**UNITED STATES**

**SECURITIESAND 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 March 31, 2005** |
|            |   |   |
|            |   | **OR** |
|            |   |   |
| **o**           | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **      | ** ** | **For the transition period from                   to                 .** |

 

**CommissionFile Number: 0-20625**

 

**DUKEREALTY LIMITED PARTNERSHIP**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Indiana**                                                     | ** ** | **35-1898425**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or Other Jurisdiction of Incorporation or Organization) |       | (IRS  Employer Identification Number) |
|                                                            |       |                                  |
| **600 East 96th Street, Suite 100****Indianapolis, Indiana**    | ** ** | **46240**                             |
| (Address  of Principal Executive Offices)                       |       | (Zip  Code)                           |

** **

**Registrant’s telephone number, including areacode:  (317) 808-6000**

 

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 isan 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 April 30, 2005 was156,969,629.

 

----

 

**DUKE REALTY LIMITED PARTNERSHIP**

 

**INDEX**

 
| **Part I - Financial Information** |                                                                                                              |   |
|------------------------------------|-------------------------------------------------------------------------------------------------------------------|--------|
|                               |                                                                                                              |   |
| **Item 1. Financial Statements**   |                                                                                                              |   |
|                               |                                                                                                              |   |   |
|                               | Condensed Consolidated Balance  Sheets as of   March 31, 2005 (Unaudited) and December 31, 2004                   |   |   |
|                               |                                                                                                              |   |   |
|                               | Condensed Consolidated  Statements of Operations (Unaudited)  for the three months ended March 31, 2005 and 2004  |   |   |
|                               |                                                                                                              |   |   |
|                               | Condensed Consolidated  Statements of Cash Flows (Unaudited)  for the three months ended March 31, 2005 and 2004  |   |   |
|                               |                                                                                                              |   |   |
|                               | Condensed Consolidated  Statement of Partners’ Equity  (Unaudited) for the three months ended March 31, 2005 |   |   |
|                               |                                                                                                              |   |   |
|                               | Notes to Condensed Consolidated  Financial Statements  (Unaudited)                                           |   |   |
|                               |                                                                                                              |   |   |
|                               | Report of  Independent Registered Public Accounting Firm                                                          |   |   |
|                               |                                                                                                              |   |   |
| **Item 2.**                        | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations**                   |   |   |
|                               |                                                                                                              |   |   |
| **Item 3.**                        | **Quantitative and  Qualitative Disclosures About Market Risk**                                                   |   |   |
|                               |                                                                                                              |   |   |
| **Item 4.**                        | **Controls and Procedures**                                                                                       |   |   |
|                               |                                                                                                              |   |   |
| **Part II - Other Information**    |                                                                                                              |   |
|                               |                                                                                                              |   |   |
| Item 1.                            | Legal Proceedings                                                                                                 |   |   |
| Item  2.                           | Unregistered  Sales of Equity Securities and Use of Proceeds                                                      |   |   |
| Item 3.                            | Defaults Upon  Senior Securities                                                                                  |   |   |
| Item  4.                           | Submission  of Matters to a Vote of Security Holders                                                              |   |   |
| Item 5.                            | Other Information                                                                                                 |   |   |
| Item 6.                            | Exhibits                                                                                                          |   |   |
|                                    |                                                                                                                   |        |  |  |

 

 

----

 

 

**PART I****-FINANCIAL INFORMATIONItem 1. Financial StatementsDUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIESCondensed Consolidated Balance Sheets(in thousands)**

 
| ** **                                                                                | ** ** | **March 31,**   | ** **    | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------|---------------|------------------|------------|
| **ASSETS**                                                                                | ** ** | **2005**        | ** **    | **2004**         | ** ** |
| ** **                                                                                | ** ** | **(Unaudited)** | ** **    | ** **       | ** ** |
| Real estate investments:                                                                  |       |            |          |             |       |
| Land and improvements                                                                     | ** ** | **$**           | **722,210**   | ** **       | $          | 710,379 |   |
| Buildings and tenant improvements                                                         | ** ** | **4,693,700**   | ** **    | 4,666,715        |       |
| Construction in progress                                                                  | ** ** | **102,853**     | ** **    | 109,788          |       |
| Investments in unconsolidated companies                                                   | ** ** | **294,718**     | ** **    | 287,554          |       |
| Land held for development                                                                 | ** ** | **412,710**     | ** **    | 393,100          |       |
| ** **                                                                                |       | **6,226,191**   | ** **    | 6,167,536        |       |
| Accumulated depreciation                                                                  | ** ** | **(825,902**    | **)**         | (788,900         | )          |
|                                                                                      |       |            | ** **    |             |       |
| Net real estate investments                                                               | ** ** | **5,400,289**   | ** **    | 5,378,636        |       |
|                                                                                      |       |            | ** **    |             |       |
| Cash and cash equivalents                                                                 | ** ** | **3,181**       | ** **    | 5,770            |       |
| Accounts receivable, net of allowance of $1,199 and $1,238                                | ** ** | **16,676**      | ** **    | 17,127           |       |
| Straight-line rent receivable, net of allowance of $1,568 and $1,646                      | ** ** | **94,724**      | ** **    | 89,497           |       |
| Receivables on construction contracts, including retentions                               | ** ** | **70,033**      | ** **    | 59,342           |       |
| Deferred financing costs, net of accumulated amortization of $10,379  and $9,006          | ** ** | **31,013**      | ** **    | 31,924           |       |
| Deferred leasing and other costs, net of accumulated amortization of  $97,850 and $88,888 | ** ** | **205,556**     | ** **    | 203,882          |       |
| Escrow deposits and other assets                                                          | ** ** | **122,591**     | ** **    | 108,466          |       |
| ** **                                                                                |       | **$**           | **5,944,063** | ** **       | $          | 5,894,644 |   |
| **LIABILITIES AND PARTNERS’ EQUITY**                                                 |       |            | ** **    |             |       |
|                                                                                      |       |            | ** **    |             |       |
| Indebtedness:                                                                             |       |            | ** **    |             |       |
| Secured debt                                                                              | ** ** | **$**           | **201,188**   | ** **       | $          | 203,081 |   |
| Unsecured notes                                                                           | ** ** | **2,150,565**   | ** **    | 2,315,623        |       |
| Unsecured lines of credit                                                                 | ** ** | **272,000**     | ** **    | —           |       |
| ** **                                                                                |       | **2,623,753**   | ** **    | 2,518,704        |       |
|                                                                                      |       |            | ** **    |             |       |
| Construction payables and amounts due subcontractors, including  retentions               | ** ** | **66,335**      | ** **    | 67,740           |       |
| Accounts payable                                                                          | ** ** | **559**         | ** **    | 526              |       |
| Accrued expenses:                                                                         |       |            | ** **    |             |       |
| Real estate taxes                                                                         | ** ** | **60,398**      | ** **    | 55,745           |       |
| Interest                                                                                  | ** ** | **23,796**      | ** **    | 36,531           |       |
| Other                                                                                     | ** ** | **32,624**      | ** **    | 48,605           |       |
| Other liabilities                                                                         | ** ** | **107,289**     | ** **    | 105,838          |       |
| Tenant security deposits and prepaid rents                                                | ** ** | **37,984**      | ** **    | 39,827           |       |
| Total liabilities                                                                         | ** ** | **2,952,738**   | ** **    | 2,873,516        |       |
|                                                                                      |       |            | ** **    |             |       |
| Partners’ equity:                                                                    |       |            | ** **    |             |       |
| General Partner                                                                           |       |            | ** **    |             |       |
| Common equity                                                                             | ** ** | **2,190,656**   | ** **    | 2,214,473        |       |
| Preferred equity (liquidation preference of $657,250)                                     | ** ** | **616,780**     | ** **    | 616,780          |       |
| ** **                                                                                |       | **2,807,436**   | ** **    | 2,831,253        |       |
| Limited Partner’s common equity                                                      | ** ** | **192,115**     | ** **    | 196,422          |       |
| Accumulated other comprehensive income                                                    | ** ** | **(8,226**      | **)**         | (6,547           | )          |
| Total Partners’ equity                                                               | ** ** | **2,991,325**   | ** **    | 3,021,128        |       |
| ** **                                                                                |       | **$**           | **5,944,063** |             | $          | 5,894,644 |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

2

----

 

**DUKEREALTY LIMITED PARTNERSHIP AND SUBSIDIARIESCondensed Consolidated Statements ofOperationsFor the three months ended March 31,(in thousands, except per unit data)(Unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** **  |
|------------------------------------------------------------------------------|------------|------------------------|-------------|
| ** **                                                                   | ** ** | **2005**               | ** **  | **2004** | ** ** |
| **RENTAL OPERATIONS**                                                        |       |                   |        |   |   |
| Revenues:                                                                    |       |                   |        |   |   |
| Rental income from continuing operations                                     | ** ** | **$**                  | **191,030** |   | $ | 181,424 |   |
| Equity in earnings of unconsolidated companies                               | ** ** | **5,206**              |        | 4,525 |   |
| ** **                                                                   |       | **196,236**            |        | 185,949 |   |
| Operating expenses:                                                          |       |                   | ** **  |   |   |
| Rental expenses                                                              | ** ** | **44,296**             | ** **  | 39,100 |   |
| Real estate taxes                                                            | ** ** | **22,847**             | ** **  | 21,026 |   |
| Interest expense                                                             | ** ** | **35,226**             | ** **  | 32,196 |   |
| Depreciation and amortization                                                | ** ** | **62,876**             | ** **  | 50,756 |   |
| ** **                                                                   |       | **165,245**            | ** **  | 143,078 |   |
| Earnings from continuing rental operations                                   | ** ** | **30,991**             | ** **  | 42,871 |   |
| **SERVICE OPERATIONS**                                                       |       |                   | ** **  |   |   |
| Revenues:                                                                    |       |                   | ** **  |   |   |
| General contractor gross revenue                                             | ** ** | **86,616**             | ** **  | 82,723 |   |
| General contractor costs                                                     | ** ** | **(79,559**            | **)**       | (76,036 | ) |
| Net general contractor revenue                                               | ** ** | **7,057**              | ** **  | 6,687 |   |
| Property management, maintenance and leasing fees                            | ** ** | **3,879**              | ** **  | 3,935 |   |
| Construction management and development activity income                      | ** ** | **7,994**              | ** **  | 579 |   |
| Other income                                                                 | ** ** | **2,765**              | ** **  | 234­ |   |
| Total revenue                                                                | ** ** | **21,695**             | ** **  | 11,435 |   |
| Operating expenses                                                           | ** ** | **10,775**             | ** **  | 9,393 |   |
| Total earnings from service operations                                       | ** ** | **10,920**             | ** **  | 2,042 |   |
| General and administrative expense                                           | ** ** | **(7,580**             | **)**       | (8,317 | ) |
| Operating income                                                             | ** ** | **34,331**             | ** **  | 36,596 |   |
| **OTHER INCOME (EXPENSE)**                                                   |       |                   | ** **  |   |   |
| Interest income                                                              | ** ** | **1,320**              | ** **  | 1,507 |   |
| Earnings from sale of land, net of impairment adjustments                    | ** ** | **143**                | ** **  | 4,629 |   |
| Other expenses                                                               | ** ** | **(78**                | **)**       | (3 | ) |
| Other minority interest in earnings of subsidiaries                          | ** ** | **(37**                | **)**       | (307 | ) |
| Income from continuing operations                                            | ** ** | **35,679**             | ** **  | 42,422 |   |
| Discontinued operations:                                                     |       |                   | ** **  |   |   |
| Net income from discontinued operations                                      | ** ** | **401**                | ** **  | 1,005 |   |
| Gain on sale of discontinued operations, net of impairment adjustment        |       | **3,701**              | ** **  | 4,009 |   |
| Income from discontinued operations                                          | ** ** | **4,102**              | ** **  | 5,014 |   |
|                                                                         |       |                   | ** **  |   |   |
| Net income                                                                   | ** ** | **39,781**             | ** **  | 47,436 |   |
| Dividends on preferred units                                                 | ** ** | **(11,620**            | **)**       | (7,600 | ) |
| Adjustments for redemption of preferred units                                |       | —                 | ** **  | (3,614 | ) |
| Net income available for common unitholders                                  | ** ** | **$**                  | **28,161**  |   | $ | 36,222 |   |
| Basic net income per common unit:                                            |       |                   |        |   |   |
| Continuing operations                                                        | ** ** | **$**                  | **.15**     |   | $ | .21 |   |
| Discontinued operations                                                      | ** ** | **.03**                |        | .03 |   |
| Total                                                                        | ** ** | **$**                  | **.18**     |   | $ | .24 |   |
| Diluted net income per common unit:                                          |       |                   |        |   |   |
| Continuing operations                                                        | ** ** | **$**                  | **.15**     |   | $ | .20 |   |
| Discontinued operations                                                      | ** ** | **.03**                |        | .03 |   |
| Total                                                                        | ** ** | **$**                  | **.18**     |   | $ | .23 |   |
|                                                                         |       |                   |        |   |   |
| Weighted average number of common units outstanding                          | ** ** | **156,947**            |        | 152,444 |   |
| Weighted average number of common units and dilutive potential common  units |       | **157,720**            |        | 156,913 |   |

 

Seeaccompanying Notes to Consolidated Financial Statements.

 

 

3

----

 

**DUKEREALTY LIMITED PARTNERSHIP AND SUBSIDIARIESCondensed Consolidated Statements ofCash FlowsFor the three months ended March 31,(in thousands)(Unaudited)**

 
| ** **                                                                                                  | ** ** | **2005**     | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------|------------|----------|------------|
| Cash flows from operating activities:                                                                       |       |         |       |     |       |
| Net income                                                                                                  | ** ** | **$**        | **39,781** |     | $          | 47,436 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:                          |       |         |       |     |       |
| Depreciation of buildings and tenant improvements                                                           | ** ** | **51,563**   |       | 43,012   |       |
| Amortization of deferred leasing and other costs                                                            | ** ** | **11,663**   |       | 9,385    |       |
| Amortization of deferred financing costs                                                                    | ** ** | **1,544**    | ** ** | 1,067    |       |
| Minority interest in earnings                                                                               | ** ** | **37**       | ** ** | 308      |       |
| Straight-line rent adjustment                                                                               | ** ** | **(6,170**   | **)**      | (5,892   | )          |
| Earnings from land and depreciated property sales                                                           | ** ** | **(3,843**   | **)**      | (8,638   | )          |
| Build-for-sale operations, net                                                                              | ** ** | **5,562**    | ** ** | (2,672   | )          |
| Construction contracts, net                                                                                 | ** ** | **(9,935**   | **)**      | (2,689   | )          |
| Other accrued revenues and expenses, net                                                                    | ** ** | **(24,363**  | **)**      | (15,146  | )          |
| Operating distributions received in excess of (less than) equity in  earnings from unconsolidated companies |       | **(867**     | **)**      | 3,399    |       |
| **Net cash provided by operating activities**                                                               | ** ** | **64,972**   | ** ** | 69,570   |       |
| Cash flows from investing activities:                                                                       |       |         | ** ** |     |       |
| Development of real estate investments                                                                      | ** ** | **(29,693**  | **)**      | (22,114  | )          |
| Acquisition of real estate investments                                                                      |       | —       | ** ** | (9,606   | )          |
| Acquisition of land held for development and infrastructure costs                                           | ** ** | **(34,742**  | **)**      | —   |       |
| Recurring tenant improvements                                                                               | ** ** | **(13,732**  | **)**      | (14,244  | )          |
| Recurring leasing costs                                                                                     | ** ** | **(8,811**   | **)**      | (6,652   | )          |
| Recurring building improvements                                                                             | ** ** | **(2,446**   | **)**      | (4,555   | )          |
| Other deferred leasing costs                                                                                | ** ** | **(4,401**   | **)**      | (5,426   | )          |
| Other deferred costs and other assets                                                                       | ** ** | **(1,786**   | **)**      | (7,153   | )          |
| Tax deferred exchange escrow, net                                                                           |       | —       | ** ** | (1,334   | )          |
| Proceeds from land and depreciated property sales, net                                                      | ** ** | **13,608**   | ** ** | 29,405   |       |
| Investment in secured mortgage loan                                                                         |       | —       | ** ** | (65,000  | )          |
| Advances to unconsolidated companies                                                                        | ** ** | **(6,441**   | **)**      | (701     | )          |
| **Net cash used for investing activities**                                                                  | ** ** | **(88,444**  | **)**      | (107,380 | )          |
|                                                                                                        |       |         | ** ** |     |       |
| Cash flows from financing activities:                                                                       |       |         | ** ** |     |       |
| Contributions from General Partner, common units                                                            | ** ** | **633**      | ** ** | 8,534    |       |
| Contributions from General Partner, preferred units                                                         |       | —       | ** ** | 144,975  |       |
| Payments for redemption of General Partner’s preferred equity                                          |       | —       | ** ** | (102,621 | )          |
| Payments for exercise of warrants                                                                           |       | —       | ** ** | (2,881   | )          |
| Proceeds from indebtedness                                                                                  |       | —       | ** ** | 125,000  |       |
| Payments on unsecured debt                                                                                  | ** ** | **(100,000** | **)**      | —   |       |
| Proceeds (payments) from (on) term loan                                                                     | ** ** | **(65,000**  | **)**      | 65,000   |       |
| Payments on secured indebtedness including principal amortization                                           | ** ** | **(1,697**   | **)**      | (1,707   | )          |
| Borrowings (payments) on lines of credit, net                                                               | ** ** | **272,000**  | ** ** | (121,000 | )          |
| Distributions to common unitholders                                                                         | ** ** | **(72,971**  | **)**      | (69,722  | )          |
| Distributions to preferred unitholders                                                                      | ** ** | **(11,620**  | **)**      | (6,381   | )          |
| Distributions to minority interest                                                                          |       | —       | ** ** | (209     | )          |
| Deferred financing costs                                                                                    | ** ** | **(462**     | **)**      | (3,963   | )          |
| **Net cash provided by financing activities**                                                               | ** ** | **20,883**   | ** ** | 35,025   |       |
| **Net decrease in cash and cash equivalents**                                                               | ** ** | **(2,589**   | **)**      | (2,785   | )          |
|                                                                                                        |       |         | ** ** |     |       |
| Cash and cash equivalents at beginning of period                                                            | ** ** | **5,770**    |       | 12,695   |       |
| Cash and cash equivalents at end of period                                                                  | ** ** | **$**        | **3,181**  |     | $          | 9,910 |   |
|                                                                                                        |       |         |       |     |       |
| Other non-cash items:                                                                                       |       |         |       |     |       |
| Conversion of Limited Partner Units to common shares of General  Partner                                    | ** ** | **$**        | **708**    |     | $          | 1,816 |   |
| Conversion of Series D Preferred Units to common shares of General  Partner                                 | ** ** | **$**        | **—** |     | $          | 130,665 |   |
| Issuance of Limited Partner Units for acquisition of minority  interest                                     | ** ** | **$**        | **15,000** |     | $          | — |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

4

----

 

**DUKE REALTYLIMITED PARTNERSHIP AND SUBSIDIARIESConsolidated Statements of Partners’EquityFor the three months ended March 31, 2005(in thousands, except per unit data)(Unaudited)**

 
| ** **                                                               | ** ** | ** **          | ** **    | ** **         | ** ** | **Limited** | ** ** | **Accumulated**   | ** **  | ** ** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------|---------------|--------------------|------------|-------------|------------|-------------------|-------------|------------|------------|
| ** **                                                               | ** ** | **General Partner** | ** **    | **Partners’** | ** ** | **Other**   | ** ** | ** **        | ** **  |
| ** **                                                               | ** ** | **Common**          | ** **    | **Preferred**      | ** ** | **Common**  | ** ** | **Comprehensive** | ** **  | ** ** | ** ** |
| ** **                                                               | ** ** | **Equity**          | ** **    | **Equity**         | ** ** | **Equity**  | ** ** | **Income (Loss)** | ** **  | **Total**  | ** ** |
| **Balance at December 31, 2004**                                         | ** ** | **$**               | **2,214,473** | ** **         | **$**      | **616,780** | ** ** | **$**             | **196,422** | ** ** | **$**      | **(6,547** | **)** | **$** | **3,021,128** | ** ** |
|                                                                     |       |                |          |               |       |        |       |              |        |       |       |
| Comprehensive income:                                                    |       |                |          |               |       |        |       |              |        |       |       |
| Net income                                                               |       | 25,483              |          | 11,620             |       | 2,678       |       | —            |        | 39,781     |       |
|                                                                     |       |                |          |               |       |        |       |              |        |       |       |
| Distributions to preferred unitholders                                   |       | —              |          | (11,620            | )          | —      |       | —            |        | (11,620    | )          |
|                                                                     |       |                |          |               |       |        |       |              |        |       |       |
| Gains (losses) on derivative instruments                                 |       | —              |          | —             |       | —      |       | (1,679            | )           | (1,679     | )          |
|                                                                     |       |                |          |               |       |        |       |              |        |       |       |
| Comprehensive income available for common unitholders                    |       |                |          |               |       |        |       |              |        | 26,482     |       |
|                                                                     |       |                |          |               |       |        |       |              |        |       |       |
| Capital contribution from General Partner                                |       | 683                 |          | —             |       | —      |       | —            |        | 683        |       |
|                                                                     |       |                |          |               |       |        |       |              |        |       |       |
| Acquisition of partnership interest for common stock of General  Partner |       | 16,169              |          | —             |       | (15,461     | )          | —            |        | 708        |       |
|                                                                     |       |                |          |               |       |        |       |              |        |       |       |
| Acquisition of minority interest in exchange for Limited Partner  Units  |       | —              |          | —             |       | 15,000      |       | —            |        | 15,000     |       |
|                                                                     |       |                |          |               |       |        |       |              |        |       |       |
| Tax benefits from Employee Stock Plans                                   |       | 25                  |          | —             |       | —      |       | —            |        | 25         |       |
|                                                                     |       |                |          |               |       |        |       |              |        |       |       |
| FASB 123 Compensation Expense                                            |       | 282                 |          | —             |       | —      |       | —            |        | 282        |       |
|                                                                     |       |                |          |               |       |        |       |              |        |       |       |
| Distribution to General Partner                                          |       | (3                  | )             | —             |       | —      |       | —            |        | (3         | )          |
|                                                                     |       |                |          |               |       |        |       |              |        |       |       |
| Distributions to partners ($.465 per Common Unit)                        |       | (66,456             | )             | —             |       | (6,524      | )          | —            |        | (72,980    | )          |
|                                                                     |       |                |          |               |       |        |       |              |        |       |       |
| **Balance at March 31, 2005**                                            | ** ** | **$**               | **2,190,656** | ** **         | **$**      | **616,780** | ** ** | **$**             | **192,115** | ** ** | **$**      | **(8,226** | **)** | **$** | **2,991,325** | ** ** |

 

Seeaccompanying Notes to Condensed Consolidated Financial Statements

 

5

----

 

 

**DUKE REALTY LIMITED PARTNERSHIPNOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS(Unaudited)**

**1.       General Basis of Presentation**

 

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, 2004). 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 Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded herein and the condensed consolidated financial statements and notesthereto included in our Annual Report on Form 10-K for the year ended December31, 2004.

 

Duke Realty Limited Partnership (the “Partnership”)was formed on October 4, 1993, when Duke Realty Corporation (the “GeneralPartner”) contributed all of its properties and related assets and liabilities,along with the net proceeds from the issuance of additional shares of theGeneral Partner through an offering, to the Partnership. Simultaneously, thePartnership completed the acquisition of Duke Associates, a full-servicecommercial real estate firm operating in the Midwest. The General Partner wasformed in 1985 and qualifies as a Real Estate Investment Trust (“REIT”) underprovisions of the Internal Revenue Code. TheGeneral Partner is the sole general partner of the Partnership, owning 91.4% ofthe common partnership interests as of March 31, 2005 (“General Partner Units”).The remaining 8.6% of the Partnership’s common interest is owned by limitedpartners (“Limited Partner Units” and, together with the General Partner Units,the “Common Units”). The Limited Partner Units areexchangeable for shares of the General Partner’s common stock on a one-for-onebasis subject generally to a one-year holding period. The General Partner alsoowns preferred partnership interests in the Partnership (“Preferred Units”).

 

We own and operate a portfolio of industrial,office and retail properties in the midwestern and southeastern United Statesand provides real estate services to third-partyowners. We conduct Service Operations through Duke Realty Services LLC (“DRS”),Duke Realty Services Limited Partnership (“DRSLP”) and Duke ConstructionLimited Partnership (“DCLP”).

 

**2.       Indebtedness**

** **

We have one unsecured line of credit available at March 31, 2005,described as follows (in thousands):

 
| **Description**          | ** ** | **Borrowing  Capacity** | ** ** | **Maturity  Date** | ** ** | **Interest   Rate** | ** ** | **Outstanding at March 31, 2005** | ** ** |
|--------------------------|------------|-------------------------|------------|--------------------|------------|---------------------|------------|-----------------------------------|------------|
| Unsecured Line of Credit |       | $500,000                |       | January  2007      |       | LIBOR  + .60        | %          | $272,000                          |       |

 

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

 

The line of creditprovides us with an option to obtain borrowings from financial institutionsthat participate in the line, at rates lower than the stated interest rate,subject to certain restrictions. Amounts outstanding on theunsecured line of credit at March 31, 2005, range from LIBOR + .19 to .60(3.00% to 3.45% at March 31, 2005).

 

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The line of creditalso contains financial covenants that require us to meet defined levels ofperformance.  As of March 31, 2005, weare in compliance with all covenants and expect to remain in compliance for theforeseeable future.

 

In January 2005,we retired our $65.0 million variable rate term loan. In March 2005, we retired$100.0 million of 6.94% senior unsecured debt that matured.

 

**3.       Related Party Transactions**

 

We provide property management, leasing, construction and other tenantrelated services to unconsolidated companies in which we have equity interests.For the three months ended March 31, 2005 and 2004, respectively, we receivedmanagement fees of $1.2 million and $1.2 million, leasing fees of $922,000 and$815,000 and construction and development fees of $517,000 and $501,000 fromthese unconsolidated companies. These fees were recorded at market rates and weeliminated our ownership percentage of these fees in the condensed consolidatedfinancial statements.

 

Effective as of January 1, 2005, the Partnership (“DRLP”), DukeManagement, Inc. (“DMI”), an Indiana corporation, and DRSLP entered into aContribution Agreement, pursuant to which DMI contributed to DRLP all of DMI’slimited partnership interest in DRSLP in exchange for the issuance to DMI of435,814 DRLP limited partnership units. This transaction was at fair marketvalue and was recorded under the purchase accounting method. As a result, wenow own 100% of the partnership interests in DRSLP. On March 1, 2005, DMImerged into the Partnership.  For moredetails regarding this transaction, see our General Partner’s Current Report onForm 8-K filed with the SEC on January 4, 2005.

 

**4.       Net Income Per Common Unit**

 

Basic net income per common unit is computed bydividing net income available for common units by the weighted average numberof common units outstanding for the period. Diluted net income per common unitis computed by dividing the sum of net income available for common unitholdersby the sum of the weighted average number of common units outstanding,including any dilutive potential common units for the period.

 

The following table reconciles the components ofbasic and diluted net income per common unit for the three months ended March31, 2005 and 2004, respectively (in thousands):

 

| ** **                                                                   | ** ** | **2005**    | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|
| Basic net income available for common unitholders                            | ** ** | **$**       | **28,161** |     | $          | 36,222 |   |
|                                                                         |       |        |       |     |       |
| Weighted average number of common units outstanding                          | ** ** | **156,947** |       | 152,444  |       |
| Weighted average conversion of Series D preferred units (1)                  |       | —      |       | 3,510    |       |
| Dilutive shares for stock-based compensation plan                            | ** ** | **773**     |       | 959      |       |
| Weighted average number of common units and dilutive potential common  units |       | **157,720** |       | 156,913  |       |
|                                                                              |            |             |            |          |            |  |  |

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(1)          TheGeneral Partner called for the redemption of the Series D preferred units as ofMarch 16, 2004. Prior to the redemption date, nearly 5.3 million Series Dpreferred units were converted into 4.9 million common units. These unitsrepresent the weighted effect, assuming the Series D units had been convertedon January 1, 2004.

 

 

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**5.****                   ****SegmentReporting**

 

We are engaged in four operating segments, the first three of whichconsist of the ownership and rental of office, industrial and retail realestate investments (collectively, “Rental Operations”). The fourth segmentconsists of our build-to-suit for sale operations and the providing of variousreal estate services such as property management, maintenance, leasing, development and construction management to third-partyproperty owners and joint ventures (“Service Operations”). Our reportablesegments offer different products or services and are managed separatelybecause each requires different operating strategies and management expertise.There are no material intersegment sales or transfers.

 

Non-segment revenue consists mainly of equity in earnings ofunconsolidated companies. Segment FFO information is calculated by subtractingoperating expenses attributable to the applicable segment from segmentrevenues.  Non-segment assets consist ofcorporate assets including cash, deferred financing costs and investments inunconsolidated companies. Interest expense and other non-property specificrevenues and expenses are not allocated to individual segments in determiningour performance measure.

 

We assess and measure segment operating results based upon an industryperformance measure referred to as Funds FromOperations (“FFO”), which management believes is a useful indicator of ouroperating performance. Funds From Operations is used by industry analysts and investorsas a supplemental operating performance measure of an equity real estateinvestment trust (“REIT”). FFO is calculated in accordance with the definitionthat was adopted by the Board of Governors of the National Association of RealEstate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents netincome (loss) determined in accordance with accounting principles generallyaccepted in the United States of America (“GAAP”), excluding extraordinaryitems as defined under GAAP and gains or losses from sales of previouslydepreciated operating real estate assets, plus certain non-cash items such asreal estate asset depreciation and amortization, and after similar adjustmentsfor unconsolidated partnerships and joint ventures.

 

The revenues and FFO for each of the reportable segments for the threemonths ended March 31, 2005, and 2004, and the assets for each of thereportable segments as of March 31, 2005 and December 31, 2004, are summarizedas follows (in thousands):

 

 

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| ** **                                                           | ** ** | **Three Months Ended March 31,** | ** **  |
|----------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                           | ** ** | **2005**                         | ** **  | **2004** | ** ** |
| Revenues                                                             |       |                             |        |   |   |
| Rental Operations:                                                   |       |                             |        |   |   |
| Office                                                               | ** ** | **$**                            | **119,289** |   | $ | 111,701 |   |
| Industrial                                                           | ** ** | **69,583**                       | ** **  | 67,403 |   |
| Retail                                                               | ** ** | **1,042**                        | ** **  | 1,161 |   |
| Service Operations                                                   | ** ** | **21,695**                       | ** **  | 11,435 |   |
| Total Segment Revenues                                               | ** ** | **211,609**                      | ** **  | 191,700 |   |
| Non-Segment Revenue                                                  | ** ** | **6,322**                        | ** **  | 5,683 |   |
| Consolidated Revenue from continuing operations                      |       | **217,931**                      | ** **  | 197,383 |   |
| Discontinued Operations                                              | ** ** | **1,535**                        | ** **  | 5,678 |   |
| Consolidated Revenue                                                 | ** ** | **$**                            | **219,466** | ** ** | $ | 203,061 |   |
| Funds From Operations                                                |       |                             | ** **  |   |   |
| Rental Operations:                                                   |       |                             | ** **  |   |   |
| Office                                                               | ** ** | **$**                            | **73,584**  | ** ** | $ | 71,000 |   |
| Industrial                                                           | ** ** | **49,555**                       | ** **  | 49,188 |   |
| Retail                                                               | ** ** | **803**                          | ** **  | 915 |   |
| Services Operations                                                  | ** ** | **10,920**                       | ** **  | 2,042 |   |
| Total Segment FFO                                                    | ** ** | **134,862**                      | ** **  | 123,145 |   |
|                                                                 |       |                             | ** **  |   |   |
| Non-Segment FFO:                                                     |       |                             | ** **  |   |   |
| Interest expense                                                     | ** ** | **(35,226**                      | **)**       | (32,196 | ) |
| Interest income                                                      | ** ** | **1,320**                        | ** **  | 1,507 |   |
| General and administrative expense                                   | ** ** | **(7,581**                       | **)**       | (8,317 | ) |
| Gain on land sales                                                   | ** ** | **143**                          | ** **  | 4,629 |   |
| Impairment adjustments on depreciable property                       |       | **(2,809**                       | **)**       | — |   |
| Other income (expenses)                                              | ** ** | **(133**                         | **)**       | 193 |   |
| Minority interest in earnings of subsidiaries                        |       | **(37**                          | **)**       | (307 | ) |
| Joint venture FFO                                                    | ** ** | **10,072**                       | ** **  | 9,112 |   |
| Dividends on preferred units                                         | ** ** | **(11,620**                      | **)**       | (7,600 | ) |
| Adjustment for redemption of preferred units                         |       | —                           | ** **  | (3,614 | ) |
| Discontinued operations                                              | ** ** | **751**                          | ** **  | 2,646 |   |
| Consolidated FFO                                                     | ** ** | **89,742**                       | ** **  | 89,198 |   |
| Depreciation and amortization on continuing operations               |       | **(62,876**                      | **)**       | (50,756 | ) |
| Depreciation and amortization on discontinued operations             |       | **(350**                         | **)**       | (1,641 | ) |
| Share of joint venture adjustments                                   | ** ** | **(4,865**                       | **)**       | (4,588 | ) |
| Earnings from depreciated property sales on  discontinued operations |       | **6,510**                        |        | 4,009 |   |
| Net income available for common unitholders                          | ** ** | **$**                            | **28,161**  |   | $ | 36,222 |   |

 
| ** **           | ** ** | **March 31,** | ** **    | **December 31,** | ** ** |
|----------------------|------------|---------------|---------------|------------------|------------|
| ** **           | ** ** | **2005**      | ** **    | **2004**         | ** ** |
| Assets               |       |          |          |             |       |
| Rental Operations:   |       |          |          |             |       |
| Office               | ** ** | **$**         | **3,093,225** |             | $          | 3,128,387 |   |
| Industrial           | ** ** | **2,239,441** |          | 2,211,509        |       |
| Retail               | ** ** | **111,691**   |          | 84,625           |       |
| Service Operations   | ** ** | **154,871**   |          | 131,218          |       |
| Total Segment Assets | ** ** | **5,599,228** |          | 5,555,739        |       |
| Non-Segment Assets   | ** ** | **344,835**   |          | 338,905          |       |
| Consolidated Assets  | ** ** | **$**         | **5,944,063** |             | $          | 5,894,644 |   |

 

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In addition to revenues and FFO, we also reviewour recurring capital expenditures in measuring the performance of ourindividual Rental Operations segments. These recurring capital expendituresconsist of tenant improvements, leasing commissions and building improvements.We review these expenditures to determine the costs associated with re-leasingvacant space and maintaining the condition of our properties. Our recurringcapital expenditures by segment are summarized as follows for the three monthsended March 31, 2005 and 2004, respectively  (in thousands):

 

| ** **                     | ** ** | **2005**   | ** ** | **2004** | ** ** |
|--------------------------------|------------|------------|------------|----------|------------|
| Recurring Capital Expenditures |       |       |       |     |       |
| Office                         | ** ** | **$**      | **13,761** |     | $          | 15,062 |   |
| Industrial                     | ** ** | **11,228** |       | 10,371   |       |
| Retail                         | ** ** | **—** |       | 18       |       |
| Total                          | ** ** | **$**      | **24,989** |     | $          | 25,451 |   |

 

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

 

Wehave classified the operations of 50 buildings as discontinued operations as ofMarch 31, 2005. These 50 buildings consist of 41 industrial, six office andthree retail properties. As a result, we classified net income from operationsof $401,000 and $1.0 million as net income from discontinued operations for thethree months ended March 31, 2005 and 2004, respectively. Two of the propertiesclassified in discontinued operations were sold during the first quarter of2005 and 41 properties were sold during 2004. The gains on disposal of theseproperties, net of impairment adjustments of $3.7 million and $4.0 million forthe three months ended March 31, 2005 and 2004, respectively, are also reportedin discontinued operations.

 

At March 31, 2005, we had five industrialproperties, one office property and one retail property, which comprisedapproximately 660,000 square feet classified as held-for-sale. At March 31,2005, these properties have signed contracts, but there can be no assurancethat such properties classified as held-for-sale will be sold.

 

The following tableillustrates the operations of the 50 buildings reflected in discontinuedoperations, at March 31, 2005 and 2004, respectively (in thousands):

 

| ** **                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Statement of Operations:                                 |       |                             |       |   |   |
| Revenues                                                 | ** ** | **$**                            | **1,535**  |   | $ | 5,678 |   |
| Expenses:                                                |       |                             |       |   |   |
| Operating                                                | ** ** | **522**                          |       | 1,876 |   |
| Interest                                                 | ** ** | **261**                          |       | 1,151 |   |
| Depreciation and Amortization                            | ** ** | **350**                          |       | 1,641 |   |
| General and Administrative                               | ** ** | **1**                            |       | 6 |   |
| Operating Income                                         | ** ** | **401**                          |       | 1,004 |   |
| Other Income                                             |       | —                           |       | 1 |   |
| Income from discontinued operations, before gain on sale |       | **401**                          |       | 1,005 |   |
| Gain on sale of property, net of impairment adjustments  |       | **3,701**                        |       | 4,009 |   |
| Income from discontinued operations                      | ** ** | **$**                            | **4,102**  |   | $ | 5,014 |   |

 

 

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The following tableillustrates the aggregate balance sheet of our seven properties identified asheld-for-sale at March 31, 2005 (in thousands):

 

| ** **                   | ** ** | **March 31, 2005** | ** ** |
|------------------------------|------------|--------------------|------------|
| Balance Sheet:               |       |               |       |
| Real estate investments, net |       | $                  | 22,179     |   |
| Other Assets                 |       | 1,032              |       |
| Total Assets                 |       | $                  | 23,211     |   |
| Accrued Expenses             |       | $                  | 231        |   |
| Other Liabilities            |       | 196                |       |
| Equity                       |       | 22,784             |       |
| Total Liabilities and Equity |       | $                  | 23,211     |   |

 

We allocate interestexpense to discontinued operations as permitted under EITF 87-24, *“Allocation of Interest to Discontinued Operations,”*andhave included such interest expense in computing net income from discontinuedoperations. Interest expense allocable to discontinued operations includesinterest on any debt on secured properties included in discontinued operationsand an allocable share of our consolidated unsecured interest expense forunencumbered properties. The allocation of unsecured interest expense todiscontinued operations was based upon the gross book value of the discontinuedoperations unencumbered population as it related to our entire unencumberedpopulation.

 

For the three months ended March 31, 2005 and2004, we recorded impairment adjustments of $2.8 million and $100,000,respectively. The $2.8 million of impairment recorded in the first quarter of2005 reflects the write-down of the carrying value of one held-for-sale officebuilding, five held-for-sale industrial buildings and one land parcelcontracted to sell in 2005. The $100,000 impairment recorded in the firstquarter of 2004 reflects the write-down of the carrying value of a land parcelthat was later sold in 2004.

 

Effective January 1,2005, we have changed the estimated useful lives on building improvements from40 years to a  10-yearlife. This change has been applied prospectively. The change in estimateduseful lives is based upon management’s belief that a 10-year life on buildingimprovements represents a better estimate of the asset’s useful life. Thesebuilding improvements will continue to be depreciated using the straight-linemethod.

 

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

 

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

 

The following series of preferred units are outstanding as of March 31,2005 (in thousands, except percentage data):

 
| ** **         | ** ** | **Units**       | ** ** | **Dividend** | ** ** | **Redemption**      | ** ** | **Liquidation** | ** ** | ** **      | ** ** |
|--------------------|------------|-----------------|------------|--------------|------------|---------------------|------------|-----------------|------------|-----------------|------------|
| **Description**    | ** ** | **Outstanding** | ** ** | **Rate**     | ** ** | **Date**            | ** ** | **Preference**  | ** ** | **Convertible** | ** ** |
|               |       |            |       |         |       |                |       |            |       |            |       |
| Series B Preferred |       | 265             |       | 7.990        | %          | September  30, 2007 |       | $               | 132,250    |            | No         |   |
| Series I Preferred |       | 300             |       | 8.450        | %          | February  6, 2006   |       | 75,000          |       | No              |       |
| Series J Preferred |       | 400             |       | 6.625        | %          | August  29, 2008    |       | 100,000         |       | No              |       |
| Series K Preferred |       | 600             |       | 6.500        | %          | February  13, 2009  |       | 150,000         |       | No              |       |
| Series L Preferred |       | 800             |       | 6.600        | %          | November  30, 2009  |       | 200,000         |       | No              |       |
|                    |            |                 |            |              |            |                     |            |                 |            |                 |            |  |

 

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

 

 

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All series of preferred units require cumulative distributions and haveno stated maturity date (although we may redeem them on or following theiroptional redemption dates).

 

The Series B, Series I, Series J, Series K and Series L preferred unitsmay be redeemed on or after the dates noted above only at our option, in wholeor in part.

 

**8.      Reclassifications**

 

Certain 2004 balances have been reclassified to conform to the 2005presentation.

 

**9.     Financial Instruments**

 

We are exposed to capital market risk, such as changes in interestrates. In order to manage the volatility relating to interest rate risk, we mayenter into interest rate hedging arrangements from time to time. We do notutilize derivative financial instruments for trading or speculative purposes.We account for derivative instruments under Statement of Financial AccountingStandard No. 133, “Accounting for Derivative Instruments and Hedging Activities”as amended (“SFAS 133”).

 

In March 2005, we entered into $300.0 millionof cash flow hedges through forward-starting interest rate swaps to hedgeinterest rates on $300.0 million of estimated debt offerings in 2006. The swapsqualify for hedge accounting under SFAS 133 with any changes in fair valuerecorded in Accumulated Other Comprehensive Income (“OCI”). Due to a decline inrates, the fair value at the end of the first quarter is a liability of $1.8million.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity* (“SFAS 150”). SFAS150 establishes standards for classifying and measuring as liabilities certainfinancial instruments that embody obligations of the issuer and havecharacteristics of both liabilities and equity. SFAS 150 is effective for allfinancial instruments created or modified after May 31, 2003, and otherwise iseffective July 1, 2003. We include the operations of one joint

venture in our condensed consolidated financial statements at March 31, 2005.This joint venture is partially owned by unaffiliated parties that havenoncontrolling interests. SFAS 150 requires the disclosure of the estimatedsettlement value of these noncontrolling interests. As of March 31, 2005, theestimated settlement value of the noncontrolling interest in this consolidatedjoint venture was approximately $1.1 million as compared to the receivableasset recorded on our books for this joint venture of $105,000.

 

**10.  Stock Based Compensation**

 

Under the limitedpartnership agreement of the partnership, the Partnership is required to issueone Common Unit to the General Partner for each share of common stock issued bythe General Partner. Accordingly, the issuance of common shares by the GeneralPartner under its stock based compensation plans requires the issuance of acorresponding number of Common Units by the Partnership to the General Partner.

 

For all issuances priorto 2002, the Partnership applies the recognition and measurement provisions ofAPB Opinion No. 25, *Accounting for StockIssued to Employees*, and related Interpretations in accounting forits stock based compensation. Effective January 1, 2002, the Partnership prospectively adopted the fairvalue recognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*,to all awards granted after January 1, 2002.

 

 

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The following table illustrates the effect on net income and earningsper unit if the fair value method had been applied to all outstanding andunvested awards in each period (in thousands except per unit data).

 

| ** **                                                                                                | ** **  | **Three Months ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|-------------|----------------------------------|------------|
| ** **                                                                                                | ** **  | **2005**                         | ** ** | **2004** | ** ** |
| Net income available for common unitholders, as reported                                                  |        | **$**                            | 28,161     |   | $ | 36,222 |   |
| Add: Stock-based employee compensation expense included in net income  determined under fair value method |        | **282**                          | ** ** | 101 |   |
| Deduct: Total stock based compensation expense determined under fair  value method for all awards         |        | **(415**                         | **)**      | (220 | ) |
| Proforma net income available for common unitholders                                                      |        | **$**                            | **28,028** | ** ** | $ | 36,103 |   |
|                                                                                                      |        |                             |       |   |   |
| Basic net income per unit                                                                                 | As reported | ** **                       | **$**      | **.18** |   | $ | .24 |   |
|                                                                                                      | Pro forma   | ** **                       | **$**      | **.18** |   | $ | .24 |   |
|                                                                                                      |        |                             |       |   |   |
| Diluted net income per unit                                                                               | As reported | ** **                       | **$**      | **.18** |   | $ | .24 |   |
|                                                                                                      | Pro forma   | ** **                       | **$**      | **.18** |   | $ | .23 |   |

 

**11.  Recent Accounting Pronouncements**

 

In December 2004, FASB issued SFAS No. 123 (R), *Share-Based Payment,*which is a revisionof SFAS No. 123, *Accounting for Stock BasedCompensation.*In April 2005, the SEC delayed the effective date onSFAS No. 123 (R) from July 2005 to January 2006. We are currently evaluatingthe impact on our financial position and results of operations, but do notbelieve that the adoption of SFAS 123 (R) will have a material impact on ourfinancial statements.

 

**12.  Subsequent Events**

 

*Declaration of Distributions*

The General Partner’s Board of Directors declared the followingdistributions at its April 27, 2005, regularly scheduled Board meeting:

 
| ** **                        | ** ** | **Quarterly**   | ** ** | ** **      | ** **     | ** **       | ** **     |
|-----------------------------------|------------|-----------------|------------|-----------------|----------------|------------------|----------------|
| **Class**                         | ** ** | **Amount/Unit** | ** ** | **Record Date** | ** **     | **Payment Date** | ** **     |
| Common                            |       | $               | 0.465      |            | May  12, 2005  |             | May  31, 2005  |   |
| Preferred (per depositary share): |       |            |       |            |           |             |           |
| Series B                          |       | $               | 0.99875    |            | June  16, 2005 |             | June  30, 2005 |   |
| Series I                          |       | $               | 0.52813    |            | June  16, 2005 |             | June  30, 2005 |   |
| Series J                          |       | $               | 0.41406    |            | May  17, 2005  |             | May  31, 2005  |   |
| Series K                          |       | $               | 0.40625    |            | May  17, 2005  |             | May  31, 2005  |   |
| Series L                          |       | $               | 0.41250    |            | May  17, 2005  |             | May  31, 2005  |   |

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

The Partners

**Duke Realty Limited Partnership:**

 

We have reviewed the condensed consolidated balance sheet of DukeRealty Limited Partnership and subsidiaries as of March 31, 2005, the relatedcondensed consolidated statements of operations and  cash flows for the three months endedMarch 31, 2005 and 2004, and the related condensed consolidated statement ofpartners’ equity for the three months ended March 31, 2005. These condensedconsolidated financial statements are the responsibility of the Partnership’smanagement.

 

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

 

Based on our review, we are not aware of any material modificationsthat should be made to the condensed consolidated financial statements referredto above for them to be in conformity with U.S. generally accepted accountingprinciples.

 

We have previously audited, in accordance with standards established bythe Public Company Accounting Oversight Board (United States), the consolidatedbalance sheet of Duke Realty Limited Partnership and subsidiaries as ofDecember 31, 2004, and the related consolidated statements of operations,partners’ equity and cash flows for the year then ended (not presented herein);and in our report dated February 28, 2005, we expressed an unqualified opinionon those consolidated financial statements. In our opinion, the information setforth in the accompanying condensed consolidated balance sheet as of December31, 2004, is fairly presented, in all material respects, in relation to theconsolidated balance sheet from which it has been derived.

 

 

KPMG LLP

Indianapolis, Indiana

May 13, 2005

 

 

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

 

**Cautionary Statement RegardingForward Looking Statements**

 

Certain statements in this quarterly report,including those related to our future operations, constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended.These forward-looking statements involve known and unknown risks, uncertaintiesand other important factors that could cause our actual results, performance orachievements, or industry results, to differ materially from any predictions of future results, performance or achievementsthat we express or imply in this report. Some of the risks, uncertainties andother important factors that may affect future results include, among others:

 

•                 Changes in generaleconomic and business conditions, including performance of financial markets;

•                 Our continuedqualification as a real estate investment trust;

•                 Heightened competitionfor tenants and potential decreases in property occupancy;

•                 Potential increases inreal estate construction costs;

•                 Potential changes inthe financial markets and interest rates;

•                 Continuing ability tofavorably raise debt and equity in the capital markets;

•                 Inherent risks in thereal estate business including tenant defaults, potential liability relating toenvironmental matters and liquidity of real estate investments; and

•                 Other risks anduncertainties described from time-to-time in our filings with the SEC.

 

This list of risks and uncertainties, however, isnot intended to be exhaustive. We have on file with the Securities and ExchangeCommission (“SEC”) a Current Report on Form 8-K dated September 5, 2003, withadditional risk factor information.

 

The words “believe,” “estimate,” “expect,” “anticipate,” “intend,” “plan,”“seek” and similar expressions or statements regarding future periods areintended to identify forward-lookingstatements. Although we believe that the plans, expectations and resultsexpressed in or suggested by the forward-looking statements are reasonable, allforward-looking statements are inherently uncertain as they involve substantialrisks and uncertainties beyond our control. New factors emerge from time totime, and it is not possible for us to predict the nature or assess thepotential impact of each new factor on our business. Given these uncertainties,we caution you not to place undue reliance on these forward-looking statements.We undertake no obligation to update or revise any of our forward-lookingstatements for events or circumstances that arise after the statement is made.

 

**Business Overview**

 

As of March 31, 2005, we:

 

•                 Owned or controlled 898industrial, office and retail properties (including properties underdevelopment), consisting of approximately 115.2 million square feet located in13 operating platforms; and

•                 Owned or controlledapproximately 4,400 acres of land with an estimated future developmentpotential of approximately 65 million square feet of industrial, office andretail properties.

 

15

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We provide the following services for ourproperties and for certain properties owned by third parties and jointventures:

 

•                 Property leasing;

•                 Property management;

•                 Construction;

•                 Development; and

•                 Other tenant-relatedservices.

 

**Key Performance Indicators**

 

Our operating results depend primarily uponrental income from our office, industrial and retail properties (“RentalOperations”). The following highlights the areas of Rental Operations that weconsider critical for future revenue growth (all square footage totals andoccupancy percentages reflect both wholly-owned properties and properties injoint ventures):

 

***OccupancyAnalysis:*** Our ability to maintainoccupancy rates is a principal driver of our results of operations. Thefollowing table sets forth occupancy information regarding our in-serviceportfolio of rental properties as of March 31, 2005 and 2004 (in thousands,except percentage data):

 
| ** **      | ** ** | **Total  Square Feet** | ** ** | **Percent of  Total Square Feet** | ** ** | **Percent Occupied** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------------------|------------|----------------------|------------|
| **Type**        | ** ** | **2005**               | ** ** | **2004**                          | ** ** | **2005**             | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Industrial**  |       |                   |       |                              |       |                 |       |   |   |   |   |   |   |
| Service Centers | ** ** | **12,889**             |       | 13,200                            | ** ** | **11.5**             | **%**      | 12.2 | % | **86.4** | **%** | 84.9 | % |
| Bulk            | ** ** | **70,324**             |       | 66,850                            | ** ** | **62.8**             | **%**      | 62.1 | % | **92.4** | **%** | 91.3 | % |
| **Office**      | ** ** | **28,201**             |       | 26,891                            | ** ** | **25.2**             | **%**      | 25.0 | % | **87.5** | **%** | 86.9 | % |
| **Retail**      | ** ** | **596**                |       | 738                               | ** ** | **0.5**              | **%**      | 0.7 | % | **96.8** | **%** | 98.5 | % |
| Total           | ** ** | **112,010**            |       | 107,679                           | ** ** | **100.0**            | **%**      | 100.0 | % | **90.5** | **%** | 89.5 | % |

 

***LeaseExpiration and Renewal:*** Ourability to maintain and grow occupancy rates primarily depends upon ourcontinuing ability to re-lease expiring space.******The following table reflects ourin-service portfolio lease expiration schedule as of March 31, 2005, byproperty type. The table indicates square footage and annualized net effectiverents (based on March 2005 rental revenue) under expiring leases (inthousands):

 
| ** **                  | ** ** | **Total  Portfolio** | ** ** | **Industrial** | ** ** | **Office**     | ** ** | **Retail** | ** ** |
|-----------------------------|------------|----------------------|------------|----------------|------------|----------------|------------|------------|------------|
| **Year of**                 | ** ** | **Square**           | ** ** | **Ann. Rent**  | ** ** | **Percent of** | ** ** | **Square** | ** ** | **Ann. Rent** | ** ** | **Square** | ** ** | **Ann. Rent** | ** ** | **Square** | ** ** | **Ann. Rent** | ** ** |
| **Expiration**              | ** ** | **Feet**             | ** ** | **Revenue**    | ** ** | **Revenue**    | ** ** | **Feet**   | ** ** | **Revenue** | ** ** | **Feet** | ** ** | **Revenue** | ** ** | **Feet** | ** ** | **Revenue** | ** ** |
| 2005                        |       | 9,362                |       | $              | 58,286     |           | 9          | %          | 7,628      |   | $ | 34,694 |   | 1,728 |   | $ | 23,509 |   | 6 |   | $ | 83 |   |
| 2006                        |       | 12,001               |       | 79,305         |       | 12             | %          | 9,546      |       | 45,672 |   | 2,455 |   | 33,633 |   | — |   | - |   |
| 2007                        |       | 12,761               |       | 82,213         |       | 12             | %          | 9,984      |       | 45,994 |   | 2,768 |   | 36,096 |   | 9 |   | 123 |   |
| 2008                        |       | 13,328               |       | 83,274         |       | 12             | %          | 10,367     |       | 45,915 |   | 2,942 |   | 37,024 |   | 19 |   | 335 |   |
| 2009                        |       | 12,877               |       | 86,373         |       | 13             | %          | 9,440      |       | 41,899 |   | 3,429 |   | 44,344 |   | 8 |   | 130 |   |
| 2010                        |       | 10,185               |       | 78,968         |       | 12             | %          | 7,113      |       | 36,408 |   | 3,064 |   | 42,399 |   | 8 |   | 161 |   |
| 2011                        |       | 5,631                |       | 43,964         |       | 6              | %          | 3,854      |       | 18,520 |   | 1,758 |   | 25,105 |   | 19 |   | 339 |   |
| 2012                        |       | 6,178                |       | 37,334         |       | 5              | %          | 4,683      |       | 18,065 |   | 1,488 |   | 18,936 |   | 7 |   | 333 |   |
| 2013                        |       | 4,849                |       | 44,083         |       | 6              | %          | 2,640      |       | 11,296 |   | 2,177 |   | 32,282 |   | 32 |   | 505 |   |
| 2014                        |       | 4,353                |       | 21,243         |       | 3              | %          | 3,690      |       | 12,732 |   | 663 |   | 8,511 |   | — |   | — |   |
| 2015 and Thereafter         |       | 9,822                |       | 65,607         |       | 10             | %          | 7,161      |       | 29,614 |   | 2,193 |   | 33,152 |   | 468 |   | 2,841 |   |
| Total Leased                |       | 101,347              |       | $              | 680,650    |           | 100        | %          | 76,106     |   | $ | 340,809 |   | 24,665 |   | $ | 334,991 |   | 576 |   | $ | 4,850 |   |
| Total Portfolio Square Feet |       | 112,010              |       |           |       |           |       | 83,213     |       |   |   | 28,201 |   |   |   | 596 |   |   |   |
|                        |       |                 |       |           |       |           |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Percent Occupied            |       | 90.5                 | %          |           |       |           |       | 91.1       | %          |   |   | 87.5 | % |   |   | 96.8 | % |   |   |

 

We renewed 75.4% and 73.1% of leases up forrenewal totaling approximately 1.8 million and 3.0 million square feet on whichwe attained a 2.5% and 3.6% growth in net effective rents in the three monthsended

 

 

16

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March 31, 2005 and 2004,respectively. The decline in rental rategrowth is indicative of excess vacancies in many of our markets requiringcompetitive pricing strategies to retain current tenants. Our lease renewalpercentages over the past three years have remained relatively consistent at a70-75% success rate despite the relatively weak market conditions.

 

The average term of renewals decreased from 4.4years as of March 31, 2004 to 3.5 years as of March 31, 2005.

 

***Future Development:***Another source of growth in earnings is thedevelopment of additional properties. These properties should provide futureearnings through Service Operations income upon sale or from Rental Operationsgrowth as they are placed in service. At March 31, 2005, we had 3.2 millionsquare feet of property under development with total costs of $200.0 millionwhich was 52% pre-leased. This compares to 2.1 million square feet with a totalcost of $98.2 million, which was 88% pre-leased at March 31, 2004. We haveincreased our held-for-rental development volume as a result of improvingmarket conditions. This increase includes additional speculative developmentsthat generally result in lower pre-leased levels.

 

A summary of properties under development as of March 31, 2005, follows(in thousands, except percentage data):

 
| **Anticipated**  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Anticipated** | ** ** |
|------------------|------------|------------|------------|-------------|------------|-------------|------------|-----------------|------------|
| **In-Service**   | ** ** | **Square** | ** ** | **Percent** | ** ** | **Project** | ** ** | **Stabilized**  | ** ** |
| **Date**         | ** ** | **Feet**   | ** ** | **Leased**  | ** ** | **Costs**   | ** ** | **Return**      | ** ** |
| Held for Rental: |       |       |       |        |       |        |       |            |       |
| 2nd Quarter 2005 |       | 978        |       | 70          | %          | $           | 40,871     |            | 9.8        | % |
| 3rd Quarter 2005 |       | 450        |       | 29          | %          | 28,536      |       | 10.2            | %          |
| 4th Quarter 2005 |       | 835        |       | 17          | %          | 37,826      |       | 10.4            | %          |
| Thereafter       |       | 561        |       | 65          | %          | 64,338      |       | 10.3            | %          |
|             |       | 2,824      |       | 47          | %          | $           | 171,571    |            | 10.2       | % |
| Held-for-sale:   |       |       |       |        |       |        |       |            |       |
| 2nd Quarter 2005 |       | 200        |       | 100         | %          | $           | 6,216      |            | 9.3        | % |
| 3rd Quarter 2005 |       | 83         |       | 78          | %          | 13,129      |       | 9.5             | %          |
| 4th Quarter 2005 |       | 69         |       | 100         | %          | 9,037       |       | 9.7             | %          |
| Thereafter       |       | —     |       | —      |       | —      |       | —          |       |
|             |       | 352        |       | 95          | %          | $           | 28,382     |            | 9.5        | % |
| Total            |       | 3,176      |       | 52          | %          | $           | 199,953    |            | 10.1       | % |

 

***Acquisition andDisposition Activity:*******Sales proceeds from dispositions ofheld-for-rental properties for the first quarter of 2005 and 2004 were $13.6and $16.9 million, respectively. The disposition proceeds were used to fundacquisitions during 2005 and 2004 of $12.5 million and $15.4 million,respectively. We will continue to pursue both disposition and acquisitionopportunities that arise and are in line with our business plan.

 

**Funds FromOperations**

 

Funds From Operations (“FFO”)is used by industry analysts and investors as a supplemental operatingperformance measure of an equity real estate investment trust (“REIT”). FFO iscalculated in accordance with the definition that was adopted by the Board ofGovernors of the National Association of Real Estate Investment Trusts (“NAREIT”).FFO, as defined by NAREIT, represents net income (loss) determined inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”), excluding extraordinary items as defined under GAAP andgains or losses from sales of previously depreciated operating real estateassets, plus certain non-cash items such as real estate asset depreciation andamortization, and after similar adjustments for unconsolidated partnerships andjoint ventures.

 

 

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Historical cost accounting for real estate assetsin accordance with GAAP implicitly assumes that the value of real estate assetsdiminishes predictably over time. Since real estate values instead havehistorically risen or fallen with market conditions, many industry investorsand analysts have considered presentation of operating results for real estatecompanies that use historical cost accounting to be insufficient by themselves.Thus, NAREIT created FFO as a supplemental measure of REIT operatingperformance that excludes historical cost depreciation, among other items, fromGAAP net income. Management believes that the use of FFO, combined with therequired primary GAAP presentations, has improved the understanding ofoperating results of REITs among the investing public and made comparisons ofREIT operating results more meaningful. Management considers FFO to be a usefulmeasure for reviewing comparative operating and financial performance (althoughFFO should be reviewed in conjunction with net income which remains the primarymeasure of performance) because, by excluding gains or losses related to salesof previously depreciated operating real estate assets and excluding realestate asset depreciation and amortization, FFO assists in comparing theoperating performance of a company’s real estate between periods or as comparedto different companies.

 

The following table summarizes the calculation ofFFO for the three months ended March 31, 2005 and 2004 ,respectively (in thousands):

 

| ** **                                      | ** ** | **2005**   | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------|------------|
| Net income available for common unitholders     | ** ** | **$**      | **28,161** |     | $          | 36,222 |   |
| Add back (deduct):                              |       |       |       |     |       |
| Depreciation and amortization                   | ** ** | **63,226** |       | 52,397   |       |
| Share of joint venture adjustments              | ** ** | **4,865**  |       | 4,588    |       |
| Earnings from depreciable property dispositions | ** ** | **(6,510** | **)**      | (4,009   | )          |
| **Funds From Operations**                       | ** ** | **$**      | **89,742** |     | $          | 89,198 |   |

 

**Results of Operations**

 

A summary of our operating results and propertystatistics for the three months ended March 31, 2005 and 2004,is as follows (in thousands, except number of properties and per unit data):

 

| ** **                                                  | ** ** | **2005**       | ** **        | **2004** | ** ** |
|-------------------------------------------------------------|------------|----------------|-------------------|----------|------------|
| Rental Operations revenues from Continuing Operations       |       | **$**          | ** 196,236** |     | $          |  185,949 |   |
| Service Operations revenues from Continuing Operations      |       | **21****,695** |              | 11,435   |       |
| Earnings from Continuing Rental Operations                  | ** ** | **30,991**     |              | 42,871   |       |
| Earnings from Continuing Service Operations                 | ** ** | **10****,920** |              | 2,042    |       |
| Operating income                                            | ** ** | **34,331**     |              | 36,596   |       |
| Net income available for common units                       | ** ** | **$**          | **28,161**        |     | $          | 36,222 |   |
| Weighted average common units outstanding                   | ** ** | **156,947**    |              | 152,444  |       |
| Weighted average common and dilutive potential common units |       | **157,720**    |              | 156,913  |       |
| Basic income per common unit:                               |       |           |              |     |       |
| Continuing operations                                       | ** ** | **$**          | **.15**           |     | $          | .21 |   |
| Discontinued operations                                     | ** ** | **$**          | **.03**           |     | $          | .03 |   |
| Diluted income per common unit:                             |       |           |              |     |       |
| Continuing operations                                       | ** ** | **$**          | **.15**           |     | $          | .20 |   |
| Discontinued operations                                     | ** ** | **$**          | **.03**           |     | $          | .03 |   |
| Number of in-service properties at end of period            | ** ** | **898**        |              | 899      |       |
| In-service square footage at end of period                  | ** ** | **112,010**    |              | 107,679  |       |
| Under development square footage at end of period           | ** ** | **3****,176**  |              | 2,061    |       |

 

**Comparison of Three Months EndedMarch 31, 2005 to Three Months Ended March 31, 2004**

 

Rental Income FromContinuing Operations

 

Overall, rental income from continuing operations increased from $181.4million for the three months ended March 31, 2004 to $191.0 million for thesame period in 2005. The following table reconciles rental income

 

 

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from continuingoperations by reportable segment to our total reported rental income fromcontinuing operations for the three months ended March 31, 2005 and 2004,respectively (in thousands):

 

| ** **  | ** ** | **2005**       | ** **  | **2004** | ** ** |
|-------------|------------|----------------|-------------|----------|------------|
| Office      | ** ** | **$**          | **119,289** |     | 111,701    |   |
| Industrial  | ** ** | **69****,583** |        | 67,403   |       |
| Retail      | ** ** | **1,042**      |        | 1,161    |       |
| Non-segment | ** ** | **1,116**      |        | 1,159    |       |
| Total       | ** ** | **$**          | **191,030** |     | $          | 181,424 |   |
|             |            |                |             |          |            |  |  |

 

Our three reportablesegments comprising Rental Operations (office, industrial and retail) are allwithin the real estate industry; however, the same economic and industryconditions do not necessarily affect each segment. The primary causes of theincrease in rental income from continuing operations, with specific referencesto a particular segment when applicable, are summarized below:

•                 We acquired 18 properties and placed 17developments in service from April 1, 2004 to March 31, 2005. Theseacquisitions and developments are the primary factor in the overall $9.6million increase in rental revenue for the first quarter of 2005 compared tothe same period in 2004. Acquisitions and developments placed in service in thelast three quarters of 2004 and the first quarter of 2005 provided revenues of$10.1 million in the first quarter of 2005. The $10.1 million includes $5.5million from two large acquisitions of office buildings in Atlanta andCincinnati.

•                 Lease termination fees totaled $1.8 millionfor the first quarter of 2005 compared to $4.3 million for the same period in2004. The decrease in termination fees continues a downward trend associatedwith an improving economy.

 

Rental Expenses and Real Estate Taxes

 

The following table reconciles rental expenses and real estate taxes byreportable segment to our total reported amounts in the statement of operationsfor the three months ended March 31, 2005 and 2004, respectively (inthousands):

 

| ** **         | ** ** | **2005**   | ** ** | **2004** | ** ** |
|--------------------|------------|------------|------------|----------|------------|
| Rental Expenses:   |       |       |       |     |       |
| Office             | ** ** | **$**      | **32,732** |     | $          | 28,553 |   |
| Industrial         | ** ** | **11,308** |       | 10,215   |       |
| Retail             | ** ** | **155**    |       | 152      |       |
| Non-segment        | ** ** | **101**    |       | 180      |       |
| Total              | ** ** | **$**      | **44,296** |     | $          | 39,100 |   |
|               |       |       |       |     |       |
| Real Estate Taxes: |       |       |       |     |       |
| Office             | ** ** | **$**      | **12,973** |     | $          | 11,848 |   |
| Industrial         | ** ** | **8,720**  |       | 8,001    |       |
| Retail             | ** ** | **84**     |       | 92       |       |
| Non-segment        | ** ** | **1,070**  |       | 1,085    |       |
| Total              | ** ** | **$**      | **22,847** |     | $          | 21,026 |   |

 

The overall increase in rental expenses and real estate taxes is theresult of our increased real estate assets associated with the acquisitions anddevelopments as noted above.

 

Interest Expense

 

Interest expense increased from $32.2 million in the first quarter of2004 to $35.2 million in the first quarter of 2005 resulting primarily from anet increase in unsecured long-term debt. Our long-term unsecured debtincreased by a net $185 million since March 31, 2004, resulting in an increasein interest expense of $2.7 million.

 

 

19

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Depreciation and Amortization

 

Depreciation and amortization expense increased from $50.8 millionduring the three months ended March 31, 2004 to $62.9 million for the sameperiod in 2005.

 

The following highlights the significant changes in depreciationexpense for these time periods:

•                 Building depreciation expense increased by$4.1 million due to increases in our held-for-rental asset base fromacquisitions and developments.

•                 Depreciation expense on tenant improvementsincreased by $4.4 million and lease commission amortization increased by $2.3million due to increased leasing activity and the effect of SFAS 141, *Business Combinations*(“SFAS 141”) onacquisitions. SFAS 141 requires the allocation of a portion of a property’spurchase price to existing tenant improvements and intangible assets for leasesacquired and in-place at the time of acquisition. We amortize these assets overthe remaining life of the leases.

 

Service Operations

 

Service Operations primarily consist of our merchant building sales andthe leasing, management, construction and development services for jointventure properties and properties owned by third parties. These operations areheavily influenced by the current state of the economy as leasing and managementfees are dependent upon occupancy while construction and development servicesrely on businesses expanding operations. Service Operations earnings increasedfrom $2.0 million for the three months ended March 31, 2004 to $10.9 millionfor the three months ended March 31, 2005, primarily as a result of thefollowing:

•                 Our merchant building development and salesprogram, whereby a building is developed and then sold, is a significantcomponent of construction and development income. During the first quarter of2005, we sold two such properties for a gain of $4.6 million compared to oneproperty in the first quarter of 2004 for a gain of $382,000.

•                 During the first quarter of 2005, werecognized $2.7 million of a deferred gain associated with the sale of ourlandscaping operations in 2001. The gain was deferred as a result of futureperformance provisions contained in the original sale agreement. As a result ofcontract renegotiations effective in the first quarter of 2005, all futureperformance provisions were removed and the gain was recognized.

 

General and AdministrativeExpense

 

General and administrative expenses decreased from $8.3 million to $7.6million for the three months ended March 31, 2004, compared to the same periodin 2005. General and administrative expenses are comprised of two components.The first is direct expenses that are not attributable to specific assets suchas legal fees, external audit fees, marketing costs, investor relation expensesand other corporate overhead. The second component is the unallocated overheadcosts associated with the operation of our owned properties and ServiceOperations, including construction, leasing and maintenance operations. Thoseoverhead costs not allocated to these operations are charged to general andadministrative expenses. The overall decrease in general and administrativeexpenses is primarily the result of an increase in levels of construction forthe first quarter of 2005, resulting in more overhead costs applied to projectsversus expensed in general and administrative expenses.

 

 

20

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Other Income and Expenses

 

Earnings from sale of land, net of impairment adjustments, arecomprised of the following amounts for the three months ended March 31, 2005and 2004, respectively (in thousands):

 

| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Gain on land sales             | ** ** | **$**    | **177**    |     | $          | 4,729 |   |
| Impairment adjustment for land | ** ** | **(34**  | )          | (100     | )          |
| Total                          | ** ** | **$**    | **143**    |     | $          | 4,629 |   |

 

Gain on land sales are derived from sales of undeveloped land owned byus. Gains from land sales decreased $4.6 million from the first quarter of 2004compared to the first quarter of 2005. In the first quarter of 2004, we soldsix parcels of land versus only one parcel in the first quarter of 2005. Wepursue opportunities to dispose of land in markets with a high concentration ofundeveloped land and those markets where the land no longer meets our strategicdevelopment plans.

 

We recorded a $34,000 impairment charge in the first quarter of 2005and $100,000 for the same period in 2004 associated with the contracted sale ofland parcels. The land parcel with the $100,000 impairment was later sold in2004 and the land parcel with the $34,000 impairment is scheduled to be soldlater in 2005.

 

Discontinued Operations

 

Wehave classified the operations of 50 buildings as discontinued operations as ofMarch 31, 2005. These 50 buildings consist of 41 industrial, six office andthree retail properties. As a result, we classified net income from operationsof $401,000 and $1.0 million as net income from discontinued operations for thethree months ended March 31, 2005 and 2004, respectively. In addition, two ofthe properties classified in discontinued operations were sold during the firstquarter of 2005 and 41 properties were sold during 2004. The gains on disposalof these properties, net of impairment adjustments of $3.7 million and $4.0million for the three months ended March 31, 2005 and 2004, respectively, arealso reported in discontinued operations.

 

**Liquidity and Capital Resources**

 

Sources of Liquidity

 

We expect to meet our short-term liquidity requirements over the nexttwelve months, including payments of dividends and distributions as well as recurring capital expendituresrelating to maintaining our current real estate assets, primarily through thefollowing:

 

•                 working capital; and

•                 net cash providedby operating activities.

 

Although we historically have not used any other sources of funds topay for recurring capital expenditures on our current real estate investments,the use of borrowings or property disposition proceeds may be temporarilyneeded to fund such expenditures during periods of high leasing volume.

 

We expect to meet long-termliquidity requirements, such as scheduled mortgage debt maturities, refinancingof long-term debt, preferred share redemptions, the retirement of unsecurednotes and amounts outstanding under the unsecured credit facility, propertyacquisitions, financing of development activities and other non-recurringcapital improvements, primarily through the following sources:

•                 issuance of additionalunsecured notes;

•                 issuance of additionalGeneral Partner preferred equity;

•                 undistributed cash providedby operating activities, if any; and

•                 proceeds received fromreal estate dispositions.  

 

 

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### ***Rental Operations***

We believe that ourprincipal source of liquidity, cash flows from Rental Operations, provides astable source of cash to fund operational expenses. We believe that thiscash-based revenue stream is substantially aligned with revenue recognition(except for periodic straight-line rental income accruals and amortization ofabove or below market rents) as cash receipts from the leasing of rentalproperties are generally received in advance of or in a short time followingthe actual revenue recognition. We are subject to risks of decreased occupancythrough market conditions as well as tenant defaults and bankruptcies, andpotential reduction in rental rates upon renewal or re-letting of properties,which would result in reduced cash flow from operations. However, we believethat these risks are mitigated by our strong market presence in most of ourlocations and the fact that we perform in-house credit review and analysis onmajor tenants and all significant leases before they are executed.

*Credit Facilities*

We have one unsecured line of credit available at March 31, 2005,described as follows (in thousands):
| ** **               | ** ** | **Borrowing** | ** ** | **Maturity** | ** **    | **Interest** | ** **   | **Outstanding Balance** | ** ** |
|--------------------------|------------|---------------|------------|--------------|---------------|--------------|--------------|-------------------------|------------|
| **Description**          | ** ** | **Capacity**  | ** ** | **Date**     | ** **    | **Rate**     | ** **   | **at March 31, 2005**   | ** ** |
| Unsecured Line of Credit |       | $             | 500,000    |         | January  2007 |         | LIBOR  + .60 | %                       | $          | 272,000 |   |
|                          |            |               |            |              |               |              |              |                         |            |  |  |

 

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

 

The line of creditprovides us with an option to obtain borrowings from financial institutionsthat participate in the line at rates lower than the stated interest rate,subject to certain restrictions. Amounts outstanding on the unsecured line ofcredit at March 31, 2005, range from LIBOR + .19% to .60% (3.00% to 3.45% atMarch 31, 2005).

 

The line of creditalso contains financial covenants that require us to meet defined levels ofperformance.  As of March 31, 2005, weare in compliance with all covenants and expect to remain in compliance for theforeseeable future.

 

*Debtand Equity Securities*

 

At March 31, 2005, we have on file with the SEC an effective shelfregistration statement that permits us to sell up to an additional $795.0million of unsecured debt securities. In addition, the General Partner has onfile with the SEC an effective shelf registration statement that permits theGeneral Partner to sell up to an additional $350.7 million of common andpreferred stock as of March 31, 2005. From time-to-time, we expect to issue additionalsecurities under these registration statements to fund development andacquisition of additional rental properties and to fund the repayment of thecredit facilities and other long-term debt upon maturity.

 

The indenturegoverning our unsecured notes also requires us to comply with financial ratiosand other covenants regarding our operations. We are currently in compliancewith all such covenants as of March 31, 2005 and expect to remain in compliancefor the foreseeable future.

 

*Sale of Real Estate Assets*

We utilize sales of real estate assets as an additional source ofliquidity. We pursue opportunities to sell real estate assets and prune ourolder portfolio properties when beneficial to our long-term strategy.

 

 

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Uses of Liquidity

 

Our principal usesof liquidity include the following:

 

•                 Property investments;

•                 Recurring leasing/capital costs;

•                 Distributions to unitholders;

•                 Long-term debt maturities; and

•                 Other contractual obligations.

 

*PropertyInvestment*

 

We evaluatedevelopment and acquisition opportunities based upon market outlook, supply andlong-term growth potential.

 

*RecurringExpenditures*

 

One of our principal uses of our liquidity is to fund the development,acquisition and recurring leasing/capital expenditures of our real estateinvestments.

 

A summary of our recurring capital expenditures for the three monthsended March 31, 2005 and 2004, respectively, is as follows (in thousands):
| ** **            | ** ** | **2005**  | ** ** | **2004** | ** ** |
|-----------------------|------------|-----------|------------|----------|------------|
| Tenant improvements   | ** ** | **$**     | **13,732** |     | $          | 14,244 |   |
| Leasing costs         | ** ** | **8,811** |       | 6,652    |       |
| Building improvements | ** ** | **2,446** |       | 4,555    |       |
| Totals                | ** ** | **$**     | **24,989** |     | $          | 25,451 |   |

 

*DebtMaturities*

Debt outstanding at March 31, 2005, totaled $2.6 billion with aweighted average interest rate of 5.53% maturing at various dates through 2028.We had $2.2 billion of unsecured debt and approximately $201 million of secureddebt outstanding at March 31, 2005. Scheduled principal amortization of suchdebt totaled $1.7 million for the three months ended March 31, 2005.

 

Following is a summary of the scheduled future amortization andmaturities of our indebtedness at March 31, 2005 (in thousands, exceptpercentage data):

 
| ** ** | ** ** | **Future Repayments** | ** ** | **Weighted****Average** | ** ** |
|------------|------------|-----------------------|------------|-------------------------|------------|
| ** ** | ** ** | **Scheduled**         | ** ** | ** **              | ** ** | ** ** | ** ** | **Interest Rate of** | ** ** |
| **Year**   | ** ** | **Amortization**      | ** ** | **Maturities**          | ** ** | **Total** | ** ** | **Future Repayments** | ** ** |
| 2005       |       | $                     | 6,734      |                    | $          | 105,979 |   | $ | 112,713 |   | 7.39 | % |
| 2006       |       | 8,318                 |       | 415,186                 |       | 423,504 |   | 4.62 | % |
| 2007       |       | 6,891                 |       | 486,615                 |       | 493,506 |   | 4.29 | % |
| 2008       |       | 6,031                 |       | 259,028                 |       | 265,059 |   | 4.52 | % |
| 2009       |       | 5,867                 |       | 275,000                 |       | 280,867 |   | 7.37 | % |
| 2010       |       | 5,313                 |       | 175,000                 |       | 180,313 |   | 5.39 | % |
| 2011       |       | 4,647                 |       | 175,000                 |       | 179,647 |   | 6.94 | % |
| 2012       |       | 3,332                 |       | 200,000                 |       | 203,332 |   | 5.86 | % |
| 2013       |       | 3,050                 |       | 150,000                 |       | 153,050 |   | 4.64 | % |
| 2014       |       | 3,800                 |       | 273,197                 |       | 276,997 |   | 6.23 | % |
| Thereafter |       | 4,765                 |       | 50,000                  |       | 54,765 |   | 7.01 | % |
|       |       | $                     | 58,748     |                    | $          | 2,565,005 |   | $ | 2,623,753 |   | 5.53 | % |

 

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Historical Cash Flows

Cash and cash equivalents were $3.7 million and $11.9 million at March31, 2005 and 2004, respectively. The following highlights significant changesin net cash, associated with our operating, investing and financing activities(in millions):

 

| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Net Cash Provided by   Operating Activities |       | $                                | 65.0       |   | $ | 69.6 |   |
| Net Cash Used for   Investing Activities    |       | $                                | (88.4      | ) | $ | (107.4 | ) |
| Net Cash Provided by   Financing Activities |       | $                                | 20.9       |   | $ | 35.0 |   |

 

*OperatingActivities*

Cash flows from operating activities provide the cash necessary to meetnormal operational requirements of our rental operations and merchant buildingactivities. The receipt of rental income from rental operations continues toprovide the primary source of our revenues and operating cash flows. Inaddition, we also develop buildings with the intent to sell, which providesanother significant source of operating cash flow activity.

•                 During the period endedMarch 31, 2005, we incurred merchant building development costs of $13.6million compared to $8.8 million for the period ended March 31, 2004. Thedifference is reflective of the timing of activity in our held-for-salepipeline. The pipeline of held-for-sale projects under construction as of March31, 2005, has anticipated costs of $28.4 million. In addition to thedevelopment costs noted above, we also acquired a building for $6.0 millionduring the first quarter of 2005 on which we intend to make minor improvementsand sell later in 2005.

•                  We sold two merchantbuildings in the first quarter of 2005 compared to one sale of a merchantbuilding for the same period in 2004, for net after tax gains of $4.6 million and $382,000,respectively.

 

*Investing Activities*

Investingactivities are one of the primary uses of our liquidity. Development andacquisition activities typically generate additional rental revenues andprovide cash flows for operational requirements. Highlights of significant cashuses are as follows:

•                 Development costs increased to $29.7 millionfor the period March 31, 2005 from $22.1 million for the same period in 2004.

•                 During the first quarter of 2005, weincreased our acquisition of land held for development.  We acquired $34.5 million of land in thefirst quarter of 2005. The significant increase is primarily attributable tothe acquisition of over 40 acres of land at a cost of over $23 million in ourSouth Florida market. This acquisition is associated with a retail developmentwe are planning for this market.

•                 Sales of land and depreciated propertyprovided $13.6 million in net proceeds for the period ended March 31, 2005,compared to $29.4 million for the same period in 2004. Sales of non-strategicand older properties will continue to be utilized as part of our capitalrecycling program to fund acquisitions and new development while improving theoverall quality of our investment portfolio.

 

24

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*Financing Activities*

Thefollowing significant items highlight fluctuations in net cash provided byfinancing activities:

•                 In January 2005, we retired a $65.0 millionvariable rate term loan.

•                 In March 2005, we retired $100.0 million of6.94% senior unsecured debt that matured in March 2005.

•                 During the first quarter of 2005, we had netborrowings on our $500.0 million line of credit of $272.0 million. Theseborrowings were used to retire the above-mentioned debt and to supportoperations.

 

*Financial Instruments*

We are exposed to capital market risk, such as changes in interestrates. In order to manage the volatility relating to interest rate risk, we mayenter into interest rate hedging arrangements from time to time. We do notutilize derivative financial instruments for trading or speculative purposes.We account for derivative instruments under Statement of Financial AccountingStandard No. 133, “Accounting for Derivative Instruments and Hedging Activities”as amended (“SFAS 133”).

 

In March 2005, we entered into $300.0 millionof cash flow hedges through forward-starting interest rate swaps to hedgeinterest rates on $300.0 million of estimated debt offerings in 2006. The swapsqualify for hedge accounting under SFAS 133 with any changes in fair valuerecorded in Accumulated Other Comprehensive Income (“OCI”). Due to the declinein rates, the fair value at the end of the first quarter is a liability of $1.8million

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity* (“SFAS 150”). SFAS150 establishes standards for classifying and measuring as liabilities certainfinancial instruments that embody obligations of the issuer and havecharacteristics of both liabilities and equity. SFAS 150 is effective for allfinancial instruments created or modified after May 31, 2003, and otherwise iseffective July 1, 2003. We include the operations of one joint venture in ourcondensed consolidated financial statements at March 31, 2005. This jointventure is partially owned by unaffiliated parties that have non-controllinginterests. SFAS 150 requires the disclosure of the estimated settlement valueof these non-controlling interests. As of March 31, 2005, the estimatedsettlement value of the non-controlling interest in this consolidated jointventure was approximately $1.1 million as compared to the receivable assetrecorded on our books for this joint venture of $105,000.

 

**Recent Accounting Pronouncements**

 

In December 2004, FASB issued SFAS No. 123 (R), *Share-Based Payment,*which is a revisionof SFAS No. 123, *Accounting for Stock BasedCompensation.*In April 2005, the SEC delayed the effective date onSFAS No. 123 (R) from July 2005 to January 2006. We are currently evaluatingthe impact on our financial position and results of operations, but do notbelieve that the adoption of SFAS 123 (R) will have a material impact on ourfinancial statements.

 

**Investments in UnconsolidatedCompanies**

 

We analyze our investments in joint ventures under Financial AccountingStandards Board (“FASB”) Interpretation No. 46(R) (FIN 46(R)), *Consolidation of Variable Interest Entities,*todetermine if the joint venture is a variable interest entity and would requireconsolidation. As of March 31, 2005, none of our joint ventures qualified as avariable interest entity under FIN 46(R). To the extent that our joint venturesdo not qualify as variable interest entities, we further assess under theguidelines of SOP 78-9, ARB 51 and FASB 94 to determine if the venture shouldbe consolidated. We have equity interests in unconsolidated

 

25

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partnerships and joint ventures that ownand operate rental properties and hold land for development. The equity methodof accounting is used for these investments in which we have the ability toexercise significant influence, but not control, over operating and financialpolicies. As a result, the assets and liabilities of these joint ventures arenot included on our balance sheet. Our investment in unconsolidated companiesrepresents less than 5% of our total assets as of March 31, 2005. Theseinvestments provide several benefits to us, including increased market shareand an additional source of capital to fund real estate projects.

 

**Item3****.**** Quantitative and Qualitative Disclosure AboutMarket Risk**

 

We are exposed tointerest rate changes primarily as a result of our line of credit and long-termdebt used to maintain liquidity and fund capital expenditures and expansion ofour real estate investment portfolio and operations. Our interest rate riskmanagement objective is to limit the impact of interest rate changes onearnings and cash flows and to lower our overall borrowing costs. To achieveour objectives, we borrow primarily at fixed rates and may enter intoderivative financial instruments such as interest rate swaps, caps and treasurylocks in order to mitigate our interest rate risk on a related financialinstrument. We do not enter into derivative or interest rate transactions forspeculative purposes. For a discussion of the market risk with respect to ouroutstanding cash flow hedges, see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Liquidity and Capital Resources— Financial Instruments.”

 

**Item4****.**** Controls and Procedures**

 

(a)          Evaluation of disclosure controls and procedures

 

We maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in annual and periodic reports filed with the SEC isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms. These disclosure controls and procedures arefurther designed to ensure that such information is accumulated and communicatedto management, including the chief executive officer and the chief financialofficer to allow timely decisions regarding required disclosure.

 

(b)  Changes in internal control over financialreporting

 

Based on the mostrecent evaluation, which was completed as of March 31, 2005, the chiefexecutive officer and chief financial officer believe that our disclosurecontrols and procedures are effective. There have been no changes in ourinternal control over financial reporting during the period covered by thisreport that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**Part II - OtherInformation**

Item1.  Legal Proceedings

 

None

 

Item2.  Unregistered Sales of Equity Securities andUse of Proceeds

 

On March 1, 2005, DMI merged into the Partnership. At the effectivetime of the merger, our General Partner issued an aggregate of 501,349 sharesof our common stock in exchange for an equal amount of DRLP partnership unitsto John W. Wynne, Thomas L. Hefner, Darell E. Zink, Jr., Daniel C. Staton, GaryA. Burk, David R. Mennel and Michael Coletta, who were former shareholders ofDMI. The shares were privately issued pursuant to Section 4(2) of theSecurities Act of 1933. Each of the persons who acquired shares in the mergeris an accredited investor. We exercised reasonable care to assure that thesepersons were not purchasing the shares with a view to their distribution. Formore details regarding this transaction, see our Current Report on Form 8-Kfiled with the SEC on January 4, 2005.

 

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Item3.  Defaults upon Senior Securities

 

None

 

Item4.  Submission of Matters to a Vote of SecurityHolders

 

None

 

Item5.  Other Information

 

None

 

Item6.  Exhibits

 

(a)           Exhibits

 
| Exhibit 10.1  |   | Duke  Realty Corporation 2005 Long-Term Incentive Plan (incorporated herein by  reference to Appendix A of the General Partner’s Definitive Proxy Statement  on Schedule 14A (File No. 001-09044) filed with the Securities and Exchange  Commission on March 15, 2005)                           |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                                                                                                                                                                                                   |
| Exhibit  10.2 |   | Duke  Realty Corporation Shareholder Value Plan, a subplan of the 2005 Long-Term  Incentive Plan (incorporated herein by reference to Exhibit 99.2 of the  General Partner’s Current Report on Form 8-K filed with the Securities and  Exchange Commission on May 3, 2005).                       |
|          |   |                                                                                                                                                                                                                                                                                                   |
| Exhibit  10.3 |   | Duke  Realty Corporation Non-Employee Directors Compensation Plan, a subplan of the  2005 Long-Term Incentive Plan (incorporated herein by reference to Exhibit  99.3 of the Registrant’s Current Report on Form 8-K filed with the Securities  and Exchange Commission on May 3, 2005).          |
|          |   |                                                                                                                                                                                                                                                                                                   |
| Exhibit  10.4 |   | Form  of 2005 Long-Term Incentive Plan Stock Option Award Certificate (incorporated  herein by reference to Exhibit 99.4 of the General Partner’s Current Report  on Form 8-K filed with the Securities and Exchange Commission on May 3,  2005).                                                 |
|          |   |                                                                                                                                                                                                                                                                                                   |
| Exhibit  10.5 |   | Form  of 2005 Long-Term Incentive Plan Award Certificate for Restricted Stock Units  and Shareholder Value Plan Awards (incorporated herein by reference to  Exhibit 99.5 of the General Partner’s Current Report on Form 8-K filed with  the Securities and Exchange Commission on May 3, 2005). |
|          |   |                                                                                                                                                                                                                                                                                                   |
| Exhibit  10.6 |   | Form  of 2005 Long-Term Incentive Plan Restricted Stock Unit Award Certificate for  Non-Employee Directors (incorporated herein by reference to Exhibit 99.6 of  the General Partner’s Current Report on Form 8-K filed with the Securities  and Exchange Commission on May 3, 2005).             |
|          |   |                                                                                                                                                                                                                                                                                                   |
| Exhibit  10.7 |   | Amendments  to Previously Existing Long-Term Incentive Plans (incorporated herein by  reference to Appendix B of the General Partner’s Definitive Proxy Statement  on Schedule 14A (File No. 001-09044) filed with the Securities and Exchange  Commission on March 15, 2005).                    |
|          |   |                                                                                                                                                                                                                                                                                                   |
| Exhibit  11.1 |   | Ratio  of Earnings to Combined Fixed Charges and Preferred Stock Dividends.                                                                                                                                                                                                                            |
|          |   |                                                                                                                                                                                                                                                                                                   |
| Exhibit  11.2 |   | Ratio  of Earnings to Debt Service.                                                                                                                                                                                                                                                                    |
|          |   |                                                                                                                                                                                                                                                                                                   |

 

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| Exhibit  15   |   | Letter  regarding unaudited interim financial information.                           |
|---------------|--------|--------------------------------------------------------------------------------------|
|          |   |                                                                                 |
| Exhibit  31.1 |   | Rule  13a-14(a) Certification of the General Partner’s Chief Executive Officer. |
|          |   |                                                                                 |
| Exhibit  31.2 |   | Rule  13a-14(a) Certification of the General Partner’s Chief Financial Officer. |
|          |   |                                                                                 |
| Exhibit  32.1 |   | Section  1350 Certification of the General Partner’s Chief Executive Officer.   |
|          |   |                                                                                 |
| Exhibit  32.2 |   | Section  1350 Certification of the General Partner’s Chief Financial Officer.   |

 

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**SIGNATURES**

 

 

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

 
|               | DUKE REALTY LIMITED  PARTNERSHIP |
|--------------------|----------------------------------|
|               | By:                              | DUKE REALTY CORPORATION |
|               |                             | Its General Partner |
|               |                             |   |
| Date: May 16, 2005 |                             | /s/ DENNIS D. OKLAK |
|               |                             | Dennis D. Oklak |
|               |                             | *Chairman and Chief Executive  Officer   of the General Partner* |
|               |                             |   |
|               |                             | /s/ MATTHEW A. COHOAT |
|               |                             | Matthew A. Cohoat |
|               |                             | *Executive Vice President and  Chief Financial Officer   of the General Partner* |

 

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