**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

**FORM 10-Q**

 
| **(Mark One)** |                                                                                                                                                  |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                          |
|           | **For  the quarterly period ended June 30, 2002**                                                                                                     |
|           |                                                                                                                                                  |
|           | **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

 

The number of Common Units outstanding as of August 8, 2002 was14,993,355 ($.01 par value).

 

 

----

 

**DUKE REALTY LIMITED PARTNERSHIP**

 

**INDEX**

 
| **Part I - Financial  Information** |                                                                                                                    |
|-------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                    |   |
| **Item 1.**                         | **Financial Statements**                                                                                                |   |
|                                |                                                                                                                    |   |
|                                | Condensed  Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and December 31,  2001                           |
|                                |                                                                                                                    |   |
|                                | Condensed  Consolidated Statements of Operations (Unaudited) for the three and six  months ended June 30, 2002 and 2001 |
|                                |                                                                                                                    |   |
|                                | Condensed  Consolidated Statements of Cash Flows (Unaudited) for the six months ended  June 30, 2002 and 2001           |
|                                |                                                                                                                    |   |
|                                | Condensed  Consolidated Statement of Partners’ Equity (Unaudited) for the six months  ended June 30, 2002          |
|                                |                                                                                                                    |   |   |
|                                | 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**                         |
|                                |                                                                                                                    |
| **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 |
|                                     |                                                                                                                         |  |  |  |

 

----

 

**PARTI - FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES**

**Condensed Consolidated Balance Sheets**

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

 
|                                                                                      |   | **June 30,  2002** |          | **December 31,  2001** |   |
|-------------------------------------------------------------------------------------------|--------|--------------------|---------------|------------------------|--------|
|                                                                                      |   | **(Unaudited)**    |          |                   |   |
| **ASSETS**                                                                                |   |               |          |                   |   |
|                                                                                      |   |               |          |                   |   |
| Real estate investments:                                                                  |   |               |          |                   |   |
| Land and improvements                                                                     |   | **$**              | **588,138**   |                   | $      | 583,909 |   |
| Buildings and tenant improvements                                                         |   | **4,108,407**      |          | 4,068,944              |   |
| Construction in progress                                                                  |   | **65,383**         |          | 154,086                |   |
| Investments in unconsolidated companies                                                   |   | **322,097**        |          | 323,682                |   |
| Land held for development                                                                 |   | **324,327**        |          | 322,528                |   |
|                                                                                      |   | **5,408,352**      |          | 5,453,149              |   |
| Accumulated depreciation                                                                  |   | **(488,871**       | )             | (425,721               | )      |
|                                                                                      |   |               |          |                   |   |
| Net real estate investments                                                               |   | **4,919,481**      |          | 5,027,428              |   |
|                                                                                      |   |               |          |                   |   |
| Cash and cash equivalents                                                                 |   | **1****,435**      |          | 10,453                 |   |
| Accounts receivable, net of allowance of $3,690 and  $2,820                               |   | **17,535**         |          | 23,142                 |   |
| Straight-line rent receivable, net of allowance of  $3,266 and $841                       |   | **46,621**         |          | 42,751                 |   |
| Receivables on construction contracts                                                     |   | **25,876**         |          | 30,077                 |   |
| Deferred financing costs, net of accumulated  amortization of $14,268 and $17,459         |   | **10,579**         |          | 12,489                 |   |
| Deferred leasing and other costs, net of accumulated  amortization of $46,396 and $41,284 |   | **98,695**         |          | 97,117                 |   |
| Escrow deposits and other assets                                                          |   | **116,456**        |          | 86,789                 |   |
|                                                                                      |   | **$**              | **5,236,678** |                   | $      | 5,330,246 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                             |   |               |          |                   |   |
|                                                                                      |   |               |          |                   |   |
| Indebtedness:                                                                             |   |               |          |                   |   |
| Secured debt                                                                              |   | **$**              | **318,960**   |                   | $      | 318,484 |   |
| Unsecured notes                                                                           |   | **1,376,257**      |          | 1,376,372              |   |
| Unsecured lines of credit                                                                 |   | **40,000**         |          | 120,000                |   |
|                                                                                      |   | **1,735,217**      |          | 1,814,856              |   |
|                                                                                      |   |               |          |                   |   |
| Construction payables and amounts due subcontractors                                      |   | **37,585**         |          | 54,735                 |   |
| Accounts payable                                                                          |   | **2,133**          |          | 2,274                  |   |
| Accrued expenses:                                                                         |   |               |          |                   |   |
| Real estate taxes                                                                         |   | **57,279**         |          | 51,462                 |   |
| Interest                                                                                  |   | **30,996**         |          | 24,313                 |   |
| Other                                                                                     |   | **44,820**         |          | 48,678                 |   |
| Other liabilities                                                                         |   | **111,272**        |          | 117,577                |   |
| Tenant security deposits and prepaid rents                                                |   | **28,513**         |          | 34,644                 |   |
| Total liabilities                                                                         |   | **2,047,815**      |          | 2,148,539              |   |
|                                                                                      |   |               |          |                   |   |
| Minority interest                                                                         |   | **5,524**          |          | 5,475                  |   |
|                                                                                      |   |               |          |                   |   |
| Partners’ equity:                                                                    |   |               |          |                   |   |
| General Partner                                                                           |   |               |          |                   |   |
| Common equity                                                                             |   | **2,253,576**      |          | 2,203,291              |   |
| Preferred equity (liquidation preference of $608,664)                                     |   | **583,419**        |          | 583,419                |   |
|                                                                                      |   | **2,836,995**      |          | 2,786,710              |   |
| Limited partners’ common equity                                                      |   | **243,485**        |          | 286,759                |   |
| Limited partners’ preferred equity                                                   |   | **102,955**        |          | 102,955                |   |
| Accumulated other comprehensive income (loss)                                             |   | **(96**            | )             | (192                   | )      |
|                                                                                      |   | **3,183,339**      |          | 3,176,232              |   |
|                                                                                      |   | **$**              | **5,236,678** |                   | $      | 5,330,246 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements

 

2

----

 

**DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES**

**Condensed Consolidated Statements of Operations**

**For the three and six months ended June 30,**

** (in thousands, exceptper unit amounts)**

**(Unaudited)**

 
|                                                                   |   | **Three  Months Ended** |        | **Six Months  Ended** |   |
|------------------------------------------------------------------------|--------|-------------------------|-------------|-----------------------|--------|
|                                                                   |   | **2002**                | ** **  | **2001**              |   | **2002** |   | **2001** |   |
| **RENTAL OPERATIONS:**                                                 |   |                    |        |                  |   |   |   |   |   |
| Revenues:                                                              |   |                    |        |                  |   |   |   |   |   |
| Rental income                                                          |   | **$**                   | **173,895** | ** **            | $      | 172,906 |   | **$** | **342,768** | ** ** | $ | 345,357 |   |
| Equity in earnings of unconsolidated companies                         |   | **6,278**               | ** **  | 7,315                 |   | **12,574** | ** ** | 17,285 |   |
|                                                                   |   | **180,173**             | ** **  | 180,221               |   | **355,342** | ** ** | 362,642 |   |
| Operating expenses:                                                    |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Rental expenses                                                        |   | **30,226**              | ** **  | 29,649                |   | **61,513** | ** ** | 60,324 |   |
| Real estate taxes                                                      |   | **18,959**              | ** **  | 18,030                |   | **38,123** | ** ** | 35,850 |   |
| Interest expense                                                       |   | **27,918**              | ** **  | 28,340                |   | **55,327** | ** ** | 57,627 |   |
| Depreciation and amortization                                          |   | **42,991**              | ** **  | 37,900                |   | **85,490** | ** ** | 78,034 |   |
|                                                                   |   | **120,094**             | ** **  | 113,919               |   | **240,453** | ** ** | 231,835 |   |
|                                                                   |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Earnings from rental operations                                        |   | **60,079**              | ** **  | 66,302                |   | **114,889** | ** ** | 130,807 |   |
|                                                                   |   |                    | ** **  |                  |   |   | ** ** |   |   |
| **SERVICE OPERATIONS**                                                 |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Revenues:                                                              |   |                    | ** **  |                  |   |   | ** ** |   |   |
| General contractor gross revenue                                       |   | **40,980**              | ** **  | 64,035                |   | **86,913** | ** ** | 125,203 |   |
| General contractor costs                                               |   | **(36,658**             | **)**       | (56,482               | )      | **(76,877** | **)** | (106,360 | ) |
| Net general contractor revenue                                         |   | **4,322**               | ** **  | 7,553                 |   | **10,036** | ** ** | 18,843 |   |
|                                                                   |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Construction management and development activity  income               |   | **7,536**               | ** **  | 7,763                 |   | **27,929** | ** ** | 11,925 |   |
| Property management, maintenance and leasing fees                      |   | **3,429**               | ** **  | 7,896                 |   | **6,628** | ** ** | 14,494 |   |
| Other income                                                           |   | **77**                  | ** **  | 415                   |   | **52** | ** ** | 687 |   |
| Total revenue                                                          |   | **15,364**              | ** **  | 23,627                |   | **44,645** | ** ** | 45,949 |   |
|                                                                   |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Operating expenses                                                     |   | **8,195**               | ** **  | 14,400                |   | **21,944** | ** ** | 27,434 |   |
|                                                                   |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Total earnings from service operations                                 |   | **7,169**               | ** **  | 9,227                 |   | **22,701** | ** ** | 18,515 |   |
|                                                                   |   |                    | ** **  |                  |   |   | ** ** |   |   |
| General and administrative expense                                     |   | **(6,798**              | **)**       | (4,688                | )      | **(14,036** | **)** | (8,715 | ) |
|                                                                   |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Operating income                                                       |   | **60,450**              | ** **  | 70,841                |   | **123,554** | ** ** | 140,607 |   |
|                                                                   |   |                    | ** **  |                  |   |   | ** ** |   |   |
| **OTHER INCOME (EXPENSE)**                                             |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Interest income                                                        |   | **1,333**               | ** **  | 1,566                 |   | **1,760** | ** ** | 3,000 |   |
| Earnings from land and depreciable property  dispositions              |   | **2,976**               | ** **  | 530                   |   | **4,087** | ** ** | 13,316 |   |
| Other revenue (expense)                                                |   | **25**                  | ** **  | (428                  | )      | **237** | ** ** | (1,367 | ) |
| Other minority interest in earnings of subsidiaries                    |   | **(251**                | **)**       | (330                  | )      | **(636** | **)** | (1,241 | ) |
| Income from continuing operations                                      |   | **64,533**              | ** **  | 72,179                |   | **129,002** | ** ** | 154,315 |   |
|                                                                   |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Discontinued operations:                                               |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Net income from discontinued operations                                |   | **968**                 | ** **  | 615                   |   | **1,752** | ** ** | 1,258 |   |
| Gain on sale of discontinued operations                                |   | **2,723**               | ** **  | —                |   | **2,723** | ** ** | — |   |
| Net income from discontinued operations                                |   | **3,691**               | ** **  | 615                   |   | **4,475** | ** ** | 1,258 |   |
|                                                                   |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Net income                                                             |   | **68,224**              | ** **  | 72,794                |   | **133,477** | ** ** | 155,573 |   |
| Dividends on preferred units                                           |   | **(14,209**             | **)**       | (15,917               | )      | **(28,419** | **)** | (31,291 | ) |
| Net income available for common unitholders                            |   | **$**                   | **54,015**  | ** **            | $      | 56,877 |   | **$** | **105,058** | ** ** | $ | 124,282 |   |
|                                                                   |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Basic net income per common unit:                                      |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Continuing operations                                                  |   | **$**                   | **.34**     | ** **            | $      | .39 |   | **$** | **.67** | ** ** | $ | .83 |   |
| Discontinued operations                                                |   | **.02**                 | ** **  | —                |   | **.03** | ** ** | .01 |   |
| Total                                                                  |   | **$**                   | **.36**     | ** **            | $      | .39 |   | **$** | **.70** | ** ** | $ | .84 |   |
| Diluted net income per common unit:                                    |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Continuing operations                                                  |   | **$**                   | **.34**     | ** **            | $      | .38 |   | **$** | **.67** | ** ** | $ | .82 |   |
| Discontinued operations                                                |   | **.02**                 | ** **  | —                |   | **.03** | ** ** | .01 |   |
| Total                                                                  |   | **$**                   | **.36**     | ** **            | $      | .38 |   | **$** | **.70** | ** ** | $ | .83 |   |
|                                                                   |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Weighted average number of common units outstanding                    |   | **149,310**             | ** **  | 147,899               |   | **148,992** | ** ** | 147,569 |   |
| Weighted average number of common and dilutive  potential common units |   | **151,092**             | ** **  | 149,572               |   | **150,682** | ** ** | 151,369 |   |

 

See accompanying Notes toConsolidated Financial Statements.

 

3

----

 

**DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES**

**Condensed Consolidated Statements of Cash Flows**

**For the six months ended June 30**

**(in thousands)**

**(Unaudited)**

 
|                                                                                               |   | **2002**      | ** **  | **2001**   |   |
|----------------------------------------------------------------------------------------------------|--------|---------------|-------------|------------|--------|
| Cash flows from operating activities:                                                              |   |          | ** **  |       |   |
| Net income                                                                                         |   | **$**         | **133,477** | ** ** | $      | 155,573 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:                 |   |          | ** **  |       |   |
| Depreciation of buildings and tenant improvements                                                  |   | **75,584**    | ** **  | 69,556     |   |
| Amortization of deferred leasing and other costs                                                   |   | **10,228**    | ** **  | 9,406      |   |
| Amortization of deferred financing costs                                                           |   | **1,923**     | ** **  | 2,609      |   |
| Minority interest in earnings                                                                      |   | **636**       | ** **  | 1,241      |   |
| Straight-line rent adjustment                                                                      |   | **(4,099**    | **)**       | (6,320     | )      |
| Earnings from land and depreciated property dispositions                                           |   | **(5,545**    | **)**       | (13,316    | )      |
| Build-to-suit operations, net                                                                      |   | **163,639**   | ** **  | (123,466   | )      |
| Construction contracts, net                                                                        |   | **(13,537**   | **)**       | 235        |   |
| Other accrued revenues and expenses, net                                                           |   | **7,****474** | ** **  | (3,040     | )      |
| Equity in earnings in shortfall of operating distributions received  from unconsolidated companies |   | **5,308**     | ** **  | 6,692      |   |
| **Net cash  provided by operating activities**                                                     |   | **375,088**   | ** **  | 99,170     |   |
|                                                                                               |   |          | ** **  |       |   |
| Cash flows from investing activities:                                                              |   |          | ** **  |       |   |
| Development of real estate investments                                                             |   | **(63,914**   | **)**       | (98,007    | )      |
| Acquisition of real estate investments                                                             |   | **(32,941**   | **)**       | (13,927    | )      |
| Acquisition of land held for development and infrastructure costs                                  |   | **(16,388**   | **)**       | (22,953    | )      |
| Recurring tenant improvements                                                                      |   | **(13,959**   | **)**       | (7,819     | )      |
| Recurring leasing costs                                                                            |   | **(8,556**    | **)**       | (6,394     | )      |
| Recurring building improvements                                                                    |   | **(5,849**    | **)**       | (3,811     | )      |
| Other deferred leasing costs                                                                       |   | **(8,603**    | **)**       | (7,704     | )      |
| Other deferred costs and other assets                                                              |   | **(19,076**   | **)**       | (11,916    | )      |
| Tax deferred exchange escrow, net                                                                  |   | —        | ** **  | 25,202     |   |
| Proceeds from land and depreciated property sales, net                                             |   | **35,023**    | ** **  | 187,605    |   |
| Capital distributions from unconsolidated companies                                                |   | —        | ** **  | 59,899     |   |
| Advances to unconsolidated companies                                                               |   | **(18,224**   | **)**       | (2,544     | )      |
| **Net cash  (used) provided by investing activities**                                              |   | **(152,487**  | **)**       | 97,631     |   |
|                                                                                               |   |          | ** **  |       |   |
| Cash flows from financing activities:                                                              |   |          | ** **  |       |   |
| Contribution from General Partner                                                                  |   | **18,201**    | ** **  | 102,913    |   |
| Proceeds from indebtedness                                                                         |   | —        | ** **  | 175,000    |   |
| Payments on indebtedness including principal amortization                                          |   | **(7,738**    | **)**       | (46,019    | )      |
| Repayments on lines of credit, net                                                                 |   | **(78,488**   | **)**       | (204,247   | )      |
| Distributions to partners                                                                          |   | **(134,433**  | **)**       | (126,793   | )      |
| Distributions to preferred unitholders                                                             |   | **(28,419**   | **)**       | (31,291    | )      |
| Distributions to minority interest                                                                 |   | **(565**      | **)**       | (1,147     | )      |
| Deferred financing costs                                                                           |   | **(177**      | **)**       | (4,548     | )      |
| **Net cash used  for financing activities**                                                        |   | **(231,619**  | **)**       | (136,132   | )      |
| **Net increase  (decrease) in cash and cash equivalents**                                          |   | **(9,018**    | **)**       | 60,669     |   |
|                                                                                               |   |          | ** **  |       |   |
| Cash and cash equivalents at beginning of period                                                   |   | **10,453**    | ** **  | 39,200     |   |
| Cash and cash equivalents at end of period                                                         |   | **$**         | **1,435**   | ** ** | $      | 99,869 |   |
|                                                                                               |   |          | ** **  |       |   |
| Other non-cash  items:                                                                             |   |          | ** **  |       |   |
| Assumption of  debt for real estate acquisitions                                                   |   | **$**         | **9,566**   | ** ** | $      | 6,379 |   |
| Contributions of  land and depreciable property to unconsolidated companies                        |   | **$**         | **—**  | ** ** | $      | 15,812 |   |
| Conversion of  Limited Partner Units to common shares of General Partner                           |   | **$**         | **12,480**  | ** ** | $      | 7,847 |   |
| Transfer of debt  in sale of depreciated property                                                  |   | **$**         | **2,432**   | ** ** | $      | — |   |
| Issuance of  Limited Partner Units for real estate acquisitions                                    |   | **$**         | **5,440**   |       | $      | 2,487 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements

 

4

----

 

**DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES**

**Condensed Consolidated Statement of Partners’ Equity**

**For the six months ended June 30, 2002**

**(in thousands,  exceptper unit data)**

**(Unaudited)**

 
|                                                                                |   | **General Partner**   |          | **Limited  Partners’  Common  Equity** |   | **Limited  Partners’  Preferred  Equity** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |        | **Total**  |   |
|-------------------------------------------------------------------------------------|--------|-----------------------|---------------|---------------------------------------------|--------|------------------------------------------------|------------|------------------------------------------------------|-------------|------------|--------|
| **Common  Equity**                                                                  |   | **Preferred  Equity** |
|                                                                                |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
| **Balance at December 31, 2001**                                                    |   | **$**                 | **2,203,291** | ** **                                  | **$**  | **583,419**                                    | ** ** | **$**                                                | **286,759** | ** ** | **$**  | **102,955** | ** ** | **$** | **(192** | **)** | **$** | 3,176,232 | ** ** |
|                                                                                |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
| Comprehensive  income:                                                              |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
|                                                                                |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
| Net income                                                                          |   | 93,830                |          | 24,215                                      |   | 11,228                                         |       | 4,204                                                |        | —     |   | 133,477 |   |
|                                                                                |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
| Distributions to  preferred unitholders                                             |   | —                |          | (24,215                                     | )      | —                                         |       | (4,204                                               | )           | —     |   | (28,419 | ) |
|                                                                                |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
| Gains (losses)  on derivative instruments                                           |   |                  |          |                                        |   |                                           |       |                                                 |        | 96         |   | 96 |   |
|                                                                                |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
| Comprehensive  income available for common unitholders                              |   | —                |          | —                                      |   | —                                         |       | —                                               |        | —     |   | 105,156 |   |
|                                                                                |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
| Capital  contribution from General Partner                                          |   | 18,466                |          | —                                      |   | —                                         |       | —                                               |        | —     |   | 18,466 |   |
|                                                                                |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
| Acquisition  of Partnership interest for common  stock of General Partner |   | 58,051                |          | —                                      |   | (45,571                                        | )          | —                                               |        | —     |   | 12,480 |   |
|                                                                                |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
| Acquisition of  property in exchange for Limited Partner Units                      |   | —                |          | —                                      |   | 5,440                                          |       | —                                               |        | —     |   | 5,440 |   |
|                                                                                |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
| Distributions to  General Partner                                                   |   | (323                  | )             | —                                      |   | —                                         |       | —                                               |        | —     |   | (323 | ) |
|                                                                                |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
| Distributions to  partners ($.90 er Common Unit)                                    |   | (119,739              | )             | —                                      |   | (14,371                                        | )          | —                                               |        | —     |   | (134,110 | ) |
|                                                                                |   |                  |          |                                        |   |                                           |       |                                                 |        |       |   |   |   |
| **Balance at June  30, 2002**                                                  |   | **$**                 | **2,253,576** | ** **                                  | **$**  | **583,419**                                    | ** ** | **$**                                                | **243,485** | ** ** | **$**  | **102,955** | ** ** | **$** | **(96** | **)** | **$** | **3,183,339** | ** ** |

 

See accompanying Notes toCondensed Consolidated Financial Statements

 

5

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**DUKE REALTY LIMITED PARTNERSHIP**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

The interim condensed consolidated financialstatements included herein have been prepared by Duke Realty LimitedPartnership (the “Partnership”) without audit (except for the Balance Sheet asof December 31, 2001). The statements have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and in accordance with Rule 10-01 of RegulationS-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring adjustments) considered necessaryfor a fair presentation have been included. These financial statements shouldbe read in conjunction with the consolidated financial statements and notesthereto included in the Partnership’s Annual Report on Form 10-K.

 

**The Partnership**

 

Duke Realty Limited Partnership (the “Partnership”) was formed onOctober 4, 1993, when Duke Realty Corporation (the “General Partner”)contributed all of its properties and related assets and liabilities along withthe net proceeds of $309.2 million from the issuance of an additional14,000,833 units through an offering (the “1993 Offering”) to the Partnership.Simultaneously, the Partnership completed the acquisition of Duke Associates, afull-service commercial real estate firm operating in the Midwest. The GeneralPartner was formed in 1985 and qualifies as a Real Estate Investment Trust(“REIT”) under provisions of the Internal Revenue Code.  In connection with the 1993 Offering, theformation of the Partnership and the acquisition of Duke Associates, theGeneral Partner effected a 1 for 4.2 reverse stock split of its existing commonunits. The General Partner is the sole general partner of the Partnership andreceived 16,046,144 units of partnership interest (“General Partner Units”) inexchange for its original contribution which represented a 78.36% interest inthe Partnership. As part of the acquisition, Duke Associates received 4,432,109units of limited partnership interest (“Limited Partner Units”) (together withthe General Partner Units, the (“Common Units”)) which represented a 21.64%interest in the Partnership. The Limited Partner Units are exchangeable forunits of the General Partner’s common stock on a one-for-one basis subjectgenerally to a one-year holding period.

 

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 creditavailable (in thousands):

 
| **Description**           |   | **Borrowing  Capacity  (in 000’s)** |    | **Maturity  Date** |          | **Interest  Rate** |   | **Outstanding  at June 30, 2002  (in 000’s)** |   |
|---------------------------|--------|------------------------------------------|---------|--------------------|---------------|--------------------|--------|----------------------------------------------------|--------|
| Unsecured Line  of Credit |   | $                                        | 500,000 |               | February 2004 |               | LIBOR  | +                                                  | .65    | % | $ | 40,000 |   |
| Secured Line of  Credit   |   | 100,000                                  |    | January 2003       |          | LIBOR              | +      | 1.05                                               | %      | 29,102 |   |
|                           |        |                                          |         |                    |               |                    |        |                                                    |        |  |  |  |  |

 

6

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The lines ofcredit are used to fund development and acquisition of additional rentalproperties and to provide working capital.

 

The $500 millionline of credit allows the Partnership an option to obtain borrowings from thefinancial institutions that participatein the line of credit at rates lower than the stated interest rate, subject tocertain restrictions. Amounts outstanding on the line of credit at June 30,2002, are at LIBOR + .65% (2.49% at June 30, 2002).

 

**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$650,000 and $943,000 for services provided to the Option Properties for thesix months ended June 30, 2002 and 2001, respectively. The Partnership believesthat the fees charged by the Partnership for such services are equivalent tothose charged to third-party owners for similar services.

 

The Partnership has other related party transactionsthat are insignificant and that include terms that are considered by thePartnership to be at arm’s-length and equal to those negotiated withunaffiliated parties.

 

**4.     Net Income Per Common Unit**

 

Basic net income per common unit is computed by dividing net incomeavailable for common unitholders 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 six months ended June 30 (inthousands):

 
|                                                                               |   | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** |       |
|------------------------------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                                                               |   | **2002**                         |       | **2001**                       |       | **2002** |   | **2001** |   |
|                                                                               |   |                             |       |                           |       |   |   |   |   |
| Basic net income available for  common unitholders                            |   | **$**                            | **54,015** |                           | $          | 56,877 | ** ** | **$** | **105,058** |   | $ | 124,282 |   |
| Joint venture partner convertible ownership net income                             |   | —                           |       | —                         |       | — |   | 1,666 |   |
| Diluted net income available for common units and  dilutive potential common units |   | **$**                            | **54,015** |                           | $          | 56,877 | ** ** | **$** | **105,058** |   | $ | 125,948 |   |
|                                                                               |   |                             |       |                           |       |   |   |   |   |
| Weighted average number of common units outstanding                                |   | **149,310**                      |       | 147,899                        | ** ** | **148,992** |   | 147,569 |   |
| Joint venture partner convertible ownership common  unit equivalents               |   | **—**                       | ** ** | **—**                     |       | — |   | 2,118 |   |
| Dilutive units for long-term compensation plans                                    |   | **1,782**                        |       | 1,673                          | ** ** | **1,690** |   | 1,682 |   |
| Weighted average number of common units and dilutive  potential common units       |   | **151,092**                      |       | 149,572                        | ** ** | **150,682** |   | 151,369 |   |

 

ThePreferred D Series Convertible equity and the Series G preferred limitedpartner units were anti-dilutive for the three months and six months ended June30, 2002 and 2001; therefore, no conversion to common units is included inweighted dilutive potential common units.

 

Ajoint venture partner in one of the Partnership’s unconsolidated ventures hasthe option to convert a portion of its ownership to General Partner commonshares. The effects of the option on earnings per

 

7

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unitwas anti-dilutive for the three and six months ended June 30, 2002; thereforeno conversion to common units is included in weighted dilutive potential commonunits. During the six months ended June 30, 2001, the effect of the option onearnings per unit was dilutive. Therefore, additional equity in earnings wasincluded in diluted net income available for common unitholders and conversionto common units was included in weighted dilutive potential common units. Theeffect of this same option was anti-dilutive for the three months ended June30, 2002; therefore, no conversion to common units is included in dilutivepotential common units.

 

**5.     SegmentReporting**

 

The Partnership is engaged in four operating segments;the ownership and rental of office, industrial and retail real estateinvestments and the providing of various real estate services such as propertymanagement, maintenance, leasing, development and construction management tothird-party property owners (“Service Operations”). The Partnership’sreportable segments offer different products or services and are managedseparately because each requires different operating strategies and managementexpertise. There are no material intersegment sales or transfers.

 

Non-segment revenue to reconcile to total revenueconsists mainly of equity in earnings of unconsolidated companies. Non-segmentassets to reconcile to total assets consist of corporate assets including cash,deferred financing costs and investments in unconsolidated companies.

 

The Partnership assesses and measures segmentoperating results based on industry performance measures referred to as FundsFrom Operations (“FFO”). The National Association of Real Estate InvestmentTrusts defines FFO as net income or loss, excluding gains or losses from debtrestructuring and sales of depreciated operating property, plus operatingproperty depreciation and amortization and adjustments for minority interestand unconsolidated companies on the same basis. FFO is not a measure ofoperating results or cash flows from operating activities as measured bygenerally accepted accounting principles, is not necessarily indicative of cashavailable to fund cash needs and should not be considered an alternative tocash flows as a measure of liquidity. Interest expense and other non-propertyspecific revenues and expenses are not allocated to individual segments indetermining the Partnership’s performance measure.

 

The revenues and FFO for each of the reportablesegments for the three and six months ended June 30, 2002 and 2001, and theassets for each of the reportable segments as of June 30, 2002 and December 31,2001, are summarized as follows (in thousands):

 
|                                                      |   | **Three Months Ended June 30,** |        | **Six Months Ended June 30,** |                                                                                       |
|-----------------------------------------------------------|--------|---------------------------------|-------------|-------------------------------|--------------------------------------------------------------------------------------------|
|                                                      |   | **2002**                        |        | **2001**                      |                                                                                       | **2002** |   | **2001** |   |
| Revenues                                                  |   |                            | ** **  |                          |                                                                                       |   |   |   |   |
| Rental  Operations:                                       |   |                            | ** **  |                          |                                                                                       |   |   |   |   |
| Office                                                    |   | **$**                           | **103,051** | ** **                    | $                                                                                          | 94,019 | ** ** | **$** | **200,116** |   | $ | 185,737 |   |
| Industrial                                                |   | **68****,817**                  | ** **  | 72,428                        | ** **                                                                                 | **138,332** |   | 146,152 |   |
| Retail                                                    |   | **1****,755**                   | ** **  | 6,569                         | ** **                                                                                 | **3****,474** |   | 13,564 |   |
| Service Operations                                        |   | **15,364**                      | ** **  | 23,627                        | ** **                                                                                 | **44,645** |   | 45,949 |   |
| Total Segment Revenues                                    |   | **188,987**                     | ** **  | 196,643                       | ** **                                                                                 | **386,567** |   | 391,402 |   |
| Non-Segment Revenue                                       |   | **6,550**                       | ** **  | 7,205                         | ** **                                                                                 | **13,420** |   | 17,189 |   |
| Consolidated Revenue from continuing operations           |   | **195****,537**                 | ** **  | $                             | 203,848                                                                                    | ** ** | **$** | **399,987** |   | $ | 408,591 |   |
| Discontinued Operations                                   |   | **1,404**                       | ** **  | 1,547                         |                 | **2,953** |   | 3,094 |   |
| Consolidated Revenue                                      |   | $                               | **196,941** | ** **                    | $                                                                                          | 205,395 |   | **$** | 402,940 |   | $ | 411,685 |   |
|                                                      |   |                            |        |                          |                                                                                       |   |   |   |   |   |   |   |   |
| Funds From Operations                                     |   |                            | ** **  |                          |                                                                                       |   |   |   |   |
| Rental  Operations:                                       |   |                            | ** **  |                          |                                                                                       |   |   |   |   |
| Office                                                    |   | **$**                           | **70,864**  | ** **                    | $                                                                                          | 63,892 |   | **$** | **135,370** |   | $ | 125,029 |   |
| Industrial                                                |   | **52,895**                      | ** **  | 56,347                        |                                                                                       | **105,844** |   | 112,959 |   |
| Retail                                                    |   | **1,****481**                   | ** **  | 5,476                         |                                                                                       | **2,949** |   | 11,190 |   |
| Services Operations                                       |   | **7,169**                       | ** **  | 9,227                         |                                                                                       | **22,701** |   | 18,515 |   |
| Total Segment FFO                                         |   | **132,409**                     | ** **  | 134,942                       |                                                                                       | **266,864** |   | 267,693 |   |
|                                                      |   |                            | ** **  |                          |                                                                                       |   |   |   |   |
| Non-Segment FFO:                                          |   |                            | ** **  |                          |                                                                                       |   |   |   |   |
| Interest expense                                          |   | **(27,918**                     | **)**       | (28,340                       | )                                                                                          | **(55,327** | ) | (57,627 | ) |
| Interest income                                           |   | **1,333**                       | ** **  | 1,566                         |                                                                                       | **1,760** |   | 3,000 |   |
| General and  administrative expense                       |   | **(6,798**                      | **)**       | (4,688                        | )                                                                                          | **(14,036** | ) | (8,715 | ) |
| Gain on land  sales                                       |   | **1,883**                       | ** **  | 2,643                         |                                                                                       | **3,091** |   | 3,320 |   |
| Other expenses                                            |   | **(601**                        | **)**       | (890                          | )                                                                                          | **(957** | ) | (1,416 | ) |
| Minority  interest in earnings of subsidiaries            |   | **(251**                        | **)**       | (330                          | )                                                                                          | **(636** | ) | (1,241 | ) |
| Joint venture FFO                                         |   | **10,758**                      | ** **  | 11,564                        |                                                                                       | **21,534** |   | 22,752 |   |
| Dividends on  preferred units                             |   | **(14,209**                     | **)**       | (15,917                       | )                                                                                          | **(28,419** | ) | (31,291 | ) |
| Discontinued  operations                                  |   | **2,235**                       | ** **  | 1,095                         |                                                                                       | **3,340** |   | 2,186 |   |
| Consolidated FFO                                          |   | **9****8,841**                  | ** **  | 101,645                       |                                                                                       | **197,214** |   | 198,661 |   |
|                                                      |   |                            | ** **  |                          |                                                                                       |   |   |   |   |
| Depreciation and  amortization on continuing operations   |   | **(42,991**                     | **)**       | (37,900                       | )                                                                                          | **(85,490** | ) | (78,034 | ) |
| Depreciation and  amortization on discontinued operations |   | **(2**                          | **)**       | (479                          | )                                                                                          | **(322** | ) | (928 | ) |
| Share of joint  venture adjustments                       |   | **(4,383**                      | **)**       | (4,277                        | )                                                                                          | **(8,798** | ) | (5,414 | ) |
| Earnings (loss) from depreciated property sales           |   | **2,550**                       | ** **  | (2,112                        | )                                                                                          | **2,454** |   | 9,997 |   |
|                                                      |   |                            | ** **  |                          |                                                                                       |   |   |   |   |
| Net Income Available for Common Unitholders               |   | **$**                           | **54,015**  | ** **                    | $                                                                                          | 56,877 |   | **$** | **105,058** |   | $ | 124,282 |   |

 

8

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|                 |   | **June 30,  2002** |          | **December 31,  2001** |   |
|----------------------|--------|--------------------|---------------|------------------------|--------|
| Assets               |   |               |          |                   |   |
| Rental  Operations:  |   |               |          |                   |   |
| Office               |   | **$**              | **2,570,695** |                   | $      | 2,625,015 |   |
| Industrial           |   | **2,112,803**      |          | 2,184,234              |   |
| Retail               |   | **66****,199**     |          | 64,946                 |   |
| Service Operations   |   | **84,824**         |          | 99,554                 |   |
| Total Segment Assets |   | **4****,834,521**  |          | 4,973,749              |   |
| Non-Segment Assets   |   | **402,157**        |          | 356,497                |   |
| Consolidated Assets  |   | **$**              | **5,236,678** |                   | $      | 5,330,246 |   |

 

 

**6.     RealEstate Assets Held for Sale**

 

The Partnership adoptedStatement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long Lived Assets” (“SFAS 144”), on January 1, 2002.SFAS 144 requires the Partnership to report in discontinued operations theresults of operations of a property  that has either beendisposed of or is classified as held for sale, unless certain conditions aremet.

 

At June 30, 2002, thePartnership had one industrial property, five office properties and one retailproperty comprising a total of approximately 688,000 square feet classified asheld for sale. Of these properties, two build-to-suit office properties wereunder development at June 30, 2002. Net operating income (defined as totalproperty revenues, less property expenses, which include real estate taxes,repairs and maintenance, property management, utilities, insurance and otherexpenses) of the properties held for sale for the six months ended June 30,2002 and 2001, respectively, was $1.6 million and $2.6 million. Net book valueof the properties was $49.7 million at June 30, 2002. There can be noassurances that such properties will be sold.

 

The Partnershipclassified the results of operations of one building in its June 30, 2002, heldfor sale portfolio as discontinued operations in accordance with SFAS 144. Theresults of operations for the remaining held for sale properties are included incontinuing operations as these properties were

 

9

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identified for sale priorto the adoption of SFAS 144. In addition, two properties were sold during thesix months ended June 30, 2002, that were identified as held for sale postadoption of SFAS 144; therefore, their results of operations and gains ondisposal for these two properties are reported in discontinued operations. Theresults of operations and gains from disposal for all other properties sold duringthe six months ended June 30, 2002, are classified in continuing operations asthese properties were identified as held for sale prior to the adoption of SFAS144. The effect of the adoption of SFAS 144 resulted in net income of $4.5million and $1.3 million being classified as discontinued operations for thesix months ended June 30, 2002 and 2001, respectively.

 

**7.     Partners’Equity**

 

The General Partnerperiodically accesses the public equity markets and contributes the netproceeds to the Partnership to fund the development and acquisition ofadditional properties. The following series of preferred equity are outstandingas of June 30, 2002 (in thousands, except percentages):

 
| **Description**    |   | **Units  Outstanding** |   | **Dividend  Rate** |   | **Initial  Optional  Redemption  Date** |   | **Liquidation  Preference** |   | **Convertible** |   |
|--------------------|--------|------------------------|--------|--------------------|--------|-----------------------------------------|--------|-----------------------------|--------|-----------------|--------|
| Series B Preferred |   | 300                    |   | 7.990              | %      | September 30, 2007                      |   | 150,000                     |   | No              |   |
| Series D Preferred |   | 535                    |   | 7.375              | %      | December 31, 2003                       |   | 133,750                     |   | Yes             |   |
| Series E Preferred |   | 400                    |   | 8.250              | %      | January 20, 2004                        |   | 100,000                     |   | No              |   |
| Series F Preferred |   | 600                    |   | 8.000              | %      | October 10, 2002                        |   | 150,000                     |   | No              |   |
| Series I Preferred |   | 300                    |   | 8.450              | %      | February 6, 2006                        |   | 75,000                      |   | No              |   |

 

All series of preferredequity require cumulative distributions, have no stated maturity date, and theredemption price of each series may only be paid from the proceeds of othercapital shares of the General Partner, which may include other classes orseries of preferred shares.

 

The Series DPreferred equity is convertible at a conversion rate of 9.3677 common units foreach preferred unit outstanding.

 

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

 

**8.     OtherMatters**

 

**Reclassifications**

 

Certain 2001 balanceshave been reclassified to conform to 2002 presentation.

 

**9.     DerivativeInstruments**

 

The Partnership has one interest rate swap contractthat does not meet the criteria of Statement of Financial Accounting StandardsNo. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS133”) to qualify for hedge accounting. SFAS 133 requires that unrealized gainsand losses on derivatives not qualifying as hedge accounting be recognizedcurrently in earnings. During the six months ended June 30, 2002, thePartnership recognized income of $549,000 from this interest rate swap contractcompared to an expense of $721,000 for the six months ended June 30, 2001.

 

10

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**10.  StockBased Compensation**

 

The Partnership elected toadopt Statement of Financial Accounting Standards No. 123, “*Accounting for Stock Based Compensation”*effective January 1, 2002. As a result, the Partnership will expense stockoptions based upon estimated fair value of the options at the date of grant.Additionally, the Partnership will expense the discount given to employeesunder the employee stock purchase plan. The Partnership recorded expense of$200,000 for the first six months of 2002 related to stock compensation fromthis accounting change.

 

**11.  SubsequentEvents**

 

The Board of Directors of the General Partner declaredthe following distributions at its July 31, 2002 regularly scheduled Boardmeeting:

 
| **Class**                         |   | **Quarterly  Amount/Unit** |    | **Record  Date** |               | **Payment  Date** |               |
|-----------------------------------|--------|----------------------------|---------|------------------|--------------------|-------------------|--------------------|
| Common                            |   | $                          | 0.455   |             | August 14, 2002    |              | August 30, 2002    |   |
| Preferred (per  depositary unit): |   |                       |    |             |               |              |               |
| Series B                          |   | $                          | 0.99875 |             | September 16, 2002 |              | September 30, 2002 |   |
| Series D                          |   | $                          | 0.46094 |             | September 16, 2002 |              | September 30, 2002 |   |
| Series E                          |   | $                          | 0.51563 |             | September 16, 2002 |              | September 30, 2002 |   |
| Series F                          |   | $                          | 0.50000 |             | October 17, 2002   |              | October 31, 2002   |   |
| Series I                          |   | $                          | 0.52813 |             | September 16, 2002 |              | September 30, 2002 |   |

 

At the same meeting, theBoard authorized the following:

 

•      A resolution to amend theGeneral Partner’s Shareholder Rights Plan by changing the termination date forthe Plan to August 31, 2002;

 

•      The redemption of all the $150million of the outstanding Series F Preferred equity, with the redemption datefixed for October 10, 2002.

 

11

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The Partners

**DukeRealty Limited Partnership:**

 

We have reviewed the condensed consolidated balance sheet of DukeRealty Limited Partnership and subsidiaries as of June 30, 2002, the relatedcondensed consolidated statements of operations for the three months and thesix months ended June 30, 2002 and 2001, the related condensed consolidatedstatements of cash flows for the six months ended June 30, 2002 and 2001, andthe related condensed consolidated statement of partners’ equity for the sixmonths ended June 30, 2002. These condensed consolidated financial statementsare 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 modifications thatshould be made to the condensed consolidated financial statements referred toabove 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 31,2001, and the related consolidated statements of operations, partners’ equityand cash flows for the year then ended (not presented herein); and in ourreport dated January 30, 2002, 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, 2001is fairly presented, in all material respects, in relation to the consolidatedbalance sheet from which it has been derived.

 

 

KPMG LLP

Indianapolis, Indiana

July 31, 2002

 

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Business Overview**

 

Certain statements in this “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”including those related to the Partnership’s future operations, constitute“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended. Such forward-looking statements involve known andunknown risks, uncertainties and other important factors that could cause theactual results, performance or achievements of the Partnership, or industryresults, to differ materially from any future results, performance or achievementsexpressed or implied by such forward-looking statements. Such risks,uncertainties and other important factors include, among others: generaleconomic and business conditions; continued qualification as a real estateinvestment trust; competition for tenants; increases in real estateconstruction costs; interest rates, accessibility of debt and equity capitalmarkets and other risks inherent in the real estate business including tenantdefaults, potential liability relating to environmental matters and liquidityof real estate investments. The words “believe,” “estimate,” “expect” andsimilar expressions or statements regarding future periods are intended toidentify forward-looking statements. All forward-looking statements areinherently uncertain as they involve substantial risks and uncertainties beyondthe Partnership’s control. The Partnership undertakes no obligation to updateor revise any forward-looking statements for events or circumstance after thedate on which such statement is made. New factors emerge from time to time, andit is not possible for the Partnership to predict all such factors. Further,the Partnership cannot assess the impact of each such factor on its business orthe extent to which any factor, or combination of factors, may cause actualresults to differ materially from those contained in any forward-lookingstatements.

 

The Partnership’s operating results dependprimarily upon income from the Rental Operations of its industrial, office andretail properties located in its primary markets. This rental income issubstantially influenced by the supply and demand for the Partnership’s rentalspace in its primary markets. In addition, the Partnership’s growth isdependent upon its ability to increase and maintain occupancy rates andincrease rental rates of its in-service portfolio. The Partnership’s strategyfor growth also includes developing and acquiring additional rental propertiesin its primary markets.

 

For the six months ended June 30, 2002, thePartnership’s rental income from continuing operations decreased byapproximately 1% from the same period in 2001. This reduction resulted from acombination of a slower economy reducing overall portfolio occupancy by 1.7%since June 30, 2001, and the sale of over $500 million of assets in 2001. Whilethese events have affected growth and related rental income, the Partnershiphas a debt to market capitalization ratio of 25.5% at June 30, 2002, and only$40 million drawn on its $500 million unsecured line of credit as of June 30, 2002.

 

As noted above, the Partnership’s operatingresults depend primarily upon income from the Rental Operations of itsindustrial, office and retail properties. The following highlights the areas ofRental Operations that the Partnership considers critical for future revenuegrowth (all square footage totals and occupancy percentages reflect 100% ofboth wholly-owned properties and properties in joint ventures that thePartnership has ownership interests):

 

13

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***SameProperty Performance*:**The Partnership tracks Same Property performance,which compares those properties that were in-service for all reported portions of a two-year period. The netoperating income from the same property portfolio increased 1.0% for the sixmonths ended June 30, 2002, compared to the six months ended June 30, 2001.

 

***OccupancyAnalysis:***Thefollowing table sets forth information regarding the Partnership’s in-serviceportfolio of rental properties as of June 30, 2002 and 2001 (square feet, inthousands):

 

| **Type**        |   | **Total  Square Feet** |       | **Percent  of  Total Square Feet** |       | **Percent  Occupied** |       |
|-----------------|--------|------------------------|------------|-----------------------------------------|------------|-----------------------|------------|
|            |   | **2002**               | ** ** | **2001**                                | ** ** | **2002**              | ** ** | **2001** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Industrial**  |   |                   |       |                                    |       |                  | ** ** |   |   |   | ** ** |   |   |
| Service Centers |   | **13,832**             |       | 13,878                                  | ** ** | **13.42**             | **%**      | 13.70 | **%** | **87.8** | **%** | 90.2 | % |
| Bulk            |   | **64,340**             |       | 62,274                                  | ** ** | **62.41**             | **%**      | 61.48 | **%** | **88.9** | **%** | 92.8 | % |
| **Office**      |   | **24,080**             |       | 22,687                                  | ** ** | **23.36**             | **%**      | 22.40 | **%** | **85.4** | **%** | 88.5 | % |
| **Retail**      |   | **837**                |       | 2,448                                   | ** ** | **.81**               | **%**      | 2.42 | **%** | **97.4** | **%** | 95.6 | % |
| Total           |   | **103,089**            |       | 101,287                                 |       | **100****.00**        | **%**      | 100.00 | % | **88.0** | **%** | 91.6 | % |

 

***LeaseExpiration:***Thefollowing table reflects the Partnership’s in-service portfolio leaseexpiration schedule as of June 30, 2002, by product type indicating squarefootage and annualized net effective rents under expiring leases (in thousands,except per square foot amounts):

 
|                         |   | **Total  Portfolio** |   | **Industrial**         |    | **Office**  |   | **Retail**       |   |
|------------------------------|--------|----------------------|--------|------------------------|---------|-------------|--------|------------------|--------|
| **Year of  Expiration**      |   | **Square  Feet**     |   | **Ann. Rent  Revenue** |    | **Percent** |   | **Square  Feet** |   | **Ann. Rent  Revenue** |   | **Square  Feet** |   | **Ann. Rent  Revenue** |   | **Square  Feet** |   | **Ann. Rent  Revenue** |   |
| 2002                         |   | 5,347                |   | $                      | 31,475  |        | 5      | %                | 4,647  |   | $ | 23,132 |   | 700 |   | $ | 8,343 |   | – |   | $ | – |   |
| 2003                         |   | 9,882                |   | 65,572                 |    | 10          | %      | 7,723            |   | 38,335 |   | 2,159 |   | 27,237 |   | – |   | – |   |
| 2004                         |   | 11,352               |   | 76,751                 |    | 12          | %      | 8,789            |   | 41,831 |   | 2,540 |   | 34,513 |   | 23 |   | 407 |   |
| 2005                         |   | 13,707               |   | 95,957                 |    | 15          | %      | 10,776           |   | 53,590 |   | 2,893 |   | 41,865 |   | 38 |   | 502 |   |
| 2006                         |   | 11,441               |   | 81,234                 |    | 13          | %      | 8,925            |   | 45,423 |   | 2,509 |   | 35,702 |   | 7 |   | 109 |   |
| 2007                         |   | 10,034               |   | 68,780                 |    | 11          | %      | 7,760            |   | 37,845 |   | 2,231 |   | 30,353 |   | 43 |   | 582 |   |
| 2008                         |   | 6,541                |   | 42,796                 |    | 7           | %      | 5,109            |   | 23,149 |   | 1,408 |   | 19,277 |   | 24 |   | 370 |   |
| 2009                         |   | 5,912                |   | 36,739                 |    | 6           | %      | 4,818            |   | 21,024 |   | 1,075 |   | 15,346 |   | 19 |   | 369 |   |
| 2010                         |   | 5,587                |   | 44,460                 |    | 7           | %      | 3,925            |   | 18,437 |   | 1,643 |   | 25,709 |   | 19 |   | 314 |   |
| 2011                         |   | 3,607                |   | 31,610                 |    | 5           | %      | 2,325            |   | 11,225 |   | 1,266 |   | 20,140 |   | 16 |   | 245 |   |
| 2012 and Thereafter          |   | 7,271                |   | 57,940                 |    | 9           | %      | 4,510            |   | 20,349 |   | 2,134 |   | 32,345 |   | 627 |   | 5,246 |   |
| Total Leased                 |   | 90,681               |   | $                      | 633,314 |        | 100    | %                | 69,307 |   | $ | 334,340 |   | 20,558 |   | $ | 290,830 |   | 816 |   | $ | 8,144 |   |
|                         |   |                 |   |                   |    |        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Total Portfolio  Square Feet |   | 103,089              |   |                   |    |        |   | 78,173           |   |   |   | 24,079 |   |   |   | 837 |   |   |   |
|                         |   |                 |   |                   |    |        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Percent Occupied             |   | 87.96                | %      |                   |    |        |   | 88.66            | %      |   |   | 85.38 | % |   |   | 97.43 | % |   |   |

 

 

***Future Development:***The Partnership also expects to realize growth inearnings from Rental Operations through the development and acquisition ofadditional rental properties in its primary markets. Specifically, the Partnershiphas 3.3 million square feet of properties under development at June 30, 2002.These properties under development should provide future earnings throughService Operations income upon sale or from Rental Operations growth as theyare placed in service as follows (in thousands, except percent leased andstabilized returns):

 

14

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| **Anticipated In-Service Date** |   | **Square  Feet** |   | **Percent  Leased** |   | **Project  Costs** |    | **Estimated  Stabilized  Return** |   |
|---------------------------------|--------|------------------|--------|---------------------|--------|--------------------|---------|-----------------------------------|--------|
|                            |   |             |   |                |   |               |    |                              |   |
| Held For Rental:                |   |             |   |                |   |               |    |                              |   |
|                            |   |             |   |                |   |               |    |                              |   |
| 3rd Quarter 2002                |   | 1,039            |   | 9                   | %      | $                  | 30,580  |                              | 11.0   | % |
| 4th Quarter 2002                |   | 434              |   | 49                  | %      | 19,289             |    | 11.1                              | %      |
| 1st  Quarter 2003          |   | 843              |   | 78                  | %      | 33,598             |    | 10.7                              | %      |
| Thereafter                      |   | 324              |   | 48                  | %      | 35,550             |    | 11.5                              | %      |
|                            |   | 2,640            |   | 42                  | %      | $                  | 119,017 |                              | 11.1   | % |
| Build-to-Suit for Sale:         |   |             |   |                |   |               |    |                              |   |
|                            |   |             |   |                |   |               |    |                              |   |
| 3rd Quarter 2002                |   | 642              |   | 98                  | %      | $                  | 12,288  |                              | 10.6   | % |
| 4th Quarter 2002                |   | –           |   | –              |   | –             |    | –                            |   |
| 1st  Quarter 2003          |   | 17               |   | 25                  | %      | 2,335              |    | 12.2                              | %      |
| Thereafter                      |   | 43               |   | 100                 | %      | 4,483              |    | 10.4                              | %      |
|                            |   | 702              |   | 96                  | %      | $                  | 19,106  |                              | 10.8   | % |
| Total                           |   | 3,342            |   | 53                  | %      | $                  | 138,123 |                              | 11.0   | % |

 

***LeaseRenewals:***ThePartnership renewed 72.4% of leases up for renewal in the three months endedJune 30, 2002, totaling 2.1 million square feet on which it attained a 8.2%growth in net effective rent. This compares to renewals of 70.1% for the threemonths ended June 30, 2001, totaling 2.6 million square feet and 13.3% growthin net effective rent.

 

**Results of Operations**

 

A summary of the Partnership’s operating resultsand property statistics for the three and six months ended June 30, 2002 and2001, is as follows (in thousands, except number of properties and per unitamounts):

 
|                                                         |   | **Three  Months Ended June 30,** |        | **Six Months  Ended June 30,** |       |
|--------------------------------------------------------------|--------|----------------------------------|-------------|--------------------------------|------------|
|                                                         |   | **2002**                         |        | **2001**                       |       | **2002** |   | **2001** |   |
| Rental Operations revenue                                    |   | **$**                            | **180,173** |                           | $          | 180,221 | ** ** | **$** | **355,342** |   | $ | 362,642 |   |
| Service Operations revenue                                   |   | **15,36****4**                   |        | 23,627                         | ** ** | **44,645** |   | 45,949 |   |
| Earnings from Rental Operations                              |   | **60,079**                       |        | 66,302                         | ** ** | **114,889** |   | 130,807 |   |
| Earnings from Service Operations                             |   | **7,169**                        |        | 9,227                          | ** ** | **22,701** |   | 18,515 |   |
| Operating income                                             |   | **60,450**                       |        | 70,841                         | ** ** | **123,554** |   | 140,607 |   |
| Net income available for common unitholders                  |   | **$**                            | **54,015**  |                           | $          | 56,877 | ** ** | **$** | **105,058** |   | $ | 124,282 |   |
| Weighted average common units outstanding                    |   | **149,310**                      |        | 147,899                        | ** ** | **148,992** |   | 147,569 |   |
| Weighted average common and dilutive potential common  units |   | **151,092**                      |        | 149,572                        | ** ** | **150,682** |   | 151,369 |   |
| Basic income per common unit:                                |   |                             |        |                           |       |   |   |   |   |
| Continuing operations                                        |   | **$**                            | **.34**     |                           | $          | .39 | ** ** | **$** | **.67** |   | $ | .83 |   |
| Discontinued operations                                      |   | **$**                            | **.02**     |                           | $          | .00 | ** ** | **$** | **.03** |   | $ | .01 |   |
| Diluted income per common unit:                              |   |                             |        |                           |       |   |   |   |   |
| Continuing operations                                        |   | **$**                            | **.34**     |                           | $          | .38 | ** ** | **$** | **.67** |   | $ | .82 |   |
| Discontinued operations                                      |   | **$**                            | **.02**     |                           | $          | .00 | ** ** | **$** | **.03** |   | $ | .01 |   |
|                                                         |   |                             |        |                           |       |   |   |   |   |
| Number of in-service properties at end of period             |   | **899**                          |        | 905                            | ** ** | **899** |   | 905 |   |
| In-service square footage at end of period                   |   | **103,089**                      |        | 101,287                        | ** ** | **103,089** |   | 101,287 |   |
| Under development square footage at end of period            |   | **3,342**                        |        | 7,585                          | ** ** | **3,342** |   | 7,585 |   |

 

**Comparison of Three Months Ended June 30, 2002 to ThreeMonths Ended June 30, 2001**

 

Rental Operations

 

Rental Operations revenue remained consistent at $180.2 million for thethree months ended June 30, 2002, compared to the three months ended June 30,2001. Rental Operations revenue is primarily comprised of rental income fromheld for rental properties (“Rental Income”) and equity in earnings from unconsolidatedcompanies (“Equity in earnings”). Rental Income increased from $172.9 million

 

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in 2001 to $173.9 million in 2002. This increase is the result of thePartnership recognizing $10.5 million of lease termination fees for the threemonths ended June 30, 2002, compared to $4.2 million for the three months endedJune 30, 2001. The increase in lease termination fees was offset by an overalldecrease in occupancy of in-service properties from 91.6% at June 30, 2001, to88.0% at June 30, 2002. Also contributing to the decline in Rental Income isthe effect of the Partnership’s property dispositions. Throughout 2001 and thefirst quarter 2002, the Partnership sold nearly $440 million of held forinvestment rental properties from its in-service portfolio. A majority of theseproperties were over 90% leased and the new developments placed in-service overthe same time period are currently leased at lower percentages and, therefore,the Partnership has realized less rental income. The following is a summary ofthe Partnership’s in-service portfolio since January 1, 2001:

 

|                           |   | **Buildings** |   | **Square  Feet** |   |
|--------------------------------|--------|---------------|--------|------------------|--------|
| Properties in service as of:   |   |          |   |             |   |
| January 1, 2001                |   | 913           |   | 100,962          |   |
| Acquisitions                   |   | 5             |   | 258              |   |
| Developments placed in service |   | 55            |   | 9,906            |   |
| Dispositions                   |   | (85           | )      | (8,234           | )      |
|                           |   |          |   |             |   |
| December 31, 2001              |   | 888           |   | 102,892          |   |
| Acquisitions                   |   | 4             |   | 528              |   |
| Developments placed in service |   | 18            |   | 2,779            |   |
| Dispositions                   |   | (11           | )      | (3,110           | )      |
|                           |   |          |   |             |   |
| June 30, 2002                  |   | 899           |   | 103,089          |   |

 

Equity in earnings decreased to $6.3 million from $7.3 million for thethree months ended June 30, 2002, compared to the same period in 2001. In thesecond quarter of 2001, the Partnership recognized approximately $500,000 oflease termination fees compared to only $134,000 for the second quarter of2002. In addition, two of the Partnership’s 50% joint ventures borrowedadditional debt during 2001, resulting in increased interest expense in thesecond quarter of 2002.

 

Depreciation and amortization expense for the period ended June 30,2002, increased over the prior year as a result of additional investments intenant improvements and write-offs associated with early terminations oftenants.

 

As a result of the above-mentioned items, earnings from RentalOperations decreased $6.2 million from $66.3 million for the three months endedJune 30, 2001, to $60.1 million for the three months ended June 30, 2002.

 

Service Operations

 

Service Operations revenues decreased from $23.6 million for the threemonths ended June 30, 2001, to $15.4 million for the three months ended June30, 2002. Overall, Service Operations has experienced decreased levels ofconstruction volume as the effects of a slowed economy have continued to delaycustomer decisions to expand operations into new office or industrialbuildings. As a result, the Partnership experienced a $3.4 million decrease innet general contractor revenues from third party jobs construction projects.

 

Property management, maintenance and leasing fee revenues decreased to$3.4 million from $7.9 million for the three months ended June 30, 2002,compared to the same period in 2001. The $4.5 million decrease is due mainly toa decrease in landscaping maintenance revenue associated with the sale of thelandscape business in the third quarter of 2001.

 

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As a result, earnings from Service Operations decreased from $9.2million for the three months ended June 30, 2001, to $7.2 million for the threemonths ended June 30, 2002.

 

General and Administrative Expense

 

General and administrative expense increased from $4.7 million for thethree months ended June 30, 2001 to $6.8 million for the three months endedJune 30, 2002. While the Partnership continues to implement several initiativesthat are reducing total operating and administration costs, reducedconstruction and development activity resulted in a greater amount of overheadbeing charged to general and administrative expense during the second quarter2002 instead of being capitalized into development projects.

 

Discontinued Operations

 

The Partnership adopted Statement of Financial Accounting Standards No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS144”) on January 1, 2002. In conjunction with the adoption of SFAS 144, thePartnership is required to classify operations of properties identified as heldfor sale as discontinued operations when certain conditions are met. ThePartnership classified net income and gains as sales of properties of $3.7 millionand $615,000, respectively,  asdiscontinued operations for the three months ended June 30, 2002 and 2001,respectively. These operations pertain to one property added to the held forsale portfolio post adoption of SFAS 144 and two properties which were soldduring the three months ended June 30, 2002, that were identified as held forsale after the adoption of SFAS 144.

 

Net Income Available for CommonUnits

 

Net income available for common units for thethree months ended June 30, 2002, was $54.0 million compared to $56.9 millionfor the same period in 2001. This decrease results primarily from the operatingfluctuations in Rental Operations, Service Operations and general andadministrative expenses as discussed above.

 

**Comparison of Six Months Ended June 30, 2002 to Six MonthsEnded June 30, 2001**

 

Rental Operations

 

Rental Operations revenue decreased to $355.3 million for the sixmonths ended June 30, 2002, from $362.6 million for the six months ended June30, 2002. Rental Operations revenue is primarily comprised of rental incomefrom held for rental properties (“Rental Income”) and equity in earnings fromunconsolidated companies (“Equity in earnings”). Rental Income decreased from$345.4 million in 2001 to $342.8 million in 2002. The Partnership continues tofeel the impact of a slowed economy as businesses are delaying decisions toexpand operations and, in some cases, are downsizing occupied space currentlyrented from the Partnership. Also contributing to the decline in occupancy isthe effect of the Partnership’s property dispositions. Throughout 2001 and thefirst six months of 2002, the Partnership has sold over $440 million of heldfor investment rental properties from its in-service portfolio. A majority ofthese properties were over 90% leased and the new developments placedin-service over the same time period have leased at lower percentages and,therefore, the Partnership has realized less rental income. The effect of thesetrends is a decrease of the occupancy of the in-service portfolio from 91.6% atJune 30, 2001, to 88.0% at June 30, 2002. The Partnership has mitigated thedecreased occupancy effects to Rental Income through the recognition of $15.8

 

17

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million of lease termination fees for the six months ended June 30,2002. These fees are the result of negotiated terms for tenants vacating ordownsizing previously leased space from the Partnership. During the six monthsended June 30, 2001, the Partnership recognized $5.1 million in leasetermination fees.

 

Equity in earnings decreased to $12.6 million from $17.3 million forthe six months ended June 30, 2002, compared to the same period in 2001. In thefirst quarter of 2001, the Partnership recognized a $2.9 million gain resultingfrom the sale of a property in a joint venture that the Partnership had a 50%ownership interest.  In addition, two ofthe Partnership’s 50% joint ventures acquired additional debt during 2001,resulting in increased interest expense for the six months ended June 30, 2002,compared to six months ended June 30, 2001.

 

Rental and real estate tax expenses increased for the six months endedJune 30, 2002, compared to the same period in 2001. Generally, these increasesresulted from increasing operating costs of the Partnership’s properties withno individually significant fluctuations or variances. The majority of theoperating expenses are recovered from the tenants through increased renewalbillings. Depreciation and amortization expense for the six months ended June30, 2002, increased over the prior year, due to an increase in thePartnership’s investments in tenant improvements and write-offs associated withearly terminations of tenants.

 

Interest expense decreased by $2.3 million for the six months endedJune 30, 2002, compared to the same period in 2001. This decrease isattributable to the repayment of secured debt by the Partnership throughout2001. In the third and fourth quarters of 2001 the Partnership paid off $116.6million of secured debt, resulting in lower interest expense for the periodended June 30, 2002 compared to June 30, 2001. This decrease was offset by adecrease in the amount of interest capitalized by the Partnership for the sixmonths ended June 30, 2002, compared to the same period in 2001, which wasattributed to the decreased development volume in 2002.

 

As a result of the above-mentioned items, earnings from RentalOperations decreased $15.9 million from $130.8 million for the six months endedJune 30, 2001, to $114.9 million for the six months ended June 30, 2002.

 

Service Operations

 

Service Operations revenues decreased slightly from $45.9 million forthe six months ended June 30, 2001, to $44.6 million for the six months endedJune 30, 2002. Overall, Service Operations has experienced decreased levels ofconstruction volume during the six months ended June 30, 2002, compared to thesame period in 2001, as the effects of a slowed economy have continued toaffect customer decisions to expand operations into new office or industrialbuildings. However, the timing of completion of projects in the Partnership’sheld for sale pipeline (see below) helped to offset the decrease in thePartnership’s construction volume.

 

The Partnership experienced an $8.8 million decrease in net generalcontractor revenues from third party projects due to continued decreases involume as the economy continues to be slower than in previous  years.

 

Construction management and development activity income representsconstruction and development fees earned on projects where the Partnership actsas the construction manager, and profits from the Partnership’s held for saleprogram whereby a property is developed and sold upon completion to a

 

18

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third party. The significant increase for the six months ended June 30,2002 is attributable to the Partnership selling eight properties from thisportfolio compared to five for the same period in 2001.

 

Property management, maintenance and leasing fee revenues decreased to$6.6 million from $14.5 million for the six months ended June 30, 2002,compared to the same period in 2001. The $7.9 million decrease is due mainly toa decrease in landscaping maintenance revenue associated with the sale of thelandscape business in the third quarter of 2001.

 

Service Operations expenses decreased by $5.5 million from $27.4million for the six months ended June 30, 2001, to $21.9 million for the sixmonths ended June 30, 2002. This decrease is attributable to the decrease inconstruction and development activity associated with the slowdown in theeconomy and the reduced overhead costs from the sale of the landscapingbusiness in the third quarter of 2001.

 

As a result of the above, earnings from Service Operations increasedfrom $18.5 million for the six months ended June 30, 2001, to $22.7 million forthe six months ended June 30, 2002.

 

General and Administrative Expense

 

General and administrative expense increased from $8.7 million for thesix months ended June 30, 2001 to $14.0 million for the six months ended June30, 2002. While the Partnership continues to implement several initiatives thatare reducing total operating and administration costs, reduced construction anddevelopment activity resulted in a greater amount of overhead being charged togeneral and administrative expense instead of being capitalized intodevelopment projects.

 

Other Income and Expenses

 

Gain on sale of land and depreciable property dispositions is primarilydriven by the sale of held for investment rental properties. Throughout 2000and 2001, the Partnership actively pursued favorable opportunities to disposeof real estate assets that no longer met long-term investment objectives. Thisdisposition strategy generated approximately $10 million of gain on sales of depreciableproperty during the fist six months of 2001, compared to only $2.5 million inthe same six month period of 2002, in conjunction with the Partnership’sdecision to slow dispositions in 2002 in light of the economy and currentbusiness climate.

 

Other revenue for the six months ended June 30, 2002, includes $549,000of gain related to an interest rate swap that does not qualify for hedgeaccounting. During the six months ended June 30, 2001, the Partnershiprecognized a $721,000 loss on the same interest rate swap.

 

Discontinued Operations

 

The Partnership adopted Statement of Financial Accounting Standards No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS144”) on January 1, 2002.  Inconjunction with the adoption of SFAS 144, the Partnership is required toclassify operations of properties identified as held for sale as discontinuedoperations when certain conditions are met. The Partnership classified netincome of $4.5 million and $1.3 as discontinued operations for the six monthsended June 30, 2002 and 2001, respectively. These operations pertain to one property added to the held for saleportfolio post adoption of SFAS 144 and two properties which were sold duringthe six months ended June 30, 2002, that were identified as held for sale afteradoption of SFAS 144.

 

19

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Net Income Available for CommonUnits

 

Net income available for common units for the sixmonths ended June 30, 2002, was $105.1 million compared to $124.3 million forthe same period in 2001. This decrease results primarily from the operatingfluctuations in Rental Operations, Service Operations, general andadministrative expenses and earnings from sales of real estate investmentsexplained above.

 

**Liquidity and Capital Resources**

 

Operating Activities

 

Net cash flow provided by operating activitiestotaled $375.1 million and $99.2 million for the six months ended June 30, 2002and 2001, respectively. Operating activity cash flows represents the primarysource of liquidity to fund distributions to unitholders and the other minorityinterests. The significant increase in 2002 is due to the Partnership receivingapproximately $200.0 million of proceeds from the sale of eight buildings inits build-to-suit portfolio.

 

Investing Activities

 

Net cash used by investing activities totaled $152.5 million for thesix months ended June 30, 2002, compared to net cash provided by investingactivities of $97.6 million for the six months ended June 30, 2001.  Investing activities represent theinvestment of funds by the Partnership to lease, improve and expand itsportfolio of held for rental properties through the development and acquisitionof additional rental properties, net of proceeds received from property sales.As noted in the comparison of 2002 to 2001, the Partnership sold a significantamount of held for rental property in 2001. During the six months ended June30, 2002, the Partnership generated proceeds of $35.0 million from propertysales compared to $187.6 million for the same period in 2001.

 

Financing Activities

 

Net cash used for financing activities totaled $231.6 million for thesix months ended June 30, 2002 compared to $136.1 million for the same periodin 2001. During the first six months of 2002, the Partnership utilized proceedsfrom property sales and cash flows from operations to reduce the amountsoutstanding on its unsecured lines of credit. During the six months of 2001,the General Partner and the Partnership issued $75.0 million of preferredequity and $175.0 million of unsecured debt that was used to pay offoutstanding balances on its unsecured lines of credit. The Partnership made a$.90 per unit distribution to common unitholders during the six months endedJune 30, 2002, compared to a $.88 per unit distribution for the same period in2001.

 

Debt and Equity

 

The General Partner and the Partnership currently have on file with theSecurities and Exchange Commission (the “SEC”) one Form S-3 RegistrationStatement (the “Shelf Registration”), which, as of June 30, 2002, has remainingavailability of $542.8 million to issue additional common shares, preferredequity and unsecured debt securities. The General Partner and the Partnershipmay from time to time issue additional securities under this Shelf Registrationto fund the development and acquisition of additional rental properties. TheGeneral Partner and the Partnership also has a Shelf Registration Statement onfile for at-the-market offerings of 1.5 million common shares of the General Partner.

 

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

 
| **Description**           |   | **Borrowing  Capacity** |    | **Maturity  Date** |          | **Interest  Rate** |        | **Outstanding  at June  30, 2002** |   |
|---------------------------|--------|-------------------------|---------|--------------------|---------------|--------------------|-------------|------------------------------------|--------|
| Unsecured Line  of Credit |   | $                       | 500,000 |               | February 2004 |               | LIBOR + .65 | %                                  | $      | 40,000 |   |
| Secured Line of  Credit   |   | 100,000                 |    | January 2003       |          | LIBOR + 1.05       | %           | 29,102                             |   |
|                           |        |                         |         |                    |               |                    |             |                                    |        |  |  |

 

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 allows the Partnership an option toobtain borrowings from the financial institutions that participate in the lineof credit at rates lower than the stated interest rate, subject to certainrestrictions. Amounts outstanding on the line of credit at June 30, 2002 are atLIBOR + .65% (2.49% at June 30, 2002).

 

The total debt outstanding at June 30, 2002, totals $1.7 billion with aweighted average interest rate of 7.00% maturing at various dates through 2028.The Partnership has $1.4 billion of unsecured debt and $319.0 million ofsecured debt outstanding at June 30, 2002. Scheduled principal amortization ofsuch debt totaled $5.0 million for the six months ended June 30, 2002.

 

Following is a summary of the scheduled future amortization andmaturities of the Partnership’s indebtedness at June 30, 2002 (in thousands):

 

|       |   |                        |   |           |   |      |   | **Weighted  Average  Interest Rate of  Future Repayments** |      |
|------------|--------|-----------------------------|--------|----------------|--------|-----------|--------|------------------------------------------------------------|-----------|
|       |   | **Future  Repayments**      |   |           |
| **Year**   |   | **Scheduled  Amortization** |   | **Maturities** |   | **Total** |   |                                                       |
| 2002       |   | $                           | 6,363  |           | $      | 55,483    |   | $                                                          | 61,846    |   | 7.26 | % |
| 2003       |   | 10,300                      |   | 306,977        |   | 317,277   |   | 7.19                                                       | %         |
| 2004       |   | 8,631                       |   | 216,185        |   | 224,816   |   | 6.34                                                       | %         |
| 2005       |   | 7,534                       |   | 219,642        |   | 227,176   |   | 7.18                                                       | %         |
| 2006       |   | 6,976                       |   | 146,179        |   | 153,155   |   | 7.08                                                       | %         |
| 2007       |   | 5,147                       |   | 116,555        |   | 121,702   |   | 7.09                                                       | %         |
| 2008       |   | 4,828                       |   | 100,000        |   | 104,828   |   | 6.75                                                       | %         |
| 2009       |   | 4,844                       |   | 275,000        |   | 279,844   |   | 7.31                                                       | %         |
| 2010       |   | 4,190                       |   | —         |   | 4,190     |   | 6.35                                                       | %         |
| 2011       |   | 3,463                       |   | 175,000        |   | 178,463   |   | 6.93                                                       | %         |
| Thereafter |   | 11,920                      |   | 50,000         |   | 61,920    |   | 6.50                                                       | %         |
| Total      |   | $                           | 74,196 |           | $      | 1,661,021 |   | $                                                          | 1,735,217 |   | 7.00 | % |

 

**Accounting Changes**

 

The Partnership electedto adopt Statement of Financial Accounting Standards No. 123, *“Accounting for Stock Based Compensation,”*effectiveJanuary 1, 2002. As a result, the Partnership will expense stock options basedupon estimated fair value of the options at the date of grant. Additionally,the Partnership will expense the discount given to employees under the employeestock purchase plan. The Partnership recorded expense of $200,000 for the firstsix months of 2002 related to stock compensation from this accounting change.

 

**Funds From Operations**

 

Management believes that Funds From Operations(“FFO”), which is defined by the National Association of Real Estate InvestmentTrusts as GAAP net income or loss, excluding gains or losses from sales of depreciatedoperating property, plus operating property depreciation and amortization andadjustments for minority interest and unconsolidated companies on the samebasis, is the industry standard for reporting the operations of real estateinvestment trusts.

 

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The following table reflects the calculation ofthe Partnership’s FFO for the three and six months ended June 30 as follows (inthousands):

 
|                                                   |   | **Three  Months Ended June 30,** |        | **Six Months  Ended June 30,** |       |
|--------------------------------------------------------|--------|----------------------------------|-------------|--------------------------------|------------|
|                                                   |   | **2002**                         |        | **2001**                       |       | **2002** |   | **2001** |   |
| Net income available for common unitholders            |   | **$**                            | **54,015**  | ** **                     | $          | 56,877 | ** ** | **$** | **105,058** | ** ** | $ | 124,282 |   |
| Add back (deduct):                                     |   |                             | ** **  |                           |       |   | ** ** |   |   |
| Depreciation and amortization                          |   | **42,993**                       | ** **  | 38,379                         | ** ** | **85,812** | ** ** | 78,962 |   |
| Share of joint venture adjustments                     |   | **4,383**                        | ** **  | 4,277                          | ** ** | **8,798** | ** ** | 5,414 |   |
| (Earnings) Loss from depreciable property dispositions |   | **(2,550**                       | **)**       | 2,112                          | ** ** | **(2,454** | **)** | (9,997 | ) |
| **Funds From Operations**                              |   | **$**                            | **98,841**  | ** **                     | $          | 101,645 | ** ** | **$** | **197,214** | ** ** | $ | 198,661 |   |
| **Cash flow provided by (used by):**                   |   |                             | ** **  |                           |       |   | ** ** |   |   |
| Operating activities                                   |   | **$**                            | **163,822** | ** **                     | $          | 21,545 | ** ** | **$** | **375,088** | ** ** | $ | 99,170 |   |
| Investing activities                                   |   | **(103,058**                     | **)**       | 125,192                        | ** ** | **(152,487** | **)** | 97,631 |   |
| Financing activities                                   |   | **(72,583**                      | **)**       | (85,940                        | **)**      | **(231,619** | **)** | (136,132 | ) |

 

While management believes that FFO is the most relevant and widely usedmeasure of the Partnership’s operating performance, such amount does notrepresent cash flow from operations as defined by generally accepted accountingprinciples, should not be considered as an alternative to net income as anindicator of the Partnership’s operating performance, and is not indicative ofcash available to fund all cash flow needs.

 

**Part II – Other Information**

 

Item 1.  Legal Proceedings

 

None

 

Item 2. Changes in Securities

 

None

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4.  Submissionof Matters to a Vote of Security Holders

 

1.     On April 24, 2002, the General Partner held its annual meetingof shareholders. At that meeting, the General Partner’s shareholders electedBarrington H. Branch, Thomas L. Hefner, L. Ben Lytle and John W. Nelley, Jr. toserve a three year term. The number of votes cast for and against each of thedirector nominees was as follows:

 
| **NOMINEE**          |   | **FOR**     |   | **AGAINST** |   |
|----------------------|--------|-------------|--------|-------------|--------|
| Barrington H. Branch |   | 113,415,210 |   | 2,114,926   |   |
| Thomas L. Hefner     |   | 113,420,064 |   | 2,110,071   |   |
| L. Ben Lytle         |   | 113,397,855 |   | 2,132,281   |   |
| John W. Nelley, Jr.  |   | 113,409,393 |   | 2,120,744   |   |

 

The remaining directors, Geoffrey Button, William Cavanaugh III, NgaireCuneo, Charles R. Eitel, Howard L. Feinsand, William O. McCoy, James E. Rogersand Darell E. Zink, Jr., continued in office following the annual meeting. Inaddition, at a Board meeting held that same day, the Board of Directors electedRobert J. Woodward, Jr. to fill a vacancy on the Board.

 

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At the Annual meeting, the shareholders also ratified the appointmentof KPMG LLP as the Partnership’s independent auditors.  111,433,820 votes were cast in favor of theappointment; 3,509,440 votes were cast against it, and 566,870 votes abstained.

 

Item 5.  Other Information

 

None

 

Item 6. Exhibits and Reports on Form 8-K

 

(a)   Exhibits

 

Exhibit 15.  Letter regarding unaudited interim financial information

 

(b)   Reportson Form 8-K

 

None

 

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**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                         | DUKE REALTY LIMITED PARTNERSHIP                      |
|------------------------------|------------------------------------------------------|
|                         | By: Duke Realty Corporation                          |
|                         |                                                 | Its General Partner |
|                         |                                                 |
|                         |                                                 |   |
| Date:  August  14, 2002 | /s/                                                  | Thomas L. Hefner |
|                         | Thomas L. Hefner                                     |
|                         | President and Chief Executive Officer                |
|                         |                                                 |
|                         |                                                 |   |
|                         | /s/                                                  | Darell E. Zink, Jr. |
|                         | Darell E. Zink, Jr.                                  |
|                         | Executive Vice President and Chief Financial Officer |
|                         |                                                 |
|                         |                                                 |   |
|                         | /s/                                                  | Matthew A. Cohoat |
|                         | Matthew A. Cohoat                                    |
|                         | Senior Vice President and Corporate Controller       |
|                              |                                                      |  |  |

 

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