Duke Realty (DRE)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

DUKE REALTY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Indiana		35-1740409
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation or Organization)		Identification Number)

600 East 96th Street, Suite 100
Indianapolis, Indiana		46240
(Address of Principal Executive Offices)		(Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    YES  o      NO  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Outstanding at November 1, 2008
Common Stock, $.01 par value per share		147,364,620 shares

 

 

DUKE REALTY CORPORATION

INDEX

		Page
Part I — Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007			2
Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2008 and 2007			3
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2008 and 2007			4
Consolidated Statement of Shareholders’ Equity (Unaudited) for the nine months ended September 30, 2008			5
Notes to Consolidated Financial Statements (Unaudited)			6-14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14-30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			31
Part II — Other Information
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31-32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32-33
Item 3. Defaults Upon Senior Securities			33
Item 4. Submission of Matters to a Vote of Security Holders			33
Item 5. Other Information			33
Item 6. Exhibits			33-35
EX-3.1(X)
EX-12.1
EX-31.1
EX-32.1

PART I — FINANCIAL INFORMATION

Consolidated Balance Sheets

		September 30,				December 31,
		2008				2007
		(Unaudited)
ASSETS
Real estate investments:
Land and improvements		$	1,028,142			$	872,372
Buildings and tenant improvements			5,069,712				4,600,408
Construction in progress			193,206				412,729
Investments in and advances to unconsolidated companies			700,637				601,801
Land held for development			866,016				912,448
			7,857,713				7,399,758
Accumulated depreciation			(1,121,202	)			(951,375	)
Net real estate investments			6,736,511				6,448,383
Real estate investments and other assets held-for-sale			197,287				273,591
Cash and cash equivalents			3,470				48,012
Accounts receivable, net of allowance of $2,011 and $1,359			22,680				29,009
Straight-line rent receivable, net of allowance of $2,669 and $2,886			121,469				110,737
Receivables on construction contracts, including retentions			92,043				66,925
Deferred financing costs, net of accumulated amortization of $35,191 and $29,170			50,929				55,987
Deferred leasing and other costs, net of accumulated amortization of $182,017 and $150,702			370,610				374,635
Escrow deposits and other assets			247,865				254,702
		$	7,842,864			$	7,661,981
LIABILITIES AND SHAREHOLDERS’ EQUITY
Indebtedness:
Secured debt		$	520,034			$	524,393
Unsecured notes			3,346,000				3,246,000
Unsecured lines of credit			533,709				546,067
			4,399,743				4,316,460
Liabilities of properties held-for-sale			3,546				8,954
Construction payables and amounts due subcontractors, including retentions			125,157				142,655
Accrued expenses:
Real estate taxes			100,521				63,796
Interest			44,371				54,631
Other			39,154				59,221
Other liabilities			145,043				148,013
Tenant security deposits and prepaid rents			28,082				34,535
Total liabilities			4,885,617				4,828,265
Minority interest			71,817				83,683
Shareholders’ equity:
Preferred shares ($.01 par value); 5,000 shares authorized; 4,176 and 2,976 shares issued and outstanding			1,044,000				744,000
Common shares ($.01 par value); 250,000 shares authorized; 147,110 and 146,175 shares issued and outstanding			1,471				1,462
Additional paid-in capital			2,652,605				2,632,615
Accumulated other comprehensive income (loss)			(7,902	)			(1,279	)
Distributions in excess of net income			(804,744	)			(626,765	)
Total shareholders’ equity			2,885,430				2,750,033
		$	7,842,864			$	7,661,981

See accompanying Notes to Consolidated Financial Statements.

DUKE REALTY CORPORATION AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		2008				2007				2008				2007
RENTAL OPERATIONS
Revenues:
Rental revenue from continuing operations		$	216,665			$	205,003			$	641,795			$	598,878
Equity in earnings of unconsolidated companies			204				1,838				17,184				17,478
			216,869				206,841				658,979				616,356
Operating expenses:
Rental expenses			49,466				45,826				147,479				136,669
Real estate taxes			27,415				25,362				82,593				75,048
Interest expense			49,260				43,414				143,657				127,882
Depreciation and amortization			75,144				71,438				228,062				204,642
			201,285				186,040				601,791				544,241
Earnings from continuing rental operations			15,584				20,801				57,188				72,115
SERVICE OPERATIONS
Revenues:
General contractor gross revenue			86,524				77,996				248,918				195,714
General contractor costs			(84,588	)			(66,696	)			(231,526	)			(171,374	)
Net general contractor revenue			1,936				11,300				17,392				24,340
Service fee revenue			6,792				7,857				22,929				21,909
Gain on sale of Build-for-Sale properties			20,338				1,116				26,657				10,793
Total service operations revenue			29,066				20,273				66,978				57,042
Operating expenses			7,328				12,972				30,437				30,789
Earnings from service operations			21,738				7,301				36,541				26,253
General and administrative expense			(10,448	)			(3,856	)			(29,498	)			(27,923	)
Other operating expenses			(2,474	)			(501	)			(5,273	)			(1,359	)
Operating income			24,400				23,745				58,958				69,086
OTHER INCOME (EXPENSE)
Interest and other income, net			2,804				6,755				9,123				12,546
Earnings from sales of land, net			4,469				1,799				8,491				18,207
Minority interest in earnings of common unitholders			(823	)			(1,174	)			(1,640	)			(3,666	)
Income from continuing operations			30,850				31,125				74,932				96,173
Discontinued operations:
Income (loss) from discontinued operations, net of minority interest			(165	)			299				1,663				4,065
Gain on sale of depreciable properties, net of minority interest			1,235				37,190				11,342				104,467
Income from discontinued operations			1,070				37,489				13,005				108,532
Net income			31,920				68,614				87,937				204,705
Dividends on preferred shares			(18,866	)			(15,227	)			(53,038	)			(45,679	)
Net income available for common shareholders		$	13,054			$	53,387			$	34,899			$	159,026
Basic net income per common share:
Continuing operations		$	.08			$	.12			$	.15			$	.37
Discontinued operations			.01				.27				.09				.79
Total		$	.09			$	.39			$	.24			$	1.16
Diluted net income per common share:
Continuing operations		$	.08			$	.12			$	.15			$	.37
Discontinued operations			.01				.27				.09				.78
Total		$	.09			$	.39			$	.24			$	1.15
Weighted average number of common shares outstanding			146,966				137,576				146,680				137,110
Weighted average number of common shares and potential dilutive securities			155,344				147,651				155,105				147,986

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY CORPORATION AND SUBSIDIARIES

		2008				2007
Cash flows from operating activities:
Net income		$	87,937			$	204,705
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of buildings and tenant improvements			179,699				160,987
Amortization of deferred leasing and other costs			51,257				47,235
Amortization of deferred financing costs			10,134				8,518
Minority interest in earnings			2,326				11,233
Straight-line rent adjustment			(13,523	)			(13,643	)
Earnings from land and depreciated property sales			(20,431	)			(129,958	)
Build-for-sale operations, net			31,558				(167,640	)
Construction contracts, net			(12,748	)			720
Other accrued revenues and expenses, net			6,325				8,991
Operating distributions received in excess of equity in earnings from unconsolidated companies			6,730				4,166
Net cash provided by operating activities			329,264				135,314
Cash flows from investing activities:
Development of real estate investments			(365,781	)			(324,317	)
Acquisition of real estate investments and related intangible assets			(20,123	)			(80,954	)
Acquisition of land held for development			(35,564	)			(155,556	)
Recurring tenant improvements			(28,075	)			(32,987	)
Recurring leasing costs			(18,934	)			(22,771	)
Recurring building improvements			(5,387	)			(4,894	)
Other deferred leasing costs			(18,930	)			(20,562	)
Other deferred costs and other assets			(8,392	)			(11,301	)
Proceeds from land and depreciated property sales, net			85,717				405,094
Capital distributions from unconsolidated companies			65,553				207,545
Capital contributions and advances to unconsolidated companies, net			(78,760	)			(104,461	)
Net cash used for investing activities			(428,676	)			(145,164	)
Cash flows from financing activities:
Proceeds from issuance of common shares			14,020				2,889
Proceeds from issuance of preferred shares, net			290,014				—
Proceeds from unsecured debt issuance			325,000				339,424
Payments on unsecured debt			(225,000	)			(100,000	)
Payments on secured indebtedness including principal amortization			(43,103	)			(22,617	)
Borrowings (payments) on lines of credit, net			(12,358	)			(12,776	)
Distributions to common shareholders			(211,898	)			(195,799	)
Distributions to preferred shareholders			(53,038	)			(45,679	)
Distributions to minority interest, net			(10,481	)			(11,637	)
Cash settlement of interest rate swaps			(14,625	)			10,746
Deferred financing costs			(3,661	)			(4,760	)
Net cash provided by (used for) financing activities			54,870				(40,209	)
Net decrease in cash and cash equivalents			(44,542	)			(50,059	)
Cash and cash equivalents at beginning of period			48,012				68,483
Cash and cash equivalents at end of period		$	3,470			$	18,424
Other non-cash items:
Conversion of Limited Partner Units to common shares		$	5,499			$	168,671
Issuance of Limited Partner Units for acquisition		$	—			$	11,020
Assumption of secured debt for real estate acquisitions		$	39,480			$	—
Contribution of property to, net of debt assumed by, unconsolidated companies		$	113,688			$	125,353
Distribution of property from partner in unconsolidated company		$	28,577			$	—

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY CORPORATION AND SUBSIDIARIES

														Accumulated
										Additional				Other				Distributions
		Preferred				Common				Paid-in				Comprehensive				in Excess of
		Stock				Stock				Capital				Income (Loss)				Net Income				Total
Balance at December 31, 2007		$	744,000			$	1,462			$	2,632,615			$	(1,279	)		$	(626,765	)		$	2,750,033
Comprehensive Income:
Net income			—				—				—				—				87,937				87,937
Losses on derivative instruments			—				—				—				(6,623	)			—				(6,623	)
Comprehensive income																						$	81,314
Issuance of preferred shares			300,000				—				(10,000	)			—				—				290,000
Issuance of common shares			—				5				12,093				—				—				12,098
Stock based compensation plan activity			—				2				12,400				—				(980	)			11,422
Conversion of Limited Partner Units			—				2				5,497				—				—				5,499
Distributions to preferred shareholders			—				—				—				—				(53,038	)			(53,038	)
Distributions to common shareholders ($1.445 per share)			—				—				—				—				(211,898	)			(211,898	)
Balance at September 30, 2008		$	1,044,000			$	1,471			$	2,652,605			$	(7,902	)		$	(804,744	)		$	2,885,430

See accompanying Notes to Consolidated Financial Statements

DUKE REALTY CORPORATION

1.		General Basis of Presentation
		The interim consolidated financial statements included herein have been prepared by Duke Realty Corporation (the “Company”) without audit. The 2007 year-end consolidated balance sheet data included in this Quarterly Report on Form 10-Q (this “Report”) was derived from the audited financial statements in our Annual Report on Form 10-K for the year ended December 31, 2007, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenue and expenses during the reporting period. Our actual results could differ from those estimates and assumptions. These financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.
		We believe we qualify as a real estate investment trust (“REIT”) under the provisions of the Internal Revenue Code of 1986, as amended. Substantially all of our Rental Operations (see Note 6) are conducted through Duke Realty Limited Partnership (“DRLP”). We owned approximately 95.1% of the common partnership interests of DRLP (“Units”) at September 30, 2008. The remaining Units are redeemable for shares of our common stock on a one-to-one basis and earn dividends at the same rates as shares of our common stock. We conduct our Service Operations (see Note 6) through Duke Realty Services LLC, Duke Realty Services Limited Partnership and Duke Construction Limited Partnership. The consolidated financial statements include our accounts and the accounts of our majority-owned or controlled subsidiaries. In this Report, unless the context indicates otherwise, the terms “we,” “us” and “our” refer to the Company and those entities owned or controlled by the Company.
2.		Reclassifications
		Certain amounts in the accompanying consolidated financial statements for 2007 have been reclassified to conform to the 2008 consolidated financial statement presentation.
3.		Indebtedness
		Our unsecured lines of credit as of September 30, 2008 are described as follows (in thousands):

		Borrowing				Maturity		Outstanding Balance
Description		Capacity				Date		at September 30, 2008
Unsecured Line of Credit — DRLP		$	1,300,000			January 2010		$	525,000
Unsecured Line of Credit — Consolidated Subsidiary		$	30,000			July 2011		$	8,709

We use the DRLP unsecured line of credit to fund development activities, acquire additional rental properties and provide working capital. This line of credit provides us with an option to obtain borrowings from financial institutions that participate in the line, at rates that may be lower than the stated interest rate, subject to certain restrictions. Interest rates on the amounts outstanding on the DRLP unsecured line of credit as of September 30, 2008 ranged from LIBOR plus .48% to LIBOR plus .525% (ranging from 2.97% to 4.235% as of September 30, 2008). This line of credit also contains financial covenants that require us to meet financial ratios and defined levels of performance, including those related to variable rate indebtedness, consolidated net worth and debt-to-market capitalization. As of September 30, 2008, we were in compliance with all covenants under this line of credit.

		The consolidated subsidiary’s unsecured line of credit allows for borrowings up to $30.0 million at a rate of LIBOR plus .85% (equal to 4.279% for outstanding borrowings as of September 30, 2008). This unsecured line of credit is used to fund development activities within the consolidated subsidiary and matures in July 2011 with a 12-month extension option.
		In January 2008, we repaid $125.0 million of senior unsecured notes with an effective interest rate of 3.36% on their scheduled maturity date.
		In May 2008, we repaid $100.0 million of senior unsecured notes with an effective interest rate of 6.76% on their scheduled maturity date.
		In May 2008, we issued $325.0 million of 6.25% senior unsecured notes due in May 2013. After including the effect of forward starting swaps (see Note 9), which were designated as cash flow hedges for this offering, the effective interest rate is 7.36%.
4.		Related Party Transactions
		We provide property management, leasing, construction and other tenant related services to unconsolidated companies in which we have equity interests. For the nine months ended September 30, 2008 and 2007, respectively, we earned management fees of $5.6 million and $5.1 million, leasing fees of $1.9 million and $2.7 million and construction and development fees of $9.6 million and $9.0 million from these companies. We recorded these fees based on contractual terms that approximate market rates for these types of services and we have eliminated our ownership percentage of these fees in the consolidated financial statements.
5.		Net Income Per Common Share
		Basic net income per common share is computed by dividing net income available for common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing the sum of net income available for common shareholders and the minority interest in earnings allocable to Units not owned by us, by the sum of the weighted average number of common shares outstanding and minority Units outstanding, including any potential dilutive securities for the period.
		The following table reconciles the components of basic and diluted net income per common share for the three and nine months ended September 30, 2008 and 2007, respectively (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Basic net income available for common shareholders		$	13,054			$	53,387			$	34,899			$	159,026
Minority interest in earnings of common unitholders			687				3,573				1,861				11,101
Diluted net income available for common shareholders		$	13,741			$	56,960			$	36,760			$	170,127
Weighted average number of common shares outstanding			146,966				137,576				146,680				137,110
Weighted average partnership Units outstanding			7,638				9,176				7,727				9,560
Dilutive shares for stock-based compensation plans (1)			740				899				698				1,316
Weighted average number of common shares and potential dilutive securities			155,344				147,651				155,105				147,986

6.		Segment Reporting
		We have three reportable operating segments, the first two of which consist of the ownership and rental of office and industrial real estate investments. The operations of our office and industrial properties, along with our healthcare and retail properties (our healthcare and retail properties, which do not meet the quantitative thresholds defined in Statement of Financial Accounting Standard (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information, are not separately presented as a reportable segment), are collectively referred to as “Rental Operations”. The third reportable segment consists of our Build-for-Sale operations (defined below) and providing of various real estate services such as property management, maintenance, leasing, development and construction management to third-party property owners and joint ventures (and is collectively referred to as “Service Operations”). Our reportable segments offer different products or services and are managed separately because each segment requires different operating strategies and management expertise.
		During the period between the completion of development, rehabilitation or repositioning of a property developed or acquired with the intent to sell (“Build-for-Sale” property) and the date the property is contributed to an unconsolidated company or sold to a third party, the property and its associated rental revenue and rental expenses are included in the applicable Rental Operations segment because the primary activity associated with the Build-for-Sale property during that period is rental activities. Upon contribution or sale, the resulting gain or loss is part of the income of the Service Operations business segment.
		Other revenue consists mainly of equity in earnings of unconsolidated companies. Segment FFO information (FFO is defined below) is calculated by subtracting operating expenses attributable to the applicable segment from segment revenues. Non-segment assets consist of corporate assets including cash, deferred financing costs and investments in unconsolidated companies. Interest expense and other non-property specific revenues and expenses are not allocated to individual segments in determining our performance measure.
		We assess and measure segment operating results based upon an industry performance measure referred to as Funds From Operations (“FFO”), which management believes is a useful indicator of our operating performance. FFO is used by industry analysts and investors as a supplemental operating performance measure of a REIT. FFO is calculated in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from net income determined in accordance with GAAP. FFO is a non-GAAP financial measure developed by NAREIT to compare the operating performance of REITs. The most comparable GAAP measure is net income (loss). FFO should not be considered as a substitute for net income or any other measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other companies.
		Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry analysts and investors have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. FFO, as defined by NAREIT, represents GAAP net income (loss), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after similar adjustments for unconsolidated partnerships and joint ventures.

		Management believes that the use of FFO, combined with the required primary GAAP presentations, improves the understanding of operating results of REITs among the investing public and makes comparisons of REIT operating results more meaningful. Management believes FFO is a useful measure for reviewing comparative operating and financial performance (although FFO should be reviewed in conjunction with net income, which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated real estate assets and excluding real estate asset depreciation and amortization, FFO provides a useful comparison of the operating performance of our real estate between periods or as compared to different companies.
		The following table shows (i) the revenues and FFO for each of the reportable segments and (ii) a reconciliation of net income available for common shareholders to the calculation of FFO for the three and nine months ended September 30, 2008 and 2007, respectively (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Revenues
Rental Operations:
Office		$	144,026			$	144,729			$	427,393			$	420,930
Industrial			62,856				52,497				184,691				160,031
Non-reportable Rental Operations segments			8,014				6,212				22,374				12,963
Service Operations			29,066				20,273				66,978				57,042
Total Segment Revenues			243,962				223,711				701,436				650,966
Other Revenue			1,973				3,403				24,521				22,432
Consolidated Revenue from continuing operations		$	245,935			$	227,114			$	725,957			$	673,398
Discontinued Operations			91				3,461				6,707				22,635
Consolidated Revenue		$	246,026			$	230,575			$	732,664			$	696,033
Funds From Operations
Rental Operations:
Office		$	87,037			$	89,966			$	258,136			$	257,702
Industrial			49,283				40,444				141,471				122,925
Non-reportable Rental Operations segment			5,174				4,222				14,029				8,887
Service Operations			21,738				7,301				36,541				26,253
Total Segment FFO			163,232				141,933				450,177				415,767
Non-Segment FFO:
Interest expense			(49,260	)			(43,414	)			(143,657	)			(127,882	)
Interest and other income, net			330				6,254				3,850				11,187
General and administrative expense			(10,448	)			(3,856	)			(29,498	)			(27,923	)
Gain on land sales, net			4,469				1,799				8,491				18,207
Other non-segment income (expense)			(1,710	)			(816	)			(1,913	)			(2,352	)
Minority interest			(823	)			(1,174	)			(1,640	)			(3,666	)
Minority interest share of FFO adjustments			(4,363	)			(2,697	)			(12,351	)			(7,539	)
Joint venture FFO			14,654				12,414				45,458				36,801
Dividends on preferred shares			(18,866	)			(15,227	)			(53,038	)			(45,679	)
Discontinued operations, net of minority interest			(113	)			(1,543	)			3,959				361
Consolidated basic FFO		$	97,102			$	93,673			$	269,838			$	267,282
Depreciation and amortization on continuing operations			(75,144	)			(71,438	)			(228,062	)			(204,642	)
Depreciation and amortization on discontinued operations			(116	)			(638	)			(2,894	)			(3,580	)
Company’s share of joint venture adjustments			(14,450	)			(10,574	)			(28,769	)			(21,152	)
Earnings from depreciated property sales on discontinued operations			1,299				39,670				11,940				111,751
Earnings from depreciated property sales- share of joint venture			—				(3	)			495				1,828
Minority interest share of FFO adjustments			4,363				2,697				12,351				7,539
Net income available for common shareholders		$	13,054			$	53,387			$	34,899			$	159,026

7.		Discontinued Operations and Assets Held-for-Sale
		The operations of 39 buildings are currently classified as discontinued operations for the nine-month periods ended September 30, 2008 and September 30, 2007. These 39 buildings consist of 20 industrial and 19 office properties. Of these properties, seven were sold during the first nine months of 2008 and 32 were sold during 2007.
		The following table illustrates the operations of the buildings reflected in discontinued operations for the three and nine months ended September 30, 2008 and 2007, respectively (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Revenues		$	91			$	3,461			$	6,707			$	22,635
Expenses:
Operating			62				1,475				1,239				8,945
Interest			86				1,021				821				5,732
Depreciation and amortization			116				638				2,894				3,580
General and administrative			—				8				2				30
Operating income (loss)			(173	)			319				1,751				4,348
Minority interest income (expense)			8				(20	)			(88	)			(283	)
Income (loss) from discontinued operations, before gain on sales			(165	)			299				1,663				4,065
Gain on sale of properties			1,299				39,670				11,940				111,751
Minority interest expense – gain on sales			(64	)			(2,480	)			(598	)			(7,284	)
Gain on sale of properties, net of minority interest			1,235				37,190				11,342				104,467
Income from discontinued operations		$	1,070			$	37,489			$	13,005			$	108,532

At September 30, 2008, we have classified 10 in-service properties as held-for-sale, but have included the results of operations of these properties in continuing operations. The following table illustrates the aggregate balance sheet information of these 10 held-for-sale properties at September 30, 2008 (in thousands):

		Total
		Held-for-Sale
		Properties
Balance Sheet:
Real estate investments, net		$	185,399
Other assets			11,888
Total assets held-for-sale		$	197,287
Accrued expenses		$	1,296
Other liabilities			2,250
Total liabilities held-for-sale		$	3,546

We had entered into a preliminary agreement to sell a portfolio of 14 buildings in our Cleveland Office market and had accordingly ceased depreciation on those buildings in July 2007, as they met the criteria for held-for-sale accounting. As a result, we had also included the 14 buildings in discontinued operations. However, because the potential buyer was not able to secure financing on acceptable terms, the sale agreement was cancelled and we have determined that this portfolio no longer meets the criteria for held-for-sale classification. As a result of this determination, the portfolio was reclassified from discontinued operations to continuing operations in the first quarter of 2008, resulting in an additional $5.3 million of depreciation expense in the first quarter of 2008.

		We allocate interest expense to discontinued operations and have included such interest expense in computing income from discontinued operations. Interest expense allocable to discontinued operations includes interest on any secured debt for properties included in discontinued operations and an allocable share of our consolidated unsecured interest expense for unencumbered properties. The allocation of unsecured interest expense to discontinued operations was based upon the gross book value of the unencumbered real estate assets included in discontinued operations as it related to the total gross book value of our unencumbered real estate assets.
8.		Shareholders’ Equity
		We periodically use the public equity markets to fund the development and acquisition of additional rental properties or to pay down debt. The proceeds of these offerings are contributed to DRLP in exchange for an additional interest in DRLP. In February 2008, we issued $300.0 million of 8.375% Series O Cumulative Redeemable Preferred Stock from which the net proceeds were used to reduce the outstanding balance on DRLP’s unsecured line of credit. Shares of our Series O Cumulative Redeemable Preferred Stock have no stated maturity date although they may be redeemed, at our option, in February 2013.
		We also issued new shares of common stock under employee and non-employee stock purchase plans, as well as for dividend reinvestment plans. We received $12.1 million and $2.2 million of proceeds from share issuances during the nine-month periods ended September 30, 2008 and 2007, respectively.
9.		Financial Instruments
		We are exposed to capital market risk, such as changes in interest rates. In order to manage the volatility relating to interest rate risk, we may enter into interest rate hedging arrangements from time to time. We do not utilize derivative financial instruments for trading or speculative purposes.
		The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
		To comply with the provisions of SFAS 157, to the extent it has been adopted for the period ending September 30, 2008 (see Note 10), we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
		Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counterparties. However, as of September 30, 2008, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuations of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We do not have any fair value measurements using significant unobservable inputs (Level 3) as of September 30, 2008.

		In November 2007, we entered into forward-starting interest rate swaps with notional amounts appropriate to hedge interest rates on $300.0 million of anticipated debt offerings in 2008. The forward-starting swaps were appropriately designated and tested for effectiveness as cash flow hedges. In March 2008, we settled the forward-starting swaps and made a cash payment of $14.6 million to the counterparties. An effectiveness test was performed as of the settlement date and it was concluded that a highly effective cash flow hedge was still in place for the expected debt offering. Of the amount paid in settlement, approximately $700,000 was immediately reclassified to interest expense, as the result of partial ineffectiveness calculated at the settlement date. The net amount of $13.9 million was recorded in Other Comprehensive Income (“OCI”) and is being recognized through interest expense over the life of the hedged debt offering, which took place in May 2008. The remaining unamortized amount included in OCI as of September 30, 2008 is $12.7 million.
		The effectiveness of our hedges is evaluated throughout their lives using the hypothetical derivative method under which the change in fair value of the actual swap designated as the hedging instrument is compared to the change in fair value of a hypothetical swap. We had no material interest rate derivatives, when considering both fair value and notional amount, at September 30, 2008.
10.		Recent Accounting Pronouncements
		SFAS No.157, Fair Value Measurements (“SFAS 157”) was effective for us on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. Based on the guidance provided by Financial Accounting Standards Board (“FASB”) Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (“FSP No. 157-2”), we have only partially implemented the guidance promulgated under SFAS 157 as of January 1, 2008, which in our circumstances only affects financial instruments. SFAS 157 will not be applied during 2008 to nonfinancial long-lived asset groups that may be measured for an impairment assessment, reporting units measured at fair value in the first step of the goodwill impairment test, and nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination. We will fully apply the provisions of SFAS 157 beginning January 1, 2009 and do not expect there to be a material impact to the financial statements.
		SFAS 157 emphasized that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
		Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities to which we have access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair

		value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
		In October 2008, FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset in a Market That Is Not Active (“FSP 157-3”), was approved and became immediately effective. FSP 157-3 provides additional guidance for applying fair value measurements in markets that are not active. Beginning January 1, 2009, the date in which we will fully apply the provisions of SFAS 157, FSP 157-3 will apply to fair value measurements of nonfinancial long-lived asset groups, specifically real estate assets, which will be performed in the context of impairment testing or in applying acquisition accounting. We are currently evaluating the impact of adopting FSP 157-3.
		In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS 141R”) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment to ARB No. 51 (“SFAS 160”). SFAS 141R and SFAS 160 require most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both Statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS 141R will be applied to business combinations after the effective date. SFAS 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. We are currently evaluating the impact of adopting SFAS 141R and SFAS 160 on our results of operations and financial position.
		In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures for derivative instruments and hedging activities, specifically in regard to the purpose of the derivative and how the derivative and hedging activities affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 and early application is allowed. We will apply SFAS 161 beginning in 2009.
		In May 2008, the FASB ratified FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”) that will require separate accounting for the debt and equity components of convertible instruments. FSP APB 14-1 will require that the value assigned to the debt component would be the estimated fair value of a similar bond without the conversion feature, which would result in the debt being recorded at a discount. The resulting debt discount will be amortized over the period during which the debt is expected to be outstanding (i.e., through the first optional redemption date) as additional non-cash interest expense. FSP APB 14-1 is effective January 1, 2009 and will be applied retrospectively to the Exchangeable Notes that we issued in November 2006, which we currently estimate will result in us recognizing additional non-cash interest expense of between $5.5 million and $7.5 million per annum.

11. Subsequent Events

Declaration of Dividends

The Company’s Board of Directors declared the following dividends at its October 29, 2008, regularly scheduled board meeting:

Quarterly

Class

Amount/Share

Record Date

Payment Date

Common

$

0.485

November 14, 2008

November 29, 2008

Preferred (per depositary share):

Series J

$

0.414063

November 14, 2008

November 28, 2008

Series K

$

0.406250

November 14, 2008

November 28, 2008

Series L

$

0.412500

November 14, 2008

November 28, 2008

Series M

$

0.434375

December 17, 2008

December 31, 2008

Series N

$

0.453125

December 17, 2008

December 31, 2008

Series O

$

0.523438

December 17, 2008

December 31, 2008

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

Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in or incorporated by reference into this Report, including, without limitation, those related to our future operations, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe,” “estimate,” “expect,” “anticipate,” “intend,” “plan,” “seek,” “may,” and similar expressions or statements regarding future periods are intended to identify forward-looking statements.

These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any predictions of future results, performance or achievements that we express or imply in this Report. Some of the risks, uncertainties and other important factors that may affect future results include, among others:

	•		Changes in general economic and business conditions, including the performance of financial markets;
	•		Our continued qualification as a real estate investment trust, or “REIT”, for U.S. federal income tax purposes;
	•		Heightened competition for tenants and potential decreases in property occupancy;
	•		Potential increases in real estate construction costs;
	•		Potential changes in the financial markets and interest rates;
	•		Volatility in our stock price and trading volume;
	•		Our continuing ability to raise funds on favorable terms through the issuance of debt and equity in the capital markets;
	•		Our ability to successfully identify, acquire, develop and/or manage properties on terms that are favorable to us;
	•		Our ability to be flexible in the development and operations of joint venture properties;
	•		Our ability to successfully dispose of properties on terms that are favorable to us;
	•		Inherent risks in the real estate business including, but not limited to, tenant defaults, potential liability relating to environmental matters and liquidity of real estate investments; and
	•		Other risks and uncertainties described herein, as well as those risks and uncertainties discussed from time to time in our other reports and other public filings with the Securities and Exchange Commission (“SEC”).

Although we presently believe that the plans, expectations and results expressed in or suggested by the forward-looking statements are reasonable, all forward-looking statements are inherently subjective, uncertain and subject to change, as they involve substantial risks and uncertainties beyond our control. New factors emerge from time to time, and it is not possible for us to predict the nature, or assess the potential 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-looking statements for events or circumstances that arise after the statement is made, except as otherwise may be required by law.

This list of risks and uncertainties, however, is only a summary of some of the most important factors and is not intended to be exhaustive. Additional information regarding risk factors that may affect us is included under the caption “Risk Factors” in Part II, Item 1A of this Report, and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, which we filed with the SEC on February 29, 2008. The risk factors contained in our Annual Report are updated by us from time to time in Quarterly Reports on Form 10-Q and other public filings.

Business Overview

We are a self-administered and self-managed REIT that began operations through a related entity in 1972. A more complete description of our business, and of management’s philosophy and priorities, is included in our Annual Report on Form 10-K.

As of September 30, 2008, we:

	•		Owned or jointly controlled 734 industrial, office, healthcare and retail properties (including properties under development), consisting of more than 126.0 million square feet; and
	•		Owned or jointly controlled more than 7,100 acres of land with an estimated future development potential of more than 107 million square feet of industrial, office, healthcare and retail properties.

We provide the following services for our properties and for certain properties owned by third parties and joint ventures:

	•		Property leasing;
	•		Property management;
	•		Asset management;
	•		Construction;
	•		Development; and
	•		Other tenant-related services.

We also develop or acquire properties with the intent to sell (hereafter referred to as “Build-for-Sale” properties). Build-for-Sale properties represent properties where our investment strategy results in a decision to sell the property within a relatively short time after it is placed in service. Build-for-Sale properties are generally identified as such prior to construction commencement and may either be sold or contributed to an unconsolidated entity in which we have an ownership interest or sold outright to third parties. The state of the capital markets has limited the access to financing for potential purchasers of our properties and, therefore, made it more difficult for us to execute our capital recycling program. Additionally, with the potential limits that the current state of the economy may place on our own ability to access debt financing at acceptable rates, management’s priorities with regard to uses of capital for development of new properties have been re-evaluated and, thus, new development commitments have been significantly curtailed.

Key Performance Indicators

Our operating results depend primarily upon rental income from our industrial, office, healthcare and retail properties (“Rental Operations”). The following highlights the areas of Rental Operations that we consider critical for future revenue growth. All square footage totals and occupancy percentages reflect both wholly owned properties and properties in joint ventures.

Occupancy Analysis: Our ability to maintain favorable occupancy rates is a principal driver of maintaining and increasing rental revenues from continuing operations. The following table sets forth occupancy information regarding our in-service portfolio of rental properties (including rental properties of unconsolidated joint ventures but excluding all in-service Build-for-Sale properties) as of September 30, 2008 and 2007, respectively (in thousands, except percentage data):

		Total								Percent of
		Square Feet								Total Square Feet								Percent Occupied
Type		2008				2007				2008				2007				2008				2007
Industrial			88,764				76,539				71.5	%			69.8	%			89.3	%			93.8	%
Office			33,723				31,787				27.1	%			29.0	%			88.3	%			90.7	%
Other			1,691				1,306				1.4	%			1.2	%			90.0	%			92.8	%
Total			124,178				109,632				100.0	%			100.0	%			89.1	%			92.9	%

The decrease in occupancy at September 30, 2008, as compared to September 30, 2007, is the result of an increase in developments which were not fully leased being placed in service between the two periods. There are no significant differences in occupancy between wholly owned properties and properties held by unconsolidated subsidiaries.

Lease Expiration and Renewal: Our ability to maintain and improve occupancy rates primarily depends upon our continuing ability to re-lease expiring space. The following table reflects our in-service portfolio lease expiration schedule by property type as of September 30, 2008. The table indicates square footage and annualized net effective rents (based on September 2008 rental revenue) under expiring leases (in thousands, except percentage data):

		Total
		Portfolio												Industrial								Office								Other
Year of		Square				Ann. Rent				%of				Square				Ann. Rent				Square				Ann. Rent				Square				Ann. Rent
Expiration		Feet				Revenue				Revenue				Feet				Revenue				Feet				Revenue				Feet				Revenue
2008			2,613			$	13,453				3	%			2,037			$	7,441				561			$	5,801				15			$	211
2009			12,023				80,091				10	%			8,742				36,271				3,235				43,373				46				447
2010			14,190				100,269				13	%			10,090				42,687				4,087				57,395				13				187
2011			16,016				95,965				12	%			12,337				46,064				3,609				48,726				70				1,175
2012			11,315				79,127				10	%			7,771				30,408				3,501				47,908				43				811
2013			12,939				105,260				14	%			7,867				32,037				5,015				72,329				57				894
2014			8,787				55,054				7	%			6,749				24,469				2,004				30,021				34				564
2015			8,643				64,550				8	%			6,276				24,854				2,366				39,667				1				29
2016			4,904				32,249				4	%			3,527				11,947				1,166				17,859				211				2,443
2017			6,389				43,454				6	%			4,598				18,146				1,528				21,935				263				3,373
2018 and Thereafter			12,774				99,161				13	%			9,295				43,805				2,710				41,877				769				13,479
Total Leased			110,593			$	768,633				100	%			79,289			$	318,129				29,782			$	426,891				1,522			$	23,613
Total Portfolio Square Feet			124,178												88,764								33,723								1,691
Percent Occupied			89.1	%											89.3	%							88.3	%							90.0	%