10-K 1 a201410kdoc.htm 10-K 2014 10K Doc

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
  X      
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
           
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             .
Commission File Number: 1-9044 (Duke Realty Corporation) 0-20625 (Duke Realty Limited Partnership)
DUKE REALTY CORPORATION
DUKE REALTY LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)
 
Indiana (Duke Realty Corporation)
 
35-1740409 (Duke Realty Corporation)
Indiana (Duke Realty Limited Partnership)
 
35-1898425 (Duke Realty Limited Partnership)
(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 area code: (317) 808-6000
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of Each Class:
  
Name of Each Exchange on Which Registered:
Duke Realty Corporation
 
Common Stock ($.01 par value)
  
New York Stock Exchange
Duke Realty Limited Partnership
 
None
 
None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   
Duke Realty Corporation
Yes x
 No   o
 
Duke Realty Limited Partnership
Yes x
 No   o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    
Duke Realty Corporation
Yes  o
No  x
 
Duke Realty Limited Partnership
Yes  o
No  x
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.    
Duke Realty Corporation
Yes x
 No   o
 
Duke Realty Limited Partnership
Yes x
 No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Duke Realty Corporation
Yes x
 No   o
 
Duke Realty Limited Partnership
Yes x
 No   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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 definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



Duke Realty Corporation:
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
Duke Realty Limited Partnership:
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  x
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).    
Duke Realty Corporation
Yes  o
No  x
 
Duke Realty Limited Partnership
Yes  o
No  x
The aggregate market value of the voting shares of Duke Realty Corporation's outstanding common shares held by non-affiliates of Duke Realty Corporation is $6.1 billion based on the last reported sale price on June 30, 2014.
The number of common shares of Duke Realty Corporation, $.01 par value outstanding as of February 20, 2015 was 344,746,189.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Duke Realty Corporation's Definitive Proxy Statement for its Annual Meeting of Shareholders (the "Proxy Statement") to be filed pursuant to Rule 14a-6 of the Securities Exchange Act of 1934, as amended, are incorporated by reference into this Form 10-K. Other than those portions of the Proxy Statement specifically incorporated by reference pursuant to Items 10 through 14 of Part III hereof, no other portions of the Proxy Statement shall be deemed so incorporated.



EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the year ended December 31, 2014 of both Duke Realty Corporation and Duke Realty Limited Partnership. Unless stated otherwise or the context otherwise requires, references to "Duke Realty Corporation" or the "General Partner" mean Duke Realty Corporation and its consolidated subsidiaries; and references to the "Partnership" mean Duke Realty Limited Partnership and its consolidated subsidiaries. The terms the "Company," "we," "us" and "our" refer to the General Partner and the Partnership, collectively, and those entities owned or controlled by the General Partner and/or the Partnership.
Duke Realty Corporation is a self-administered and self-managed real estate investment trust ("REIT") and is the sole general partner of the Partnership, owning 98.9% of the common partnership interests of the Partnership ("General Partner Units") as of December 31, 2014. The remaining 1.1% of the common partnership interests ("Limited Partner Units" and, together with the General Partner Units, the "Common Units") are owned by limited partners. As the sole general partner of the Partnership, the General Partner has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Partnership.
The General Partner and the Partnership are operated as one enterprise. The management of the General Partner consists of the same members as the management of the Partnership. As the sole general partner with control of the Partnership, the General Partner consolidates the Partnership for financial reporting purposes, and the General Partner does not have any significant assets other than its investment in the Partnership. Therefore, the assets and liabilities of the General Partner and the Partnership are substantially the same.
We believe combining the annual reports on Form 10-K of the General Partner and the Partnership into this single report results in the following benefits:
enhances investors' understanding of the General Partner and the Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation of information since a substantial portion of the Company's disclosure applies to both the General Partner and the Partnership; and
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
We believe it is important to understand the few differences between the General Partner and the Partnership in the context of how we operate as an interrelated consolidated company. The General Partner's only material asset is its ownership of partnership interests in the Partnership. As a result, the General Partner does not conduct business itself, other than acting as the sole general partner of the Partnership and issuing public equity from time to time. The General Partner does not issue any indebtedness, but does guarantee some of the unsecured debt of the Partnership. The Partnership holds substantially all the assets of the business, directly or indirectly, and holds the ownership interests related to certain of the Company's investments. The Partnership conducts the operations of the business and has no publicly traded equity. Except for net proceeds from equity issuances by the General Partner, which are contributed to the Partnership in exchange for General Partner Units or Preferred Units, the Partnership generates the capital required by the business through its operations, its incurrence of indebtedness and the issuance of Limited Partner Units to third parties.
Noncontrolling interests, shareholders' equity and partners' capital are the main areas of difference between the consolidated financial statements of the General Partner and those of the Partnership. The noncontrolling interests in the Partnership's financial statements include the interests in consolidated investees not wholly owned by the Partnership. The noncontrolling interests in the General Partner's financial statements include the same noncontrolling interests at the Partnership level, as well as the common limited partnership interests in the Partnership, which are accounted for as partners' capital by the Partnership.
In order to highlight the differences between the General Partner and the Partnership, there are separate sections in this report, as applicable, that separately discuss the General Partner and the Partnership including separate financial statements, and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the General



Partner and the Partnership, this report refers to actions or holdings as being actions or holdings of the collective Company.





TABLE OF CONTENTS
Form 10-K
Item No.
 
Page(s)
 
 
 
 
 
 
 
 
1
1A.
1B.
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5
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7A.
8
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9A.
9B.
 
 
 
 
 
 
 
 
10
11
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15
 
 
127 



IMPORTANT INFORMATION ABOUT THIS REPORT
In this Annual Report on Form 10-K (this "Report") for Duke Realty Corporation (the "General Partner") and Duke Realty Limited Partnership (the "Partnership"), the terms the "Company," "we," "us" and "our" refer to the General Partner and the Partnership, collectively, and those entities owned or controlled by the General Partner and/or the Partnership.
Cautionary Notice 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," "could," "may" and similar expressions or statements regarding future periods are intended to identify forward-looking statements, although not all forward-looking statements may contain such words.
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 or in the information incorporated by reference into 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 financial condition of our tenants and the value of our real estate assets;
The General Partner's continued qualification as a real estate investment trust ("REIT") for U.S. federal income tax purposes;
Heightened competition for tenants and potential decreases in property occupancy;
Potential changes in the financial markets and interest rates;
Volatility in the General Partner's stock price and trading volume;
Our continuing ability to raise funds on favorable terms;
Our ability to successfully identify, acquire, develop and/or manage properties on terms that are favorable to us;
Potential increases in real estate construction costs;
Our ability to successfully dispose of properties on terms that are favorable to us, including, without limitation, through one or more transactions that are consistent with our previously disclosed strategic plans;
Our ability to retain our current credit ratings;
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, including those 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.

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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 this Report, and is updated by us from time to time in Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings that we make with the SEC.
PART I
Item 1.  Business
Background
The General Partner is a self-administered and self-managed REIT, which began operations upon completion of an initial public offering in February 1986.
The Partnership was formed in October 1993, when the General Partner contributed all of its properties and related assets and liabilities, together with the net proceeds from an offering of additional shares of its common stock, to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest whose operations began in 1972. The General Partner is the sole general partner of the Partnership, owning 98.9% of the common partnership interests of the Partnership ("General Partner Units") at December 31, 2014. The remaining 1.1% of the common partnership interests ("Limited Partner Units" and, together with the General Partner Units, the "Common Units") are owned by limited partners. Limited Partners have the right to redeem their Limited Partner Units, subject to certain restrictions. Pursuant to the Fifth Amended and Restated Agreement of Limited Partnership, as amended (the "Partnership Agreement"), the General Partner is obligated to redeem the Limited Partner Units in shares of its common stock, unless it determines in its reasonable discretion that the issuance of shares of its common stock could cause it to fail to qualify as a REIT. Each Limited Partner Unit shall be redeemed for one share of the General Partner's common stock, or, in the event that the issuance of shares could cause the General Partner to fail to qualify as a REIT, cash equal to the fair market value of one share of the General Partner's common stock at the time of redemption, in each case, subject to certain adjustments described in the Partnership Agreement. The Limited Partner Units are not required, per the terms of the Partnership Agreement, to be redeemed in registered shares of the General Partner.
At December 31, 2014, our diversified portfolio of 729 rental properties (including 85 jointly controlled in-service properties with more than 19.8 million square feet, 20 consolidated properties under development with approximately 5.0 million square feet and three jointly controlled properties under development with more than 1.3 million square feet) encompassed approximately 153.2 million rentable square feet and was leased by a diverse base of more than 2,400 tenants whose businesses include government services, manufacturing, retailing, wholesale trade, distribution, healthcare and professional services. We also owned, including through ownership interests in unconsolidated joint ventures, approximately 3,600 acres of land and controlled an additional 1,650 acres through purchase options.
Our headquarters and executive offices are located in Indianapolis, Indiana. We additionally have regional offices or significant operations in 21 other geographic or metropolitan areas including Atlanta, Georgia; Baltimore, Maryland; Central Florida; Chicago, Illinois; Cincinnati, Ohio; Columbus, Ohio; Dallas, Texas; Houston, Texas; Minneapolis, Minnesota; Nashville, Tennessee; New Jersey; Northern and Southern California; Pennsylvania; Phoenix, Arizona; Raleigh, North Carolina; St. Louis, Missouri; Savannah, Georgia; Seattle, Washington; Washington D.C.; and South Florida. We had approximately 750 employees at December 31, 2014.
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for information related to our operational, asset and capital strategies.
Reportable Operating Segments
We have four reportable operating segments at December 31, 2014, the first three of which consist of the ownership and rental of (i) industrial, (ii) office and (iii) medical office real estate investments. The operations of our industrial, office and medical office properties, along with our retail properties, are collectively referred to as "Rental Operations." Our retail properties, as well as any other properties not included in our reportable segments,

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do not by themselves meet the quantitative thresholds for separate presentation as reportable segments. The fourth reportable segment consists of various real estate services such as property management, asset management, maintenance, leasing, development, general contractor 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. Our Service Operations segment also includes our taxable REIT subsidiary, a legal entity through which certain of the segment's aforementioned operations are conducted. See Item 6, "Selected Financial Data," Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Data" for financial information related to our reportable segments.
Competitive Conditions
As a fully integrated commercial real estate firm, we provide in-house leasing, management, development and construction services which we believe, coupled with our significant base of commercially zoned and unencumbered land in existing business parks, should give us a competitive advantage as a real estate operator and in future development activities.
We believe that the management of real estate opportunities and risks can be done most effectively at regional or on local levels. As a result, we intend to continue our emphasis on increasing our market share, to the extent it is in markets or product types that align with our asset strategy (see Item 7), and effective rents in the primary markets where we own properties. We believe that this regional focus will allow us to assess market supply and demand for real estate more effectively as well as to capitalize on the strong relationships with our tenant base. In addition, we seek to further capitalize on strong customer relationships to provide third-party construction services across the United States. As a fully integrated real estate company, we are able to arrange for or provide to our industrial, office and medical office customers not only well located and well maintained facilities, but also additional services such as build-to-suit construction, tenant finish construction, and expansion flexibility.
All of our properties are located in areas that include competitive properties. Institutional investors, other REITs or local real estate operators generally own such properties; however, no single competitor or small group of competitors is dominant in our current markets. The supply and demand of similar available rental properties may affect the rental rates we will receive on our properties. Other competitive factors include the attractiveness of the property location, the quality of the property and tenant services provided, and the reputation of the owner and operator. In addition, our Service Operations face competition from a considerable number of other real estate companies that provide comparable services, some of whom may have greater marketing and financial resources than are available to us.
Corporate Governance
Since our inception, we not only have strived to be a top-performer operationally, but also to lead in issues important to investors such as disclosure and corporate governance. The General Partner's system of governance reinforces this commitment and, as a limited partnership that has one general partner owning over 90% of the Partnership's common interest, the governance of the Partnership is necessarily linked to the corporate governance of the General Partner. Summarized below are the highlights of the General Partner's Corporate Governance initiatives. 

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Board Composition
  
• The General Partner's Board is controlled by a supermajority (91.7%) of "Independent Directors," as such term is defined under the rules of the New York Stock Exchange (the "NYSE") as of January 28, 2015 and thereafter
 
 
Board Committees
  
• The General Partner's Board Committee members are all Independent Directors
 
 
Lead Director
  
• The Chairman of the General Partner's Corporate Governance Committee serves as Lead Director of the Independent Directors
 
 
Board Policies
  
  No Shareholder Rights Plan (Poison Pill)
  Code of Conduct applies to all Directors and employees of the General Partner, including the Chief Executive Officer and senior financial officers; waivers applied to executive officers require the vote of a majority of (i) the General Partner's Board of Directors or (ii) the General Partner's Corporate Governance Committee
  Orientation program for new Directors of the General Partner
  Independence of Directors of the General Partner is reviewed annually
  Independent Directors of the General Partner meet at least quarterly in executive sessions
  Independent Directors of the General Partner receive no compensation from the General Partner other than as Directors
  Equity-based compensation plans require the approval of the General Partner's shareholders
  Board effectiveness and performance is reviewed annually by the General Partner's Corporate Governance Committee
  The General Partner's Executive Compensation Committee conducts an annual review, as delegated by the Corporate Governance Committee, of the Chief Executive Officer succession plan
  Independent Directors and all Board Committees of the General Partner may retain outside advisors, as they deem appropriate
  Prohibition on repricing of outstanding stock options of the General Partner
  Directors of the General Partner required to offer resignation upon job change
  Majority voting for election of Directors of the General Partner
  Shareholder Communications Policy
 
 
 
Ownership
 
Minimum Stock Ownership Guidelines apply to all Directors and Executive Officers of the General Partner
The General Partner's Code of Conduct (which applies to all Directors and employees of the General Partner, including the Chief Executive Officer and senior financial officers) and the Corporate Governance Guidelines are available in the Investor Relations/Corporate Governance section of the General Partner's website at www.dukerealty.com. A copy of these documents may also be obtained without charge by writing to Duke Realty Corporation, 600 East 96th Street, Suite 100, Indianapolis, Indiana 46240, Attention: Investor Relations. If we amend our Code of Conduct as it applies to the Directors, Chief Executive Officer or senior financial officers of the General Partner or grant a waiver from any provision of the Code of Conduct to any such person, we may, rather than filing a current report on Form 8-K, disclose such amendment or waiver in the Investor Relations/Corporate Governance section of the General Partner's website at www.dukerealty.com.
Additional Information
For additional information regarding our investments and operations, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Data." For additional information about our business segments, see Item 8, "Financial Statements and Supplementary Data."



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Available Information
In addition to this Report, we file quarterly and current reports, proxy statements and other information with the SEC. All documents that are filed with the SEC are available free of charge on the General Partner's corporate website, which is www.dukerealty.com. We are not incorporating the information on the General Partner's website into this Report, and the General Partner's website and the information appearing on the General Partner's website is not included in, and is not part of, this Report. You may also read and copy any document filed at the public reference facilities of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC's home page on the Internet (http://www.sec.gov). In addition, since some of the General Partner's securities are listed on the NYSE, you may read the General Partner's SEC filings at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
Item 1A. Risk Factors
In addition to the other information contained in this Report, you should carefully consider, in consultation with your legal, financial and other professional advisors, the risks described below, as well as the risk factors and uncertainties discussed in our other public filings with the SEC under the caption "Risk Factors" in evaluating us and our business before making a decision regarding an investment in the General Partner's securities.
The risks contained in this Report are not the only risks that we face. Additional risks that are not presently known, or that we presently deem to be immaterial, also could have a material adverse effect on our financial condition, results of operations, business and prospects. The trading price of the General Partner's securities could decline due to the materialization of any of these risks, and its shareholders and/or the Partnership's unitholders may lose all or part of their investment.
This Report also contains forward-looking statements that may not be realized as a result of certain factors, including, but not limited to, the risks described herein and in our other public filings with the SEC. Please refer to the section in this Report entitled "Cautionary Notice Regarding Forward-Looking Statements" for additional information regarding forward-looking statements.
Risks Related to Our Business
Our use of debt financing could have a material adverse effect on our financial condition.
We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required principal and interest payments and the long-term risk that we will be unable to refinance our existing indebtedness, or that the terms of such refinancing will not be as favorable as the terms of existing indebtedness. Additionally, we may not be able to refinance borrowings by our unconsolidated subsidiaries on favorable terms or at all. If our debt cannot be paid, refinanced or extended, we may not be able to make distributions to shareholders and unitholders at expected levels. Further, if prevailing interest rates or other factors at the time of a refinancing result in higher interest rates or other restrictive financial covenants upon the refinancing, then such refinancing would adversely affect our cash flow and funds available for operation, development and distribution.
We are also subject to financial covenants under our existing debt instruments. Should we fail to comply with the covenants in our existing debt instruments, then we would not only be in breach under the applicable debt instruments but we would also likely be unable to borrow any further amounts under our other debt instruments, which could adversely affect our ability to fund operations. We also have incurred, and may incur in the future, indebtedness that bears interest at variable rates. Thus, if market interest rates increase, so will our interest expense, which could reduce our cash flow and our ability to make distributions to shareholders and unitholders at expected levels.



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Debt financing may not be available and equity issuances could be dilutive to our shareholders and unitholders.
Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity issued by the General Partner. Debt financing may not be available over a longer period of time in sufficient amounts, on favorable terms or at all. If the General Partner issues additional equity securities, instead of debt, to manage capital needs, the interests of our existing shareholders and unitholders could be diluted.
Financial and other covenants under existing credit agreements could limit our flexibility and adversely affect our financial condition.
The terms of our various credit agreements and other indebtedness require that we comply with a number of customary financial and other covenants, such as maintaining debt service coverage and leverage ratios and maintaining insurance coverage. These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we have satisfied our payment obligations. 
Downgrades in our credit ratings could increase our borrowing costs or reduce our access to funding sources in the credit and capital markets.
We have a significant amount of debt outstanding, consisting mostly of unsecured debt. We are currently assigned corporate credit ratings from Moody's Investors Service, Inc. and Standard and Poor's Ratings Group based on their evaluation of our creditworthiness. All of our debt ratings remain investment grade, but there can be no assurance that we will not be downgraded or that any of our ratings will remain investment grade. If our credit ratings are downgraded or other negative action is taken, we could be required, among other things, to pay additional interest and fees on outstanding borrowings under our revolving credit agreement.
Credit rating reductions by one or more rating agencies could also adversely affect our access to funding sources, the cost and other terms of obtaining funding as well as our overall financial condition, operating results and cash flow.
If we are unable to generate sufficient capital and liquidity, then we may be unable to pursue future development projects and other strategic initiatives.
To complete our ongoing and planned development projects, and to pursue our other strategic initiatives, we must continue to generate sufficient capital and liquidity to fund those activities. To generate that capital and liquidity, we rely upon funds from our existing operations, as well as funds that we raise through our capital raising activities. In the event that we are unable to generate sufficient capital and liquidity to meet our long-term needs, or if we are unable to generate capital and liquidity on terms that are favorable to us, then we may not be able to pursue development projects, acquisitions, or our other long-term strategic initiatives.
The General Partner's stock price and trading volume may be volatile, which could result in substantial losses to its shareholders and to the Partnership's unitholders, if and when they convert their Limited Partner Units to shares of the General Partner's common stock.
The market price of the General Partner's common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in the General Partner's common stock may fluctuate and cause significant price variations to occur. Some of the factors that could negatively affect the General Partner's share price, or result in fluctuations in the price or trading volume of the General Partner's common stock, include uncertainty in the markets, general market and economic conditions, as well as those factors described in these "Risk Factors" and in other reports that we file with the SEC.
Many of these factors are beyond our control, and we cannot predict their potential effects on the price of the General Partner's common stock. If the market price of the General Partner's common stock declines, then its shareholders and the Partnership's unitholders, respectively, may be unable to resell their shares and units upon

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terms that are attractive to them. We cannot assure that the market price of the General Partner's common stock will not fluctuate or decline significantly in the future. In addition, the securities markets in general may experience considerable unexpected price and volume fluctuations.
Our use of joint ventures may negatively impact our jointly-owned investments.
We currently have joint ventures that are not consolidated with our financial statements. We may develop and acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. Our participation in joint ventures is subject to the risks that: 
We could become engaged in a dispute with any of our joint venture partners that might affect our ability to develop or operate a property;
Our joint venture partners may have different objectives than we have regarding the appropriate timing and terms of any sale or refinancing of properties;
Our joint venture partners may have competing interests in our markets that could create conflict of interest issues; and
Maturities of debt encumbering our jointly owned investments may not be able to be refinanced at all or on terms that are as favorable as the current terms.
Risks Related to the Real Estate Industry
Our net earnings available for investment or distribution to shareholders and unitholders could decrease as a result of factors related to the ownership and operation of commercial real estate that are outside of our control.
Our business is subject to the risks incident to the ownership and operation of commercial real estate, many of which involve circumstances not within our control. Such risks include the following: 
Changes in the general economic climate;
The availability of capital on favorable terms, or at all;
Increases in interest rates;
Local conditions such as oversupply of property or a reduction in demand;
Competition for tenants;
Changes in market rental rates;
Oversupply or reduced demand for space in the areas where our properties are located;
Delay or inability to collect rent from tenants who are bankrupt, insolvent or otherwise unwilling or unable to pay;
Difficulty in leasing or re-leasing space quickly or on favorable terms;
Costs associated with periodically renovating, repairing and reletting rental space;
Our ability to provide adequate maintenance and insurance on our properties;
Our ability to control variable operating costs;
Changes in government regulations; and
Potential liability under, and changes in, environmental, zoning, tax and other laws.

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Further, a significant portion of our costs, such as real estate taxes, insurance and maintenance costs and our debt service payments, are generally not reduced when circumstances cause a decrease in cash flow from our properties. Any one or more of these factors could result in a reduction in our net earnings available for investment or distribution to shareholders and unitholders.
Many real estate costs are fixed, even if income from properties decreases.
Our financial results depend on leasing space in our real estate to tenants on terms favorable to us. Our income and funds available for distribution to our shareholders and unitholders will decrease if a significant number of our tenants cannot meet their lease obligations to us or we are unable to lease properties on favorable terms. In addition, if a tenant does not pay its rent, we may not be able to enforce our rights as landlord without delays and we may incur substantial legal costs. Costs associated with real estate investment, such as real estate taxes and maintenance costs, generally are not reduced when circumstances cause a reduction in income from the investment. As a result, we may have a reduction in our net earnings available for investment or distribution to our shareholders and unitholders.
Our real estate development activities are subject to risks particular to development.
We continue to selectively develop new, pre-leased properties for rental operations in our existing markets when accretive returns are present. These development activities generally require various government and other approvals, which we may not receive. In addition, we also are subject to the following risks associated with development activities: 
Unsuccessful development opportunities could result in direct expenses to us;
Construction costs of a project may exceed original estimates, possibly making the project less profitable than originally estimated, or possibly unprofitable;
Time required to complete the construction of a project or to lease up the completed project may be greater than originally anticipated, thereby adversely affecting our cash flow and liquidity;
Occupancy rates and rents of a completed project may not be sufficient to make the project profitable; and
Favorable sources to fund our development activities may not be available.
We may be unsuccessful in operating completed real estate projects.
We face the risk that the real estate projects we develop or acquire will not perform in accordance with our expectations. This risk exists because of factors such as the following: 
Prices paid for acquired facilities are based upon a series of market judgments; and
Costs of any improvements required to bring an acquired facility up to standards to establish the market position intended for that facility might exceed budgeted costs.
As a result, we may develop or acquire projects that are not profitable.
We are exposed to the risks of defaults by tenants.
Any of our tenants may experience a downturn in their businesses that may weaken their financial condition. In the event of default or the insolvency of a significant number of our tenants, we may experience a substantial loss of rental revenue and/or delays in collecting rent and incur substantial costs in enforcing our rights as landlord. If a tenant files for bankruptcy protection, a court could allow the tenant to reject and terminate its lease with us. Our income and distributable cash flow would be adversely affected if a significant number of our tenants became unable to meet their obligations to us, became insolvent or declared bankruptcy.



-9-


We may be unable to renew leases or relet space.
When our tenants decide not to renew their leases upon their expiration, we may not be able to relet the space. Even if our tenants do renew or we are able to relet the space, the terms of renewal or reletting (including the cost of renovations, if necessary) may be less favorable than current lease terms. If we are unable to promptly renew the leases or relet the space, or if the rental rates upon such renewal or reletting are significantly lower than current rates, then our income and distributable cash flow would be adversely affected, especially if we were unable to lease a significant amount of the space vacated by tenants in our properties.
Our insurance coverage on our properties may be inadequate.
We maintain comprehensive insurance on each of our facilities, including property, liability, and environmental coverage. We believe this coverage is of the type and amount customarily obtained for real property. However, there are certain types of losses, generally of a catastrophic nature, such as hurricanes, earthquakes and floods or acts of war or terrorism that may be uninsurable or not economically insurable. We use our discretion when determining amounts, coverage limits and deductibles for insurance. These terms are determined based on retaining an acceptable level of risk at a reasonable cost. This may result in insurance coverage that in the event of a substantial loss would not be sufficient to pay the full current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also may make it unfeasible to use insurance proceeds to replace a facility after it has been damaged or destroyed. Under such circumstances, the insurance proceeds we receive may not be adequate to restore our economic position in a property. If an uninsured or underinsured loss occurred, we could lose both our investment in and anticipated profits and cash flow from a property, and we would continue to be obligated on any mortgage indebtedness or other obligations related to the property. We are also subject to the risk that our insurance providers may be unwilling or unable to pay our claims when made.
Our acquisition and disposition activity may lead to long-term dilution.
Our asset strategy is to reposition our investment concentration among product types and further diversify our geographic presence. There can be no assurance that we will be able to execute the repositioning of our assets according to our strategy or that our execution will lead to improved results.
Acquired properties may expose us to unknown liability.
From time to time, we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it, which could adversely affect our results of operations and cash flow. Unknown liabilities with respect to acquired properties might include: 

liabilities for clean-up of undisclosed environmental contamination;
claims by tenants, vendors or other persons against the former owners of the properties;
liabilities incurred in the ordinary course of business; and
claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.
We could be exposed to significant environmental liabilities as a result of conditions of which we currently are not aware.
As an owner and operator of real property, we may be liable under various federal, state and local laws for the costs of removal or remediation of certain hazardous substances released on or in our property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous substances. In addition, we could have greater difficulty in selling real estate on which hazardous substances were present or in obtaining borrowings using such real estate as collateral. It is our general policy to have Phase I environmental audits performed for all of our properties and land by qualified environmental

-10-


consultants at the time of purchase. These Phase I environmental audits have not revealed any environmental liability that would have a material adverse effect on our business. However, a Phase I environmental audit does not involve invasive procedures such as soil sampling or ground water analysis, and we cannot be sure that the Phase I environmental audits did not fail to reveal a significant environmental liability or that a prior owner did not create a material environmental condition on our properties or land which has not yet been discovered. We could also incur environmental liability as a result of future uses or conditions of such real estate or changes in applicable environmental laws.
We are exposed to the potential impacts of future climate change and climate-change related risks.
We are exposed to potential physical risks from possible future changes in climate. Our properties may be exposed to rare catastrophic weather events, such as severe storms and/or floods. If the frequency of extreme weather events increases due to climate change, our exposure to these events could increase.
We do not currently consider that we are exposed to regulatory risk related to climate change. However, we may be adversely impacted as a real estate developer in the future by stricter energy efficiency standards for buildings.
Risks Related to Our Organization and Structure
If the General Partner were to cease to qualify as a REIT, it and its shareholders would lose significant tax benefits.
The General Partner intends to continue to operate so as to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Qualification as a REIT provides significant tax advantages to the General Partner and its shareholders. However, in order for the General Partner to continue to qualify as a REIT, it must satisfy numerous requirements established under highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. Satisfaction of these requirements also depends on various factual circumstances not entirely within our control. The fact that the General Partner holds its assets through the Partnership further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize the General Partner's REIT status. Although we believe that the General Partner can continue to operate so as to qualify as a REIT, we cannot offer any assurance that it will continue to do so or that legislation, new regulations, administrative interpretations or court decisions will not significantly change the qualification requirements or the federal income tax consequences of qualification. If the General Partner were to fail to qualify as a REIT in any taxable year, it would have the following effects: 
The General Partner would not be allowed a deduction for distributions to shareholders and would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates;
Unless the General Partner was entitled to relief under certain statutory provisions, it would be disqualified from treatment as a REIT for the four taxable years following the year during which it ceased to qualify as a REIT;
The General Partner's net earnings available for investment or distribution to its shareholders would decrease due to the additional tax liability for the year or years involved; and
The General Partner would no longer be required to make any distributions to shareholders in order to qualify as a REIT.
As such, the General Partner's failure to qualify as a REIT would likely have a significant adverse effect on the value of the General Partner's securities and, consequently, the Partnership's Units.
REIT distribution requirements limit the amount of cash we have available for other business purposes, including amounts that we need to fund our future capital needs.
To maintain its qualification as a REIT under the Code, the General Partner must annually distribute to its shareholders at least 90% of its REIT taxable income, determined without regard to the dividends-paid deduction

-11-


and excluding net capital gains. The General Partner intends to continue to make distributions to its shareholders to comply with the 90% distribution requirement. However, this requirement limits our ability to accumulate capital for use for other business purposes. If we do not have sufficient cash or other liquid assets to meet the distribution requirements of the General Partner, we may have to borrow funds or sell properties on adverse terms in order to meet the distribution requirements. If the General Partner fails to make a required distribution, it would cease to qualify as a REIT.
U.S. federal income tax treatment of REITs and investments in REITs may change, which may result in the loss of our tax benefits of operating as a REIT.
The present U.S. federal income tax treatment of a REIT and an investment in a REIT may be modified by legislative, judicial or administrative action at any time. Revisions in U.S. federal income tax laws and interpretations of these laws could adversely affect us and the tax consequences of an investment in the General Partner's common shares.
We are subject to certain provisions that could discourage change-of-control transactions, which may reduce the likelihood of the General Partner's shareholders receiving a control premium for their shares.
Indiana anti-takeover legislation and certain provisions in our governing documents, as we discuss below, may discourage potential acquirers from pursuing a change-of-control transaction with us. As a result, the General Partner's shareholders may be less likely to receive a control premium for their shares.
Ownership Restriction. Subject to certain exceptions, the General Partner's charter provides that no person or entity may beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% (in value or by number of shares, whichever is more restrictive) of the General Partner's outstanding common stock or 9.8% in value of its outstanding stock.
Unissued Preferred Stock. The General Partner's charter permits its board of directors to classify unissued preferred stock by setting the rights and preferences of the shares at the time of issuance. This power enables the General Partner's board to adopt a shareholder rights plan, also known as a poison pill. Although the General Partner has repealed its previously existing poison pill and its current board of directors has adopted a policy not to adopt a shareholder rights plan without shareholder approval, the General Partner's board can change this policy at any time. The adoption of a poison pill would discourage a potential bidder from acquiring a significant position in the General Partner without the approval of its board.
Business-Combination Provisions of Indiana Law. The General Partner has not opted out of the business-combination provisions of the Indiana Business Corporation Law. As a result, potential bidders may have to negotiate with the General Partner's board of directors before acquiring 10% of its stock. Without securing board approval of the proposed business combination before crossing the 10% ownership threshold, a bidder would not be permitted to complete a business combination for five years after becoming a 10% shareholder. Even after the five-year period, a business combination with the significant shareholder would either be required to meet certain per share price minimums as set forth in the Indiana Business Corporation Law or to receive the approval of a majority of the disinterested shareholders.
Control-Share-Acquisition Provisions of Indiana Law. The General Partner has not opted out of the provisions of the Indiana Business Corporation Law regarding acquisitions of control shares. Therefore, those who acquire a significant block (at least 20%) of the General Partner's shares may only vote a portion of their shares unless its other shareholders vote to accord full voting rights to the acquiring person. Moreover, if the other shareholders vote to give full voting rights with respect to the control shares and the acquiring person has acquired a majority of the General Partner's outstanding shares, the other shareholders would be entitled to special dissenters' rights.
Supermajority Voting Provisions. The General Partner's charter prohibits business combinations or significant disposition transactions with a holder of 10% of its shares unless: 
The holders of 80% of the General Partner's outstanding shares of capital stock approve the transaction;

-12-


The transaction has been approved by three-fourths of those directors who served on the General Partner's board before the shareholder became a 10% owner; or
The significant shareholder complies with the "fair price" provisions of the General Partner's charter.
Among the transactions with large shareholders requiring the supermajority shareholder approval are dispositions of assets with a value greater than or equal to $1,000,000 and business combinations.
Operating Partnership Provisions. The limited partnership agreement of the Partnership contains provisions that could discourage change-of-control transactions, including a requirement that holders of at least 90% of the outstanding Common Units approve: 
Any voluntary sale, exchange, merger, consolidation or other disposition of all or substantially all of the assets of the Partnership in one or more transactions other than a disposition occurring upon a financing or refinancing of the Partnership;
The General Partner's merger, consolidation or other business combination with another entity unless after the transaction substantially all of the assets of the surviving entity are contributed to the Partnership in exchange for Common Units;
The General Partner's assignment of its interests in the Partnership other than to one of its wholly-owned subsidiaries; and
Any reclassification or recapitalization or change of outstanding shares of the General Partner's common stock other than certain changes in par value, stock splits, stock dividends or combinations.
We are dependent on key personnel.
The General Partner's executive officers and other senior officers have a significant role in the success of our Company. Our ability to retain our management group or to attract suitable replacements should any members of the management group leave our Company is dependent on the competitive nature of the employment market. The loss of services from key members of the management group or a limitation in their availability could adversely impact our financial condition and cash flow. Further, such a loss could be negatively perceived in the capital markets.
Item 1B.  Unresolved Staff Comments
We have no unresolved comments with the SEC staff regarding our periodic or current reports under the Exchange Act.
Item 2.  Properties
Product Review
As of December 31, 2014, we own interests in a diversified portfolio of 729 commercial properties encompassing approximately 153.2 million net rentable square feet (including 85 jointly controlled in-service properties with more than 19.8 million square feet, 20 consolidated properties under development with approximately 5.0 million square feet and three jointly controlled properties under development with more than 1.3 million square feet).
Industrial Properties: We own interests in 500 bulk distribution industrial properties encompassing approximately 130.4 million square feet (85 percent of total square feet). These properties are primarily warehouse facilities with clear ceiling heights of 28 feet or more. This also includes 32 light industrial buildings, also known as flex buildings, totaling approximately 1.9 million square feet.
Office Properties: We own interests in 148 suburban office buildings totaling more than 16.2 million square feet (11 percent of total square feet).
Medical Office Properties: We own interests in 78 medical office buildings totaling more than 6.2 million square feet (4 percent of total square feet).

-13-


Other Properties: We own interests in 3 retail buildings encompassing more than 348,000 square feet (less than 1 percent of total square feet).
See Consolidated Financial Statement Schedule III - Real Estate Properties and Accumulated Depreciation for a detailed listing of the Company’s properties and related encumbrances.
Land: We own, including through ownership interests in unconsolidated joint ventures, approximately 3,600 acres of land and control an additional 1,650 acres through purchase options. A portion of the 2,845 acres of land that we directly own, and nearly all of our jointly controlled land, is intended to be used for the development of industrial properties and, to a lesser extent, office properties. We directly own 1,140 acres of land that we do not consider strategic and that will be sold to the extent that market conditions permit us to achieve what we believe to be acceptable sale prices.
Property Descriptions
The following tables represent the geographic highlights of consolidated and jointly controlled in-service properties in our primary markets.
Consolidated Properties
 
Square Feet
 
Annual Net
Effective
Rent (1)
 
Annual Net
Effective
Rent per Square Foot (2)
 
Percent of
Annual  Net
Effective
Rent
 
Industrial
 
Office
 
Medical Office
 
Other
 
Overall
 
Percent  of Overall
 
Primary Market
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indianapolis
14,818,970

 
2,917,700

 
265,678

 
38,366

 
18,040,714

 
14.2
%
 
$
86,668,600

 
$
4.88

 
12.7
%
Raleigh
2,801,466

 
2,724,505

 
356,835

 
20,061

 
5,902,867

 
4.6
%
 
59,295,930

 
10.62

 
8.7
%
Cincinnati
9,508,479

 
2,230,956

 
419,090

 

 
12,158,525

 
9.6
%
 
55,781,762

 
4.82

 
8.2
%
Atlanta
9,422,458

 
468,285

 
889,486

 

 
10,780,229

 
8.5
%
 
55,722,927

 
5.41

 
8.1
%
South Florida
4,915,895

 
940,819

 
107,000

 

 
5,963,714

 
4.7
%
 
48,107,423

 
8.36

 
7.0
%
Chicago
11,094,902

 

 
161,443

 

 
11,256,345

 
8.9
%
 
47,611,171

 
4.28

 
7.0
%
Dallas
7,060,095

 

 
1,034,419

 

 
8,094,514

 
6.4
%
 
47,556,879

 
5.89

 
7.0
%
St. Louis
4,678,255

 
1,917,827

 

 

 
6,596,082

 
5.2
%
 
37,870,036

 
6.19

 
5.5
%
Nashville
3,932,110

 
900,995

 
173,953

 

 
5,007,058

 
3.9
%
 
35,424,617

 
7.85

 
5.2
%
Columbus
8,637,857

 

 

 

 
8,637,857

 
6.8
%
 
25,977,860

 
3.05

 
3.8
%
Other(3)
466,000

 
420,869

 
936,327

 

 
1,823,196

 
1.4
%
 
25,048,882

 
15.78

 
3.7
%
Central Florida
3,360,479

 

 
465,727

 

 
3,826,206

 
3.0
%
 
24,278,748

 
6.73

 
3.5
%
Pennsylvania
3,364,240

 

 

 
289,855

 
3,654,095

 
2.9
%
 
20,646,003

 
5.72

 
3.0
%
Houston
3,414,958

 
159,056

 
168,850

 

 
3,742,864

 
2.9
%
 
19,889,954

 
6.17

 
2.9
%
Savannah
6,431,246

 

 

 

 
6,431,246

 
5.1
%
 
18,383,486

 
3.33

 
2.7
%
Minneapolis-St. Paul
3,879,298

 

 

 

 
3,879,298

 
3.1
%
 
17,530,021

 
4.52

 
2.6
%
Southern California
2,339,379

 

 

 

 
2,339,379

 
1.8
%
 
12,849,160

 
5.80

 
1.9
%
Northern California
2,571,630

 

 

 

 
2,571,630

 
2.0
%
 
10,953,257

 
4.26

 
1.6
%
Baltimore
1,826,028

 

 

 

 
1,826,028

 
1.4
%
 
10,038,838

 
5.68

 
1.5
%
Seattle
1,136,109

 

 

 

 
1,136,109

 
0.9
%
 
7,585,819

 
6.68

 
1.1
%
New Jersey
1,830,002

 

 

 

 
1,830,002

 
1.4
%
 
6,793,434

 
5.09

 
1.0
%
Phoenix
1,132,554

 

 

 

 
1,132,554

 
1.0
%
 
4,514,726

 
4.67

 
0.7
%
Washington DC
78,560

 
219,464

 
100,952

 

 
398,976

 
0.3
%
 
4,417,433

 
15.83

 
0.6
%
Total
108,700,970

 
12,900,476

 
5,079,760

 
348,282

 
127,029,488

 
100.0
%
 
$
682,946,966

 
$
5.64

 
100.0
%
Percent of Overall
85.6
%
 
10.1
%
 
4.0
%
 
0.3
%
 
100.0
%
 
 
 
 
 
 
 
 
Annual Net Effective Rent per Square Foot (2)
$
3.97

 
$
13.24

 
$
23.23

 
$
19.89

 
$
5.64

 
 
 
 
 
 
 
 







-14-


Jointly Controlled Properties
 
Square Feet
 
Annual Net
Effective
Rent (1)
 
Annual Net
Effective
Rent per Square Foot (2)
 
Percent of
Annual  Net
Effective
Rent
 
Industrial
 
Office
 
Medical Office
 
Overall
 
Percent of
Overall
 
Primary Market
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Washington DC
669,802

 
1,735,347

 

 
2,405,149

 
12.1
%
 
$
35,281,205

 
$
17.90

 
28.4
%
Dallas
7,698,728

 

 
458,396

 
8,157,124

 
41.1
%
 
32,799,222

 
4.20

 
26.4
%
Indianapolis
4,600,903

 

 
273,479

 
4,874,382

 
24.6
%
 
23,137,671

 
4.75

 
18.6
%
South Florida

 
388,112

 

 
388,112

 
2.0
%
 
8,310,161

 
21.94

 
6.7
%
Atlanta

 
344,476

 

 
344,476

 
1.7
%
 
4,963,555

 
14.41

 
4.0
%
Phoenix
1,009,351

 

 

 
1,009,351

 
5.1
%
 
4,691,822

 
4.65

 
3.8
%
Central Florida
908,422

 

 

 
908,422

 
4.6
%
 
3,673,294

 
4.04

 
3.0
%
Columbus
1,142,400

 

 

 
1,142,400

 
5.7
%
 
3,567,144

 
3.12

 
2.9
%
Nashville

 
180,147

 

 
180,147

 
0.9
%
 
2,976,335

 
16.52

 
2.4
%
Raleigh

 
122,087

 

 
122,087

 
0.6
%
 
2,130,574

 
17.45

 
1.7
%
Chicago

 
98,304

 

 
98,304

 
0.5
%
 
1,734,060

 
17.64

 
1.4
%
Other (3)
152,944

 

 

 
152,944

 
0.8
%
 
512,362

 
3.35

 
0.4
%
Cincinnati
57,886

 

 

 
57,886

 
0.3
%
 
398,667

 
6.89

 
0.3
%
Total
16,240,436

 
2,868,473

 
731,875

 
19,840,784

 
100.0
%
 
$
124,176,072

 
$
6.52

 
100.0
%
Percent of Overall
81.8
%
 
14.5
%
 
3.7
%
 
100.0
%
 
 
 
 
 
 
 
 
Annual Net Effective Rent per Square Foot (2)
$
3.86

 
$
20.17

 
$
18.49

 
$
6.52

 
 
 
 
 
 
 
 
 
 
Occupancy %
 
Consolidated Properties
 
Jointly Controlled Properties
 
Industrial
 
Office
 
Medical Office
 
Other
 
Overall
 
Industrial
 
Office
 
Medical Office
 
Overall
Primary Market
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Minneapolis-St. Paul
100.0
%
 

 

 

 
100.0
%
 

 

 

 

Northern California
100.0
%
 

 

 

 
100.0
%
 

 

 

 

Seattle
100.0
%
 

 

 

 
100.0
%
 

 

 

 

Dallas
100.0
%
 

 
97.9
%
 

 
99.7
%
 
95.7
%
 

 
94.9
%
 
95.7
%
Pennsylvania
100.0
%
 

 

 
85.2
%
 
98.8
%
 

 

 

 

Chicago
98.8
%
 

 
99.7
%
 

 
98.8
%
 

 
100.0
%
 

 
100.0
%
Columbus
98.5
%
 

 

 

 
98.5
%
 
100.0
%
 

 

 
100.0
%
Indianapolis
99.5
%
 
92.8
%
 
96.4
%
 
91.9
%
 
98.4
%
 
100.0
%
 

 
100.0
%
 
100.0
%
Baltimore
96.8
%
 

 

 

 
96.8
%
 

 

 

 

South Florida
97.1
%
 
93.2
%
 
100.0
%
 

 
96.5
%
 

 
97.6
%
 

 
97.6
%
Atlanta
95.7
%
 
89.7
%
 
96.7
%
 

 
95.5
%
 

 
100.0
%
 

 
100.0
%
Cincinnati
98.4
%
 
80.4
%
 
98.6
%
 

 
95.1
%
 
100.0
%
 

 

 
100.0
%
Southern California
94.8
%
 

 

 

 
94.8
%
 

 

 

 

Raleigh
95.4
%
 
93.5
%
 
97.2
%
 
78.8
%
 
94.6
%
 

 
100.0
%
 

 
100.0
%
Central Florida
96.1
%
 

 
81.4
%
 

 
94.3
%
 
100.0
%
 

 

 
100.0
%
St. Louis
95.8
%
 
85.4
%
 

 

 
92.8
%
 

 

 

 

Nashville
88.2
%
 
96.4
%
 
100.0
%
 

 
90.1
%
 

 
100.0
%
 

 
100.0
%
Other (3)
100.0
%
 
67.3
%
 
89.5
%
 

 
87.1
%
 
100.0
%
 

 

 
100.0
%
Houston
86.2
%
 
100.0
%
 
73.4
%
 

 
86.2
%
 

 

 

 

Savannah
85.9
%
 

 

 

 
85.9
%
 

 

 

 

Phoenix
85.3
%
 

 

 

 
85.3
%
 
100.0
%
 

 

 
100.0
%
New Jersey
73.0
%
 

 

 

 
73.0
%
 

 

 

 

Washington DC
100.0
%
 
45.3
%
 
100.0
%
 

 
69.9
%
 
92.6
%
 
77.8
%
 

 
81.9
%
Total
96.2
%
 
88.3
%
 
94.0
%
 
85.6
%
 
95.2
%
 
97.7
%
 
86.3
%
 
96.8
%
 
96.0
%
 
(1)
Represents the average annual base rental payments, on a straight-line basis for the term of each lease, from space leased to tenants as of December 31, 2014, excluding additional amounts paid by tenants as reimbursement for operating expenses. Joint venture properties are shown at 100% of square feet and net effective rents, without regard to our ownership percentage.
(2)
Annual net effective rent per leased square foot.
(3)
Represents properties not located in our primary markets, totaling 1.4% of the total square footage of our consolidated properties.

-15-


Item 3.  Legal Proceedings
We are not subject to any material pending legal proceedings, other than routine litigation arising in the ordinary course of business. We do not expect these legal proceedings to have a material adverse effect on our financial condition, results of operations, or liquidity.
Item 4.  Mine Safety Disclosures
Not applicable.
PART II
Item 5.  Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders
The General Partner's common stock is listed for trading on the NYSE under the symbol "DRE." The following table sets forth the high and low sales prices of the General Partner's common stock for the periods indicated and the dividend or distribution paid per share or Common Unit by the General Partner or the Partnership, respectively, during each such period. There is no established trading market for the Partnership's Common Units. As of February 18, 2015, there were 6,506 record holders of the General Partner's common stock and 112 record holders of the Partnership's Common Units. 
 
2014
 
2013
Quarter Ended
High
 
Low
 
Dividend/Distribution
 
High
 
Low
 
Dividend/Distribution
December 31
$
20.83

 
$
17.06

 
$
0.17

 
 
$
17.23

 
$
14.18

 
$
0.17

September 30
18.80

 
16.94

 
0.17

 
 
17.56

 
14.12

 
0.17

June 30
18.24

 
16.62

 
0.17

 
 
18.80

 
14.29

 
0.17

March 31
17.03

 
14.48

 
0.17

 
 
17.16

 
13.94

 
0.17

On January 28, 2015, the General Partner declared a quarterly cash distribution of $0.17 per share or Common Unit, payable by the General Partner or the Partnership, respectively, on February 27, 2015, to common shareholders or common unitholders of record on February 17, 2015. Our future distributions may vary and will be determined by the General Partner's Board of Directors upon the circumstances prevailing at the time, including our financial condition, operating results, estimated taxable income and REIT distribution requirements, and may be adjusted at the discretion of the Board.
Stock Performance Graph
The following line graph compares the change in the General Partner's cumulative total shareholders' return on shares of its common stock to the cumulative total return of the Standard and Poor's 500 Stock Index ("S&P 500") and the FTSE NAREIT Equity REITs Index ("FTRETR") from December 31, 2009 to December 31, 2014. The graph assumes an initial investment of $100 in the common stock of the General Partner and each of the indices on December 31, 2009, and, the reinvestment of all dividends. The performance graph is not necessarily indicative of future performance.

-16-


This graph and the accompanying text are not “soliciting material,” are not deemed filed with the SEC and are not to be incorporated by reference in any filing by the company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Tax Characterization of Distributions
A summary of the tax characterization of the distributions paid per common share of the General Partner for the years ended December 31, 2014, 2013 and 2012 follows:
 
 
2014
 
2013
 
2012
Total distributions paid per share
$
0.68

 
$
0.68

 
$
0.68

Ordinary income
59.2
%
 
52.6
%
 
14.1
%
Return of capital
2.5
%
 
4.4
%
 
85.9
%
Capital gains
38.3
%
 
43.0
%
 
%
 
100.0
%
 
100.0
%
 
100.0
%
Sales of Unregistered Securities
The General Partner did not sell any of its securities during the year ended December 31, 2014 that were not registered under the Securities Act.
Issuer Purchases of Equity Securities
From time to time, we repurchase our securities under a repurchase program that initially was approved by the General Partner's board of directors and publicly announced in October 2001 (the "Repurchase Program").

On January 29, 2014, the board of directors adopted a resolution that amended and restated the Repurchase Program and delegated authority to management to repurchase a maximum of $100.0 million of the General Partner's common shares, $500.0 million of the Partnership's debt securities and $500.0 million of the General Partner's preferred shares, subject to the prior notification of the Chairman of the Finance Committee of the board of directors of planned repurchases within these limits (the "January 2014 Resolutions"). We did not repurchase any

-17-


securities through the Repurchase Program during the quarter ended December 31, 2014. There are no amounts remaining for repurchases under the January 2014 Resolutions as the board of directors adopted a resolution on January 28, 2015 that amended and restated the Repurchase Program and delegated authority to management to repurchase a maximum of $100.0 million of the General Partner’s common shares, $500.0 million of the Partnership’s debt securities and $500.0 million of the General Partner’s preferred shares, subject to the prior notification of the Chairman of the Finance Committee of the board of directors of planned repurchases within these limits.

The following table summarizes the share repurchase activity for the three months ended December 31, 2014:
Month
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Dollar Value of Preferred Shares That May Yet Be Repurchased Under the Plan
 
 Redemption of 6.5% Series K Cumulative
Redeemable Preferred Shares
 
 
 
 
 
 
 
 
 
October 1 - 31, 2014
 
0
 
$

 
0
 
$494,568,500
 
November 1-30, 2014
 
0
 

 
0
 
$494,568,500
 
December 1-31, 2014
 
597,579
(1)
250

(2)
0
 
$494,568,500
 
Total
 
597,579
 
$
250

 
 
 
 
 
Redemption of 6.6% Series L Cumulative Redeemable
Preferred Shares
 
 
 
 
 
 
 
 
 
October 1-31,2014
 
0
 
$

 
0
 
$494,568,500
 
November 1-30, 2014
 
0
 

 
0
 
$494,568,500
 
December 1-31,2014
 
733,597
(3)
250

(4)
0
 
$494,568,500
 
Total
 
733,597
 
$
250

 
 
 
 
 

(1) Represents the redemption of all of the outstanding Series K Shares, which were called for redemption in November 2014 with a redemption date of December 24, 2014, and were not repurchased as part of our Repurchase Program.
(2) The Series K Shares were redeemed at a price of $250 per share, plus accrued dividends, for an aggregate redemption price of $149.4 million.
(3) Represents the redemption of all of the outstanding Series L Shares, which were call for redemption in November 2014 with a redemption date of December 15, 2014, and were not repurchased as part of our Repurchase Program.
(4) The Series L Shares were redeemed at a price of $250 per share, plus accrued dividends, for an aggregate redemption price of $183.4 million.


-18-


Item 6. Selected Financial Data
The following table sets forth selected financial and operating information on a historical basis for each of the years in the five-year period ended December 31, 2014. The following information should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Data" included in this Form 10-K (in thousands, except per share or per Common Unit data):
 
2014
 
2013
 
2012
 
2011
 
2010
Results of Operations:
 
 
 
 
 
 
 
 
 
General Partner and Partnership
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Rental and related revenue from continuing operations
$
940,204

 
$
873,417

 
$
770,008

 
$
684,615

 
$
616,765

General contractor and service fee revenue
224,500

 
206,596

 
275,071

 
521,796

 
515,361

Total revenues from continuing operations
$
1,164,704

 
$
1,080,013

 
$
1,045,079

 
$
1,206,411

 
$
1,132,126

Income (loss) from continuing operations
$
225,969

 
$
61,400

 
$
(85,619
)
 
$
(3,217
)
 
$
44,273

 
 
 
 
 
 
 
 
 
 
General Partner
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders
$
204,893

 
$
153,044

 
$
(126,145
)
 
$
31,416

 
$
(14,108
)
 
 
 
 
 
 
 
 
 
 
Partnership
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common unitholders
$
207,520

 
$
155,138

 
$
(128,418
)
 
$
32,275

 
$
(14,459
)
 
 
 
 
 
 
 
 
 
 
General Partner
 
 
 
 
 
 
 
 
 
Per Share Data:
 
 
 
 
 
 
 
 
 
Basic income (loss) per common share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
0.54

 
$
0.06

 
$
(0.52
)
 
$
(0.27
)
 
$
(0.16
)
Discontinued operations
0.06

 
0.41

 
0.04

 
0.38

 
0.09

Diluted income (loss) per common share:
 
 
 
 
 
 
 
 
 
Continuing operations
0.54

 
0.06

 
(0.52
)
 
(0.27
)
 
(0.16
)
Discontinued operations
0.06

 
0.41

 
0.04

 
0.38

 
0.09

Distributions paid per common share
$
0.68

 
$
0.68

 
$
0.68

 
$
0.68

 
$
0.68

Weighted average common shares outstanding
335,777

 
322,133

 
267,900

 
252,694

 
238,920

Weighted average common shares and potential dilutive securities
340,446

 
326,712

 
267,900

 
259,598

 
238,920

Balance Sheet Data (at December 31):
 
 
 
 
 
 
 
 
 
Total Assets
$
7,754,839

 
$
7,752,614

 
$
7,560,101

 
$
7,004,437

 
$
7,644,276

Total Debt
4,453,403

 
4,254,376

 
4,446,170

 
3,809,589

 
4,207,079

Total Preferred Equity

 
447,683

 
625,638

 
793,910

 
904,540

Total Shareholders' Equity
2,860,325

 
3,013,243

 
2,591,414

 
2,714,686

 
2,945,610

Total Common Shares Outstanding
344,112

 
326,399

 
279,423

 
252,927

 
252,195

Other Data:
 
 
 
 
 
 
 
 
 
Funds from Operations attributable to common shareholders (1)
$
363,111

 
$
347,041

 
$
265,204

 
$
274,616

 
$
297,955

 
 
 
 
 
 
 
 
 
 
Partnership
 
 
 
 
 
 
 
 
 
Per Unit Data:
 
 
 
 
 
 
 
 
 
Basic income (loss) per Common Unit:
 
 
 
 
 
 
 
 
 
Continuing operations
$
0.54

 
$
0.06

 
$
(0.52
)
 
$
(0.27
)
 
$
(0.16
)
Discontinued operations
0.06

 
0.41

 
0.04

 
0.38

 
0.09

Diluted income (loss) per Common Unit:
 
 
 
 
 
 
 
 
 
Continuing operations
0.54

 
0.06

 
(0.52
)
 
(0.27
)
 
(0.16
)
Discontinued operations
0.06

 
0.41

 
0.04

 
0.38

 
0.09

Distributions paid per Common Unit
$
0.68

 
$
0.68

 
$
0.68

 
$
0.68

 
$
0.68

Weighted average Common Units outstanding
340,085

 
326,525

 
272,729

 
259,598

 
244,870

Weighted average Common Units and potential dilutive securities
340,446

 
326,712

 
272,729

 
259,598

 
244,870

Balance Sheet Data (at December 31):
 
 
 
 
 
 
 
 
 
Total Assets
$
7,754,839

 
$
7,752,614

 
$
7,560,101

 
$
7,003,982

 
$
7,644,124

Total Debt
4,453,403

 
4,254,376

 
4,446,170

 
3,809,589

 
4,207,079

Total Preferred Equity

 
447,683

 
625,638

 
793,910

 
904,540

Total Partners' Equity
2,877,434

 
3,037,330

 
2,616,803

 
2,775,037

 
2,984,619

Total Common Units Outstanding
347,828

 
330,786

 
283,842

 
259,872

 
257,426

Other Data:
 
 
 
 
 
 
 
 
 
Funds from Operations attributable to common unitholders (1)
$
367,768

 
$
351,780

 
$
269,985

 
$
282,119

 
$
305,375


-19-


(1) Funds from operations ("FFO") is a non-GAAP measure used in the real estate industry. See definitions and a complete reconciliation of FFO and Core FFO to net earnings under the caption "Year in Review" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
The General Partner is a self-administered and self-managed REIT that began operations in 1986 and is the sole general partner of the Partnership. The Partnership is a limited partnership formed in 1993, at which time all of the properties and related assets and liabilities of the General Partner, as well as proceeds from a secondary offering of the General Partner's common shares, were contributed to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest whose operations began in 1972. We operate the General Partner and the Partnership as one enterprise, and therefore, our discussion and analysis refers to the General Partner and its consolidated subsidiaries, including the Partnership, collectively.
At December 31, 2014, we: 
Owned or jointly controlled 729 industrial, office, medical office and other properties, of which 706 properties with approximately 146.9 million square feet were in service and 23 properties with approximately 6.3 million square feet were under development. The 706 in-service properties were comprised of 621 consolidated properties with more than 127.0 million square feet and 85 jointly controlled properties with more than 19.8 million square feet. The 23 properties under development consisted of 20 consolidated properties with approximately 5.0 million square feet and three jointly controlled properties with more than 1.3 million square feet.
Owned, including through ownership interests in unconsolidated joint ventures, approximately 3,600 acres of land and controlled an additional 1,650 acres through purchase options.
A key component of our overall strategy is to continue to increase our investment in quality industrial properties in both existing and select new markets, to continue to increase our investment in on-campus or hospital affiliated medical office properties and to reduce our investment in suburban office properties and other non-strategic assets. In 2009, we set out a strategic plan to re-position the Company’s overall portfolio to be 60% industrial assets, 25% suburban office assets and 15% medical office properties. At the end of 2013 we achieved those goals in accordance with our plan. In 2014, we continued to dispose of assets that we did not consider strategic to us in the long-term or to which we believed the open market was ascribing a higher value than their strategic importance to us.
We have four reportable operating segments at December 31, 2014, the first three of which consist of the ownership and rental of (i) industrial, (ii) office and (iii) medical office real estate investments. The operations of our industrial, office and medical office properties, along with our retail properties, are collectively referred to as "Rental Operations." Our retail properties, as well as any other properties not included in our reportable segments, do not by themselves meet the quantitative thresholds for separate presentation as a reportable segment. The fourth reportable segment consists of various real estate services such as property management, asset management, maintenance, leasing, development, general contractor 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. Our Service Operations segment also includes our taxable REIT subsidiary, a legal entity through which certain of the segment's operations are conducted.
Operational Strategy
Our operational focus is to drive profitability by maximizing cash from operations as well as FFO through (i) maintaining and increasing property occupancy and rental rates, while also keeping lease-related capital costs contained, by effectively managing our portfolio of existing properties; (ii) selectively developing new build-to-suit, substantially pre-leased and, in limited circumstances, speculative development projects; (iii) leveraging our

-20-


construction expertise to act as a general contractor or construction manager on a fee basis; and (iv) providing a full line of real estate services to our tenants and to third parties.
Asset Strategy
Our strategic objectives include (i) increasing our investment in quality industrial properties in both existing markets and select new markets; (ii) managing our medical office portfolio nationally to focus on hospital system relationships in order to take advantage of demographic trends; (iii) increasing our asset investment in markets we believe provide the best potential for future rental growth; (iv) reducing our investment in suburban office properties as well as reducing our investment in other non-strategic assets; and (v) monetizing our land inventory through new development activity as well as sales of surplus land. We are continuing to execute our asset strategy through a disciplined approach by identifying development opportunities, identifying select acquisition targets where the asset quality and pricing meet our objectives and continually evaluating our portfolio for disposition by regularly identifying assets that no longer meet our long-term objectives. As disclosed in Note 8 to the consolidated financial statements included in Part IV, Item 15 of this Report, we announced that we had agreed to sell a portfolio of suburban office properties (the "Suburban Office Portfolio" sale) and undeveloped land, for a total purchase price of $1.12 billion, which includes all of the company’s wholly-owned suburban office properties in Nashville, Raleigh, South Florida and St. Louis.
Capital Strategy
Our capital strategy is to maintain a strong balance sheet by actively managing the components of our capital structure in coordination with the execution of our overall operational and asset strategies. We are focused on maintaining investment grade ratings from our credit rating agencies with the ultimate goal of further improving the key metrics that formulate our credit ratings.
In support of our capital strategy, we employ an asset disposition program to sell non-strategic real estate assets, which generate proceeds that can be recycled into new property investments that better fit our growth objectives or can be used to reduce leverage and otherwise manage our capital structure. The proceeds from the Suburban Office Portfolio sale will be utilized to reduce leverage and to fund future growth.
We continue to focus on improving our balance sheet by maintaining a balanced and flexible capital structure which includes: (i) extending and sequencing the maturity dates of our outstanding debt obligations; (ii) borrowing primarily at fixed rates by targeting a variable rate component of total debt less than 20%; and (iii) issuing common equity as needed to maintain appropriate leverage parameters or support significant strategic developments or acquisitions. With our successes to date and continued focus on maintaining a strong balance sheet, which we believe will be improved significantly through the Suburban Office Portfolio sale, we expect to be well-positioned for future growth.
Year in Review
Overall, the economy has performed in line with expectations on average, but with extreme periods of volatility throughout the year. For example, while the gross domestic product for the year approximated the estimate at the beginning of the year, it was negative 2.1% for the first quarter. Also, the 10-year Treasury rate fluctuated from the low 3% range to as low as 1.8% during the year. This volatility created many challenges in executing our asset and capital strategies. Despite these challenges, we believe that we had a successful 2014 by all accounts.
Net income attributable to the common shareholders of the General Partner for the year ended December 31, 2014, was $204.9 million, or $0.60 per share (diluted), compared to net income of $153.0 million, or $0.47 per share (diluted) for the year ended December 31, 2013. Net income attributable to the common unitholders of the Partnership for the year ended December 31, 2014, was $207.5 million, or $0.60 per unit (diluted), compared to net income of $155.1 million, or $0.47 per unit (diluted) for the year ended December 31, 2013. The increase in net income in 2014 when compared to 2013 was primarily the result of larger gains on property sales from both consolidated properties and from our share of gains recognized within our unconsolidated joint ventures. Higher rental revenues that were driven by placing development projects in service, as well as by improved occupancy, and lower interest expense also contributed to the increased net income when compared to 2013. These positive factors

-21-


were partially offset by non-cash asset impairment charges on undeveloped land and buildings that were recognized during 2014.
FFO attributable to common shareholders of the General Partner totaled $363.1 million for the year ended December 31, 2014, compared to $347.0 million for 2013. FFO attributable to common unitholders of the Partnership totaled $367.8 million for the year ended December 31, 2014, compared to $351.8 million for 2013. The increase to FFO was largely the result of higher rental revenues and lower interest expense, partially offset by non-cash impairment charges recognized on undeveloped land during 2014.
The following table shows a reconciliation of net income (loss) attributable to common shareholders or common unitholders to the calculation of FFO attributable to common shareholders or common unitholders for the years ended December 31, 2014, 2013 and 2012, respectively (in thousands):
 
2014
 
2013
 
2012
Net income (loss) attributable to common shareholders of the General Partner
$
204,893

 
$
153,044

 
$
(126,145
)
Add back: Net income (loss) attributable to noncontrolling interests - common limited partnership interests in the Partnership
2,627

 
2,094

 
(2,273
)
Net income (loss) attributable to common unitholders of the Partnership
207,520

 
155,138

 
(128,418
)
Adjustments:
 
 
 
 
 
Depreciation and amortization
384,617

 
409,050

 
379,419

Impairment charges - depreciable property

15,406

 

 

Company share of joint venture depreciation and amortization
28,227

 
31,220

 
34,702

Earnings from depreciable property sales—wholly owned
(185,478
)
 
(192,421
)
 
(13,811
)
Income tax expense triggered by depreciable property sales

2,125

 

 

Earnings from depreciable property sales—share of joint venture
(84,649
)
 
(51,207
)
 
(1,907
)
Funds From Operations attributable to common unitholders of the Partnership
$
367,768

 
$
351,780

 
$
269,985

Additional General Partner Adjustments:
 
 
 
 
 
Net (income) loss attributable to noncontrolling interests - common limited partnership interests in the Partnership
(2,627
)
 
(2,094
)
 
2,273

        Noncontrolling interest share of adjustments
(2,030
)
 
(2,645
)
 
(7,054
)
Funds From Operations attributable to common shareholders of the General Partner
$
363,111

 
$
347,041

 
$
265,204

In addition to net income (loss) computed in accordance with GAAP, we assess and measure the overall operating results of the General Partner and the Partnership based upon FFO, which is a non-GAAP industry performance measure that management believes is a useful indicator of consolidated operating performance. FFO is used by industry analysts and investors as a supplemental operating performance measure of a REIT. NAREIT created FFO as a non-GAAP supplemental measure of REIT operating performance. FFO, as defined by NAREIT, represents GAAP net income (loss), excluding extraordinary items as defined under GAAP, gains or losses from sales of previously depreciated real estate assets, impairment charges related to depreciable 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. Taxes associated with sales of previously depreciated real estate assets are also excluded from FFO as defined by NAREIT. The most comparable GAAP measure is net income (loss) attributable to common shareholders or common unitholders. FFO attributable to common shareholders or common unitholders should not be considered as a substitute for net income (loss) attributable to common shareholders or common unitholders or any other measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other companies. FFO is calculated in accordance with the definition that was adopted by the Board of Governors of NAREIT.
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. Management believes that the use of FFO attributable to common shareholders or common unitholders, combined with net income (which remains the primary measure of performance), improves the understanding of operating results of REITs among the investing public and makes comparisons of REIT operating results more meaningful. Management believes that the use of FFO as a performance measure enables investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT's activity and assist them in comparing these operating results between periods or between different companies.
In accordance with our strategic plans, we continued to increase our investment in industrial and medical office properties while reducing our investment in suburban office properties. Additionally, we continued to improve our operational metrics, which evidences the continued execution of our operational strategy. Highlights of our 2014 strategic and operational activities are as follows: 

-22-


We had development starts with expected total costs of $563.5 million during 2014 across all product types, which includes $55.3 million of expected total costs for three development starts within unconsolidated joint ventures. These 2014 development starts were, in aggregate, 57.1% pre-leased.
During 2014, we placed 24 wholly-owned developments in service, across all product types, which totaled 5.3 million square feet with total costs of $527.8 million. These properties were 80.3% leased at December 31, 2014.
The total estimated cost of our consolidated properties under construction was $470.2 million at December 31, 2014, with $220.9 million of such costs incurred through that date. The total estimated cost for jointly controlled properties under construction was $55.3 million at December 31, 2014, with $33.5 million of costs incurred through that date. The consolidated properties under construction are 66.0% pre-leased, while the jointly controlled properties under construction are 30.0% pre-leased.
During 2014, we acquired four industrial properties, totaling 1.7 million rentable square feet, and one medical office property with a total combined value of $131.0 million. These properties were, in aggregate, 100.0% leased at their acquisition dates.
We generated $493.2 million of total net cash proceeds from the disposition of 29 consolidated buildings and 174 acres of wholly-owned undeveloped land.
Same property net operating income, on a cash basis, as defined hereafter under "Supplemental Performance Measures" grew by 4.4% for the twelve months ended December 31, 2014, as compared to the same period in 2013.
The percentage of total square feet leased for our in-service portfolio of consolidated properties increased from 94.1% at December 31, 2013 to 95.2% at December 31, 2014.
Total leasing activity of 21.4 million square feet in 2014 compared to 24.5 million square feet in 2013. Largely as the result of the occupancy level that we have achieved, total leasing activity was slightly lower than 2013.
Total leasing activity for our consolidated properties in 2014 included 7.9 million square feet of renewals, which represented a 65.2% retention rate on a square foot basis, and resulted in an 8.5% increase in net effective rents. Lease expirations for the year were, for the most part, backfilled with new tenants, and the increased second generation leasing volume more than compensated for a decreased level of renewals.
We executed a number of significant transactions in support of our capital strategy during 2014 in order to optimally sequence our unsecured debt maturities, manage our overall leverage profile, reduce our cost of capital and support our development and acquisition priorities in alignment with our asset strategy. Highlights of our key financing activities are as follows:
Throughout 2014, we redeemed or repurchased all of our remaining preferred shares, for aggregate cash payments totaling $446.6 million. These transactions resulted in an on-going annual reduction to preferred dividends of over $29.0 million.
Throughout 2014, we issued 16.4 million shares of common stock pursuant to our at the market ("ATM") equity program at an average price of $17.85 per share, generating gross proceeds of $292.3 million and, after deducting underwriting fees and offering costs, net proceeds of approximately $289.1 million.
During 2014, we repaid nine secured loans, totaling $99.3 million, which had a weighted average stated interest rate of 5.56%.
In November 2014, we issued $300.0 million of unsecured notes that bear interest at an effective rate of 3.90% and mature on December 1, 2024.

-23-


We believe that the change in our mix of capital resources in 2014, which was effectuated through the issuance of common equity and unsecured notes, and through the redemption of all of our outstanding preferred shares, will result in a reduction to our ongoing cost of capital.
Supplemental Performance Measures

In addition to FFO we use (i) Property Level Net Operating Income - Cash Basis ("PNOI") and (ii) Same Property Net Operating Income - Cash Basis ("SPNOI") as supplemental performance measures. Management believes that the use of PNOI and SPNOI combined with net income (which remains the primary measure of performance), improves the understanding of operating results of REITs among the investing public and makes comparisons of REIT operating results more meaningful. The most comparable GAAP measure to PNOI and SPNOI is income from continuing operations before income taxes.
PNOI and SPNOI each exclude expenses that materially impact our overall results of operations and, therefore, should not be considered as a substitute for income from continuing operations before income taxes, or any other measures derived in accordance with GAAP. Furthermore, these metrics may not be comparable to other similarly titled measures of other companies.
Property Level Net Operating Income - Cash Basis
PNOI is comprised of rental revenues from continuing operations less rental expenses and real estate taxes from continuing operations, along with certain other adjusting items that are detailed in the table below. As a performance metric that consists of only the cash-based revenues and expenses directly related to ongoing real estate rental operations, PNOI is narrower in scope than FFO.
PNOI, as we calculate it, may not be directly comparable to similarly titled, but differently calculated, measures for other REITs. We believe that PNOI is another useful supplemental performance measure, as it is an input in many REIT valuation models and it provides a means by which to evaluate the performance of the properties within our Rental Operations segments.
The major factors influencing PNOI are occupancy levels, acquisitions and sales, development properties that achieve stabilized operations, rental rate increases or decreases, and the recoverability of operating expenses. PNOI was calculated as follows for the years ended December 31, 2014, 2013 and 2012 (in thousands):
 
2014
 
2013
 
2012
Rental and related revenue from continuing operations - Rental Operations segments
$
934,063

 
$
867,853

 
$
762,587

Rental and real estate tax expenses from continuing operations - Rental Operations segments
(290,639
)
 
(271,981
)
 
(240,007
)
Less adjusting items, continuing operations:
 
 
 
 
 
  Straight-line rental income and expense, net
(20,474
)
 
(12,749
)
 
(17,899
)
  Revenues related to lease buyouts
(5,246
)
 
(11,151
)
 
(6,926
)
  Amortization of lease concessions and above and below market rents
5,345

 
8,323

 
7,928

  Intercompany rents and other adjusting items
4,219

 
4,462

 
4,704

PNOI, continuing operations
$
627,268

 
$
584,757

 
$
510,387

A reconciliation of PNOI for our Rental Operations segments to income (loss) from continuing operations before income taxes is provided in Note 8 to the consolidated financial statements included in Part IV, Item 15 of this Report.
Same Property Net Operating Income - Cash Basis
We also evaluate the performance of our properties, including our share of properties we jointly control, on a "same property" basis, using a metric referred to as SPNOI. We view SPNOI as a useful supplemental performance measure because it improves comparability between periods by eliminating the effects of changes in the composition of our portfolio.

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On an individual property basis, with the exception that SPNOI includes revenues from lease buyouts that are individually less than $250,000, SPNOI is computed in a consistent manner as PNOI.
We have defined our same property portfolio, for the three and twelve months ended December 31, 2014, as those properties that have been owned and in operation throughout the twenty-four months ended December 31, 2014. In addition to excluding properties that have not been owned and in operation for the twenty-four months ended December 31, 2014, we have also excluded properties from our same property portfolio where revenues from individual lease buyouts in excess of $250,000 have been recognized. A reconciliation of SPNOI to income or loss from continuing operations before income taxes is presented as follows (in thousands):
 
 
Three Months Ended December 31,
Percent
 
Twelve Months Ended December 31,
Percent
 
 
2014
 
2013
Change
 
2014
 
2013
Change
SPNOI
 
$
132,937

 
$
127,293

4.4%
 
$
516,747

 
$
494,732

4.4%
  Less share of SPNOI from unconsolidated joint ventures
 
(7,788
)
 
(7,793
)
 
 
(31,164
)
 
(29,981
)
 
  Less lease buyouts (same property) individually less than $250
 
(416
)
 
(184
)
 
 
(1,596
)
 
(762
)
 
  PNOI excluded from the same property population
 
35,609

 
25,375

 
 
123,846

 
79,432

 
  Earnings from Service Operations
 
3,054

 
4,684

 
 
24,469

 
22,763

 
  Rental Operations revenues and expenses excluded from PNOI
 
5,665

 
10,320

 
 
35,591

 
52,451

 
  Non-Segment Items
 
(160,147
)
 
(111,815
)
 
 
(442,768
)
 
(562,315
)
 
Income (loss) from continuing operations before income taxes
 
$
8,914

 
$
47,880

 
 
$
225,125

 
$
56,320

 
The composition of the line items titled "Rental Operations revenues and expenses excluded from PNOI" and "Non-Segment Items" from the table above are shown in greater detail in Note 8 to the consolidated financial statements included in Part IV, Item 15 of this Report.

We believe the factors that impact SPNOI are generally the same as those that impact PNOI. The following table details the number of properties, square feet, average occupancy and cash rental rates for the properties included in SPNOI for the respective periods:
 
 
Three Months Ended December 31,
 
Twelve Months Ended December 31,
 
 
2014
 
2013
 
2014
 
2013
Number of properties
 
624
 
624
 
624
 
624
Square feet (in thousands) (1)
 
107,234
 
107,234
 
107,234
 
107,234
Average commencement occupancy percentage (2)
 
94.8%
 
92.8%
 
93.9%
 
92.4%
Average rental rate - cash basis (3)
 
$5.56
 
$5.46
 
$5.51
 
$5.44
(1) Includes the total square feet of the consolidated properties that are in the same property population as well as 5.7 million square feet of space for unconsolidated joint ventures, which represents our ratable share of the 16.7 million total square feet of space for buildings owned by unconsolidated joint ventures that are in the same property population.
(2) Commencement occupancy represents the percentage of total square feet where the leases have commenced.
(3) Represents the average annualized contractual rent per square foot for the three and twelve months ended December 31, 2014 and 2013 for tenants in occupancy in properties in the same property population. Cash rent does not include the tenant's obligation to pay property operating expenses and real estate taxes. If a tenant was within a free rent period at December 31, 2014 or 2013 its rent would equal zero for purposes of this metric.
Key Performance Indicators
Our operating results depend primarily upon rental income from our Rental Operations. The following discussion highlights the areas of Rental Operations that we consider critical drivers of future revenues.
Occupancy Analysis: As previously discussed, our ability to maintain high occupancy rates is a principal driver of maintaining and increasing rental revenue from continuing operations. The following table sets forth percent leased and average net effective rent information regarding our in-service portfolio of consolidated rental properties at

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December 31, 2014 and 2013:
 
Total Square Feet
(in thousands)
 
Percent of
Total Square Feet
 
Percent Leased*
 
Average Annual Net Effective Rent**
Type
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Industrial
108,701

 
104,623

 
85.6
%
 
84.4
%
 
96.2
%
 
95.0
%
 
$3.97
 
$3.94
Office
12,900

 
14,423

 
10.1
%
 
11.6
%
 
88.3
%
 
87.8
%
 
$13.24
 
$13.35
Medical Office
5,080

 
4,566

 
4.0
%
 
3.7
%
 
94.0
%
 
93.2
%
 
$23.23
 
$22.51
Other
348

 
348

 
0.3
%
 
0.3
%
 
85.6
%
 
85.7
%
 
$19.89
 
$19.71
Total Consolidated
127,029

 
123,960

 
100.0
%
 
100.0
%
 
95.2
%
 
94.1
%
 
$5.64
 
$5.68
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unconsolidated Joint Ventures
19,841

 
22,518

 
 
 
 
 
96.0
%
 
94.8
%
 
$6.52
 
$7.60
Total Including Unconsolidated Joint Ventures
146,870

 
146,478

 
 
 
 
 
95.3
%