**UNITEDSTATESSECURITIES 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, 2003** |
|                               |   |
| **OR**                             |
|                               |   |
| **o**                              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                               |   |
|                               | **For the transition  period  from                      to                      .** |
|                               |   |
| **Commission File Number: 1-9044** |

 

**DUKE REALTYLIMITED PARTNERSHIP**

 

| State of Incorporation:                                                                                   |   | IRS Employer Identification Number: |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------------------------|
| **Indiana**                                                                                               |   | **35-1740409**                      |
|                                                                                                      |   |                                |
| **600 East 96th Street, Suite 100  Indianapolis, Indiana  46240**                                    |
|                                                                                                      |   |                                |
| **Telephone:  (317) 808-6000**                                                                       |
| (Address, including zip code and telephone  number, including area code, of principal  executive offices) |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes    ý    No    o

 

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

 

Yes    o    No    ý

 

The number of Common Units outstanding as of August 10, 2003 was150,422,813 ($.01 par value).

 

 

----

 

**DUKE REALTY LIMITEDPARTNERSHIP**

 

**INDEX**

 
| **Part I - Financial Information**                                                                              |
|-----------------------------------------------------------------------------------------------------------------|
|                                                                                                            |
| **Item 1.  Financial Statements**                                                                          |
|                                                                                                            |   |
|                                                                                                            | Condensed  Consolidated Balance Sheets as of  June 30, 2003 (Unaudited) and December 31, 2002 |
|                                                                                                            |   |
|                                                                                                            | Condensed  Consolidated Statements of Operations (Unaudited)  for the three and six months ended June 30, 2003 and 2002 |
|                                                                                                            |   |
|                                                                                                            | Condensed  Consolidated Statements of Cash Flows (Unaudited)  for the six months ended June 30, 2003 and 2002 |
|                                                                                                            |   |
|                                                                                                            | Condensed  Consolidated Statement of Partners’ Equity  (Unaudited) for the six months ended June 30, 2003 |
|                                                                                                            |   |
|                                                                                                            | Notes to Condensed Consolidated Financial  Statements  (Unaudited) |
|                                                                                                            |   |
|                                                                                                            | Independent  Accountants’ Review Report |
|                                                                                                            |   |
| **Item  2.  Management’s Discussion and  Analysis of Financial  Condition and Results of Operations** |
|                                                                                                            |
| **Item  3.  Quantitative and Qualitative  Disclosures About Market Risk**                                  |
|                                                                                                            |
| **Item  4.  Controls and Procedures**                                                                      |
|                                                                                                            |
| **Part II - Other Information**                                                                                 |
|                                                                                                            |
|                                                                                                            | Item 1. | Legal Proceedings |
|                                                                                                            | Item 2. | Changes in Securities |
|                                                                                                            | Item 3. | Defaults Upon Senior Securities |
|                                                                                                            | Item 4. | Submission of Matters to a Vote of Security  Holders |
|                                                                                                            | Item  5. | Other  Information |
|                                                                                                            | Item 6. | Exhibits and Reports on Form 8-K |
|                                                                                                                 |  |  |  |

 

----

 

**PART I - FINANCIAL INFORMATION****Item 1. Financial Statements****DUKEREALTY LIMITED PARTNERSHIP AND SUBSIDIARIES****CondensedConsolidated Balance Sheets****(inthousands)**

 
|                                                                                       |   | **June 30,  2003** |          | **December 31,  2002** |       |
|--------------------------------------------------------------------------------------------|--------|--------------------|---------------|------------------------|------------|
|                                                                                       |   | **(Unaudited)**    |          |                   |       |
| **ASSETS**                                                                                 |   |               |          |                   |       |
|                                                                                       |   |               |          |                   |       |
| Real estate  investments:                                                                  |   |               | ** **    |                   |       |
| Land and  improvements                                                                     |   | **$**              | **620,837**   | ** **             | $          | 608,995 |   |
| Buildings and  tenant improvements                                                         |   | **4,333,799**      | ** **    | 4,237,360              |       |
| Construction  in progress                                                                  |   | **100,088**        | ** **    | 85,756                 |       |
| Investments in  unconsolidated companies                                                   |   | **299,831**        | ** **    | 315,589                |       |
| Land held for  development                                                                 |   | **326,233**        | ** **    | 326,250                |       |
|                                                                                       |   | **5,680,788**      |          | 5,573,950              |       |
| Accumulated  depreciation                                                                  |   | **(623,631**       | **)**         | (555,858               | )          |
|                                                                                       |   |               | ** **    |                   |       |
| Net real  estate investments                                                               |   | **5,057,157**      | ** **    | 5,018,092              |       |
|                                                                                       |   |               | ** **    |                   |       |
| Cash and cash  equivalents                                                                 |   | **11,463**         | ** **    | 17,129                 |       |
| Accounts  receivable, net of allowance of $2,220 and $2,008                                |   | **16,777**         | ** **    | 15,415                 |       |
| Straight-line  rent receivable, net of allowance of $1,240 and $2,491                      |   | **61,934**         | ** **    | 52,062                 |       |
| Receivables on  construction contracts                                                     |   | **29,523**         | ** **    | 23,181                 |       |
| Deferred  financing costs, net of accumulated amortization of $15,361 and $15,390          |   | **13,337**         | ** **    | 11,431                 |       |
| Deferred  leasing and other costs, net of accumulated amortization of $57,741 and  $50,543 |   | **127,026**        | ** **    | 112,772                |       |
| Escrow  deposits and other assets                                                          |   | **111,865**        | ** **    | 96,973                 | ** ** |
|                                                                                       |   | **$**              | **5,429,082** |                   | $          | 5,347,055 |   |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                             |   |               | ** **    |                   |       |
|                                                                                       |   |               | ** **    |                   |       |
| Indebtedness:                                                                              |   |               | ** **    |                   |       |
| Secured debt                                                                               |   | **$**              | **273,862**   | ** **             | $          | 299,147 |   |
| Unsecured  notes                                                                           |   | **1,676,015**      | ** **    | 1,526,138              |       |
| Unsecured  lines of credit                                                                 |   | **285,000**        | ** **    | 281,000                |       |
|                                                                                       |   | **2,234,877**      |          | 2,106,285              |       |
|                                                                                       |   |               | ** **    |                   |       |
| Construction  payables and amounts due subcontractors                                      |   | **51,351**         | ** **    | 43,232                 |       |
| Accounts  payable                                                                          |   | **1,315**          | ** **    | 548                    |       |
| Accrued  expenses:                                                                         |   |               | ** **    |                   |       |
| Real estate  taxes                                                                         |   | **60,697**         | ** **    | 51,472                 |       |
| Interest                                                                                   |   | **32,297**         | ** **    | 27,374                 |       |
| Other                                                                                      |   | **38,140**         | ** **    | 52,485                 |       |
| Other  liabilities                                                                         |   | **110,350**        | ** **    | 106,893                |       |
| Tenant  security deposits and prepaid rents                                                |   | **35,626**         | ** **    | 33,710                 |       |
| Total  liabilities                                                                         |   | **2,564,653**      | ** **    | 2,421,999              |       |
|                                                                                       |   |               | ** **    |                   |       |
| Minority  interest                                                                         |   | **4,650**          | ** **    | 5,213                  |       |
|                                                                                       |   |               | ** **    |                   |       |
| Partners’  equity:                                                                    |   |               | ** **    |                   |       |
| General  Partner                                                                           |   |               | ** **    |                   |       |
| Common equity                                                                              |   | **2,160,361**      | ** **    | 2,203,060              |       |
| Preferred  equity (liquidation preference of ($440,829)                                    |   | **415,406**        | ** **    | 415,466                |       |
|                                                                                       |   | **2,575,767**      |          | 2,618,526              | ** ** |
| Limited  Partners’ common equity                                                      |   | **225,909**        | ** **    | 235,473                |       |
| Limited Partners’  preferred equity                                                   |   | **67,955**         | ** **    | 67,955                 |       |
| Accumulated  other comprehensive income                                                    |   | **(9,852**         | **)**         | (2,111                 | )          |
|                                                                                       |   | **2,859,779**      |          | 2,919,843              |       |
|                                                                                       |   | **$**              | **5,429,082** |                   | $          | 5,347,055 |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

2

----

 

**DUKE REALTY LIMITEDPARTNERSHIPAND SUBSIDIARIES****Condensed Consolidated Statements ofOperations****For thethree and six months ended June 30,****(inthousands, except per unit amounts)****(Unaudited)**

 
|                                                                                    |   | **Three  Months Ended** |        | **Six Months  Ended** |   |
|-----------------------------------------------------------------------------------------|--------|-------------------------|-------------|-----------------------|--------|
|                                                                                    |   | **2003**                |        | **2002**              |   | **2003** |   | **2002** |   |
| **RENTAL OPERATIONS:**                                                                  |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Revenues:                                                                               |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Rental income                                                                           |   | **$**                   | **175,714** | ** **            | **$**  | 172,766 |   | **$** | **356,063** | ** ** | $ | 340,525 |   |
| Equity in  earnings of unconsolidated companies                                         |   | **6,693**               | ** **  | 6,278                 |   | **10,962** | ** ** | 12,574 |   |
|                                                                                    |   | **182,407**             |        | 179,044               |   | **367,025** | ** ** | 353,099 |   |
| Operating  expenses:                                                                    |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Rental  expenses                                                                        |   | **33,511**              | ** **  | 30,058                |   | **73,938** | ** ** | 61,184 |   |
| Real estate  taxes                                                                      |   | **21,455**              | ** **  | 18,884                |   | **42,013** | ** ** | 37,988 |   |
| Interest  expense                                                                       |   | **34,767**              | ** **  | 27,614                |   | **67,377** | ** ** | 54,715 |   |
| Depreciation  and amortization                                                          |   | **46,545**              | ** **  | 42,658                |   | **94,087** | ** ** | 84,899 |   |
|                                                                                    |   | **136,278**             |        | 119,214               |   | **277,415** | ** ** | 238,786 |   |
| Earnings from  rental operations                                                        |   | **46,129**              | ** **  | 59,830                |   | **89,610** | ** ** | 114,313 |   |
|                                                                                    |   |                    | ** **  |                  |   |   | ** ** |   |   |
| **SERVICE OPERATIONS**                                                                  |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Revenues:                                                                               |   |                    | ** **  |                  |   |   | ** ** |   |   |
| General  contractor gross revenue                                                       |   | **67,519**              | ** **  | 40,980                |   | **117,661** | ** ** | 86,913 |   |
| General  contractor costs                                                               |   | **(60,554**             | **)**       | (36,658               | )      | **(105,434** | **)** | (76,877 | ) |
| Net general  contractor revenue                                                         |   | **6,965**               | ** **  | 4,322                 |   | **12,227** | ** ** | 10,036 |   |
| Property  management, maintenance and leasing fees                                      |   | **3****,448**           | ** **  | 3,429                 |   | **7****,542** | ** ** | 6,628 |   |
| Construction  and development activity income                                           |   | **910**                 | ** **  | 7,536                 |   | **717** | ** ** | 27,929 |   |
| Other income                                                                            |   | **98**                  | ** **  | 77                    |   | **117** | ** ** | 292 |   |
| Total revenue                                                                           |   | **11,421**              | ** **  | 15,364                |   | **20,603** | ** ** | 44,885 |   |
|                                                                                    |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Operating  expenses                                                                     |   | **6,731**               | ** **  | 8,195                 |   | **14,031** | ** ** | 22,184 |   |
| Total earnings  from service operations                                                 |   | **4,690**               | ** **  | 7,169                 |   | **6,572** | ** ** | 22,701 |   |
|                                                                                    |   |                    | ** **  |                  |   |   | ** ** |   |   |
| General and  administrative expense                                                     |   | **(4,932**              | **)**       | (6,798                | )      | **(10,852** | **)** | (14,036 | ) |
| Operating  income                                                                       |   | **45,887**              | ** **  | 60,201                |   | **85,330** | ** ** | 122,978 |   |
|                                                                                    |   |                    | ** **  |                  |   |   | ** ** |   |   |
| **OTHER INCOME  (EXPENSE)**                                                             |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Interest  income                                                                        |   | **882**                 | ** **  | 1,334                 |   | **1,865** | ** ** | 1,755 |   |
| Earnings from  land and depreciable property dispositions net of impairment adjustments |   | **1,744**               | ** **  | 2,976                 |   | **11,146** | ** ** | 4,087 |   |
| Other revenue  (expense)                                                                |   | **(9**                  | **)**       | 25                    |   | **(559** | **)** | 237 |   |
| Other minority  interest in earnings of subsidiaries                                    |   | **(449**                | **)**       | (251                  | )      | **(472** | **)** | (636 | ) |
| Income from  continuing operations                                                      |   | **48,055**              | ** **  | 64,285                |   | **97,310** | ** ** | 128,421 |   |
|                                                                                    |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Discontinued  operations:                                                               |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Net income  from discontinued operations                                                |   | **230**                 | ** **  | 1,216                 |   | **567** | ** ** | 2,333 |   |
| Gain on sale  of discontinued operations                                                |   | **128**                 | ** **  | 2,723                 |   | **2,482** | ** ** | 2,723 |   |
| Income from  discontinued operations                                                    |   | **358**                 | ** **  | 3,939                 |   | **3,049** | ** ** | 5,056 |   |
| Net income                                                                              |   | **48,413**              | ** **  | 68,224                |   | **100,359** | ** ** | 133,477 |   |
| Dividends on  preferred units                                                           |   | **(10,154**             | **)**       | (14,209               | )      | **(20,308** | **)** | (28,419 | ) |
| Net income  available for common unitholders                                            |   | **$**                   | **38,259**  | ** **            | **$**  | 54,015 |   | **$** | 80,051 | ** ** | $ | 105,058 |   |
| Basic net  income per common unit:                                                      |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Continuing  operations                                                                  |   | **$**                   | **.25**     | ** **            | **$**  | .33 |   | **$** | **.51** | ** ** | $ | .67 |   |
| Discontinued  operations                                                                |   | **—**              | ** **  | .03                   |   | **.02** | ** ** | .03 |   |
| Total                                                                                   |   | **$**                   | **.25**     | ** **            | **$**  | .36 |   | **$** | **.53** | ** ** | $ | .70 |   |
| Diluted net  income per common unit:                                                    |   |                    | ** **  |                  |   |   | ** ** |   |   |
| Continuing  operations                                                                  |   | **$**                   | **.25**     | ** **            | **$**  | .33 |   | **$** | **.51** | ** ** | $ | .67 |   |
| Discontinued  operations                                                                |   | **—**              | ** **  | .03                   |   | **.02** | ** ** | .03 |   |
| Total                                                                                   |   | **$**                   | **.25**     | ** **            | **$**  | .36 |   | **$** | **.53** | ** ** | $ | .70 |   |
| Weighted  average number of common units outstanding                                    |   | **150,141**             | ** **  | 149,310               |   | **150,057** | ** ** | 148,992 |   |
| Weighted  average number of common and dilutive potential common units                  |   | **151,019**             | ** **  | 151,092               |   | **150,823** | ** ** | 150,682 |   |

 

See accompanying Notes toConsolidated Financial Statements.

 

3

----

 

**DUKEREALTY LIMITED PARTNERSHIP AND SUBSIDIARIES****Condensed Consolidated Statements ofCash Flows****For thesix months ended June 30****(inthousands)****(Unaudited)**

 
|                                                                                             |   | **2003**     |        | **2002**   |   |
|--------------------------------------------------------------------------------------------------|--------|--------------|-------------|------------|--------|
| Cash flows from operating  activities:                                                           |   |         | ** **  |       |   |
| Net income                                                                                       |   | **$**        | **100,359** | ** ** | $      | 133,477 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities:               |   |         | ** **  |       |   |
| Depreciation of buildings and  tenant improvements                                               |   | **82,915**   | ** **  | 75,584     |   |
| Amortization of deferred  leasing and other costs                                                |   | **11,374**   | ** **  | 10,228     |   |
| Amortization of deferred  financing costs                                                        |   | **1,960**    | ** **  | 1,923      |   |
| Minority interest in earnings                                                                    |   | **472**      | ** **  | 636        |   |
| Straight-line rent adjustment                                                                    |   | **(11,453**  | **)**       | (4,099     | )      |
| Earnings from land and  depreciated property sales                                               |   | **(13,628**  | **)**       | (5,545     | )      |
| Build-to-suit operations, net                                                                    |   | **(20,027**  | **)**       | 163,639    |   |
| Construction contracts, net                                                                      |   | **524**      | ** **  | (13,537    | )      |
| Other accrued revenues and  expenses, net                                                        |   | **2,291**    | ** **  | 7,474      |   |
| Operating distributions  received in excess of equity and earnings from unconsolidated companies |   | **7,022**    | ** **  | 5,308      |   |
| **Net cash provided by operating activities**                                                    |   | **161,809**  | ** **  | 375,088    |   |
|                                                                                             |   |         | ** **  |       |   |
| Cash flows from investing  activities:                                                           |   |         | ** **  |       |   |
| Development of real estate  investments                                                          |   | **(68,714**  | **)**       | (63,914    | )      |
| Acquisition of real estate  investments                                                          |   | **(33,145**  | **)**       | (32,941    | )      |
| Acquisition of land held for  development and infrastructure costs                               |   | **(36,935**  | **)**       | (16,388    | )      |
| Recurring tenant improvements                                                                    |   | **(17,777**  | **)**       | (13,959    | )      |
| Recurring leasing costs                                                                          |   | **(9,217**   | **)**       | (8,556     | )      |
| Recurring building  improvements                                                                 |   | **(6,883**   | **)**       | (5,849     | )      |
| Other deferred leasing costs                                                                     |   | **(11,836**  | **)**       | (8,603     | )      |
| Other deferred costs and other  assets                                                           |   | **(3,439**   | **)**       | (19,076    | )      |
| Tax deferred exchange escrow,  net                                                               |   | **(10,506**  | **)**       | —     |   |
| Proceeds from land and  depreciated property sales, net                                          |   | **63,255**   | ** **  | 35,023     |   |
| Advances to unconsolidated  companies                                                            |   | **(1,366**   | **)**       | (18,224    | )      |
| **Net cash used by investing activities**                                                        |   | **(136,563** | **)**       | (152,487   | )      |
|                                                                                             |   |         | ** **  |       |   |
| Cash flows from financing  activities:                                                           |   |         | ** **  |       |   |
| Contribution from General  Partner                                                               |   | **6,821**    | ** **  | 18,201     |   |
| Payments for General Partner’s  redemption of preferred equity                              |   | **(20**      | **)**       | —     |   |
| Payments for exercise of  warrants                                                               |   | **(4,692**   | **)**       | —     |   |
| Proceeds from indebtedness                                                                       |   | **325,000**  | ** **  | —     |   |
| Payments on unsecured debt                                                                       |   | **(175,000** | **)**       | —     |   |
| Proceeds from debt refinancing                                                                   |   | **38,340**   | ** **  | —     |   |
| Payments on indebtedness  including principal amortization                                       |   | **(64,968**  | **)**       | (7,738     | )      |
| Repayments on lines of credit,  net                                                              |   | **5,554**    | ** **  | (78,488    | )      |
| Distributions to partners                                                                        |   | **(136,515** | **)**       | (134,433   | )      |
| Distributions to preferred  unitholders                                                          |   | **(20,308**  | **)**       | (28,419    | )      |
| Distributions to minority  interest                                                              |   | **(1,032**   | **)**       | (565       | )      |
| Deferred financing costs                                                                         |   | **(4,092**   | **)**       | (177       | )      |
| **Net cash used for financing activities**                                                       |   | **(30,912**  | **)**       | (231,619   | )      |
| **Net increase (decrease) in cash and cash  equivalents**                                        |   | **(5,666**   | **)**       | (9,018     | )      |
|                                                                                             |   |         | ** **  |       |   |
| Cash and cash equivalents at  beginning of period                                                |   | **17,129**   | ** **  | 10,453     |   |
| Cash and cash equivalents at  end of period                                                      |   | **$**        | **11,463**  | ** ** | $      | 1,435 |   |
| Other non-cash items:                                                                            |   |         | ** **  |       |   |
| Assumption of debt for real estate  acquisitions                                                 |   | **$**        | **—**  | ** ** | $      | 9,566 |   |
| Conversion of Limited Partner Units to  common shares of General Partner                         |   | **$**        | **1,749**   | ** ** | $      | 12,480 |   |
| Issuance of Limited Partner Units for real  estate acquisitions                                  |   | **$**        | **—**  | ** ** | $      | 5,440 |   |
| Transfer of debt in sale of depreciated  property                                                |   | **$**        | **—**  | ** ** | $      | 2,432 |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

4

----

 

**DUKE REALTY LIMITEDPARTNERSHIP AND SUBSIDIARIES****Condensed Consolidated Statement ofPartners’ Equity****For thesix months ended June 30, 2003****(inthousands, except per unit data)****(Unaudited)**

 
|                                                                     |   | **General Partner** |          | **Partners’  Common  Equity** |       | **Partners’  Preferred  Equity** |       | **Other  Comprehensive  Income (Loss)** |        | **Total**  |   |
|--------------------------------------------------------------------------|--------|---------------------|---------------|------------------------------------|------------|---------------------------------------|------------|-----------------------------------------|-------------|------------|--------|
|                                                                     |   | **Common  Equity**  |          | **Preferred  Equity**              |       |                                  |       |                                    |        |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| **Balance at December  31, 2002**                                        |   | **$**               | **2,203,060** | ** **                         | **$**      | **415,466**                           | ** ** | **$**                                   | **235,473** | ** ** | **$**  | **67,955** | ** ** | **$** | **(2,111** | **)** | **$** | **2,919,843** | ** ** |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| Comprehensive income:                                                    |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| Net income                                                               |   | 72,166              |          | 17,504                             |       | 7,885                                 |       | 2,804                                   |        | —     |   | 100,359 |   |
| Distributions to preferred unitholders                                   |   | —              |          | (17,504                            | )          | —                                |       | (2,804                                  | )           | —     |   | (20,308 | ) |
| Gains (losses) on derivative instruments                                 |   |                |          |                               |       |                                  |       |                                    |        | (7,741     | )      | (7,741 | ) |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| Comprehensive income available for common  unitholders                   |   | —              |          | —                             |       | —                                |       | —                                  |        | —     |   | 72,310 |   |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| Capital contribution from General Partner                                |   | 6,821               |          | —                             |       | —                                |       | —                                  |        | —     |   | 6,821 |   |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| Acquisition of Partnership interest for  common stock of General Partner |   | 5,747               |          | —                             |       | (3,998                                | )          | —                                  |        | —     |   | 1,749 |   |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| General Partner’s repurchase of Series D  Preferred Shares          |   | —              |          | (20                                | )          | —                                |       | —                                  |        | —     |   | (20 | ) |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| General Partner’s conversion of Series D  Preferred Shares          |   | 40                  |          | (40                                | )          | —                                |       | —                                  |        | —     |   | — |   |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| Tax benefits from employee stock plans                                   |   | 251                 |          | —                             |       | —                                |       | —                                  |        | —     |   | 251 |   |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| Exercise of General Partner warrants                                     |   | (4,692              | )             | —                             |       | —                                |       | —                                  |        | —     |   | (4,692 | ) |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| FASB 123 Compensation expense                                            |   | 32                  |          | —                             |       | —                                |       | —                                  |        | —     |   | 32 |   |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| Contributions from General Partner                                       |   | 34                  |          | —                             |       | —                                |       | —                                  |        | —     |   | 34 |   |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| Distributions to partners ($.91 per Common  Unit)                        |   | (123,098            | )             | —                             |       | (13,451                               | )          | —                                  |        | —     |   | (136,549 | ) |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| **Balance at June 30, 2003**                                             |   | **$**               | **2,160,361** | ** **                         | **$**      | **415,406**                           | ** ** | **$**                                   | **225,909** | ** ** | **$**  | **67,955** | ** ** | **$** | **(9,852** | **)** | **$** | **2,859,779** | ** ** |
|                                                                     |   |                |          |                               |       |                                  |       |                                    |        |       |   |   |   |
| **Common units outstanding at June 30, 2003**                            |   | **135,547**         | ** **    |                               | ** ** | **14,685**                            |       |                                    |        |       |   | **150,232** |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

5

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**DUKEREALTY LIMITED PARTNERSHIPNOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS(Unaudited)**

 

**1.**                    **FinancialStatements**

 

The interim condensed consolidated financial statements included hereinhave been prepared by Duke Realty Limited Partnership (the “Partnership”)without audit (except for the Balance Sheet as of December 31, 2002). Thefinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and in accordance with Rule 10-01 of Regulation S-X ofthe Securities Exchange Act of 1934. Accordingly, they do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements. Inthe opinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have been included.These financial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Partnership’s AnnualReport on Form 10-K for the year ended December 31, 2002.

 

**The Partnership**

 

Duke Realty Limited Partnership (the“Partnership”) was formed on October 4, 1993, when Duke Realty Corporation (the“General Partner”) contributed all of its properties and related assets andliabilities, along with the net proceeds of $309.2 million from the issuance ofan additional 14,000,833 shares of the General Partner through an offering tothe Partnership. Simultaneously, the Partnership completed the acquisition ofDuke Associates, a full-service commercial real estate firm operating in theMidwest. The General Partner was formed in 1985 and qualifies as a Real EstateInvestment Trust (“REIT”) under provisions of the Internal Revenue Code.  The General Partner is the sole general partner of the Partnership,owning 90.2% of the partnership interest as of June 30, 2003 (“General PartnerUnits”). The remaining 9.8% of the Partnership is owned by limited partners(“Limited Partner Units” and, together with the General Partner Units, the“Common Units”). The Limited PartnerUnits are exchangeable for shares of the General Partner’s common stock on aone-for-one basis subject generally to a one-year holding period.

 

The Partnership owns and operates a portfolioof industrial, office and retail properties in the midwestern and southeasternUnited States and provides real estate services to third-party owners. ThePartnership conducts Service Operations through Duke Realty Services LimitedPartnership (“DRSLP”) and Duke Construction Limited Partnership (“DCLP”). Theconsolidated financial statements include the accounts of the Partnership andits majority-owned or controlled subsidiaries.

 

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

 

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

 
| **Description**          |   | **Borrowing  Capacity  (in 000’s)** |    | **Maturity  Date** |          | **Interest  Rate** |        | **Outstanding  at June 30, 2003  (in 000’s)** |   |
|--------------------------|--------|------------------------------------------|---------|--------------------|---------------|--------------------|-------------|----------------------------------------------------|--------|
| Unsecured Line of Credit |   | $                                        | 500,000 |               | February 2004 |               | LIBOR + .65 | %                                                  | $      | 285,000 |   |
| Secured Line of Credit   |   | 50,000                                   |    | January 2006       |          | LIBOR + .60        | %           | 25,449                                             |   |
|                          |        |                                          |         |                    |               |                    |             |                                                    |        |  |  |

 

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

 

6

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The $500 million line of credit provides the Partnership with an optionto obtain borrowings from the financial institutions that participate in theline of credit at rates lower than the stated interest rate, subject to certainrestrictions. Amounts outstanding on the unsecured line of credit at June 30,2003, are at LIBOR + .65% (1.66% at June 30, 2003).

 

**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$755,000 and $650,000 for services provided to the Option Properties for thesix months ended June 30, 2003 and 2002, 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 transactions that areinsignificant and that include terms that are considered by the Partnership tobe at arm’s-length and equal to those negotiated with unaffiliated parties.

 

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

 

Basic net income per common unit is computedby dividing net income available for common units by the weighted averagenumber of common units outstanding for the period. Diluted net income percommon unit is computed by dividing net income available for common units bythe sum of the weighted average number of common units outstanding and dilutivepotential common units for the period.

 

The following table reconciles the componentsof basic and diluted net income per common unit for the three and six monthsended June 30 (in thousands):

 
|                                                                         |   | **Three months  Ended June 30,** |       | **Six Months  Ended June 30,** |       |
|------------------------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                                                         |   | **2003**                         |       | **2002**                       |       | **2003** |   | **2002** |   |
|                                                                         |   |                             |       |                           |       |   |   |   |   |
| Basic and  diluted net income available for common unitholders               |   | **$**                            | **38,259** |                           | $          | 54,015 | ** ** | **$** | **80,051** |   | $ | 105,058 |   |
|                                                                         |   |                             |       |                           |       |   |   |   |   |
| Weighted  average number of common units outstanding                         |   | **150,141**                      |       | 149,310                        | ** ** | **150,057** |   | 148,992 |   |
| Dilutive  shares for stock based compensation plans                          |   | **878**                          |       | 1,782                          | ** ** | **766** |   | 1,690 |   |
| Weighted  average number of common units and dilutive potential common units |   | **151,019**                      |       | 151,092                        | ** ** | **150,823** |   | 150,682 |   |
|                                                                              |        |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

The Series D Convertible Preferred equity wasanti-dilutive for the six months ended June 30, 2003 and 2002; therefore, noconversion to common units is included in weighted dilutive potential commonunits.

 

**5.****                    SegmentReporting**

 

The Partnership is engaged in four operating segments; the ownershipand rental of office, industrial and retail real estate investments(collectively, “Rental Operations”), and the providing of various real estateservices such as property management, maintenance, leasing, development andconstruction management to third-party property owners (“Service Operations”).The Partnership’s reportable segments offer different products or services andare managed separately because each requires different operating strategies andmanagement expertise. There are no material intersegment sales or transfers.

 

Non-segment revenue consists mainly of equity in earnings ofunconsolidated companies. Non-segment assets consist of corporate assetsincluding cash, deferred financing costs and investments in unconsolidatedcompanies.

 

7

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The Partnership assesses and measures segment operating results basedupon an industry performance measure referred to as Funds From Operations(“FFO”), which management believes is a useful indicator of the Partnership’soperating performance. The National Association of Real Estate InvestmentTrusts defines FFO as net income or loss, excluding gains or losses from salesof depreciated operating property, plus operating property depreciation andamortization and adjustments for minority interest and unconsolidated companieson the same basis. Interest expense and other non-property specific revenuesand expenses are not allocated to individual segments in determining thePartnership’s performance measure.

 

The revenues and FFO for each of the reportable segments for the sixmonths ended June 30, 2003 and 2002, and the assets for each of the reportablesegments as of June 30, 2003 and December 31, 2002, are summarized as follows(in thousands):

 
|                                                                 |   | **Three Months Ended June 30,** |        | **Six Months Ended June 30,** |   |
|----------------------------------------------------------------------|--------|---------------------------------|-------------|-------------------------------|--------|
|                                                                 |   | **2003**                        |        | **2002**                      |   | **2003** |   | **2002** |   |
| Revenues                                                             |   |                            | ** **  |                          |   |   | ** ** |   | ** ** |
| Rental Operations:                                                   |   |                            | ** **  |                          |   |   | ** ** |   |   |
| Office                                                               |   | **$**                           | **102,472** | ** **                    | $      | 102,563 |   | **$** | **209,577** | ** ** | $ | 199,217 |   |
| Industrial                                                           |   | **70****,495**                  | ** **  | 68,298                        |   | **140,628** | ** ** | 137,241 |   |
| Retail                                                               |   | **1,989**                       | ** **  | 1,633                         |   | **4,085** | ** ** | 3,221 |   |
| Service Operations                                                   |   | **11.421**                      | ** **  | 15,364                        |   | **20,603** | ** ** | 44,885 |   |
| Total Segment Revenues                                               |   | **186,377**                     | ** **  | 187,858                       |   | **374,893** | ** ** | 384,564 |   |
| Non-Segment Revenue                                                  |   | **7,451**                       | ** **  | 6,550                         |   | **12,735** | ** ** | 13,420 |   |
| Consolidated Revenue from  continuing operations                     |   | **193,828**                     | ** **  | 194,408                       |   | **387,628** | ** ** | 397,984 |   |
| Discontinued Operations                                              |   | **534**                         | ** **  | 3,798                         |   | **1,436** | ** ** | 6,461 |   |
| Consolidated Revenue                                                 |   | **$**                           | **194,362** | ** **                    | $      | 198,206 |   | **$** | **389,064** | ** ** | $ | 404,445 |   |
|                                                                 |   |                            | ** **  |                          |   |   | ** ** |   |   |
| Funds From Operations                                                |   |                            | ** **  |                          |   |   | ** ** |   |   |
| Rental Operations:                                                   |   |                            | ** **  |                          |   |   | ** ** |   |   |
| Office                                                               |   | **$**                           | **66,514**  | ** **                    | $      | 70,516 |   | **$** | **135,168** | ** ** | $ | 134,710 |   |
| Industrial                                                           |   | **52,786**                      | ** **  | 52,455                        |   | **102,510** | ** ** | 104,919 |   |
| Retail                                                               |   | **1,610**                       | ** **  | 1,383                         |   | **3,218** | ** ** | 2,755 |   |
| Services Operations                                                  |   | **4,690**                       | ** **  | 7,169                         |   | **6,572** | ** ** | 22,701 |   |
| Total Segment FFO                                                    |   | **125,600**                     | ** **  | 131,523                       |   | **247,468** | ** ** | 265,085 |   |
|                                                                 |   |                            | ** **  |                          |   |   | ** ** |   |   |
| Non-Segment FFO:                                                     |   |                            | ** **  |                          |   |   | ** ** |   |   |
| Interest expense                                                     |   | **(34,767**                     | **)**       | (27,614                       | )      | **(67,377** | **)** | (54,715 | ) |
| Interest income                                                      |   | **882**                         | ** **  | 1,334                         |   | **1,865** | ** ** | 1,755 |   |
| General and administrative expense                                   |   | **(4,932**                      | **)**       | (6,798                        | )      | **(10,852** | **)** | (14,036 | ) |
| Gain on land sales                                                   |   | **1,767**                       | ** **  | 1,883                         |   | **4,910** | ** ** | 3,091 |   |
| Other expenses                                                       |   | **(72**                         | **)**       | (440                          | )      | **(1,343** | **)** | (795 | ) |
| Minority interest in earnings of  subsidiaries                       |   | **(449**                        | **)**       | (251                          | )      | **(472** | **)** | (636 | ) |
| Joint venture FFO                                                    |   | **11,368**                      | ** **  | 10,597                        |   | **20,739** | ** ** | 21,373 |   |
| Dividends on preferred units                                         |   | **(10,154**                     | **)**       | (14,209                       | )      | **(20,308** | **)** | (28,419 | ) |
| Discontinued operations                                              |   | **302**                         | ** **  | 2,816                         |   | **769** | ** ** | 4,511 |   |
| Consolidated FFO                                                     |   | **89,545**                      | ** **  | 98,841                        |   | **175,399** | ** ** | 197,214 |   |
| Depreciation and amortization on continuing  operations              |   | **(46,545**                     | **)**       | (42,658                       | )      | **(94,087** | **)** | (84,899 | ) |
| Depreciation and amortization on  discontinued operations            |   | **(72**                         | **)**       | (335                          | )      | **(202** | **)** | (913 | ) |
| Share of joint venture adjustments                                   |   | **(4,774**                      | **)**       | (4,383                        | )      | **(9,777** | **)** | (8,798 | ) |
| Earnings from depreciated  property sales on continuing operations   |   | **(4**                          | **)**       | 2,550                         |   | **6,255** | ** ** | 2,454 |   |
| Earnings from depreciated  property sales on discontinued operations |   | **109**                         | ** **  | —                        |   | **2,463** | ** ** | — |   |
|                                                                 |   |                            | ** **  |                          |   |   | ** ** |   |   |
| Net Income Available for Common  Unitholders                         |   | **$**                           | **38,259**  | ** **                    | $      | 54,015 |   | **$** | **80,051** | ** ** | $ | 105,058 |   |

 

8

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|                 |   | **June 30,  2003** |          | **December 31,  2002** |   |
|----------------------|--------|--------------------|---------------|------------------------|--------|
| Assets               |   |               |          |                   |   |
| Rental Operations:   |   |               |          |                   |   |
| Office               |   | **$**              | **2,709,519** |                   | $      | 2,677,427 |   |
| Industrial           |   | **2,192,853**      |          | 2,144,686              |   |
| Retail               |   | **70,180**         |          | 71,072                 |   |
| Service Operations   |   | **96,423**         |          | 91,399                 |   |
| Total Segment Assets |   | **5,068,975**      |          | 4,984,584              |   |
| Non-Segment Assets   |   | **360,107**        |          | 362,471                |   |
| Consolidated Assets  |   | **$**              | **5,429,082** |                   | $      | 5,347,055 |   |

 

**6.****                    RealEstate Investments**

 

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

 

The Partnership has classified operations of 13 buildings asdiscontinued operations in accordance with SFAS 144. As a result, thePartnership classified net income of $230,000 and $1.2 million as net incomefrom discontinued operations for the three months ended June 30, 2003 and 2002and $567,000 and $2.3 million as net income from discontinued operations forthe six months ended June 30, 2003 and 2002. In addition, nine of theproperties classified in discontinued operations were sold during the first sixmonths of 2003 and two properties were sold during the first six months of2002; therefore, the gains on disposal for these properties of $128,000 and$2.7 million for the three months ended June 30, 2003 and 2002, and $2.5million and $2.7 million for the six months ended June 30, 2003 and 2002 arealso reported in discontinued operations.

 

At June 30, 2003, the Partnership had 2industrial, 4 office and 5 retail properties comprising approximately 1.4million square feet held for sale. Of these properties, 3 build-to-suit officeand 2 build-to-suit retail properties were under development. Net operatingincome (defined as total property revenues, less property expenses, whichinclude real estate taxes, repairs and maintenance, property management,utilities, insurance and other expenses) of the properties held for sale forthe six months ended June 30, 2003 and 2002 is approximately $2.4 million and$1.2 million, respectively. Net book value of the properties held for sale atJune 30, 2003, is approximately $68.2 million. There can be no assurance thatsuch properties held for sale will be sold.

 

In association with a contract for a sale of one building entered intoby the Partnership during the six months ended June 30, 2003, the Partnership recognized a total impairmentadjustment of $500,000 to reflect the anticipated loss on the sale of thebuilding.  The Partnership alsorecognized an impairment adjustment of $560,000 on three contracted land saleparcels.

 

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

 

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

 

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

 

9

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| **Description**     |   | **Shares  Outstanding** |   | **Dividend  Rate** |   | **Initial  OptionalRedemption  Date** |   | **Liquidation  Preference** |    | **Convertible** |   |
|---------------------|--------|-------------------------|--------|--------------------|--------|---------------------------------------|--------|-----------------------------|---------|-----------------|--------|
| Series B  Preferred |   | 265                     |   | 7.990              | %      | September 30, 2007                    |   | $                           | 132,250 |            | No     |   |
| Series D  Preferred |   | 534                     |   | 7.375              | %      | December 31, 2003                     |   | $                           | 133,614 |            | Yes    |   |
| Series E  Preferred |   | 400                     |   | 8.250              | %      | January 20, 2004                      |   | $                           | 100,000 |            | No     |   |
| Series I  Preferred |   | 300                     |   | 8.450              | %      | February 6, 2006                      |   | $                           | 75,000  |            | No     |   |

 

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

 

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

 

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

 

**8.****                    OtherMatters**

 

**Reclassifications**

 

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

 

**9.****                    DerivativeInstruments**

 

The Partnership is exposed to capital market risk, such as changes ininterest rates.  In order to manage thevolatility relating to interest rate risk, the Partnership may enter intointerest rate hedging arrangements from time to time. The Partnership does notutilize derivative financial instruments for trading or speculative purposes.The Partnership accounts for derivative instruments under Statement ofFinancial Accounting Standard No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” as amended (“SFAS 133”).

 

In December 2002, the Partnership simultaneously entered into two $50million forward-starting interest rate swaps. The Partnership designated theaggregate $100 million swaps as a hedge to effectively fix the rate onfinancing expected in 2003. The fair value of the swaps was a liability of($7.8) million as of June 30, 2003, and is recorded in other liabilities in theaccompanying balance sheet. The swaps qualify for hedge accounting under SFAS133; therefore, changes in fair value are recorded in other comprehensiveincome.

 

In February 2003, the Partnership simultaneously entered into two $25million forward-starting interest rate swaps. The Partnership designated theaggregate $50 million swaps as a hedge to effectively fix the rate on financingexpected in 2003. The fair value of the swaps was a liability of ($2.1) millionas of June 30, 2003, and is recorded in other liabilities in the accompanyingbalance sheet. The swaps qualify for hedge accounting under SFAS 133;therefore, changes in fair value are recorded in other comprehensive income.

 

In July 2003, the Partnership terminated the$150 million of above-mentioned swaps for a net gain of $677,000. These swapswere terminated as a result of the Partnership’s current capital needs beingmet through the sale of the Series J Preferred Equity as noted in the followingSubsequent Events section. The Partnership currently has no additional swaps orother derivative instruments.

 

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

 

For allissuances prior to 2002, the Partnership applies the recognition and measurementprovisions of APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations in accounting for these plans.

 

Effective January 1, 2002, the Partnership prospectively adopted thefair value recognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*,to all awards granted after January 1, 2002.

 

10

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

 
|                                                                                                             |   | **Three  Months ended  June 30,** |       | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|--------|
|                                                                                                             |   | **2003**                          |       | **2002**                        |   | **2003** |   | **2002** |   |
| Net income, as reported                                                                                          |   | **$**                             | **38,259** | ** **                      | $      | 54,015 |   | **$** | **80,051** | ** ** | $ | 105,058 |   |
| Add:   Stock-based employee compensation expense included in net income  determined under fair value method |   | **178**                           | ** ** | 101                             |   | **356** | ** ** | 202 |   |
| Deduct:   Total stock based compensation expense determined under fair value  method for all awards         |   | **(353**                          | **)**      | (333                            | )      | **(706** | **)** | (666 | ) |
| Proforma Net Income                                                                                              |   | **$**                             | **38,084** | ** **                      | $      | 53,783 |   | **$** | **79,701** | ** ** | $ | 104,594 |   |

 
|                         |   |        |       | **2003** |    | **2002** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------|--------|-------------|------------|----------|---------|----------|------------|----------|------------|----------|------------|
|                         |   |        |       |     |    |     |       |     |       |     |       |
| Basic net income per share   |   | As reported | ** ** | **$**    | **.25** |     | $          | .36      |       | **$**    | **.53**    |   | $ | .70 |   |
|                         |   | Pro forma   |       | **$**    | **.25** |     | $          | .36      |       | **$**    | **.53**    |   | $ | .70 |   |
|                         |   |        |       |     |    |     |       |     |       |     |       |
| Diluted net income per share |   | As reported | ** ** | **$**    | **.25** |     | $          | .36      |       | **$**    | **.53**    |   | $ | .70 |   |
|                         |   | Pro forma   |       | **$**    | **.25** |     | $          | .36      |       | **$**    | **.53**    |   | $ | .69 |   |

 

**11.****             SubsequentEvents**

 

*Declaration of Dividends*

The Board of Directors of the General Partner declared the followingdividends at its July 30, 2003 regularly scheduled Board meeting:

 
| **Class**                         |   | **Quarterly  Amount/Share** |    | **Record  Date** |                | **Payment  Date** |                |
|-----------------------------------|--------|-----------------------------|---------|------------------|---------------------|-------------------|---------------------|
| Common                            |   | $                           | 0.46    |             | August 14,  2003    |              | August 29,  2003    |   |
| Preferred (per depositary share): |   |                        |    |             |                |              |                |
| Series B                          |   | $                           | 0.99875 |             | September  16, 2003 |              | September  30, 2003 |   |
| Series D                          |   | $                           | 0.46094 |             | September  16, 2003 |              | September  30, 2003 |   |
| Series E                          |   | $                           | 0.51563 |             | September  16, 2003 |              | September  30, 2003 |   |
| Series I                          |   | $                           | 0.52813 |             | September  16, 2003 |              | September  30, 2003 |   |

 

*Preferred Stock Issuance*

The General Partner sold $100 million of Series J Preferred Equity onJuly 24, 2003, at a dividend rate of 6.625%. The General Partner and thePartnership anticipate receiving net proceeds of $96.85 million from thisoffering, which is expected to close on or about August 25, 2003.

 

11

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The Partners

**Duke Realty Limited Partnership:**

 

We have reviewed the condensedconsolidated balance sheet of Duke Realty Limited Partnership and subsidiariesas of June 30, 2003, the related condensed consolidated statements ofoperations for the three and six months ended June 30, 2003 and 2002, therelated condensed consolidated statements of cash flows for the six monthsended June 30, 2003 and 2002, and the related condensed consolidated statementof partners’ equity for the six months ended June 30, 2003. These condensedconsolidated financial statements are the responsibility of the Partnership’smanagement.

 

We conducted our review inaccordance with standards established by the American Institute of CertifiedPublic Accountants. A review of interim financial information consistsprincipally of applying analytical procedures to financial data and makinginquiries of persons responsible for financial and accounting matters. It issubstantially less in scope than an audit conducted in accordance with auditingstandards generally accepted in the United States of America, the objective ofwhich is the expression of an opinion regarding the financial statements takenas a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are notaware of any material modifications that should be made to the condensedconsolidated financial statements referred to above for them to be inconformity with accounting principles generally accepted in the United Statesof America.

 

We have previously audited, inaccordance with auditing standards generally accepted in the United States ofAmerica, the consolidated balance sheet of Duke Realty Limited Partnership andsubsidiaries as of December 31, 2002, and the related consolidated statementsof operations, shareholders’ equity and cash flows for the year then ended (notpresented herein); and in our report dated January 29, 2003, we expressed anunqualified opinion on those consolidated financial statements. In our opinion,the information set forth in the accompanying condensed consolidated balancesheet as of December 31, 2002 is fairly presented, in all material respects, inrelation to the consolidated balance sheet from which it has been derived.

 

 

KPMG LLP

Indianapolis, Indiana

July 30, 2003

 

12

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

 

**Cautionary StatementRegarding Forward Looking Statements**

 

Certainstatements in this quarterly report, including those related to thePartnership’s future operations, constitute “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Theseforward-looking statements involve known and unknown risks, uncertainties andother important factors that could cause the actual results, performance orachievements of the Partnership, or industry results, to differ materially fromany predictions of futureresults, performance or achievements that we express or imply in this report.Some of the risks, uncertainties and other important factors that may affectfuture results include, among others:

 

•                  Generaleconomic and business conditions;

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

•                  Competitionfor tenants and decrease in property occupancy;

•                  Potentialincreases in real estate construction costs;

•                  Potentialchanges in interest rates;

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

•                  Otherrisks inherent in the real estate business including tenant defaults, potentialliability relating to environmental matters and liquidity of real estate investments.

 

This listof risks and uncertainties, however, is not intended to be exhaustive. TheGeneral Partner has on file with the Securities and ExchangeCommission (“SEC”) a Current Report on Form 8-K dated July 25, 2003, whichcontains additional risk factor information.

 

The words “believe,”“estimate,” “expect” and similar expressions or statements regarding futureperiods are intended to identifyforward-looking statements. Although we believe that the plans, expectationsand results expressed in or suggested by the forward-looking statements arereasonable, all forward-looking statements are inherently uncertain as theyinvolve substantial risks and uncertainties beyond the Partnership’s control.New factors emerge from time to time, and it is not possible for us to predictthe nature or assess the potential impact of each new factor on thePartnership’s business. Given these uncertainties, we caution you not to placeundue reliance on these forward-looking statements. The Partnership undertakesno obligation to update or revise any of its forward-looking statements forevents or circumstances that arise after the statement is made.

 

**Business Overview**

 

ThePartnership is a self-administered and self managed real estate investmenttrust that began operations through a related entity in 1972. As of June 30,2003, the Partnership:

 

•                 Ownedor controlled 922 industrial, office and retail properties (includingproperties under development), consisting of 109 million square feet located in13 operating platforms; and

•                  Ownedor controlled more than 4,000 acres of land with an estimated futuredevelopment potential of more than 63 million square feet of industrial, officeand retail properties.

 

ThePartnership provides the following services for its properties and for certainproperties owned by third parties:

•                  leasing;

•                 management;

•                 construction;

•                 development;and

•                 othertenant-related services.

 

13

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ThePartnership’s operating results depend primarily upon income from the RentalOperations of its properties. This rental income is substantially influenced bythe supply and demand for the Partnership’s rental space. The Partnership’scontinued growth is dependent upon its ability to maintain occupancy rates andincrease rental rates of its in-service portfolio. The Partnership’s strategyfor growth also includes developing and acquiring additional rental properties.

 

Thefollowing highlights the areas of Rental Operations that the Partnershipconsiders critical for future revenue growth (all square footage totals andoccupancy percentages reflect 100% of both wholly-owned properties andproperties in joint ventures):

 

***Same Property Performance:*** The Partnership tracks same propertyperformance, which measures the performance of properties that were in-servicefor all reported portions of a two-year period by comparing the results of thesecond year with the results of the first year. For the three and six monthsended June 30, 2003, net operating income from the same property portfoliodecreased 5.5% and 4.4%, respectively, from the same periods in 2002. Thedecrease is primarily due to significant lease terminations included in the2002 results and significant rental expenses in 2003 amounts resulting from theeffects of a prolonged winter in many of the Partnership’s markets.

 

***Occupancy Analysis:*** As discussed above, the ability to maintainoccupancy rates is a principal driver of the Partnership’s results ofoperations. The following table sets forth information regarding thePartnership’s in-service portfolio of rental properties as of June 30, 2003 and2002 (square feet in thousands):

 
| **Type**        |   | **Total  Square Feet** |   | **Percent of  Total Square Feet** |   | **Percent  Occupied** |       |
|-----------------|--------|------------------------|--------|-----------------------------------|--------|-----------------------|------------|
|            |   | **2003**               |   | **2002**                          |   | **2003**              |       | **2002** |   | **2003** |   | **2002** |   |
| **Industrial**  |   |                   |   |                              |   |                  |       |   |   |   |   |   |   |
| Service Centers |   | **13,694**             |   | 13,832                            |   | **13.0**              | **%**      | 13.4 | % | **86.8** | **%** | 87.8 | % |
| Bulk            |   | **66,011**             |   | 64,340                            |   | **62.5**              | **%**      | 62.4 | % | **88.5** | **%** | 88.9 | % |
| **Office**      |   | **25,039**             |   | 24,080                            |   | **23.7**              | **%**      | 23.4 | % | **85.3** | **%** | 85.4 | % |
| **Retail**      |   | **837**                |   | 837                               |   | **.8**                | **%**      | .8 | % | **98.8** | **%** | 97.4 | % |
|            |   |                   |   |                              |   |                  | ** ** |   |   |   | ** ** |   |   |
| Total           |   | **105,581**            |   | 103,089                           |   | **100.0**             | **%**      | 100.0 | % | **87.6** | **%** | 88.0 | % |

 

The lower occupancy percentages in 2003compared to 2002 are the result of continued soft demand in many of thePartnership’s markets.

 

***LeaseExpiration:***Thefollowing table reflects the Partnership’s in-service portfolio leaseexpiration schedule as of June 30, 2003, by property type indicating squarefootage and annualized net effective rents under expiring leases (in thousands,except per square foot amounts):

 

14

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|                        |   | **Total  Portfolio** |   | **Industrial**       |    | **Office**            |   | **Retail**     |   |
|-----------------------------|--------|----------------------|--------|----------------------|---------|-----------------------|--------|----------------|--------|
| **Year ofExpiration**       |   | **SquareFeet**       |   | **Ann. RentRevenue** |    | **Percent ofRevenue** |   | **SquareFeet** |   | **Ann. RentRevenue** |   | **SquareFeet** |   | **Ann. RentRevenue** |   | **SquareFeet** |   | **Ann. RentRevenue** |   |
| 2003                        |   | 5,754                |   | $                    | 35,181  |                  | 5      | %              | 4,961  |   | $ | 24,491 |   | 793 |   | $ | 10,690 |   | — |   | $ | — |   |
| 2004                        |   | 11,139               |   | 75,829               |    | 12                    | %      | 8,538          |   | 40,099 |   | 2,581 |   | 35,349 |   | 20 |   | 381 |   |
| 2005                        |   | 13,512               |   | 94,200               |    | 15                    | %      | 10,697         |   | 54,066 |   | 2,783 |   | 39,704 |   | 32 |   | 430 |   |
| 2006                        |   | 11,545               |   | 78,320               |    | 12                    | %      | 9,264          |   | 47,730 |   | 2,279 |   | 30,557 |   | 2 |   | 33 |   |
| 2007                        |   | 10,686               |   | 75,908               |    | 12                    | %      | 7,984          |   | 39,859 |   | 2,670 |   | 35,651 |   | 32 |   | 398 |   |
| 2008                        |   | 10,657               |   | 65,791               |    | 10                    | %      | 8,462          |   | 37,941 |   | 2,163 |   | 27,291 |   | 32 |   | 559 |   |
| 2009                        |   | 7,406                |   | 46,049               |    | 7                     | %      | 5,923          |   | 25,550 |   | 1,462 |   | 20,098 |   | 21 |   | 401 |   |
| 2010                        |   | 6,740                |   | 51,127               |    | 8                     | %      | 4,978          |   | 24,574 |   | 1,746 |   | 26,289 |   | 16 |   | 264 |   |
| 2011                        |   | 3,646                |   | 31,791               |    | 5                     | %      | 2,373          |   | 11,667 |   | 1,247 |   | 19,680 |   | 26 |   | 444 |   |
| 2012                        |   | 4,332                |   | 27,260               |    | 4                     | %      | 3,306          |   | 12,888 |   | 1,004 |   | 13,781 |   | 22 |   | 591 |   |
| 2013 and Thereafter         |   | 7,028                |   | 62,070               |    | 10                    | %      | 3,776          |   | 17,421 |   | 2,627 |   | 39,626 |   | 625 |   | 5,023 |   |
| Total Leased                |   | 92,445               |   | $                    | 643,526 |                  | 100    | %              | 70,262 |   | $ | 336,286 |   | 21,355 |   | $ | 298,716 |   | 828 |   | $ | 8,524 |   |
|                        |   |                 |   |                 |    |                  |   |           |   |   |   |   |   |   |   |   |   |   |   |
| Total Portfolio Square Feet |   | 105,581              |   |                 |    |                  |   | 79,705         |   |   |   | 25,039 |   |   |   | 837 |   |   |   |
|                        |   |                 |   |                 |    |                  |   |           |   |   |   |   |   |   |   |   |   |   |   |
| Percent Occupied            |   | 87.56                | %      |                 |    |                  |   | 88.16          | %      |   |   | 85,28 | % |   |   | 98.82 | % |   |   |

 

***Future Development:***ThePartnership expects to realize growth in earnings from Rental Operationsthrough the development and acquisition of additional rental properties in itsprimary markets. Specifically, the Partnership has 3.8 million square feet ofproperties under development at June 30, 2003. These properties should providefuture earnings through Service Operations income upon sale or from RentalOperations growth as they are placed in service as follows (in thousands,except percent leased and stabilized returns):

 
| **Anticipated  In-Service  Date** |   | **Square  Feet** |   | **Percent  Leased** |   | **Project  Costs** |    | **Estimated  Stabilized  Return** |   |
|-----------------------------------|--------|------------------|--------|---------------------|--------|--------------------|---------|-----------------------------------|--------|
|                              |   |             |   |                |   |               |    |                              |   |
| Held For  Rental:                 |   |             |   |                |   |               |    |                              |   |
|                              |   |             |   |                |   |               |    |                              |   |
| 3rd Quarter  2003                 |   | 276              |   | 100                 | %      | $                  | 12,385  |                              | 10.3   | % |
| 4th Quarter  2003                 |   | 333              |   | 7                   | %      | 24,549             |    | 11.4                              | %      |
| 1st Quarter  2004                 |   | 2,123            |   | 83                  | %      | 73,003             |    | 9.8                               | %      |
| Thereafter                        |   | 493              |   | 100                 | %      | 20,770             |    | 10.2                              | %      |
|                              |   | 3,225            |   | 79                  | %      | $                  | 130,707 |                              | 10.2   | % |
| Build-to-Suit  for Sale:          |   |             |   |                |   |               |    |                              |   |
|                              |   |             |   |                |   |               |    |                              |   |
| 3rd Quarter  2003                 |   | 159              |   | 70                  | %      | $                  | 15,204  |                              | 11.9   | % |
| 4th Quarter  2003                 |   | 274              |   | 100                 | %      | 30,857             |    | 8.9                               | %      |
| 1st Quarter  2004                 |   | 32               |   | 100                 | %      | 4,274              |    | 9.9                               | %      |
| Thereafter                        |   | 79               |   | 100                 | %      | 8,103              |    | 10.7                              | %      |
|                              |   | 544              |   | 91                  | %      | $                  | 58,438  |                              | 10.0   | % |
| Total                             |   | 3,769            |   | 81                  | %      | $                  | 189,145 |                              | 10.2   | % |

 

***LeaseRenewals:***ThePartnership renewed 70.1% and 66.2% of leases up for renewal in the three andsix months ended June 30, 2003, totaling 1.5 million and 2.6 million squarefeet, respectively. This compares to renewals of 72.4% and 71.3% for the threeand six months ended June 30, 2002, totaling 2.1 million and 4.1 million squarefeet, respectively. Overall leasing activity has increased in 2003, but thegrowth in renewal rental rates continue to be lower than in prior years due tosoft demand and competitive pricing.

 

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**Resultsof Operations**

 

A summary of the Partnership’s operatingresults and property statistics for the three and six months ended June 30,2003 and 2002, is as follows (in thousands, except number of properties and perunit amounts):

 
|                                                         |   | **Three Months Ended June 30,** |        | **Six Months Ended June 30,** |       |
|--------------------------------------------------------------|--------|---------------------------------|-------------|-------------------------------|------------|
|                                                         |   | **2003**                        |        | **2002**                      |       | **2003** |   | **2002** |   |
|                                                         |   |                            |        |                          |       |   |   |   |   |
| Rental  Operations revenue                                   |   | **$**                           | **182,407** |                          | $          | 179,044 | ** ** | **$** | **367,025** |   | $ | 353,099 |   |
| Service  Operations revenue                                  |   | **11,421**                      |        | 15,364                        | ** ** | **20,603** |   | 44,885 |   |
| Earnings from  Rental Operations                             |   | **46,129**                      |        | 59,830                        | ** ** | **89,610** |   | 114,313 |   |
| Earnings from  Service Operations                            |   | **4,690**                       |        | 7,169                         | ** ** | **6,572** |   | 22,701 |   |
| Operating  income                                            |   | **45,887**                      |        | 60,201                        | ** ** | **85,330** |   | 122,978 |   |
| Net income  available for common unitholders                 |   | **$**                           | **38,259**  |                          | $          | 54,015 | ** ** | **$** | **80,051** |   | $ | 105,058 |   |
| Weighted  average common units outstanding                   |   | **150,141**                     |        | 149,310                       | ** ** | **150,057** |   | 148,992 |   |
| Weighted  average common and dilutive potential common units |   | **151,019**                     |        | 151,092                       | ** ** | **150,823** |   | 150,682 |   |
| Basic income  per common unit:                               |   |                            |        |                          |       |   |   |   |   |
| Continuing  operations                                       |   | **$**                           | **.25**     |                          | $          | .33 | ** ** | **$** | **.51** |   | $ | .67 |   |
| Discontinued  operations                                     |   | **$**                           | **—**  |                          | $          | .03 | ** ** | **$** | **.02** |   | $ | .03 |   |
| Diluted income  per common unit:                             |   |                            |        |                          |       |   |   |   |   |
| Continuing  operations                                       |   | **$**                           | **.25**     |                          | $          | .33 | ** ** | **$** | **.51** |   | $ | .67 |   |
| Discontinued  operations                                     |   | **$**                           | **—**  |                          | $          | .03 | ** ** | **$** | **.02** |   | $ | .03 |   |
|                                                         |   |                            |        |                          |       |   |   |   |   |
| Number of  in-service properties at end of period            |   | 908                             |        | 899                           |       | 908 |   | 899 |   |
| In-service  square footage at end of period                  |   | 105,581                         |        | 103,089                       |       | 105,581 |   | 103,089 |   |
| Under development  square footage at end of period           |   | 3,769                           |        | 3,342                         |       | 3,769 |   | 3,342 |   |

 

**Comparisonof Three Months Ended June 30, 2003 to Three Months Ended June 30, 2002**

 

Rental Income from Continuing Operations

 

Overall, rental income from continuing operations increased from $172.8million in 2002 to $175.7 million in 2003. The following table reconcilesrental income by reportable segment to the Partnership’s total reported rentalincome from continuing operations for the three months ended June 30, 2003 and2002 (in 000’s):

 

| **Rental  Income from continuing operations:** |   | **2003**   |        | **2002** |   |
|------------------------------------------------|--------|------------|-------------|----------|--------|
| Office                                         |   | **$**      | **102,472** |     | $      | 102,563 |   |
| Industrial                                     |   | **70,495** |        | 68,298   |   |
| Retail                                         |   | **1,989**  |        | 1,633    |   |
| Non-segment                                    |   | **758**    |        | 272      |   |
| Total                                          |   | **$**      | **175,714** |     | $      | 172,766 |   |

 

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

 

•                  Straight-line rentalincome for the second quarter of 2003 totaled $6.9 million compared to $2.7million in 2002 as the Partnership has increased the use of free rentconcessions in 2002 and 2003 as incentives to attract quality tenants in thecompetitive markets. The effect of these concessions is reflected asstraight-line rental income over the life of the leases.

•                  During the threemonths ended June 30, 2003 the Partnership recorded $1.5 million of recoverableexpense revenue associated with the harsh and prolonged winter that many of thePartnership’s markets incurred in 2003. These recoverable expenses will bebilled to the Partnership’s tenants at year end.

 

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•                  Throughout thesecond half of 2002 and the first six months of 2003 the Partnership hasacquired eight new properties and placed eighteen development projectsin-service. These acquisitions and developments are the primary factor in theoverall $6.0 million increase in rental revenue for the three months ended June30, 2003, compared to the same period in 2002.

•                  Lease termination feestotaled $1.5 million for the second quarter of 2003 compared to $10.5 millionfor the second quarter of 2002, which included a single tenant termination feeof $5.9 million.

•                  In-service occupancy asof June 30, 2003, was 87.6% compared to 88.0% at June 30, 2002.

 

Equity inEarnings of Unconsolidated Companies

 

Equity in earnings increased slightly from $6.3 million for the secondquarter of 2002 to $6.7 million for the same period in 2003. Combined occupancyof all the Partnership’s investments in unconsolidated companies was 92.2% atJune 30, 2003 compared to 91.2% at June 30, 2002.  Reflected in equity in earnings for the three months ended June30, 2003, are lease termination fees of $924,000 compared to fees of $134,000for the same period in 2002.

 

Rental Expenses and Real Estate Taxes

 

The following table reconciles rental expenses and real estate taxes byreportable segment to the Partnership’s total reported amounts in the statementof operations for the three months ended June 30, 2003 and 2002 (in 000’s):

 
| **Rental  Expenses:** |   | **2003**  |       | **2002** |   |
|-----------------------|--------|-----------|------------|----------|--------|
| Office                |   | **$**     | **24,335** |     | $      | 22,274 |   |
| Industrial            |   | **9,115** |       | 7,701    |   |
| Retail                |   | **219**   |       | 119      |   |
| Non-segment           |   | **(158**  | **)**      | (36      | )      |
| Total                 |   | **$**     | **33,511** |     | $      | 30,058 |   |

 
| **Real  Estate Taxes:** |   | **2003**  |       | **2002** |   |
|-------------------------|--------|-----------|------------|----------|--------|
| Office                  |   | **$**     | **11,622** |     | $      | 9,774 |   |
| Industrial              |   | **8,596** |       | 8,153    |   |
| Retail                  |   | **160**   |       | 132      |   |
| Non-segment             |   | **1,077** |       | 825      |   |
| Total                   |   | **$**     | **21,455** |     | $      | 18,884 |   |

 

The Partnership’s three reportable segments comprising RentalOperations (office, industrial and retail) are all within the real estateindustry and therefore affected by the same economic and industry conditions.The results from operations for all three segments are driven by similarfactors when analyzing performance for the three months ended June 30, 2003 and2002. There were no significant fluctuations in rental expenses or real estatetaxes for the three months ended June 30, 2002, as compared to the three monthsended June 30, 2003. The slight increases are the result of an increase in thePartnership’s in-service portfolio from 899 at June 30, 2002 to 908 at June 30,2003, an increase in the tax basis in certain markets where tax reassessmentswere performed for 2003, and normal increases in tax rates in remainingmarkets.

 

Interest Expense

 

The increase in interest expense from $27.6 million for the secondquarter of 2002, to $34.8 million for the same period in 2003 is attributableto the following:

 

•                  Interest expenseon the Partnership’s unsecured debt increased by $5 million from $24.5 millionfor the three months ended June 30, 2002 to $29.5 million for the same periodin 2003. The increase is due to the issuances of $200.0 million of unsecureddebt in the third quarter of 2002 and $325.0 million of unsecured debt duringthe first six months of 2003.

 

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•                  Capitalizedinterest on development projects decreased from $3.8 million for the threemonths ended June 30, 2002, to $1.4 million for the same period in 2003 as aresult of decreased development activity by the Partnership over the pasttwelve months in response to soft demand in many of the Partnership’s markets.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased from $42.7 millionduring the three months ended June 30, 2002 to $46.5 million for the sameperiod in 2003 as a result of the following trends:

 

•                  The Partnershipincreased its building basis in its held for investment property portfolio byapproximately $170.5 million from June 30, 2002 to June 30, 2003, primarilythrough developments placed in-service throughout 2002, a $50 million buildingacquisition in December of 2002 and $36.5 million of building acquisitions inthe first quarter of 2003.

•                  Tenantimprovements increased from $336.2 million at June 30, 2002 to $391.1 millionat June 30, 2003 as the Partnership continues to incur capital expenditures tolease-up vacant space.

 

ServiceOperations

 

Service Operations primarily consist of leasing, management,construction and development services for joint venture properties andproperties owned by third parties. Service Operations revenues decreased from$15.4 million for the three months ended June 30, 2002, to $11.4 million forthe three months ended June 30, 2003 as a result of the following significantfluctuations:

 

•                  Revenue fromwork performed as general contractor for third party construction jobsincreased from $4.3 million for the three months ended June 30, 2002, to $7.0million for the three months ended June 30, 2003. The Partnership hasexperienced an increase in volume for third party work in 2003 as businessesdecide to expand existing properties or construct new buildings to takeadvantage of the current low interest rates and lower fees in the market place.

•                  Construction anddevelopment activity income decreased as a result of a decline in activity fromthe Partnership’s held for sale program whereby the Partnership develops aproperty for sale upon completion. During the second quarter of 2002, thePartnership recognized gains totaling $8.3 million on sales of three propertiesdeveloped for immediate sale compared to a gain of approximately $800,000 on asale of a single property in the second quarter of 2003.

 

Service Operations expenses decreased from $8.2 million for the threemonths ended June 30, 2002, to $6.7 million for the three months ended June 30,2003. Included in the $8.2 million of expenses for 2002 is approximately $1.7million of income tax expense pertaining to the gain of $8.3 million on salesof properties in the Partnership’s held for sale inventory.  After adjusting this expense item out of the2002 expenses, there is an increase of approximately $200,000 in the secondquarter of 2003 compared to the same period in 2002.

 

General andAdministrative Expense

 

General and Administrative Expense decreased from $6.8 million for thethree months ended June 30, 2002 to $4.9 million for the same period in 2003.The decrease is attributable to a combination of the following:

 

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

 

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•                  An increase inlevels of construction and leasing activity during the end of 2002 and into2003 which allowed for more construction and development overhead costs to beapplied to projects versus expensed in general and administrative expenses.

 

Other Incomeand Expenses

 

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

 
|                                           |   | **2003**  |      | **2002** |   |
|------------------------------------------------|--------|-----------|-----------|----------|--------|
| Gain(loss) on sales of depreciable  properties |   | **$**     | **477**   |     | $      | 1,092 |   |
| Gain on land sales                             |   | **1,907** |      | 1,884    |   |
| Impairment adjustment                          |   | **(640**  | **)**     | —   |   |
|                                           |   |      |      |     |   |
| Total                                          |   | **$**     | **1,744** |     | $      | 2,976 |   |

 

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

 

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

 

The Partnership recorded a $500,000 adjustment in 2003 associated witha contract to sell a property and $140,000 adjustment associated with contractsto sell two parcels of land.

 

DiscontinuedOperations

 

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

 

The Partnership has classified operations of thirteen buildings asdiscontinued operations in accordance with SFAS 144. As a result, the Partnership classified net income of$230,000 and $1.2 million as net income from discontinued operations for thethree months ended June 30, 2003 and 2002. In addition, four of the propertiesclassified in discontinued operations were sold during the second quarter of2003; therefore, the gains on disposal for these properties of $128,000, net ofminority interest, are also reported in discontinued operations. ThePartnership also reported gains of $2.7 million in discontinued operationsassociated with the sale of two properties in 2002.

 

Net Income Available for Common Unitholders

 

Net income available for common unitholdersfor the three months ended June 30, 2003 was $38.3 million compared to $54.0million for the same period ended June 30, 2002. This decrease resultsprimarily from the operating result fluctuations in Rental Operations, ServiceOperations, General and Administrative Expenses and earnings from sales ofdepreciable property as discussed above.

 

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**Comparisonof Six Months Ended June 30, 2003 to Six Months Ended June 30, 2002**

 

Rental Income from Continuing Operations

 

Overall, rental income from continuing operations increased from $340.5million in 2002 to $356.0 million in 2003. The following table reconcilesrental income by reportable segment to the Partnership’s total reported rentalincome from continuing operations for the six months ended June 30, 2003 and2002 (in 000’s):

 
|           |   | **2003** |    | **2002** |   |
|----------------|--------|----------|---------|----------|--------|
| Rental Income: |   |     |    |     |   |   |   |
| Office         |   | $        | 209,577 |     | $      | 199,217 |   |
| Industrial     |   | 140,628  |    | 137,241  |   |
| Retail         |   | 4,085    |    | 3,221    |   |
| Non-segment    |   | 1,773    |    | 846      |   |
| Total          |   | $        | 356,063 |     | $      | 340,525 |   |

 

The Partnership’s three reportable segments comprising RentalOperations (office, industrial and retail) are all within the real estateindustry and therefore affected by the same economic and industry conditions.The results from operations for all three segments are driven by similarfactors when analyzing performance for the six months ended June 30, 2003 and2002. The following significant fluctuations are the primary causes of theincrease in rental income from continuing operations for all three segments,with specific references to a particular segment when applicable:

 

•                  Straight line rentalincome for 2003 totaled $11.5 million compared to $4.1 million in 2002 as thePartnership has increased the use of free rent concessions in 2002 and 2003 asincentives to attract quality tenants in the competitive markets. The Partnership’s office portfolio aloneexperienced a $3.5 million increase in straight line rental income for the sixmonths ended June 30, 2003, compared to the same period in 2002. The effect of these concessions is reflectedas straight line rental income over the life of the leases.

•                  Lease termination feestotaled $10.9 million in 2003 compared to $15.8 million in 2002 as thePartnership continues to experience tenant downsizing of leased space.

•                  Bad debt expensetotaled $815,000 for the first six months of 2003 compared to $1.1 million forthe same period in 2002. The Partnership has not experienced any significantwrite-offs in 2003.

•                  During the sixmonths ended June 30, 2003 the Partnership recorded $4.5 million more ofrecoverable expense revenue compared to 2002, mainly associated with the harshand prolonged winter that many of the Partnership’s markets incurred in 2003.These recoverable expenses will be billed to the Partnership’s tenants at yearend.

•                  As discussed earlier, throughout thesecond half of 2002 and the first six months of 2003 the Partnership hasacquired eight new properties and placed eighteen development projectsin-service. These  acquisitions anddevelopments are the primary factor in the overall $8.0 million increase inrental revenue for the six months ended June 30, 2003, compared to 2002. Fiveof the acquisitions were for office properties which resulted in $6.9 millionof additional rental income for the six months ended June 30, 2003, compared tothe same period in 2002.

 

Equity inEarnings of Unconsolidated Companies

 

Equity in earnings decreased from $12.6 million in 2002 to $11.0million for the same period in 2003. The decrease is not attributable to anysingle significant factor, but rather is reflective of market conditions incertain locations where renewals have yielded lower rates. Reflected in equityin earnings for the six months ended June 30, 2003, are lease termination feesof $1.1 million compared to fees of $404,000 for the same period in 2002.

 

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Rental Expenses and Real Estate Taxes

 

The following table reconciles rental expenses and real estate taxes byreportable segment to the Partnership’s total reported amounts in the statementof operations for the six months ended June 30, 2003 and 2002 (in 000’s):

 
|              |   | **2003** |   | **2002** |   |
|-------------------|--------|----------|--------|----------|--------|
| Rental  Expenses: |   |     |   |     |   |
| Office            |   | $        | 52,044 |     | $      | 44,985 |   |
| Industrial        |   | 20,946   |   | 15,960   |   |
| Retail            |   | 558      |   | 232      |   |
| Non-segment       |   | 390      |   | 7        |   |
| Total             |   | $        | 73,938 |     | $      | 61,184 |   |

 
|                |   | **2003** |   | **2002** |   |
|---------------------|--------|----------|--------|----------|--------|
| Real  Estate Taxes: |   |     |   |     |   |
| Office              |   | $        | 22,364 |     | $      | 19,522 |   |
| Industrial          |   | 17,173   |   | 16,373   |   |
| Retail              |   | 309      |   | 235      |   |
| Non-segment         |   | 2,167    |   | 1,858    |   |
| Total               |   | $        | 42,013 |     | $      | 37,988 |   |

 

The Partnership’s three reportable segments comprising RentalOperations (office, industrial and retail) are all within the real estateindustry and therefore affected by the same economic and industry conditions.The results from operations for all three segments are driven by similarfactors when analyzing performance for the six months ended June 30, 2003 and2002. The increase in rental expenses for both office and industrial isattributable to the first quarter 2003 expenses being inflated by approximately$6.5 million of snow removal costs. Many of the Partnership’s marketsexperienced increased amounts of snowfall and prolonged winter conditions. Theremaining increases in both rental and real estate expenses for all segmentsare attributable to an overall increase in the Partnership’s in-serviceportfolio from 899 properties at June 30, 2002 to 908 at June 30, 2003, as wellas normal anticipated increases in operating costs and real estate taxes.

 

Interest Expense

 

The increase in interest expense from $54.7 million to $67.4 million isattributable to the following:

 

•                  Interest expenseon the Partnership’s unsecured debt (excluding the line of credit) increased by$8.9 million from $49.0 million for the six months ended June 30, 2002 to $57.9million for the same period in 2003. The increase is due to the issuances of$200.0 million of unsecured debt in the third quarter of 2002 and $325.0million of unsecured debt during the first six months of 2003.

•                  Capitalized interest on developmentprojects decreased from $8.4 million for the six months ended June 30, 2002, to$3.3 million for the same period in 2003 as a result of decreased developmentactivity by the Partnership over the past twelve months in response to softdemand in many of the Partnership’s markets.

•                  Interest expense on secured debtdecreased by $2.8 million from 2002 to 2003 as a result of payoffs of $13.5million for the year ended 2002 and $22.2 million during the first six monthsof 2003.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased from $84.9 millionduring the six months ended June 30, 2002 to $94.1 million for the same periodin 2003 as a result of the following trends:

 

•                  The Partnershipincreased its building basis in its held for investment property portfolio byapproximately $170.5 million from June 30, 2002 to June 30, 2003, primarilythrough developments placed in-service throughout 2002, a $50 million buildingacquisition in December of 2002 and $36.5 million of building acquisitions inthe first quarter of 2003.

 

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•                  Tenant improvements increased from$336.2 million at June 30, 2002 to $391.1 million at June 30, 2003 as thePartnership continues to incur capital expenditures to lease-up vacant space.

 

ServiceOperations

 

Service Operations primarily consist of leasing, management, constructionand development services for joint venture properties and properties owned bythird parties. Service Operations revenues decreased from $44.9 million for thesix months ended June 30, 2002, to $20.6 million for the six months ended June30, 2003 as a result of the following significant fluctuations:

 

•                  Revenue fromwork performed as general contractor for third party construction jobsincreased from $10.0 million to $12.2 million. The Partnership has experiencedan increase in volume for third party work in 2003 as businesses decide toexpand existing properties or construct new buildings to take advantage of thecurrent low interest rates and lower fees in the market place.

•                  Propertymanagement, maintenance and leasing fees revenue increased from $6.6 million to$7.5 million primarily as a result of increased third party maintenanceactivity.

•                  Construction anddevelopment activity income decreased as a result of a decline in activity fromthe Partnership’s held for sale program whereby the Partnership develops aproperty for sale upon completion. During the first six months of 2002, thePartnership recognized gains totaling $28.2 million on sales of eightproperties developed for immediate sale compared to a gain of approximately$800,000 on a sale of a single property during the same period in 2003.

 

Service Operations expenses decreased from $22.2 million during thefirst six months of 2002 to $14.0 million for the same period in 2003. Includedin the 2002 expenses is approximately $8.3 million of income tax expensepertaining to the gains on sales of properties in the Partnership’s held forsale inventory. After adjusting this expense item out of the 2002 expenses,there is a small increase in expenses in 2003 as the result of normal increasesin salary and benefit costs.

 

General andAdministrative Expense

 

General and Administrative Expense decreased from $14.0 million for thesix months ended June 30, 2002 to $10.9 million for the same period in 2003.The decrease is attributable to a combination of the following:

 

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

•                  An increase inlevels of construction and leasing activity during the end of 2002 and into2003 which allowed for more overhead costs to be applied to projects versusexpensed in general and administrative expenses.

 

Other Incomeand Expenses

 

Gain on sale of land and depreciable property dispositions, net ofimpairment adjustment, is comprised of the following amounts for the six monthsended June 30, 2003 and 2002:

 
|                                           |   | **2003**   |       | **2002** |   |
|------------------------------------------------|--------|------------|------------|----------|--------|
| Gain(loss) on sales of depreciable  properties |   | **$**      | **6,736**  |     | $      | 996 |   |
| Gain on land sales                             |   | **5,470**  |       | 3,091    |   |
| Impairment adjustment                          |   | **(1,060** | **)**      | —   |   |
| Total                                          |   | **$**      | **11,146** |     | $      | 4,087 |   |

 

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

 

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

 

The Partnership recorded a $500,000 adjustment in 2003 associated witha contract to sell a property and $560,000 of adjustments associated withcontracts to sell parcels of land.

 

DiscontinuedOperations

 

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

 

The Partnership has classified operations of thirteen buildings asdiscontinued operations in accordance with SFAS 144. As a result, the Partnership classified net income of$567,000 and $2.3 million as net income from discontinued operations for thesix months ended June 30, 2003 and 2002. In addition, nine of the propertiesclassified in discontinued operations were sold during the first six months of2003; therefore, the gains on disposal for these properties of $2.5 million arealso reported in discontinued operations. The Partnership also reported gainsof $2.7 million in 2002 discontinued operations associated with the sale of twoproperties in 2002.

 

Net Income Available for Common Units

 

Net income available for common shares forthe six months ended June 30, 2003 was $80.1 million compared to $105.1 millionfor the same period ended June 30, 2002. This decrease results primarily fromthe operating result fluctuations in Rental Operations, Service Operations,General and Administrative Expenses and earnings from sales of depreciableproperty as discussed above.

 

**Liquidityand Capital Resources**

 

Sources of Liquidity

 

The Partnership expects to meet liquidity requirements over the nexttwelve months, including payments of dividends and distributions as well as recurring capital expendituresrelating to maintaining the Partnership’s current real estate assets, primarilythrough the following:

 

•                 working capital;and

•                 net cash providedby operating activities.

 

The Partnership expects to meetlong-term liquidity requirements, such as scheduled mortgage debt maturities,the retirement of unsecured notes and amounts outstanding under the unsecuredcredit facility, property acquisitions, financing of development activities andother non-recurring capital improvements, through the following:

 

•                 issuance ofadditional unsecured notes;

•                 undistributedcash available for distribution, if any; and

•                 proceeds receivedfrom real estate dispositions.

 

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*Credit Facilities*

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

 
| **Description**          |   | **Borrowing  Capacity** |    | **Maturity  Date** |           | **Interest  Rate** |        | **Amount  Outstanding  at June 30, 2003** |   |
|--------------------------|--------|-------------------------|---------|--------------------|----------------|--------------------|-------------|-------------------------------------------|--------|
| Unsecured Line of Credit |   | $                       | 500,000 |               | February  2004 |               | LIBOR + .65 | %                                         | $      | 285,000 |   |
| Secured Line of Credit   |   | $                       | 50,000  |               | January 2006   |               | LIBOR + .60 | %                                         | $      | 25,449 |   |

 

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

 

Associated with the $500 million line of credit are financial covenantsthat require the Partnership to meet defined levels of performance. As of June30, 2003, the Partnership is in compliance with all covenants pertaining to the$500 million line of credit.

 

*Debt and Equity Securities*

 

The Partnership currently has on file with the SEC an effective shelfregistration statement that permits the Partnership to sell up to an additional$270 million of unsecured debt securities. In addition, the General Partner hason file with the SEC an effective shelf registration statement that permits theGeneral Partner to sell up to an additional $250.7 million of common andpreferred stock. From time-to-time, the Partnership and the General Partnerexpects to issue additional securities under these registration statements tofund development and acquisition of additional rental properties and to fund therepayment of the credit facilities and other long-term debt upon maturity.

 

The indenture governing the Partnership’s unsecured notes also requiresthe Partnership to comply with financial ratios and other covenants regardingthe operations of the Partnership. The Partnership is currently in compliancewith all such covenants and expects to remain in compliance in the foreseeablefuture.

 

In January 2003, the Partnership completed an issuance of unsecureddebt totaling $175.0 million bearing an effective interest rate of 5.365%, due2010.

 

In May 2003, the Partnership completed an issuance of unsecured debttotaling $150.0 million bearing an effective rate of 4.625% due 2013.

 

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

 

The General Partner sold $100million of Series J Preferred Equity on July 24, 2003, at a dividend rate of6.625%. The General Partner and the Partnership anticipate receiving netproceeds of $96.85 million from this offering which is expected to close on orabout August 25, 2003.

 

Uses ofLiquidity

 

The Partnership’s principaluses of liquidity include the following:

 

•                 Propertyinvestments and recurring leasing/capital costs;

•                 Dividends anddistributions to shareholders and unitholders;

•                 Long-term debtmaturities; and

•                 The GeneralPartner’s common stock repurchase program.

 

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*Property Investments and Other Capital Expenditures*

 

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

 

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

 
|                  |   | **2003**  |       | **2002** |   |
|-----------------------|--------|-----------|------------|----------|--------|
|                  |   |      |       |     |   |
| Tenant improvements   |   | **$**     | **17,777** |     | $      | 13,959 |   |
| Leasing costs         |   | **9,217** |       | 8,556    |   |
| Building improvements |   | **6,883** |       | 5,849    |   |
| Totals                |   | **$**     | **33,877** |     | $      | 28,364 |   |

*Debt Maturities*

 

Debt outstanding at June 30, 2003, totals $2.2 billion with a weightedaverage interest rate of 5.96% maturing at various dates through 2028. ThePartnership had $2.0 billion of unsecured debt and $275 million of secured debtoutstanding at June 30, 2003. Scheduled principal amortization of such debttotaled $4.7 million for the six months ended June 30, 2003.

 

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

 
|       |   | **Future  Repayments**      |   | **Weighted****Average  Interest Rate of  Future Repayments** |   |
|------------|--------|-----------------------------|--------|--------------------------------------------------------------|--------|
| **Year**   |   | **Scheduled  Amortization** |   | **Maturities**                                               |   | **Total** |   |   |
|       |   |                        |   |                                                         |   |   |   |   |   |
| 2003       |   | $                           | 4,438  |                                                         | $      | 74,436 |   | $ | 78,874 |   | 8.31 | % |
| 2004       |   | 7,793                       |   | 452,386                                                      |   | 460,179 |   | 3.90 | % |
| 2005       |   | 7,825                       |   | 205,979                                                      |   | 213,804 |   | 7.21 | % |
| 2006       |   | 7,409                       |   | 165,635                                                      |   | 173,044 |   | 6.08 | % |
| 2007       |   | 5,933                       |   | 114,616                                                      |   | 120,549 |   | 7.07 | % |
| 2008       |   | 5,021                       |   | 134,028                                                      |   | 139,049 |   | 6.31 | % |
| 2009       |   | 4,802                       |   | 275,000                                                      |   | 279,802 |   | 7.38 | % |
| 2010       |   | 4,193                       |   | 175,000                                                      |   | 179,193 |   | 5.39 | % |
| 2011       |   | 3,463                       |   | 175,000                                                      |   | 178,463 |   | 6.94 | % |
| 2012       |   | 1,977                       |   | 200,000                                                      |   | 201,977 |   | 5.85 | % |
| Thereafter |   | 9,943                       |   | 200,000                                                      |   | 209,943 |   | 5.19 | % |
|       |   | $                           | 62,797 |                                                         | $      | 2,172,080 |   | $ | 2,234,877 |   | 5.96 | % |

 

HistoricalCash Flows

 

Cash and cash equivalents were $11.5 million and $1.4 million at June30, 2003 and 2002, respectively.  Theincrease is the result of the following increases/(decreases) in cash flows(amounts in thousands):

 
|                                      |   | **Six Months  Ended June 30,** |       |
|-------------------------------------------|--------|--------------------------------|------------|
|                                      |   | **2003**                       |       | **2002** |   |
| Net cash Provided by Operating Activities |   | **$**                          | **161.8**  |   | $ | 375.1 |   |
|                                      |   |                           |       |   |   |
| Net Cash Used by Investing Activities     |   | **$**                          | **(136.6** | **)** | $ | (152.5 | ) |
|                                      |   |                           | ** ** |   |   |
| Net Cash Used for Financing Activities    |   | **$**                          | **(30.9**  | **)** | $ | (231.6 | ) |

 

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*Operating Activities*

 

The decrease in net cash provided by operating activities resultedprimarily from the following:

 

•                  The Partnershipreceived net proceeds of $163.6 million from its Build-to-Suit operationsduring the six months ended June 30, 2002, compared to incurring netdevelopment costs of $20.0 million for the same period in 2003. The proceedswere the result of sale of eight   build-to-suitproperties through the first six months of 2002 compared to the sale of onesuch property in 2003.

 

*Investing Activities*

 

The decrease in net cash used by investing activities was attributableto the following significant activities:

 

•                  Dispositions ofland and depreciated property provided $63.3 million in net proceeds in 2003,compared to $35.0 million in 2002.

•                  Real estatedevelopment costs increased from $63.9 million in 2002 to $68.7 million in2003, as development activity has begun to increase in 2003 compared to early2002 levels.

•                  The Partnershipacquired $33.1 million of real estate assets in 2003 compared to $32.9 millionduring the same period in 2002.  Theacquisitions in 2003 consisted of two office buildings that are each 100% leased.

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

•                  As discussedabove under Uses of Liquidity, recurring capital expenditures for tenantimprovements, lease commissions and building improvements increased from $28.4million during the first six months of 2002 to $33.9 million for the sameperiod in 2003 as the Partnership incurs costs to release space and improveproperties.

 

*Financing Activities*

 

The decrease in net cash used for financing activities resulted fromthe following:

 

•                  In 2003, thePartnership issued $325.0 million of unsecured debt compared to no newissuances for the first six months of 2002.

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

•                  In 2003, thePartnership paid off $22.2 million of secured debt, net of a $38.1 millionsecured debt refinancing during the first quarter compared to $5.2 million ofsecured debt payoffs for the first six months of 2002.

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

 

*Derivative Financial Instruments*

 

The Partnership is exposed to capital market risk, such as changes ininterest rates.  In order to manage thevolatility relating to interest rate risk, the Partnership may enter intointerest rate hedging arrangements from time to time. The Partnership does notutilize derivative financial instruments for trading or speculative purposes.

 

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In December 2002, the Partnership simultaneously entered into two $50million forward-starting interest rate swaps. The Partnership designated theaggregate $100 million swaps as a hedge to effectively fix the rate onfinancing expected in 2003. The fair value of the swaps was a liability of($7.8) million as of June 30, 2003, and is recorded in other liabilities in theaccompanying balance sheet. The swaps qualify for hedge accounting under SFAS133; therefore, changes in fair value will be recorded in other comprehensiveincome.

 

In February 2003, the Partnership simultaneously entered into two $25million forward-starting interest rate swaps. The Partnership designated theaggregate $50 million swaps as a hedge to effectively fix the rate on financingexpected in 2003. The fair value of the swaps was a liability of $(2.1) millionas of June 30, 2003, and is recorded in other liabilities in the accompanyingbalance sheet. The swaps qualify for hedge accounting under SFAS 133;therefore, changes in fair value will be recorded in other comprehensiveincome.

 

In July 2003, the Partnership terminated the$150 million of above-mentioned swaps for a net gain of $677,000. These swapswere terminated as a result of the Partnership’s current capital needs beingmet through the sale of the Series J Preferred Equity as noted in the followingSubsequent Events section. The Partnership currently has no additional swaps orother derivative instruments.

 

**Investmentsin Unconsolidated Companies**

 

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

 

**FundsFrom Operations**

 

Funds From Operations (“FFO”), which isdefined by the National Association of Real Estate Investment Trusts as GAAPnet 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 comparing and reporting the operatingperformance of real estate companies. Management believes that FFO is a usefulindicator of the Partnership’s operating performance.

 

The following table provides a reconciliationof GAAP net income to FFO for the three and six months ended June 30 as follows(in thousands):

 
|                                                    |   | **Three Months Ended June 30,** |       | **Six Months Ended June 30,** |   |
|---------------------------------------------------------|--------|---------------------------------|------------|-------------------------------|--------|
|                                                    |   | **2003**                        |       | **2002**                      |   | **2003** |   | **2002** |   |
|                                                    |   |                            | ** ** |                          |   |   | ** ** |   |   |
| Net income  available for common shareholders           |   | **$**                           | **38,259** | ** **                    | $      | 54,015 |   | **$** | **80,051** | ** ** | $ | 105,058 |   |
| Add back  (deduct):                                     |   |                            | ** ** |                          |   |   | ** ** |   |   |
| Depreciation  and amortization                          |   | **46,617**                      | ** ** | 42,993                        |   | **94,289** | ** ** | 85,812 |   |
| Share of joint  venture adjustments                     |   | **4,774**                       | ** ** | 4,383                         |   | **9,777** | ** ** | 8,798 |   |
| (Earnings)  loss from depreciable property dispositions |   | **(105**                        | **)**      | (2,550                        | )      | **(8,718** | **)** | (2,454 | ) |
| **Funds From  Operations**                              |   | **$**                           | **89,545** | ** **                    | $      | 98,841 |   | **$** | 175,399 | ** ** | $ | 197,214 |   |

 

**Recent Accounting Pronouncements**

 

In January 2003, FASB issuedInterpretation 46, *Consolidation of VariableInterest Entities*(“Interpretation 46”)*,* which addresses consolidation of certain variable interestentities. Interpretation 46 applies immediately

 

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to variable interest entitiescreated after January 31, 2003, and to variable interest entities in which anenterprise obtains an interest after that date.  The interpretation applies in the first fiscal year or interimperiod beginning after June 15, 2003, to variable interest entities in which anenterprise holds a variable interest that it acquired before February 1, 2003.The Partnership reviewed its investments in unconsolidated companies anddetermined that no current investments in unconsolidated companies qualify forconsolidation under Interpretation 46.

 

In May 2003, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 150, *Accounting for CertainFinancial Instruments with Certain Characteristics of Both Liabilities andEquity*.  The provisions ofthis statement are effective for financial instruments entered into or modifiedafter May 31, 2003 and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003. The Partnership has reviewed thestatement and the adoption of this statement is not expected to have a materialimpact on the financial position or results of operations of the Partnership.

 

**Item 3.****  Quantitativeand Qualitative Disclosure About Market Risks**

 

ThePartnership is exposed to interest rate changes primarily as a result of itsline of credit and long-term debt used to maintain liquidity and fund capitalexpenditures and expansion of the Partnership’s real estate investmentportfolio and operations. The Partnership’s interest rate risk managementobjective is to limit the impact of interest rate changes on earnings and cashflows and to lower its overall borrowing costs. To achieve its objectives thePartnership borrows primarily at fixed rates and may enter into derivativefinancial instruments such as interest rate swaps, caps and treasury locks inorder to mitigate its interest rate risk on a related financial instrument. ThePartnership does not enter into derivative or interest rate transactions forspeculative purposes.

 

**Item 4.****  Controls andProcedures**

 

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

 

Based on the most recentevaluation, which was completed within 90 days of the filing of this report,the chief executive officer, the chief financial officer and the chiefoperating officer believe that the Partnership’s disclosure controls andprocedures are effective. There have been no significant changes in theinternal controls or in other factors that could significantly affect the internalcontrols subsequent to the date of the completed evaluation.

 

**Part II - Other Information**

 

Item 1.  Legal Proceedings

 

Broadband Office, Inc. andOfficial Committee of Unsecured Creditors of Broadband Office, Inc. recentlyfiled a complaint against a group of real estate investment trusts and realestate operating companies and certain affiliated entities and individuals inconnection with the formation and management of Broadband Office.  Among the defendants are Duke Realty LimitedPartnership and Mr. Dennis Oklak, one of the General Partner’s executiveofficers. The complaint alleges various breaches of purported fiduciary dutiesby the defendants, seeks recharacterization or equitable subordination of debt,seeks recovery of alleged avoidable transfers, appears to

 

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seek to hold them liable for,among other things, the debt of Broadband Office under alter-ego, veil-piercingand partnership theories, and seeks other relief under other theories. The complaintseeks aggregate damages in excess of $300 million from all of the defendants.The Partnership believes that it has meritorious defenses to the plaintiff’sallegations and intends to vigorously defend this litigation. Due to theinherent uncertainties of the litigation process and the judicial system, thePartnership is not able to predict the outcome of this litigation. If thislitigation is not resolved in the Partnership’s favor, it could have a materialadverse effect on its business, financial condition and results of operations.

 

Item 2.  Changes in Securities

 

None

 

Item 3.  Defaults upon Senior Securities

 

None

 

Item 4.  Submission of Matters to a Vote ofSecurity Holders

 

1.               OnApril 30, 2003, the General Partner held its annual meeting of shareholders andacted on the following matters. At that meeting, the General Partner’sshareholders elected Gary A. Burk, William O. McCoy, James E. Rogers, Jack R.Shaw and Robert J. Woodward, Jr. to serve a three- year term. The number ofvotes cast for and against each of the director nominees was as follows:

 
| **NOMINEE**             |   | **FOR**     |   | **AGAINST** |   |
|-------------------------|--------|-------------|--------|-------------|--------|
| Gary A. Burk            |   | 118,175,392 |   | 965,395     |   |
| William O. McCoy        |   | 118,151,551 |   | 989,071     |   |
| James E. Rogers         |   | 118,080,095 |   | 1,060,692   |   |
| Jack R. Shaw            |   | 118,047,445 |   | 1,093,342   |   |
| Robert J. Woodward, Jr. |   | 118,158,209 |   | 982,578     |   |

 

The GeneralPartner’s remaining directors, Barrington H. Branch, Geoffrey Button, WilliamCavanaugh III, Ngaire Cuneo, Charles R. Eitel, Thomas L. Hefner, L. Ben Lytle,James E. Rogers and Darell E. Zink, Jr., continued in office following theannual meeting. In addition, at a Board meeting held that same day, the Boardof Directors elected Robert J. Woodward, Jr. to fill a vacancy on the Board.

 

The holders of116,532,049 shares voted **FOR** anamendment to the articles of incorporation increasing the unaffiliated directorrequirement, the holders of 964,471 shares voted **AGAINST** such amendment and the holders of 1,644,267 shares **ABSTAINED**. As a result, this amendment wasapproved.

 

The holders of113,932,375 shares voted **FOR**anamendment to the articles of incorporation de-staggering the Board ofDirectors, the holders of 4,599,413 shares voted **AGAINST** such amendment and the holders of 608,999 shares **ABSTAINED**. As a result, the amendment wasapproved.

 

The holders of84,167,259 shares voted **FOR**anamendment to the articles of incorporation decreasing the shareholder votethreshold for certain business combinations, the holders of 3,214,646 sharesvoted **AGAINST** such amendment, theholders of 800,613 shares **ABSTAINED**andthe holders of 30,958,269 shares did not cast votes. As a result, the amendmentwas not approved.

 

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The holders of83,732,120 shares voted **FOR** anamendment to the articles of incorporation decreasing the shareholder votethreshold for amending the articles of incorporation, the holders of 3,658,932shares voted **AGAINST** suchamendment, the holders of 791,460 shares **ABSTAINED**and the holders of 30,958,275 shares did not cast votes. As a result, thisamendment was not approved.

 

The holders of85,348,267 shares voted **FOR** anamendment to the articles of incorporation permitting shareholder action byunanimous written consent, the holders of 2,116,936 shares voted **AGAINST** such amendment, the holders of717,318 shares **ABSTAINED** and theholders of 30,958,266 shares did not cast votes. As a result, this amendmentwas not approved.

 

The holders of117,071,003 shares voted **FOR** theratification of the appointment of KPMG LLP as the independent auditors for thefiscal 2003, the holders of 1,585,958 shares voted **AGAINST** such appointment and the holders of 483,826 shares **ABSTAINED**.

 

At the annualmeeting, the holders of 119,140,787 shares **GRANTED**authority to act on such other business as may properly come before the meetingor any adjournment thereof and the holders of     -0- shares **WITHHELD**suchauthority.

 

Item 5.  Other Information

 

None

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits

 

Exhibit 3.1Third Restated Articles of Incorporation of Duke Realty Corporation(incorporated by reference from the Partnership’s Quarterly Report on Form 10-Qfor the Three Months Ended March 31, 2003).

 

Exhibit 3.2Third Restated Articles of Incorporation of Duke Realty Corporation(incorporated by reference from the Partnership’s Quarterly Report on Form 10-Qfor the Three Months Ended March 31, 2003).

 

Exhibit 11.1Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.

 

Exhibit 11.2Ratio of Earnings to Fixed Charges.

 

Exhibit 15Letter regarding unaudited interim financial information.

 

Exhibit31.1  Certification Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002

 

Exhibit31.2  Certification Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002

 

Exhibit31.3  Certification Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002

 

Exhibit32.1  Certification Pursuant to 18 U.S. C. Section 13.50, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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

 

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

 

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(b)                                 Reportson Form 8-K

 

A currentreport was filed on Form 8-K, dated July 25, 2003, furnishing under items 9 and12 the General Partner’s press release announcing the results of operations andfinancial condition of the General Partner for the three and six months endedJune 30, 2003.

 

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**SIGNATURES**

 

 

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

 

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

 

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