in operatingcosts and real estate taxes.

 

Interest Expense

 

The increase in interest expense from $84.0 million to $98.8 million isattributable to the following:

 

•                  Interestexpense on the Partnership’s unsecured debt (excluding the line of credit)increased by $10.8 million from $74.4 million for the nine months endedSeptember 30, 2002 to $85.2 million for the same period in 2003. Theincrease is due to the issuances of $200.0 million of unsecured debt in thethird quarter of 2002 and $325.0 million of unsecured debt during the firstnine months of 2003.  The current yearissuance of unsecured debt was somewhat offset by the payoff of $175.0 millionof unsecured debt on June 30, 2003.

•                  Capitalizedinterest on development projects decreased from $10.6 million for the ninemonths ended September 30, 2002 to $5.0 million for the same period in2003. This was result of decreased development activity by the Partnership overthe past twelve months in response to soft demand in many of the Partnership’smarkets.

•                  Interestexpense on secured debt decreased by $5.3 million from 2002 to 2003 as a resultof payoffs of $13.5 million for the year ended 2002 and $131.7 million duringthe first nine months of 2003.

•                  Interestexpense on the Partnership’s unsecured line of credit increased by $2.1 millionfrom 2002 to 2003 as a result of the increase in the average balance of thePartnership’s line of credit.  ThePartnership’s line of credit balance was $385.0 million at September 30,2003, compared to $29.0 million at September 30, 2002.

 

Depreciation and Amortization

 

Depreciation and amortization expenseincreased from $129.2 million during the nine months ended September 30,2002, to $142.1 million for the same period in 2003 as a result of thefollowing trends:

 

•                  Thebasis of the Partnership’s held for investment property portfolio increased byapproximately $239.9 million from September 30, 2002, toSeptember 30, 2003, primarily through developments placed in-servicethroughout 2002 and 2003, a $50 million building acquisition inDecember 2002 and $108.1 million of building acquisitions throughout 2003.

•                  Tenantimprovements increased from $345.4 million at September 30, 2002, to$408.0 million at September 30, 2003, as the Partnership continues toincur capital expenditures to lease-up vacant space.

 

Service Operations

 

Service Operations primarily consist of leasing, management,construction and development services for joint venture properties andproperties owned by third parties. Service Operations revenues decreased from$56.5 million for the nine months ended September 30, 2002, to $33.1 millionfor the nine months ended September 30, 2003 as a result of the followingsignificant fluctuations:

 

21

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•                  Revenuefrom work performed as general contractor for third party construction jobsincreased from $17.6 million to $20.3 million. The Partnership has experiencedan increase in volume for third party work in 2003 as businesses decide toexpand existing properties or construct new buildings to take advantage of thecurrent low interest rates and lower fees in the market place.

•                  Constructionand development activity income decreased as a result of a decline in activityfrom the Partnership’s held for sale program under which the Partnershipdevelops properties for sale upon completion. During the first nine months of2002, the Partnership recognized gains totaling $28.5 million on sales of eightproperties developed for immediate sale compared to a gain of approximately$778,000 on a sale of a single property during the same period in 2003.

 

Service Operations expenses decreased from $30.5 million during thefirst nine months of 2002 to $22.2 million for the same period in 2003.Included in the 2002 expenses is approximately $8.5 million of income taxexpense pertaining to the gains on sales of properties in the Partnership’sheld for sale inventory.  Afteradjusting this expense item out of the 2002 expenses, there was an increase ofapproximately $600,000 in expenses in 2003 over 2002. This increase is theresult of normal increases in salary and benefit costs.

 

General and Administrative Expense

 

General and Administrative Expense decreased from $20.7 million for thenine months ended September 30, 2002 to $15.5 million for the same periodin 2003. The decrease is attributable to a combination of the following:

 

•                  A decrease instate and local tax expense based upon estimated reductions in taxable incomein certain jurisdictions;

•                  Anincrease in levels of construction and leasing activity throughout 2003 whichallowed for more overhead costs to be applied to projects versus expensed ingeneral and administrative expenses.

 

Other Income and Expenses

 

Gain on sale of land and depreciable property dispositions, net ofimpairment adjustment, is comprised of the following amounts for the ninemonths ended September 30, 2003 and 2002:

 
|                                           |   | **2003**   |       | **2002**   |   |
|------------------------------------------------|--------|------------|------------|------------|--------|
| Gain(loss) on sales of depreciable  properties |   | **$**      | **6,746**  | ** ** | $      | 4,470 |   |
| Gain on land sales                             |   | **6,853**  | ** ** | 4,412      |   |
| Impairment adjustment                          |   | **(1,060** | **)**      | —     |   |
| Total                                          |   | **$**      | **12,539** | ** ** | $      | 8,882 |   |

 

Gain on sales of depreciable properties represents sales of previouslyidentified held for sale rental properties prior to adoption of FASB 144. Allfuture sales of held for investment properties will be classified asdiscontinued operations. The current year gain on sale of depreciable propertiesis associated with the sale of the Partnership’s interest in a joint venture toits partner.  Under FASB 144, sales ofjoint venture interest are not considered discontinued operations and areincluded in continuing operations.

 

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.

 

The Partnership recorded a $500,000 impairment adjustment in 2003associated with a contract to sell a property and $560,000 of impairmentadjustments associated with contracts to sell parcels of land.

 

22

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Discontinued Operations

 

The Partnership adopted Statement of Financial Accounting Standards No.144, “*Accounting for the Impairment orDisposal of Long Lived Assets*” (“SFAS 144”), on January 1,2002. SFAS 144 requires the Partnership to report in discontinued operationsthe results of operations of a property that has either been sold or isclassified as held for sale, unless certain conditions are met.

 

The Partnership has classified operations of seventeen buildings asdiscontinued operations in accordance with SFAS 144. As a result, thePartnership classified net income of $1.2 million and $3.1 million as netincome from discontinued operations for the nine months endedSeptember 30, 2003 and 2002, respectively. In addition, eleven of the propertiesclassified in discontinued operations were sold during the first nine months of2003; therefore, the gains on disposal for these properties of $5.8 million,are also reported in discontinued operations. The Partnership also reportedgains of $2.7 million in 2002 discontinued operations associated with the saleof two properties in 2002.

 

**Liquidityand Capital Resources**

 

Sources of Liquidity

 

The Partnership expects to meet liquidity requirements over the nexttwelve months, including payments of distributions to unitholders as well asrecurring capital expenditures relating to maintaining the Partnership’scurrent real estate assets, primarily through the following:

 

•                 working capital;and

•                 net cash providedby operating activities.

 

The Partnership expects to meet long-term liquidity requirements, suchas scheduled mortgage debt maturities, the retirement of unsecured notes andamounts outstanding under the unsecured credit facility, property acquisitions,financing of development activities and other non-recurring capitalimprovements, primarily through the following:

 

•                 issuance ofadditional unsecured notes or General Partner preferred equity;

•                 undistributedcash provided by operations, if any; and

•                 proceeds receivedfrom real estate dispositions.

 

*Credit Facilities*

 

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

 
| **Description**          |   | **Borrowing  Capacity** |    | **Maturity  Date** |               | **Interest  Rate** |         | **Amount  Outstanding  at September 30, 2003** |   |
|--------------------------|--------|-------------------------|---------|--------------------|--------------------|--------------------|--------------|-----------------------------------------------------|--------|
| Unsecured Line of Credit |   | $                       | 500,000 |               | February 2004 |               | LIBOR + .65% |                                                | $      | 385,000 |   |
| Secured Line of Credit   |   | $                       | 50,000  |               | January 2006  |               | LIBOR + .60% |                                                | $      | 15,004 |   |

 

The lines of credit are used to fund development and acquisition ofadditional rental properties and to provide working capital.

 

The $500 million line of credit contains financial covenants thatrequire the Partnership to meet defined levels of performance.  As of September 30, 2003, thePartnership is in compliance with all covenants pertaining to the $500 millionline of credit.

 

*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$670.0 million of unsecured debt securities. In addition, the Partnership

 

23

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has on file with the SEC an effective shelf registration statement thatpermits the General Partner to sell up to an additional $400.7 million ofcommon and preferred stock. From time-to-time, the Partnership and General Partnerexpect to issue additional securities under these registration statements tofund development and acquisition of additional rental properties and to fundthe repayment of the credit facilities and other long-term debt upon maturity.

 

The indenture governing the Partnership’s unsecured notes also requiresthe Partnership to comply with financial ratios and other covenants regardingthe operations of the Partnership. The Partnership is currently in compliancewith all such covenants as of September 30, 2003.

 

In January 2003, the Partnership completed an issuance ofunsecured debt totaling $175.0 million. The debt has an effective interest rateof 5.365% and is due in 2010.

 

In May 2003, the Partnership completed an issuance of unsecureddebt totaling $150.0 million. The debt has an effective rate of 4.635% and isdue in 2013.

 

In June 2003, the Partnership retired $175.0 million of unsecureddebt.  The debt had an effectiveinterest rate of 7.33%.

 

In August 2003, the General Partner closed on its sale of Series JPreferred Stock totaling $100 million at a dividend rate of 6.625% andcontributed the proceeds to the Partnership.

 

In October 2003, the Partnership issued $100.0 million ofunsecured debt. The debt has an effective rate of 3.63% and is due in 2007.

 

Usesof Liquidity

 

ThePartnership’s principal uses of liquidity include the following:

 

•                 Property investments and recurring leasing/capitalcosts;

•                 Distributions to unitholders; and

•                 Long-term debt maturities:

 

*Property Investments and Other Capital 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 thenine months ended September 30, 2003 and 2002, is as follows (inthousands):

 
|                  |   | **2003**   |       | **2002** |   |
|-----------------------|--------|------------|------------|----------|--------|
|                  |   |       |       |     |   |
| Tenant improvements   |   | **$**      | **28,078** |     | $      | 21,221 |   |
| Leasing costs         |   | **15,993** |       | 12,216   |   |
| Building improvements |   | **12,736** |       | 8,895    |   |
| Totals                |   | **$**      | **56,807** |     | $      | 42,332 |   |

 

*Debt Maturities*

 

Debt outstanding at September 30, 2003, totaled $2.3 billion witha weighted average interest rate of 5.72% maturing at various dates through2028. The Partnership had $2.1 billion of unsecured debt and approximately $196million of secured debt outstanding at September 30, 2003. Scheduledprincipal amortization of such debt totaled $7.2 million for the nine monthsended September 30, 2003.

 

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Following is a summary of the scheduled future amortization andmaturities of the Partnership’s indebtedness at September 30, 2003 (inthousands):

 
|       |                        | **Future  Repayments** |           | **Weighted****Average********Interest Rate of  Future Repayments** |      |
|------------|-----------------------------|------------------------|----------------|--------------------------------------------------------------------|-----------|
| **Year**   | **Scheduled  Amortization** |                   | **Maturities** |                                                               | **Total** |   |
|       |                        |                   |           |                                                               |      |   |   |   |   |
| 2003       |                        | $                      | 1,900          |                                                               | $         | 9,305 |   | $ | 11,205 |   | 7.79 | % |
| 2004       |                        | 7,967                  |           | 552,001                                                            |      | 559,968 |   | 3.52 | % |
| 2005       |                        | 7,825                  |           | 205,980                                                            |      | 213,805 |   | 7.21 | % |
| 2006       |                        | 7,409                  |           | 155,189                                                            |      | 162,598 |   | 6.37 | % |
| 2007       |                        | 5,933                  |           | 114,615                                                            |      | 120,548 |   | 7.07 | % |
| 2008       |                        | 5,021                  |           | 134,028                                                            |      | 139,049 |   | 6.31 | % |
| 2009       |                        | 4,802                  |           | 275,000                                                            |      | 279,802 |   | 7.38 | % |
| 2010       |                        | 4,193                  |           | 175,000                                                            |      | 179,193 |   | 5.39 | % |
| 2011       |                        | 3,463                  |           | 175,000                                                            |      | 178,463 |   | 6.94 | % |
| 2012       |                        | 1,978                  |           | 200,000                                                            |      | 201,978 |   | 5.85 | % |
| Thereafter |                        | 9,943                  |           | 200,000                                                            |      | 209,943 |   | 5.18 | % |
|       |                        | $                      | 60,434         |                                                               | $         | 2,196,118 |   | $ | 2,256,552 |   | 5.72 | % |

 

Historical Cash Flows

 

Cash and cash equivalents were $706,000 and $43.1 million atSeptember 30, 2003 and 2002, respectively.  The following highlights significant changes in net cashassociated with the Partnership’s operating, investing and financing activities:

 
|                                                  |   | **Nine  Months Ended September 30,** |   |
|-------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                  |   | **2003**                                  |   | **2002** |   |
| Net cash Provided by Operating Activities             |   | $                                         | 235.0  |   | $ | 477.4 |   |
|                                                  |   |                                      |   |   |   |
| Net Cash Used by Investing Activities                 |   | $                                         | (262.9 | ) | $ | (208.2 | ) |
|                                                  |   |                                      |   |   |   |
| Net Cash Provided by (Used for) Financing  Activities |   | $                                         | 11.4   |   | $ | (236.5 | ) |

 

*Operating Activities*

 

The following significant items highlight fluctuations in net cashprovided by operating activities:

 

•                  The Partnershipreceived $176.7 million from its build-to-suit to sell operations during thenine months ended September 30, 2002, compared to incurring netdevelopment costs of $37.2 million for the same period in 2003. In 2003, thePartnership received net proceeds of approximately $197.0 million from the saleof eight build-to-suit to sell properties compared to $5.5 million on the saleof one such property in 2003.

 

*Investing Activities*

 

The following significant items highlight fluctuations in net cashprovided by investing activities:

 

•                  Dispositions ofland and depreciated property provided $85.7 million in net proceeds in 2003,compared to $50.5 million in 2002.

•                  Real estatedevelopment costs decreased from $111.2 million in 2002 to $100.8 million in2003.

•                  The Partnershipacquired $108.1 million of real estate assets in 2003 compared to $36.2 millionduring the same period in 2002. The acquisitions in 2003 consisted of threeoffice buildings, one industrial building and the Partnership’s partnerinterest in four unconsolidated properties.

•                  The Partnershippaid $12.0 million when it exercised a purchase option on a ground lease duringthe first quarter of 2003.

 

25

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•                  As discussedabove under Uses of Liquidity, recurring capital expenditures for tenantimprovements, lease commissions and building improvements increased from $42.3million during the first nine months of 2002 to $56.8 million for the sameperiod in 2003 as the Partnership incurs costs to re-lease space and improveproperties.

 

*Financing Activities*

 

The following significant items highlight fluctuations in net cashprovided by (used for) financing activities:

 

•                  In 2003, thePartnership issued $325.0 million of unsecured debt compared to $200.0 millionof new issuances for the first nine months of 2002.

•                  In 2003, theGeneral Partner received $96.7 million of net proceeds from the issuance ofpreferred shares.

•                  In 2003, thePartnership retired $175.0 million of unsecured debt that matured onJune 30, 2003.

•                  In 2003, thePartnership paid off $93.3 million of secured debt, net of a $38.3 million secureddebt refinancing during the first quarter, compared to $62.9 million of secureddebt payoffs for the first nine months of 2002.

•                  In 2003, thePartnership has received $95.1 million of net proceeds from its line of creditcompared to net payments of $94.1 million in 2002.

•                  The Partnershippaid $4.7 million to an institutional warrant holder who exercised theirwarrants in April 2003. The price paid represented the “in-the money”value of the warrants based upon the difference between the exercise price ofthe warrants and the price of the General Partner’s common stock at theexercise date.

 

*Derivative Financial 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”).

 

In December 2002, the Partnership simultaneously entered into two$50 million forward-starting interest rate swaps. The Partnership designatedthe aggregate $100 million swaps as a hedge to effectively fix the rate onunsecured debt financings expected in 2003. The swaps qualified for hedgeaccounting under SFAS 133; therefore, changes in fair value were recorded inother comprehensive income.

 

In February 2003, the Partnership simultaneously entered into two$25 million forward-starting interest rate swaps. The Partnership designatedthe aggregate $50 million swaps as a hedge to effectively fix the rate onunsecured debt financings expected in 2003. The swaps qualified for hedgeaccounting under SFAS 133; therefore, changes in fair value were recorded inother comprehensive income.

 

In July 2003, the Partnership terminatedthe swaps for a net gain of $643,000, which is included in other revenue in theStatements of Operations. The swaps were terminated as a result of thePartnership’s current capital needs being met through the sale of the GeneralPartner’s Series J Preferred Equity in lieu of the previously contemplatedissuance of debt. The Partnership currently has no swaps or other derivativeinstruments.

 

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**Investmentsin Unconsolidated Companies**

 

The Partnership has equity interests ranging from 10% to 64% inunconsolidated partnerships and joint ventures that own and operate rentalproperties and hold land for development. The equity method of accounting isused for these investments in which the Partnership has the ability to exercisesignificant influence, but not control, over operating and financial policies.As a result, the assets and liabilities of these joint ventures are notincluded on the Partnership’s balance sheet. The Partnership’s investment inunconsolidated companies represents less than 6% of the Partnership’s totalassets as of September 30, 2003. This investment provides several benefitsto the Partnership including increased market share and an additional source ofcapital to fund real estate projects.

 

**FundsFrom Operations**

 

Funds From Operations (“FFO”) is used by industry analysts andinvestors as a supplemental operating performance measure of an equity realestate investment trust (“REIT”). FFO is calculated in accordance with thedefinition that was adopted by the Board of Governors of the NationalAssociation of Real Estate Investment Trusts (“NAREIT”). FFO, as defined byNAREIT, represents net income (loss) determined in accordance with generallyaccepted accounting principles (“GAAP”), excluding extraordinary items asdefined under GAAP and gains or losses from sales of previously depreciatedoperating real estate assets, plus certain non-cash items such as real estateasset depreciation and amortization, and after adjustment for unconsolidatedpartnerships and joint ventures.

 

Historical cost accounting for real estate assets in accordance withGAAP implicitly assumes that the value of real estate assets diminishedpredictably 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 generally considers FFO to be a useful measure forreviewing comparative operating and financial performance (although FFO shouldbe reviewed 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.

 

The following table provides a reconciliation of GAAP net income to FFOfor the three and nine months ended September 30 as follows (in thousands):

 
|                                               |   | **Three Months Ended September 30,** |       | **Nine Months Ended September 30,** |   |
|----------------------------------------------------|--------|-------------------------------------------|------------|------------------------------------------|--------|
|                                               |   | **2003**                                  |       | **2002**                                 |   | **2003** |   | **2002** |   |
| Net income  available for common unitholders       |   | **$**                                     | **44,666** | ** **                               | $      | 42,807 |   | **$** | **124,717** | ** ** | $ | 147,865 |   |
| Add back  (deduct):                                |   |                                      | ** ** |                                     |   |   | ** ** |   |   |
| Depreciation  and amortization                     |   | **48,250**                                | ** ** | 45,074                                   |   | **142,539** | ** ** | 130,886 |   |
| Share of  joint venture adjustments                |   | **4,459**                                 | ** ** | 4,484                                    |   | **14,236** | ** ** | 13,282 |   |
| (Earnings)  from depreciable property dispositions |   | **(3,349**                                | **)**      | (3,474                                   | )      | **(12,067** | **)** | (5,928 | ) |
| **Funds From Operations**                          |   | **$**                                     | **94,026** | ** **                               | $      | 88,891 |   | **$** | **269,425** | ** ** | $ | 286,105 |   |

 

**Recent Accounting Pronouncements**

 

In January 2003, FASB issued Interpretation 46, *Consolidation of Variable Interest Entities*(“Interpretation46”)*,* which addressesconsolidation of certain variable interest entities. Interpretation 46 appliesimmediately

 

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to variable interest entities created after January 31, 2003, andto variable interest entities in which an enterprise obtains an interest afterthat date. This interpretation has been delayed and applies in the first fiscalyear or interim period beginning after December 15, 2003, to variableinterest entities in which an enterprise holds a variable interest that itacquired before February 1, 2003. The Partnership has reviewed its investmentsin unconsolidated companies based on this new accounting pronouncement and doesnot anticipate that the adoption of Interpretation 46 will have a materialimpact on its financial statements.

 

In May 2003, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 150, *Accounting for CertainFinancial Instruments with Certain Characteristics of Both Liabilities andEquity.* The provisions of this statement are effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning afterJune 15, 2003. Adoption of this statement did not have a material impacton the financial position or results of operations of the Partnership.

 

**Item 3.  Quantitative and Qualitative DisclosureAbout Market 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 maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the annual and periodic reports filed with the SECis recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. These disclosure controls andprocedures are further designed to ensure that such information is accumulatedand communicated to the Partnership’s management, including the chief executiveofficer, the chief financial officer and the chief operating officer, to allowtimely decisions regarding required disclosure.

 

Based on the most recentevaluation, which was completed as of September 30, 2003, the chiefexecutive officer, the chief financial officer and the chief operating officerbelieve that the Partnership’s disclosure controls and procedures areeffective. There have been no significant changes in the internal controls orin other factors that could significantly affect the internal controlssubsequent to the date of the completed evaluation.

 

**Part II - OtherInformation**

 

Item 1.  Legal Proceedings

 

Broadband Office, Inc. and OfficialCommittee of Unsecured Creditors of Broadband Office, Inc. recently filed acomplaint against a group of real estate investment trusts and real estateoperating companies and certain affiliated entities and individuals inconnection with the formation and management of Broadband Office.  Among the defendants are Duke Realty LimitedPartnership and Mr. Dennis Oklak, one of the General Partner’s executiveofficers. The complaint alleges various breaches of purported fiduciary dutiesby the defendants, seeks recharacterization or equitable subordination of debt,seeks recovery of alleged avoidable transfers, appears to seek to hold themliable for, among other things, the debt of Broadband Office under alter-ego,veil-piercing and partnership theories, and seeks other relief under other theories.The complaint seeks aggregate damages in excess

 

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of $300 million from all of thedefendants. The Partnership believes that it has meritorious defenses to theplaintiff’s allegations and intends to vigorously defend this litigation. Dueto the inherent uncertainties of the litigation process and the judicialsystem, the Partnership is not able to predict the outcome of this litigation.If this litigation is not resolved in the Partnership’s favor, it could have amaterial adverse effect on its business, financial condition and results ofoperations.

 

Item 2.  Changes in Securities

 

None

 

Item 3.  Defaults upon Senior Securities

 

None

 

Item 4.  Submission of Matters to a Vote of SecurityHolders

 

None

 

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 Dividends.

 

Exhibit 11.2 Ratio of Earnings to FixedCharges.

 

Exhibit 15 Letter regarding unaudited interimfinancial information.

 

Exhibit 31.1                    CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 31.2                    CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 31.3                    CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.1                    CertificationPursuant to 18 U.S. C. Section 13.50, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2                    CertificationPursuant to 18 U.S. C. Section 13.50, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.3                    CertificationPursuant to 18 U.S. C. Section 13.50, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

 

(b)                                 Reportson Form 8-K

 

A current report was filed on Form 8-K, datedJuly 30, 2003, furnishing under items 9 and 12 the General Partner’s pressrelease announcing the results of operations and financial condition of theGeneral Partner for the three and six months ended June 30, 2003.

 

A current report was filed on Form 8-K, datedSeptember 5, 2003, reporting under items 5 and 7 certain informationregarding the General Partner’s business operations.

 

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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:  November 12, 2003 |   | /s/            Thomas  L. Hefner    |
|                                    |   | Thomas L. Hefner                                                                                |
|                                    |   | Chairman and Chief Executive Officer  and Director of the General Partner                       |
|                                    |   |                                                                                            |
|                                    |   |                                                                                            |
|                                    |   | /s/            Darell  E. Zink, Jr. |
|                                    |   | Darell E. Zink, Jr.                                                                             |
|                                    |   | Vice Chairman, Executive Vice                                                                   |
|                                    |   | President and Chief Financial Officer of  the General Partner                                   |
|                                    |   |                                                                                            |
|                                    |   |                                                                                            |
|                                    |   | /s/            Dennis  D. Oklak     |
|                                    |   | Dennis D. Oklak                                                                                 |
|                                    |   | President and Chief Operating Officer of  the General Partner                                   |
|                                    |   |                                                                                            |
|                                    |   |                                                                                            |
|                                    |   | /s/            Matthew  A. Cohoat   |
|                                    |   | Matthew A. Cohoat                                                                               |
|                                    |   | Senior Vice President and  Corporate Controller of the General  Partner                         |

 

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