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, 2018
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)
dukerealtylogoa12.jpg
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)
 
(I.R.S. 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 ($0.01 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, every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth 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
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Duke Realty Limited Partnership:
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  x
Smaller reporting company  o
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 $9.8 billion based on the last reported sale price on June 30, 2018.
The number of common shares of Duke Realty Corporation, $0.01 par value outstanding as of February 20, 2019 was 359,243,594.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Duke Realty Corporation's Definitive Proxy Statement for its 2019 Annual Meeting of Shareholders (the "2019 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 2019 Proxy Statement specifically incorporated by reference pursuant to Items 10 through 14 of Part III hereof, no other portions of the 2019 Proxy Statement shall be deemed so incorporated.



EXPLANATORY NOTE
This report (the "Report") combines the annual reports on Form 10-K for the year ended December 31, 2018 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 99.2% of the common partnership interests of the Partnership ("General Partner Units") as of December 31, 2018. The remaining 0.8% 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.
2.
3.
4.
 
 
 
 
 
 
 
 
5.
6.
7.
7A.
8.
9.
9A.
9B.
 
 
 
 
 
 
 
 
10.
11.
12.
13.
14.
 
 
 
 
 
 
 
 
15.
16.
Form of 10-K Summary
 
128 



IMPORTANT INFORMATION ABOUT THIS REPORT
Cautionary Notice Regarding Forward-Looking Statements
Certain statements contained in or incorporated by reference into this Report on Form 10-K for the General Partner and the Partnership, 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," "strategy," "continue," "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 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, or at all;
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 successfully integrate our acquired properties;
Our ability to retain our current credit ratings;
Inherent risks related to disruption of information technology networks and related systems, cyber security attacks and new system implementation;
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 anticipated results expressed in or suggested by the forward-looking statements contained in or incorporated by reference into this Report 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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The above list of risks and uncertainties 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.

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PART I
Item 1.  Business
Background
The General Partner and Partnership collectively specialize in the ownership, management and development of bulk distribution ("industrial") real estate.
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 99.2% of the Common Units at December 31, 2018. The remaining 0.8% of 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, 2018, our diversified portfolio of 523 rental properties encompassed 153.7 million rentable square feet (including 39 unconsolidated joint venture in-service properties with 11.1 million square feet, 17 consolidated properties under development with 7.6 million square feet and five unconsolidated joint venture properties under development with 1.9 million square feet). Our properties are leased by a diverse base of more than 1,000 tenants whose businesses include e-commerce, government services, manufacturing, retailing, wholesale trade, and distribution. We also owned, including through ownership interests in unconsolidated joint ventures (with acreage not adjusted for our percentage ownership interest), 1,650 acres of land and controlled an additional 1,000 acres through purchase options.
Our headquarters and executive offices are located in Indianapolis, Indiana. We additionally have regional offices or significant operations in 19 other geographic or metropolitan areas including Atlanta, Georgia; Chicago, Illinois; Cincinnati, Ohio; Columbus, Ohio; Dallas, Texas; Houston, Texas; Minneapolis, Minnesota; Nashville, Tennessee; Raleigh, North Carolina; Savannah, Georgia; Seattle, Washington; St. Louis, Missouri; Washington D.C./Baltimore, Maryland; Central Florida; New Jersey; Northern and Southern California; Pennsylvania and South Florida. We had approximately 400 employees at December 31, 2018.
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.
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.

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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 our many strong relationships with customers that operate on a national level. As a fully integrated real estate company, we are able to arrange for or provide to our tenants 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 of and demand for 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.
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 (92.9%) of "Independent Directors," as such term is defined under the rules of the New York Stock Exchange (the "NYSE")
 
 
Board Committees
  
• The General Partner's Board Committee members are all Independent Directors
 
 
Lead Director
  
• The Lead Director serves as the Chairman of the General Partner's Corporate Governance Committee
 
 
Board Policies
 
- Proactively amended and restated the General Partner's Bylaws to implement proxy access
- Adopted a Board Diversity Policy
- 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 Corporate Governance Committee conducts an annual review 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
- Human Rights Policy
- 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 and all Executive 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 - Notes to Consolidated Financial Statements - (8) Segment Reporting."

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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 access any document filed through the SEC's home page on the Internet (http://www.sec.gov). In addition, since the General Partner's common stock is listed on the NYSE, you may read the General Partner's SEC filings at the offices of the NYSE, 11 Wall 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 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.
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 equity and, at times, 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.

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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. As a result, we would also likely be unable to borrow any further amounts under our other debt instruments and other debt obligations may be accelerated, which could adversely affect our ability to fund operations.
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 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.



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Our use of joint ventures may negatively impact our jointly-owned investments.
We have, and may continue to 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.
Our business and operations could suffer in the event of system failures or cyber security attacks.
Our systems are vulnerable to damages from any number of sources, including energy blackouts, natural disasters, terrorism, war, telecommunication failures and cyber security attacks, such as computer viruses, computer hacking, acts of vandalism or theft, malware or other malicious codes, phishing, employee error or malfeasance, or other unauthorized access. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions. Any future significant compromise or breach of our data security, whether external or internal, or misuse of customer, associate, supplier or company data, could result in significant costs, lost sales, fines, lawsuits, and damage to our reputation. Any compromise of our security could also result in a violation of applicable privacy and other laws, unauthorized access to information of ours and others, significant legal and financial exposure, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business.

We have programs in place to detect, contain and respond to data security incidents. However, the ever-evolving threats mean we and our third-party service providers and vendors must continually evaluate and adapt our respective systems and processes and overall security environment. Even the most well protected information, networks, systems and facilities remain potentially vulnerable when considering the rapid pace of change in this area. There can be no assurance that our efforts to maintain the security and integrity of our systems will be effective, or that we will be able to maintain our systems free from security breaches, system compromises, misuses of data, or other operational interruptions. Accordingly, we may be unable to prevent major security breaches or entirely mitigate the risk of other system interruptions or failures.

We could also be negatively impacted by similar disruptions to the operations of our vendors or outsourced service providers.

Our ability to report timely and accurate information could be negatively impacted by our plan to implement a new accounting and enterprise resource planning system.
We are in the process of implementing a new accounting and enterprise resource planning system. A system implementation of this magnitude entails a significant degree of inherent risk. The key elements of this implementation include the conversion of data from our existing system to the new system and the design of the new system to process and report financial and other transactions in an accurate and complete manner. If these, or other aspects of the implementation are not executed successfully, then our ability to report timely and accurate information could be negatively impacted. Failure to report required information in a timely or accurate fashion could result in financial penalties, fines and the loss of our well-known-seasoned issuer status with the SEC and our ability to utilize the abbreviated registration statement on Form S-3. Such events could have a significant adverse effect on the value of the General Partner’s securities and our ability to raise capital through equity offerings.

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Additionally, the process of implementing a new system includes the inherent risk of incurring significant additional costs should the time and resource requirements of the implementation be greater than what we currently anticipate.
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, many of which 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;
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.
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, insurance, maintenance costs and our debt service payments, 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 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;

-10-


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.
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 the damaged assets. Inflation, changes in building codes and ordinances, environmental considerations, acts of a governmental authority and other factors also may make it unfeasible to collect insurance proceeds to replace a facility after it has been damaged or destroyed. 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.


-11-


Our acquisition and disposition activity may lead to long-term dilution.
Our asset strategy is to increase our investment concentration in the industrial real estate product type and further diversify our geographic presence. There can be no assurance that we will be able to execute our strategy or that our execution of such strategy 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 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 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 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. 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

-12-


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 dividends distributed to shareholders and would be subject to federal corporate income tax (and any applicable state and local income taxes) on its taxable income at regular corporate income tax 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 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 satisfy the distribution requirement, it would cease to qualify as a REIT.
U.S. federal income tax treatment of REITs and investments in REITs may change in a manner that could adversely affect us or shareholders.
Legislative, regulatory or administrative changes could be enacted or promulgated at any time, either prospectively or with retroactive effect, and may adversely affect us and/or shareholders.
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

-13-


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;
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.

-14-


Item 1B.  Unresolved Staff Comments
We have no unresolved comments with the SEC staff regarding our periodic or current reports under the Exchange Act.

-15-


Item 2.  Properties
Product Review
As of December 31, 2018, we own interests in a diversified portfolio of 523 commercial properties encompassing 153.7 million net rentable square feet (including 39 unconsolidated joint venture in-service properties with 11.1 million square feet, 17 consolidated properties under development with 7.6 million square feet and five unconsolidated joint venture properties under development with 1.9 million square feet).
Industrial Properties: We own interests in 518 bulk distribution industrial properties encompassing 153.3 million square feet (99.7% of our total square feet). These properties are primarily logistics facilities with clear ceiling heights of 28 feet or more.
Non-reportable: We own interests in five Non-Reportable buildings totaling 422,000 square feet (0.3% of our 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 (with acreage not adjusted for our percentage ownership interest), 1,650 acres of land and control an additional 1,000 acres through purchase options. Approximately 850 acres of the 1,120 acres of land that we directly own, are intended to be used for the development of industrial properties and can support approximately 15.2 million square feet of industrial developments. All of our approximately 530 acres of land held by unconsolidated joint ventures, are also intended to be used for the development of industrial properties. We directly own approximately 270 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 unconsolidated joint venture in-service properties in our primary markets.















-16-


Consolidated Properties
 
Square Feet
 
Annual Net
Effective
Rent (1)
 
Annual Net
Effective
Rent per Square Foot (2)
 
Percent of
Annual  Net
Effective
Rent
 
Industrial
 
Non-Reportable
 
Overall
 
Percent of Overall
 
Primary Market
 
 
 
 
 
 
 
 
 
 
 
 
 
Chicago
14,367,680

 

 
14,367,680

 
10.8
%
 
$
59,016,429

 
$
4.23

 
9.7
%
South Florida
7,673,758

 

 
7,673,758

 
5.8
%
 
57,051,501

 
7.51

 
9.4
%
Southern California
9,208,616

 

 
9,208,616

 
6.9
%
 
53,841,995

 
6.11

 
8.9
%
Atlanta
11,776,169

 

 
11,776,169

 
8.9
%
 
44,719,773

 
4.15

 
7.4
%
Indianapolis
13,538,423

 

 
13,538,423

 
10.2
%
 
44,345,128

 
3.28

 
7.3
%
New Jersey
4,878,186

 

 
4,878,186

 
3.7
%
 
36,670,410

 
7.52

 
6.0
%
Dallas
9,822,828

 

 
9,822,828

 
7.4
%
 
35,068,362

 
3.64

 
5.8
%
Cincinnati
9,982,148

 
91,843

 
10,073,991

 
7.6
%
 
34,816,090

 
3.64

 
5.7
%
Houston
6,241,410

 

 
6,241,410

 
4.7
%
 
31,224,720

 
5.03

 
5.1
%
Savannah
7,056,496

 

 
7,056,496

 
5.3
%
 
27,001,011

 
3.97

 
4.4
%
Pennsylvania
5,137,812

 

 
5,137,812

 
3.9
%
 
23,385,861

 
5.43

 
3.9
%
Minneapolis-St. Paul
4,952,901

 

 
4,952,901

 
3.7
%
 
22,994,497

 
4.93

 
3.8
%
Columbus
6,242,525

 

 
6,242,525

 
4.7
%
 
21,459,052

 
3.44

 
3.5
%
Central Florida
4,224,815

 

 
4,224,815

 
3.2
%
 
20,426,008

 
5.27

 
3.4
%
DC-Baltimore
3,100,696

 

 
3,100,696

 
2.3
%
 
20,265,558

 
6.73

 
3.3
%
Nashville
3,645,368

 

 
3,645,368

 
2.7
%
 
17,971,164

 
5.23

 
3.0
%
Raleigh
2,910,246

 

 
2,910,246

 
2.2
%
 
17,006,386

 
6.03

 
2.8
%
St. Louis
4,491,745

 

 
4,491,745

 
3.4
%
 
15,569,224

 
3.55

 
2.6
%
Seattle
1,648,104

 

 
1,648,104

 
1.2
%
 
12,131,535

 
7.36

 
2.0
%
Northern California
1,936,349

 

 
1,936,349

 
1.5
%
 
9,434,591

 
4.87

 
1.6
%
Other (3)

 
119,030

 
119,030

 
0.1
%
 
3,487,188

 
29.30

 
0.6
%
Total
132,836,275

 
210,873

 
133,047,148

 
100.0
%
 
$
607,886,483

 
$
4.74

 
100.0
%
Percent of Overall
99.8
%
 
0.2
%
 
100.0
%
 
 
 
 
 
 
 
 
Annual Net Effective Rent per Square Foot (2)
$
4.72

 
$
24.20

 
$
4.74

 
 
 
 
 
 
 
 

-17-


Unconsolidated Joint Venture Properties
 
Square Feet
 
Annual Net
Effective
Rent (1)
 
Annual Net
Effective
Rent per Square Foot (2)
 
Percent of
Annual  Net
Effective
Rent
 
Industrial
 
Non-Reportable
 
Overall
 
Percent of
Overall
 
Primary Market
 
 
 
 
 
 
 
 
 
 
 
 
 
Dallas
6,047,818

 

 
6,047,818

 
54.5
%
 
$
24,246,506

 
$
4.12

 
56.5
%
Indianapolis
4,631,322

 

 
4,631,322

 
41.7
%
 
15,522,937

 
3.62

 
36.2
%
DC-Baltimore

 
211,025

 
211,025

 
1.9
%
 
2,253,595

 
19.72

 
5.2
%
Cincinnati
57,886

 

 
57,886

 
0.5
%
 
398,667

 
6.89

 
0.9
%
Other (3)
152,944

 

 
152,944

 
1.4
%
 
512,362

 
3.35

 
1.2
%
Total
10,889,970

 
211,025

 
11,100,995

 
100.0
%
 
$
42,934,067

 
$
4.09

 
100.0
%
Percent of Overall
98.1
%
 
1.9
%
 
100.0
%
 
 
 
 
 
 
 
 
Annual Net Effective Rent per Square Foot (2)
$
3.91

 
$
19.72

 
$
4.09

 
 
 
 
 
 
 
 
 
 
Occupancy %
 
Consolidated Properties
 
Unconsolidated Properties
 
Industrial
 
Non-Reportable
 
Overall
 
Industrial
 
Non-Reportable
 
Overall
Primary Market
 
 
 
 
 
 
 
 
 
 
 
Indianapolis
100.0
%
 

 
100.0
%
 
92.7
%
 

 
92.7
%
Columbus
100.0
%
 

 
100.0
%
 

 

 

New Jersey
100.0
%
 

 
100.0
%
 

 

 

Northern California
100.0
%
 

 
100.0
%
 

 

 

Seattle
100.0
%
 

 
100.0
%
 

 

 

Houston
99.4
%
 

 
99.4
%
 

 

 

South Florida
99.1
%
 

 
99.1
%
 

 

 

Dallas
98.1
%
 

 
98.1
%
 
97.4
%
 

 
97.4
%
St. Louis
97.7
%
 

 
97.7
%
 

 

 

DC-Baltimore
97.1
%
 

 
97.1
%
 

 
54.2
%
 
54.2
%
Chicago
97.1
%
 

 
97.1
%
 

 

 

Raleigh
96.9
%
 

 
96.9
%
 

 

 

Savannah
96.3
%
 

 
96.3
%
 

 

 

Southern California
95.7
%
 

 
95.7
%
 

 

 

Cincinnati
95.4
%
 
55.9
%
 
95.0
%
 
100.0
%
 

 
100.0
%
Nashville
94.3
%
 

 
94.3
%
 

 

 

Minneapolis-St. Paul
94.1
%
 

 
94.1
%
 

 

 

Central Florida
91.8
%
 

 
91.8
%
 

 

 

Atlanta
91.5
%
 

 
91.5
%
 

 

 

Pennsylvania
83.8
%
 

 
83.8
%
 

 

 

Other (3)

 
100.0
%
 
100.0
%
 
100.0
%
 

 
100.0
%
Total
96.4
%
 
80.8
%
 
96.4
%
 
95.5
%
 
54.2
%
 
94.7
%
 
(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, 2018, excluding amounts paid by tenants as reimbursement for operating expenses. Unconsolidated 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.

-18-


Item 3.  Legal Proceedings
We are not subject to any 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." There is no established trading market for the Partnership's Common Units. As of February 20, 2019, there were 5,120 record holders of the General Partner's common stock and 89 record holders of the Partnership's Common Units. 

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 ("NAREIT Index") from December 31, 2013 to December 31, 2018. The graph assumes an initial investment of $100 in the common stock of the General Partner and each of the indices on December 31, 2013, and the reinvestment of all dividends. The performance graph is not necessarily indicative of future performance.
fiveyeartotalreturn18.jpg

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.


-19-


Tax Characterization of Dividends
A summary of the tax characterization of the dividends paid per common share of the General Partner for the years ended December 31, 2018, 2017 and 2016 follows:
 
 
2018
 
2017
 
2016
Dividends paid per share
$
0.815

 
$
0.77

 
$
0.73

Dividends paid per share - special

 
0.85

 

Total Dividends paid per share
$
0.815

 
$
1.62

 
$
0.73

Ordinary income
78.4
%
 
23.7
%
 
72.6
%
Return of capital

 

 
2.6
%
Capital gains
21.6
%
 
76.3
%
 
24.8
%
 
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, 2018 that were not registered under the Securities Act.
Issuer Purchases of Equity Securities
From time to time, we may 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").

During 2018 we did not repurchase any equity securities under the Repurchase Program.
On January 30, 2019 the General Partner's board of directors adopted a resolution that amended and restated the Repurchase Program and delegated authority to management to repurchase a maximum of $300.0 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 Chairperson of the Finance Committee of the board of directors of planned repurchases within these limits.

-20-


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, 2018. 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):
 
2018
 
2017
 
2016
 
2015
 
2014
Results of Operations:
 
 
 
 
 
 
 
 
 
General Partner and Partnership
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Rental and related revenue from continuing operations
$
785,319

 
$
686,514

 
$
641,701

 
$
658,809

 
$
682,653

General contractor and service fee revenue
162,551

 
94,420

 
88,810

 
133,367

 
224,500

Total revenues from continuing operations
$
947,870

 
$
780,934

 
$
730,511

 
$
792,176

 
$
907,153

Income from continuing operations
$
383,368

 
$
290,592

 
$
298,421

 
$
188,248

 
$
221,162

 
 
 
 
 
 
 
 
 
 
General Partner
 
 
 
 
 
 
 
 
 
Net income attributable to common shareholders
$
383,729

 
$
1,634,431

 
$
312,143

 
$
615,310

 
$
204,893

 
 
 
 
 
 
 
 
 
 
Partnership
 
 
 
 
 
 
 
 
 
Net income attributable to common unitholders
$
387,257

 
$
1,649,607

 
$
315,232

 
$
621,714

 
$
207,520

 
 
 
 
 
 
 
 
 
 
General Partner
 
 
 
 
 
 
 
 
 
Per Share Data:
 
 
 
 
 
 
 
 
 
Basic income per common share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
1.06

 
$
0.80

 
$
0.84

 
$
0.53

 
$
0.53

Discontinued operations
0.01

 
3.78

 
0.05

 
1.24

 
0.07

Diluted income per common share:
 
 
 
 
 
 
 
 
 
Continuing operations
1.06

 
0.80

 
0.84

 
0.53

 
0.53

Discontinued operations
0.01

 
3.76

 
0.04

 
1.24

 
0.07

Distributions paid per common share
$
0.815

 
$
0.77

 
$
0.73

 
$
0.69

 
$
0.68

Distributions paid per common share - special
$

 
$
0.85

 
$

 
$
0.20

 
$

Weighted average common shares outstanding
357,569

 
355,762

 
349,942

 
345,057

 
335,777

Weighted average common shares and potential dilutive securities
363,297

 
362,011

 
357,076

 
352,197

 
340,446

Balance Sheet Data (at December 31):
 
 
 
 
 
 
 
 
 
Total Assets
$
7,804,024

 
$
7,388,196

 
$
6,772,002

 
$
6,895,515

 
$
7,725,001

Total Debt
2,658,501

 
2,422,891

 
2,908,477

 
3,320,141

 
4,382,801

Total Shareholders' Equity
4,658,201

 
4,532,844

 
3,465,818

 
3,181,932

 
2,860,325

Total Common Shares Outstanding
358,851

 
356,361

 
354,756

 
345,285

 
344,112

Other Data:
 
 
 
 
 
 
 
 
 
Funds from Operations attributable to common shareholders (1)
$
484,003

 
$
447,001

 
$
416,370

 
$
307,331

 
$
386,076

 
 
 
 
 
 
 
 
 
 
Partnership
 
 
 
 
 
 
 
 
 
Per Unit Data:
 
 
 
 
 
 
 
 
 
Basic income per Common Unit:
 
 
 
 
 
 
 
 
 
Continuing operations
$
1.06

 
$
0.80

 
$
0.84

 
$
0.53

 
$
0.53

Discontinued operations
0.01

 
3.78

 
0.05

 
1.24

 
0.07

Diluted income per Common Unit:
 
 
 
 
 
 
 
 
 
Continuing operations
1.06

 
0.80

 
0.84

 
0.53

 
0.53

Discontinued operations
0.01

 
3.76

 
0.04

 
1.24

 
0.07

Distributions paid per Common Unit
$
0.815

 
$
0.77

 
$
0.73

 
$
0.69

 
$
0.68

Distributions paid per Common Unit - special
$

 
$
0.85

 
$

 
$
0.20

 
$

Weighted average Common Units outstanding
360,859

 
359,065

 
353,423

 
348,639

 
340,085

Weighted average Common Units and potential dilutive securities
363,297

 
362,011

 
357,076

 
352,197

 
340,446

Balance Sheet Data (at December 31):
 
 
 
 
 
 
 
 
 
Total Assets
$
7,804,024

 
$
7,388,196

 
$
6,772,002

 
$
6,895,515

 
$
7,725,001

Total Debt
2,658,501

 
2,422,891

 
2,908,477

 
3,320,141

 
4,382,801

Total Partners' Equity
4,708,786

 
4,573,407

 
3,490,509

 
3,201,964

 
2,877,434

Total Common Units Outstanding
361,771

 
359,644

 
358,164

 
348,772

 
347,828

Other Data:
 
 
 
 
 
 
 
 
 
Funds from Operations attributable to common unitholders (1)
$
488,454

 
$
451,154

 
$
420,496

 
$
310,538

 
$
391,027


(1) Funds from operations ("FFO") is a non-GAAP measure used in the real estate industry and is calculated in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT"). 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 NAREIT FFO, which is a non-GAAP industry performance measure that management believes is a useful indicator of consolidated operating performance. NAREIT FFO is used by industry analysts and investors as a supplemental operating performance measure of a REIT.


-21-


The most comparable GAAP measure is net income (loss) attributable to common shareholders or common unitholders. NAREIT 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. 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 NAREIT 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 NAREIT 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 December 2018, NAREIT issued the "NAREIT Funds from Operations White Paper - 2018 Restatement" (the "2018 White Paper"), which reaffirmed, and in some cases refined, NAREIT’s prior determinations concerning FFO.  The guidance in the 2018 White Paper allows preparers an option as it pertains to whether gains or losses on sale, or impairment charges, on real estate assets incidental to a REIT’s business are excluded from the calculation of FFO.  We have made the election to exclude activity related to such real estate assets that are incidental to our business. Under the guidance in the 2018 White Paper, NAREIT FFO is calculated as net income (loss) in accordance with GAAP excluding depreciation and amortization related to real estate, gains and losses on sales of real estate assets (including real estate assets incidental to our business) and related taxes, gains and losses from change in control, impairment charges related to real estate assets (including real estate assets incidental to our business) and similar adjustments for unconsolidated partnerships and joint ventures. The guidance in the 2018 White Paper is effective for annual periods beginning after December 15, 2018, with early adoption permitted.  We early-adopted the guidance in the 2018 White Paper effective December 31, 2018 and have, accordingly, revised prior periods to reflect that guidance.

NAREIT FFO for 2017, as previously reported, was revised pursuant to the 2018 White Paper, which resulted in a decrease of $8.7 million and $8.8 million for the General Partner and the Partnership, respectively, due to excluding gains on land sales and land impairment charges. NAREIT FFO for 2016, as previously reported, was also revised, which resulted in a decrease of $12.1 million and $12.2 million for the General Partner and the Partnership, respectively, due to excluding gains on land sales, gains on incidental property sales, land impairment charges and a gain on change in control. The revision to NAREIT FFO for 2015 resulted in an increase of $6.5 million and $6.6 million to the amounts previously reported for the General Partner and the Partnership, respectively, due to excluding land impairment charges and gains on land sales. The revision to NAREIT FFO for 2014 resulted in an increase of $23.0 million and $23.3 million to the amounts previously reported for the General Partner and the Partnership, respectively, due to excluding land impairment charges and gains on land sales. NAREIT-defined reconciling items between net income and NAREIT FFO totaled $(307,979) and $181,183 for the General Partner, and $(311,176) and $183,507 for the Partnership, in 2015 and 2014, respectively. See a reconciliation of NAREIT FFO to net income attributable to common shareholders under "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 and Partnership collectively specialize in the ownership, management and development of industrial real estate.
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, 2018, we: 
Owned or jointly controlled 523 primarily industrial properties, of which 501 properties with 144.1 million square feet were in service and 22 properties with 9.5 million square feet were under development. The 501 in-service properties were comprised of 462 consolidated properties with 133.0 million square feet and 39 unconsolidated joint venture properties with 11.1 million square feet. The 22 properties under development consisted of 17 consolidated properties with 7.6 million square feet and five unconsolidated joint venture properties with 1.9 million square feet.
Owned directly, or through ownership interests in unconsolidated joint ventures (with acreage not adjusted for our percentage ownership interest), approximately 1,650 acres of land and controlled approximately 1,000 acres through purchase options.

-22-


Our overall strategy is to continue to increase our investment in quality industrial properties primarily through development, on both a speculative and build-to-suit basis, supplemented with acquisitions in higher barrier markets with the highest growth potential.
Operational Strategy
Our operational focus is to drive profitability by maximizing cash from operations as well as NAREIT FFO through (i) maintaining property occupancy and increasing 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 select markets, speculative development projects; and (iii) 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 through development; (ii) acquiring properties in markets we believe provide the best potential for future rental growth; and (iii) maintaining an optimal land inventory through selected strategic land acquisitions, new development activity and 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.
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 our current investment grade ratings from our credit rating agencies. As of December 31, 2018, our senior unsecured notes have been assigned a rating of Baa1 by Moody's Investors Services and BBB+ by Standard & Poor's Ratings Group, and we are focused on maintaining such ratings in order to maintain access to liquidity.
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 otherwise manage our capital structure.
We continue to focus on 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, we expect to be in a very strong position to be opportunistic in our investment opportunities.
Environmental, Social and Governance Strategy
We are focused on promoting our growth in a sustainable way, one that succeeds by delivering long-term value for our stakeholders. As part of our vision to continually set the standard for maximizing stakeholder value, we have a long standing commitment to sustainable practices in environmental, social and corporate governance initiatives. Our environmental initiatives have included research, development and deployment of sustainable building strategies and technologies, staff education and LEED accreditation to construct high-performing sustainable buildings and to operate an energy-efficient portfolio. While we do not control most of the utility usage at our properties, we partnered with Goby, Inc. starting in 2018 in order to help monitor and manage the utility usage that we do control. In 2018, we also became a member of Global Real Estate Sustainability Benchmark, a leading provider of real estate sustainability performance assessments.
We are committed to fair compensation, fostering a dynamic and balanced work environment and providing employees with developmental opportunities to perform well and derive satisfaction from their work. We also focus on charitable giving and volunteering, with a dollars for doers program (matching dollars for volunteer hours spent) and our matching gifts program (matching dollars for employee donation) as well as paid community service

-23-


days for all employees. We maintain a formal and structured diversity and inclusion program and have increased diversity within our board of directors with a Board that is now 21% female. Through all of these initiatives, we endeavor to make a positive impact on the communities in which we conduct business.
We strive to maintain an effective corporate governance structure and comply with applicable laws, rules, regulations and policies. Please see “Item 1-Corporate Governance’ for more information regarding our governance initiatives.
Through all of our environmental, social and governance efforts, we demonstrate that operating and developing commercial real estate can be conducted with a conscious regard for the environment and community, while also benefiting ours investors, employees, tenants and the communities in which we operate.
Results of Operations
A summary of our operating results and property statistics for each of the years in the three-year period ended December 31, 2018, is as follows (in thousands, except number of properties and per share or per Common Unit data):

 
2018
 
2017
 
2016
Rental and related revenue from continuing operations
$
785,319

 
$
686,514

 
$
641,701

General contractor and service fee revenue
162,551

 
94,420

 
88,810

Operating income
460,356

 
388,621

 
433,312

General Partner
 
 
 
 
 
Net income attributable to common shareholders
$
383,729

 
$
1,634,431

 
$
312,143

Weighted average common shares outstanding
357,569

 
355,762

 
349,942

Weighted average common shares and potential dilutive securities
363,297

 
362,011

 
357,076

Partnership
 
 
 
 
 
Net income attributable to common unitholders
$
387,257

 
$
1,649,607

 
$
315,232

Weighted average Common Units outstanding
360,859

 
359,065

 
353,423

Weighted average Common Units and potential dilutive securities
363,297

 
362,011

 
357,076

General Partner and Partnership
 
 
 
 
 
Basic income per common share or Common Unit:
 
 
 
 
 
Continuing operations
$
1.06

 
$
0.80

 
$
0.84

Discontinued operations
$
0.01

 
$
3.78

 
$
0.05

Diluted income per common share or Common Unit:
 
 
 
 
 
Continuing operations
$
1.06

 
$
0.80

 
$
0.84

Discontinued operations
$
0.01

 
$
3.76

 
$
0.04

Number of in-service consolidated properties at end of year
462

 
451

 
492

In-service consolidated square footage at end of year
133,047

 
128,396

 
119,493

Number of in-service unconsolidated joint venture properties at end of year
39

 
42

 
42

In-service unconsolidated joint venture square footage at end of year
11,101

 
11,183

 
10,736


-24-


Year in Review
Overall, the economy has performed consistently with economic forecasts, with estimated growth in the United States gross domestic product of 2.9% for 2018. The 10-year Treasury rate generally fluctuated between 2.7% and 3.0% for most of 2018 and ended the year at 2.7%. The continued growth of e-commerce and supply chain modernization has been a significant positive factor for the industrial real estate sector, while the issues facing some traditional retail operators have not significantly impacted our business. Under these conditions we were able to execute our asset and capital strategies for the year and had a successful 2018.
Net income attributable to the common shareholders of the General Partner for the year ended December 31, 2018, was $383.7 million, compared to net income of $1.63 billion for the year ended December 31, 2017. Net income attributable to the common unitholders of the Partnership for the year ended December 31, 2018, was $387.3 million, compared to net income of $1.65 billion for the year ended December 31, 2017. The decrease in net income in 2018 for the General Partner and the Partnership, when compared to 2017, was primarily the result of significant gains on property sales recognized during 2017.
NAREIT FFO attributable to common shareholders of the General Partner totaled $484.0 million for the year ended December 31, 2018, compared to $447.0 million for 2017. NAREIT FFO attributable to common unitholders of the Partnership totaled $488.5 million for the year ended December 31, 2018, compared to $451.2 million for 2017. The increase to NAREIT FFO from 2017 for the General Partner and the Partnership was the result of lower interest expense, as the result of significant debt repayments in 2017, as well as new industrial properties being placed in service and improved operational performance in our existing industrial portfolio.
The following table shows a reconciliation of net income attributable to common shareholders or common unitholders to the calculation of NAREIT FFO attributable to common shareholders or common unitholders for the years ended December 31, 2018, 2017 and 2016, respectively (in thousands):
 
2018
 
2017
 
2016
Net income attributable to common shareholders of the General Partner
$
383,729

 
$
1,634,431

 
$
312,143

Add back: Net income attributable to noncontrolling interests - common limited partnership interests in the Partnership
3,528

 
15,176

 
3,089

Net income attributable to common unitholders of the Partnership
387,257

 
1,649,607

 
315,232

Adjustments:
 
 
 
 
 
Depreciation and amortization
312,217

 
299,472

 
317,818

Company share of unconsolidated joint venture depreciation and amortization
9,146

 
9,674

 
14,188

Partnership share of gains on property sales
(208,780
)
 
(1,466,599
)
 
(163,109
)
Gains on land sales
(10,334
)
 
(9,244
)
 
(9,865
)
Income tax expense (benefit) triggered by sales of real estate assets
8,828

 
17,660

 
(589
)
Gain on change in control

 

 
(7,272
)
Impairment charges

 
4,481

 
18,018

Gain on dissolution of unconsolidated joint venture

 

 
(30,697
)
Gains on sales of real estate assets—share of unconsolidated joint ventures
(12,094
)
 
(53,897
)
 
(33,228
)
        Impairment charges - unconsolidated joint venture
2,214

 

 

NAREIT FFO attributable to common unitholders of the Partnership
$
488,454

 
$
451,154

 
$
420,496

Additional General Partner Adjustments:
 
 
 
 
 
Net income attributable to noncontrolling interests - common limited partnership interests in the Partnership
(3,528
)
 
(15,176
)
 
(3,089
)
        Noncontrolling interest share of adjustments
(923
)
 
11,023

 
(1,037
)
NAREIT FFO attributable to common shareholders of the General Partner
$
484,003

 
$
447,001

 
$
416,370

In December 2018, we adopted the 2018 White Paper issued by NAREIT and have revised prior periods to reflect the changes. See Item 6. "Selected Financial Data" for additional information regarding the NAREIT FFO definition and revision.

-25-


In accordance with our strategic plan, we continue to increase our investment in high-quality industrial properties. Additionally, we continued to experience improved operational metrics during 2018, and believe that the fundamental drivers of industrial real estate performance remain strong. Highlights of our 2018 strategic and operational activities are as follows: 
We generated $511.4 million of total net cash proceeds from the disposition of 15 consolidated buildings and 187 acres of wholly owned undeveloped land.
We started new development projects with expected total costs of $862.1 million, which included $104.4 million of expected total costs for five development projects started within unconsolidated joint ventures. The development projects started in 2018 were, in aggregate, 57.5% pre-leased.
We placed 18 newly completed wholly owned development projects in service, which totaled 9.5 million square feet with total costs of $640.4 million. These properties were 73.9% leased at December 31, 2018.
The total estimated cost of our consolidated properties under construction at December 31, 2018 totaled $709.7 million, with $445.8 million of such costs already incurred. The total estimated cost for unconsolidated joint venture properties under construction was $104.4 million at December 31, 2018, with $43.9 million of costs already incurred. The consolidated properties under construction are 53% pre-leased, while the unconsolidated joint venture properties under construction are 66% pre-leased.
Same property net operating income, on a cash basis, as defined hereafter under "Supplemental Performance Measures", increased by 4.3% for the twelve months ended December 31, 2018, as compared to the same period in 2017.
As the result of leasing up space in speculative developments in service at the end of 2017, the percentage of total square feet leased for our in-service portfolio of consolidated properties increased from 96.1% at December 31, 2017 to 96.4% at December 31, 2018.
Total leasing activity for our consolidated properties totaled 24.1 million square feet in 2018 compared to 21.4 million square feet in 2017. The increase in total leasing activity in 2018 was largely the result of leasing new development projects as well as a higher volume of lease renewals.
Total leasing activity for our consolidated properties in 2018 included 11.3 million square feet of lease renewals, which represented an 81.7% retention rate on a square foot basis. New second generation and renewal leases, on a combined basis, executed for consolidated properties during the year resulted in a 24.2% increase to net effective rents ("net effective rents" is defined hereafter in the "Key Performance Indicators" section) when compared to the previous leases of the same space.
We utilized the capital generated from dispositions during the year to reduce debt and to fund our development activities. Highlights of our key financing activities are as follows:

In September 2018, we issued $450.0 million of senior unsecured notes that bear interest at a stated interest rate of 4.00%, have an effective interest of 4.13%, and mature on September 15, 2028.
During 2018, we repaid three fixed rate secured loans, totaling $227.1 million, which had a weighted average stated interest rate of 7.62%.
During 2018, we issued 990,400 shares of common stock pursuant to our at the market ("ATM") equity program at an average price of $29.24 per share, generating gross proceeds of $29.0 million and, after deducting commissions and other costs, net proceeds of $28.4 million.
Supplemental Performance Measures

In addition to NAREIT FFO we use (i) Property Level Net Operating Income - Cash Basis ("PNOI") and (ii) Same Property Net Operating Income - Cash Basis ("SPNOI") as supplemental non-GAAP performance measures. Management believes that the use of PNOI and SPNOI combined with net income (which remains the primary

-26-


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. 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 NAREIT 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 operations of our industrial properties, as well as our non-reportable Rental Operations (our residual non-industrial properties that have not yet been sold, referred to throughout as "Non-Reportable"), are collectively referred to as "Rental Operations."
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.
Note 8 to the consolidated financial statements included in Part IV, Item 15 of this Report shows a calculation of our PNOI for the years ended December 31, 2018, 2017 and 2016 and provides a reconciliation of PNOI for our Rental Operations segments to income from continuing operations before income taxes.
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.
On an individual property basis, SPNOI is computed in a consistent manner as PNOI.
Effective January 1, 2018, we define our "same property" population once a year at the beginning of the current calendar year and include buildings that were stabilized (the term "stabilized" means properties that have reached 90% leased or that have been in-service for at least one year since development completion or acquisition) as of January 1 of the prior calendar year. The "same property" pool is also adjusted to remove properties that were sold subsequent to the beginning of the current calendar year. As such, the "same property" population for the period ended December 31, 2018 includes all properties that we owned or jointly controlled at January 1, 2018, which had both been owned or jointly controlled and had reached stabilization by January 1, 2017, and have not been sold.

A reconciliation of income from continuing operations before income taxes to SPNOI is presented as follows (in thousands, except percentages):

-27-


 
 
Three Months Ended December 31,
Percent
 
Twelve Months Ended December 31,
Percent
 
 
2018
 
2017
Change
 
2018
 
2017
Change
Income from continuing operations before income taxes
 
$
63,124

 
$
54,422

 
 
$
392,196

 
$
290,235


  Share of SPNOI from unconsolidated joint ventures
 
4,169

 
3,997

 
 
16,189

 
15,989

 
  PNOI excluded from the "same property" population
 
(32,454
)
 
(13,422
)
 
 
(109,261
)
 
(40,864
)
 
  Earnings from Service Operations
 
(3,482
)
 
(847
)
 
 
(8,642
)
 
(4,963
)
 
  Rental Operations revenues and expenses excluded from PNOI
 
(8,929
)
 
(12,558
)
 
 
(38,203
)
 
(50,409
)
 
  Non-Segment Items
 
93,683

 
80,622

 
 
207,393

 
230,686

 
SPNOI
 
$
116,111

 
$
112,214

3.5
%
 
$
459,672

 
$
440,674

4.3
%
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,
 
 
2018
 
2017
 
2018
 
2017
Number of properties
 
417
 
417
 
417
 
417
Square feet (in thousands) (1)
 
107,225
 
107,225
 
107,225
 
107,225
Average commencement occupancy percentage (2)
 
98.5%
 
97.9%
 
98.3%
 
97.7%
Average rental rate - cash basis (3)
 
$4.38
 
$4.25
 
$4.32
 
$4.21
(1) Includes the total square feet of the consolidated properties that are in the "same property" population as well as 4.5 million square feet of space for unconsolidated joint ventures, which represents our ratable share of the 9.1 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, 2018 and 2017 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, 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
Our ability to maintain high occupancy rates is a principal driver of maintaining and increasing rental revenue. The following table sets forth percent leased and average net effective rent information regarding our in-service portfolio of consolidated rental properties, including properties classified within both continuing and discontinued operations, at December 31, 2018 and 2017, respectively:

-28-


 
Total Square Feet
(in thousands)
 
Percent of
Total Square Feet
 
Percent Leased*
 
Average Annual Net Effective Rent**
Type
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Industrial
132,836

 
127,507

 
99.8
%
 
99.3
%
 
96.4
%
 
96.2
%
 
$4.72
 
$4.42
Non-Reportable Rental Operations
211

 
889

 
0.2
%
 
0.7
%
 
80.8
%
 
80.9
%
 
$24.20
 
$15.78
Total Consolidated
133,047

 
128,396

 
100.0
%
 
100.0
%
 
96.4
%
 
96.1
%
 
$4.74
 
$4.49
Unconsolidated Joint Ventures
11,101

 
11,183

 
 
 
 
 
94.7
%
 
89.1
%
 
$4.09
 
$4.18
Total Including Unconsolidated Joint Ventures
144,148

 
139,579

 
 
 
 
 
96.2
%
 
95.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Represents the percentage of total square feet leased based on executed leases and without regard to whether the leases have commenced.
** Average annual net effective rent represents average annual base rental payments per leased square foot, on a straight-line basis for the term of each lease, from space leased to tenants at the end of the most recent reporting period. This amount excludes additional amounts paid by tenants as reimbursement for operating expenses.

The increase in occupancy at December 31, 2018 within our industrial portfolio, when compared to December 31, 2017, primarily resulted from the lease up of speculative developments that were placed in service, or acquired from third parties, during 2018.
Vacancy Activity
The following table sets forth vacancy activity, shown in square feet, from our in-service consolidated rental properties included within both continuing and discontinued operations, for the year ended December 31, 2018 (in thousands):
 
Consolidated Properties
 
Unconsolidated Joint Venture Properties
 
Total Including Unconsolidated Joint Venture Properties
Vacant square feet at December 31, 2017
4,992

 
1,219

 
6,211

  Vacant space in completed developments
2,487

 

 
2,487

  Dispositions
(388
)
 

 
(388
)
  Expirations
4,058

 
263

 
4,321

  Early lease terminations
420

 
24

 
444

  Property structural changes/other
(26
)
 

 
(26
)
  Leasing of previously vacant space
(6,696
)
 
(915
)
 
(7,611
)
Vacant square feet at December 31, 2018
4,847

 
591

 
5,438

 
Total Leasing Activity

The initial leasing of development projects or vacant space in acquired properties is referred to as first generation lease activity. Our ability to maintain and improve occupancy rates and net effective rents primarily depends upon our continuing ability to re-lease expiring space. The leasing of such space that we have previously held under lease to a tenant is referred to as second generation lease activity. Second generation lease activity may be in the form of renewals of existing leases or new second generation leases of previously leased space. The total leasing activity for our consolidated and unconsolidated rental properties included within both continuing and discontinued operations, expressed in square feet of leases signed, is as follows for the years ended December 31, 2018 and 2017 (in thousands):

-29-


 
2018
 
2017
New Leasing Activity - First Generation Industrial
7,902

 
6,633

New Leasing Activity - Second Generation Industrial
4,925

 
4,909

Renewal Leasing Activity - Industrial
11,267

 
9,535

Non-reportable Rental Operations Leasing Activity
5

 
277

Total Consolidated Leasing Activity
24,099

 
21,354

Unconsolidated Joint Venture Leasing Activity
3,949

 
2,607

Total Including Unconsolidated Joint Venture Leasing Activity
28,048

 
23,961

Second Generation Leases
The following table sets forth the estimated costs of tenant improvements and leasing commissions, on a per square foot basis, that we are obligated to fulfill under the second generation industrial leases signed for our rental properties included within both continuing and discontinued operations, during the years ended December 31, 2018 and 2017:
 
Square Feet of Leases
(in thousands)
 
Percent of Expiring Leases Renewed
 
Average Term in Years
 
Estimated Tenant Improvement Cost per Square Foot
 
Leasing Commissions per Square Foot
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Consolidated - New Second Generation
4,925

 
4,909

 


 


 
6.6

 
5.7

 
$
1.91

 
$
1.99

 
$
1.97

 
$
1.81

Unconsolidated Joint Ventures - New Second Generation
329

 
380

 


 


 
7.3

 
8.2

 
$
1.94

 
$
1.59

 
$
2.41

 
$
2.16

Total - New Second Generation
5,254

 
5,289

 


 


 
6.6

 
5.9

 
$
1.91

 
$
1.96

 
$
2.00

 
$
1.83

Consolidated - Renewal
11,267

 
9,535

 
81.7
%
 
82.8
%
 
5.4

 
5.7

 
$
0.62

 
$
0.63

 
$
1.27

 
$
1.25

Unconsolidated Joint Ventures - Renewal
660

 
444

 
71.5
%
 
49.7
%
 
5.2

 
4.0

 
$
0.39

 
$
0.31

 
$
1.57

 
$
1.33

Total - Renewal
11,927

 
9,979

 
81.1
%
 
80.4
%
 
5.3

 
5.6

 
$
0.61

 
$
0.61

 
$
1.29

 
$
1.25

Growth in average annual net effective rents for new second generation and renewal leases, on a combined basis, for our consolidated and unconsolidated rental properties, is as follows for the years ended December 31, 2018 and 2017:
 
2018
 
2017
Ownership Type

 
 
 
Consolidated properties
24.2
%
 
19.8
%
Unconsolidated joint venture properties
33.4
%
 
18.3
%
Lease Expirations
The table below reflects our consolidated in-service portfolio lease expiration schedule, at December 31, 2018 (in thousands, except percentage data and number of leases):

-30-


 
Total Consolidated Portfolio
 
Industrial
 
Non-reportable
Year of
Expiration
Square
Feet
 
Annual Rental
Revenue*
 
Number of Leases
 
Square
Feet
 
Annual Rental
Revenue*
 
Square
Feet
 
Annual Rental
Revenue*
2019
7,388

 
$
33,019

 
109

 
7,374

 
$
32,851

 
14

 
$
168

2020
13,310

 
61,414

 
152

 
13,304

 
61,340

 
6

 
74

2021
13,880

 
62,601

 
151

 
13,880

 
62,601

 

 

2022
17,614

 
73,093

 
131

 
17,602

 
72,965

 
12

 
128

2023
12,895

 
63,079

 
137

 
12,880

 
62,877

 
15

 
202

2024
13,450

 
62,922

 
93

 
13,445

 
62,860

 
5

 
62

2025
10,073

 
46,368

 
60

 
10,073

 
46,368

 

 

2026
9,368

 
42,739

 
43

 
9,368

 
42,739

 

 

2027
6,331

 
27,770

 
19

 
6,331

 
27,770

 

 

2028
8,019

 
52,344

 
29

 
7,900

 
48,857

 
119

 
3,487

2029 and Thereafter
15,874

 
82,535

 
41

 
15,874

 
82,535

 

 

Total Leased
128,202

 
$
607,884

 
965

 
128,031

 
$
603,763

 
171

 
$
4,121

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Portfolio Square Feet
133,047

 
 
 
 
 
132,836