ITEM 1. BUSINESS
The Company
Liberty Property Trust (the "Trust") is a self-administered and self-managed Maryland real estate investment trust (a "REIT"). Substantially all of the Trust's assets are owned directly or indirectly, and substantially all of the Trust's operations are conducted directly or indirectly, by its subsidiary, Liberty Property Limited Partnership, a Pennsylvania limited partnership (the "Operating Partnership" and, together with the Trust and their consolidated subsidiaries, the "Company").
The Company completed its initial public offering in 1994 to continue and expand the commercial real estate business of Rouse & Associates, a Pennsylvania general partnership, and certain affiliated entities (collectively, the "Predecessor"), which was founded in 1972. As of December 31, 2016, the Company owned and operated 450 industrial and 55 office properties (the "Wholly Owned Properties in Operation") totaling 86.0 million square feet. In addition, as of December 31, 2016, the Company owned 25 properties under development, which when completed are expected to comprise 5.6 million square feet (the "Wholly Owned Properties under Development") and 1,643 acres of developable land, substantially all of which is zoned for commercial use. Additionally, as of December 31, 2016, the Company had an ownership interest, through unconsolidated joint ventures, in 49 industrial and 14 office properties totaling 13.1 million square feet (the "JV Properties in Operation" and, together with the Wholly Owned Properties in Operation, the "Properties in Operation"), two properties under development, which when completed are expected to comprise 1.6 million square feet and a 222-room Four Seasons Hotel (the "JV Properties under Development" and, collectively with the Wholly Owned Properties under Development, the "Properties under Development" and, collectively with the Properties in Operation, the "Properties"), and 360 acres of developable land, substantially all of which is zoned for commercial use.
The Company provides leasing, property management, development and other tenant-related services for the Properties. The industrial Properties consist of a variety of warehouse, distribution, service, assembly, light manufacturing and research and development facilities. They include both single-tenant and multi-tenant facilities, with most designed flexibly to accommodate various types of tenants, space requirements and industrial uses. The Company's office Properties consist of metro-office buildings and multi-story and single-story office buildings located principally in suburban mixed-use developments or office parks. Substantially all of the Properties are located in prime business locations within established business communities. The Company’s strategy with respect to product and market selection generally favors industrial properties nationally and metro-office properties in markets with strong demographic and employment trends as well as certain urban characteristics such as population density and transportation access. Additionally, from time to time, the Company develops properties on a fee basis for unrelated third parties or joint ventures in which the Company holds an interest. In these cases the Company typically agrees to be responsible for all aspects of the development of the project and to guarantee the timely lien-free completion of construction of the project and the payment of certain cost overruns incurred in the development of the project.
The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 97.7% of the common equity of the Operating Partnership at December 31, 2016. The common units of limited partnership interest in the Operating Partnership (the "Common Units"), other than those owned by the Trust, are exchangeable on a one-for-one basis (subject to anti-dilution protections) for the Trust's common shares of beneficial interest, $0.001 par value per share (the "Common Shares"). As of December 31, 2016, the Common Units held by the limited partners were exchangeable for 3.5 million Common Shares. The ownership of the holders of Common Units is reflected on the Trust's financial statements as “noncontrolling interest- operating partnership” as a component of total equity. The ownership of the holders of Common Units not owned by the Trust is reflected on the Operating Partnership's financial statements as “limited partners' equity” as a component of total owners' equity.
In addition to this Annual Report on Form 10-K, the Company files with or furnishes to the SEC periodic and current reports, proxy statements and other information. The Company makes these documents available on its website, www.libertyproperty.com, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Any document the Company files with or furnishes to the SEC is available to read and copy at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Further information about the public reference facilities is available by calling the SEC at (800) SEC-0330. These documents also may be accessed on the SEC's website, http://www.sec.gov.
Also posted on the Company's website is the Company's Code of Conduct, which applies to all of its employees and also serves as a code of ethics for its chief executive officer, chief financial officer and persons performing similar functions. The Company will send the Code of Conduct, free of charge, to anyone who requests a copy in writing from its Investor Relations Department at the address set forth on the cover of this filing. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendments to or waivers of the Code of Conduct by posting the required information in the Corporate Governance page in the Investors section of its website.
Management and Employees
As of February 28, 2017, the Company's 301 employees operated under the direction of 16 senior executives, who have been affiliated with the Company and the Predecessor for an average of 19 years. The Company and the Predecessor have developed and managed commercial real estate for the past 44 years. The Company maintains an in-house leasing and property management staff which the Company believes enables it to better understand the characteristics of the local markets in which it operates, to respond quickly and directly to tenant needs and to better identify local real estate opportunities. In certain circumstances the Company also engages and directs the activities of third party property managers and leasing agents.
Segments and Markets
At December 31, 2016, the Company's reportable segments were based on the Company's method of internal reporting and were as follows:
•Carolinas/Richmond;
•Chicago/Milwaukee;
•Florida;
•Houston;
•Lehigh/Central PA;
•Minnesota;
•Philadelphia;
•Southeastern PA; and
•United Kingdom.
Certain other segments are aggregated into an "Other" category which includes the reportable segments: Arizona; Atlanta; Cincinnati/Columbus/Indianapolis; Dallas; DC Metro; New Jersey; Southern California; and other.
Business Objective and Strategies for Growth
The Company's business objective is to maximize long-term profitability for its shareholders by operating as a leader in commercial real estate through the ownership, management, development and acquisition of superior industrial and office properties. The Company intends to achieve this objective by owning and operating industrial properties nationally and owning and operating office properties in a focused group of office markets. The Company believes that pursuing this objective will provide the benefits of enhanced investment opportunities, economies of scale, risk diversification, access to capital and the ability to attract and retain personnel. The Company also strives to provide an exceptional and positive tenant experience. The Company is committed to developing and owning high-performing sustainable buildings and operating an energy-efficient portfolio. In pursuing its business objective, the Company seeks to achieve a combination of internal and external growth, maintain a conservative balance sheet and pursue a strategy of financial flexibility.
Products
The Company strives to be a high quality provider of two products: industrial (distribution and flex) and office. The Company's strategy with respect to product and market selection generally favors industrial and metro-office properties and markets with strong demographic and economic fundamentals. However, consistent with the Company's strategy and market opportunities, the Company may pursue industrial and office products other than those noted above. In addition, the Company also develops properties on a fee basis for unrelated third parties or unconsolidated joint ventures in which the Company has an interest.
Markets
The Company owns and operates industrial properties nationally and owns and operates office properties in a focused group of office markets. Additionally, the Company owns certain assets in the United Kingdom. Generally, the Company seeks to have a presence in each market sufficient for the Company to compete effectively in that market. The Company gathers information from internal sources and independent third parties and analyzes this information to support its evaluation of current and new markets and market conditions.
Organizational Plan
The Company seeks to maintain a management organization that facilitates efficient execution of the Company's strategy. As part of this effort, the Company pursues a human resources plan designed to create and maintain a highly effective real estate company through recruiting, training and retaining capable people. The structure is designed to support a local entrepreneurial platform operating within a value-added corporate structure. The Company seeks to provide management and all employees with technology tools to enhance competitive advantage and more effectively execute on strategic and operational goals.
Internal Growth Strategies
The Company seeks to maximize the profitability of its Properties by endeavoring to maintain high occupancy levels while obtaining competitive rental rates, controlling costs and focusing on customer service efforts.
Maintain High Occupancies
The Company believes that the quality and diversity of its tenant base and its strategy of operating in multiple markets is integral to achieving its goal of attaining high occupancy levels for its portfolio. The Company targets financially stable tenants in an effort to minimize uncertainty relating to the ability of the tenants to meet their lease obligations.
Cost Controls
The Company seeks to identify best practices to apply throughout the Company in order to enhance cost savings and other efficiencies. The Company also employs an annual capital improvement and preventative maintenance program designed to reduce operating costs and maintain the long-term value of the Properties in Operation.
Customer Service
The Company seeks to achieve high tenant retention through a comprehensive customer service program, which is designed to provide an exceptional and positive tenant experience. The customer service program establishes best practices and provides an appropriate customer feedback process. The Company believes that the program has been helpful in increasing tenant satisfaction.
High Performance Buildings
The Company is committed to the sustainable design, development and operation of its portfolio. The Company strives to create work environments that limit resource consumption, improve building performance and promote human health and productivity. The Company believes that sustainable, high performance buildings and environmentally responsible business practices are not only good for the environment, but that they also create value for the Company's tenants and shareholders.
The Company's efforts have included research, development, and deployment of sustainable building strategies and technologies, tenant education and outreach and education, and LEED accreditation for its development, property management and leasing staff.
The Company has utilized the U.S. Green Building Council's LEED rating system and the U.S. Department of Energy's ENERGY STAR system to drive energy efficiency and sustainable construction across its buildings and operations. As of December 31, 2016, either directly or through equity interests in unconsolidated joint ventures, the Company owns or has under construction 89 LEED buildings and has one building in the United Kingdom constructed under the international BREEAM standards. The Company has 45 ENERGY STAR-certified buildings and pursues energy and water efficient performance in the Properties in Operation.
External Growth Strategies
The Company seeks to enhance its long-term profitability through the development, acquisition and disposition of properties either directly or through joint ventures. The Company also considers acquisitions of real estate operating companies.
Wholly Owned Properties
Development
The Company's development investment strategy focuses primarily on the development of high-quality industrial and office properties within its existing markets. When the Company's marketing efforts identify opportunities, the Company will consider pursuing such opportunities outside of the Company's established markets. The Company and its Predecessor have developed over 82 million square feet of commercial real estate during the past 44 years. The Company's development activities generally fall into two categories: build-to-suit projects and projects built for inventory (projects that are less than 75% leased prior to commencement of construction). The Company develops build-to-suit projects for existing and new tenants. The Company also
builds properties for inventory where the Company has identified sufficient demand at market rental rates to justify such construction.
During the year ended December 31, 2016, the Company brought into service seven build-to-suit projects and 11 inventory projects totaling 5.7 million square feet and representing an aggregate Total Investment of $518.3 million. As of December 31, 2016, these completed development properties were 93.4% leased.
As of December 31, 2016, the Company had 25 Wholly Owned Properties under Development, which are expected to comprise, upon completion, 5.6 million square feet and are expected to represent a Total Investment of $537.1 million. These Wholly Owned Properties under Development were 22.9% pre-leased as of December 31, 2016. The scheduled deliveries of the 5.6 million square feet of Wholly Owned Properties under Development are as follows (in thousands, except percentages):
“Total Investment” for a Property Under Development is defined as the sum of the land costs and the costs of land improvements, building and building improvements, lease transaction costs, and where appropriate, other development costs and carrying costs.
The Company believes that, because it is a fully integrated real estate firm, its base of commercially zoned land in existing industrial and office business parks provides a competitive advantage for future development activities. As of December 31, 2016, the Company owned 1,643 acres of land held for development, substantially all of which is zoned for commercial use. Substantially all of the land is located adjacent to or within existing industrial or business parks with site improvements, such as public sewers, water and utilities, available for service. The Company estimates that its land holdings would support, as and when developed, approximately 27.9 million square feet. The Company's investment in land held for development as of December 31, 2016 was $336.6 million.
Through a development agreement with Philadelphia Industrial Development Corporation, the Company has development rights for 135 acres of land located at the Navy Yard in Philadelphia. The Company estimates that these 135 acres would support, as and when developed, approximately 2.4 million square feet.
Through a development agreement with the city of Tempe, AZ, the Company has development rights for five acres of land. The Company estimates that these five acres would support, as and when developed, approximately 60,000 square feet.
Through a development agreement with Kent County Council, the Company develops commercial buildings at Kings Hill, a 650-acre mixed use development site in the County of Kent, England. The Company also is the project manager for the installation of infrastructure on the site and receives a portion of the proceeds from the sale of land parcels to home builders. The site has planning consent and available land for approximately 1.35 million square feet of commercial space of which approximately 1.0 million square feet had been built as of December 31, 2016. During 2015, the Company obtained planning consent for a further 635 homes at Kings Hill, taking the total consent to 3,486 homes of which 2,836 had been sold as of December 31, 2016.
Acquisitions/Dispositions
The Company seeks to acquire properties consistent with its business objectives and strategy. The Company executes its acquisition strategy by purchasing properties that the Company believes will create shareholder value over the long-term.
During the year ended December 31, 2016, the Company acquired one operating property for a purchase price of $8.0 million. This property contains 73,000 square feet. The Company also acquired eight parcels of land totaling 216 acres for an aggregate purchase price of $52.9 million.
The Company disposes of properties and land held for development that no longer fit within the Company's strategic plan, or with respect to which the Company believes it can optimize cash proceeds. During the year ended December 31, 2016, the Company sold 125 Wholly Owned Properties containing an aggregate of 9.5 million square feet as well as 36 acres of land for aggregate proceeds of $1.2 billion.
Joint Venture Properties
The Company, from time to time, considers joint venture opportunities with institutional investors or other real estate companies. Joint venture partnerships provide the Company with additional sources of capital to share investment risk and fund capital requirements. In some instances, joint venture partnerships provide the Company with additional local market or product type expertise.
As of December 31, 2016, the Company had investments in and advances to unconsolidated joint ventures totaling $245.1 million (see Note 7 to the Company's Consolidated Financial Statements).
Development
During the year ended December 31, 2016, unconsolidated joint ventures in which the Company held an interest brought into service five inventory projects totaling 1.6 million square feet and representing an aggregate Total Investment of $103.3 million. As of December 31, 2016, these completed development properties were 75.3% leased.
As of December 31, 2016, the Company had two JV Properties under Development, which are expected to comprise, upon completion, 1.6 million square feet and a 222-room Four Seasons Hotel and are expected to represent a Total Investment of $952.5 million. These JV Properties under Development were 81.1% pre-leased as of December 31, 2016.
Included in these totals, joint ventures in which the Company held a 20% interest continued development on the Comcast Technology Center, which is expected to comprise, upon completion, 1.3 million square feet of office space and a 222-room Four Seasons Hotel and is expected to represent a Total Investment by the joint ventures of $932.0 million.
As of December 31, 2016, unconsolidated joint ventures in which the Company held an interest owned 360 acres of land held for development and had an option for a leasehold interest in an additional 11 acres of land. Substantially all of the land held for development and the land related to the leasehold interest is zoned for commercial use and is located adjacent to or within existing industrial or business parks with site improvements, such as public sewers, water and utilities, available for service. The Company estimates that its joint venture land holdings and leasehold interest would support, as and when developed, approximately 6.3 million square feet.
Acquisitions/Dispositions
During the year ended December 31, 2016, none of the unconsolidated joint ventures in which the Company held an interest acquired any operating properties or land parcels.
During the year ended December 31, 2016, unconsolidated joint ventures in which the Company holds an interest sold 17 properties containing 1.9 million square feet and 6.8 acres of land for an aggregate of $233.4 million. In addition, due to adverse conditions in the Northern Virginia office market, the fair value of six properties owned by Liberty Washington, LP (an unconsolidated joint venture in which the Company holds a 25% interest) containing 698,000 square feet was determined to be less than the debt encumbering the properties. As a result, during the year ended December 31, 2016, the joint venture cooperated with the mortgage lenders in the transfer of the six properties to the lenders in satisfaction of an aggregate of $112.5 million in nonrecourse mortgage debt. The book values of these properties had been written down to fair value in a prior period.
ITEM 1A.
ITEM 1A. RISK FACTORS
The Company's results of operations and the ability to make distributions to our shareholders and service our indebtedness may be affected by the risk factors set forth below. (The Company refers to itself as "we," "us" or "our" in the following risk factors.) This section contains some forward looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
Risks Related to Our Business
The Company's business is subject to the risks in this section.
Unfavorable events affecting our existing tenants and potential tenants, or negative market conditions that may affect our existing tenants and potential tenants, could have an adverse impact on our ability to attract new tenants, relet space, collect rent or renew leases, and thus could have a negative effect on our cash flow from operations.
Our cash flow from operations depends on our ability to lease space to tenants on economically favorable terms. Therefore, we could be adversely affected by various facts and events over which we have limited control, such as:
•
lack of demand for space in the areas where our Properties are located
•
inability to retain existing tenants and attract new tenants
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oversupply of or reduced demand for space and changes in market rental rates
•
defaults by our tenants or their failure to pay rent on a timely basis
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the need to periodically renovate and repair our space
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physical damage to our Properties
•
economic or physical decline of the areas where our Properties are located
•
potential risk of functional obsolescence of our Properties over time
If a tenant is unable to pay rent due to us, we may be forced to evict the tenant, or engage in other remedies, which may be expensive and time consuming and may adversely affect our net income, shareholders' equity and cash distributions to shareholders.
If our tenants do not renew their leases as they expire, we may not be able to rent the space. Furthermore, leases that are renewed, and some new leases for space that is relet, may have terms that are less economically favorable to us than current lease terms, or may require us to incur significant costs, such as for renovations, tenant improvements or lease transaction costs.
Any of these events could adversely affect our cash flow from operations and our ability to make expected distributions to our shareholders and service our indebtedness.
A significant portion of our costs, such as real estate taxes, insurance costs, and debt service payments, generally are not reduced when circumstances cause a decrease in cash flow from our Properties.
We may face risks associated with our current business strategy.
As previously reported, and as further summarized below in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” we undertook several significant transactions in recent years, consistent with our strategy to favor industrial and metro-office properties and markets with strong demographic and economic fundamentals.
While management believes that this strategy will be in the best long-term interests of the Company and its shareholders, in the near term, this strategy will be dilutive to operating cash flow as the proceeds from asset sales were substantially used to reduce leverage, and we cannot assure you that this strategy will produce the intended benefit, or when, if ever, those intended benefits will be achieved. This strategy poses certain risks, including without limitation the following:
▪
for similar investment dollars, rental income from industrial properties is generally less in the short term than rental income generated from suburban office properties
▪
our expectation of increasing demand and increasing stability of value in the industrial sector and metro-office sector may not materialize
▪
the relative advantages in the ownership of industrial properties and metro-office properties as opposed to suburban office properties will be affected by variable and unpredictable macro-economic and global conditions that are outside of our control
▪
our identification of markets with strong demographic and economic fundamentals may prove erroneous, due to macro-economic and global conditions that are outside of our control
Failure of our strategy to achieve the intended benefits could have a material adverse effect on our results of operations, financial condition and liquidity.
We may not be able to compete successfully with other entities that operate in our industry.
We experience a great deal of competition in attracting tenants for our Properties and in locating land to develop and properties to acquire.
In our effort to lease our Properties, we compete for tenants with a broad spectrum of other landlords in each of our markets. These competitors include, among others, publicly-held REITs, privately-held entities, individual property owners and tenants who wish to sublease their space. Some of these competitors may be able to offer prospective tenants more attractive financial or other terms than we are able to offer.
We may experience increased operating costs, which could adversely affect our operations.
Our Properties are subject to increases in operating expenses such as real estate taxes, insurance, cleaning, electricity, heating, ventilation and air conditioning, general and administrative costs and other costs associated with security, landscaping, repairs and maintenance. While our current tenants generally are obligated to pay a significant portion of these costs, there is no assurance that these tenants will make such payments or agree to pay these costs upon renewal or that new tenants will agree to pay these costs. If operating expenses increase in our markets, we may not be able to increase rents or reimbursements in all of these markets so as to meet increased expenses without simultaneously decreasing occupancy rates. If this occurs, our ability to make distributions to shareholders and service our indebtedness could be adversely affected.
Our ability to achieve growth in operating income depends in part on our ability to develop properties, which may suffer under certain circumstances.
We intend to continue to develop properties when warranted by market conditions. Our general construction and development activities include the risks that:
▪
construction and leasing of a property may not be completed on schedule, which could result in increased expenses and construction costs, and would result in reduced profitability
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construction costs may exceed our original estimates due to increases in interest rates and increased materials, labor or other costs, possibly making the property unprofitable or less profitable than projected because we may not be able to increase rents to compensate for the increase in construction costs
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we may be unable to obtain, or may face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to a project
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we may abandon development opportunities after we begin to explore them and as a result, we may fail to recover costs already incurred. If we alter or discontinue our development efforts, costs of the investment may need to be expensed rather than capitalized and we may determine the investment is impaired, resulting in a loss
▪
we may expend funds on and devote management's time to projects that we do not complete
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occupancy rates and rents at newly completed properties may not meet our expectations. This may result in lower than projected occupancy and rental rates with the result that our investment is not profitable or less profitable than projected
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we may incur losses under construction warranties, guaranties and delay damages under our contracts with tenants and other customers.
We face risks when we develop properties on a fee basis for joint ventures in which we hold an interest or for unrelated third parties.
We develop properties, from time to time, on a fee basis for joint ventures in which we hold an interest or for unrelated third parties, in addition to developing properties to be wholly owned in our own portfolio. In these cases we typically agree to be responsible for all aspects of the development of the project and to guarantee the timely lien-free completion of construction of the project and the payment, subject to certain exceptions, of cost overruns incurred in the development of the project. For example, in addition to the Comcast Technology Center project discussed below, in 2016 we entered into an agreement to develop a corporate headquarters office building for American Water Works, Inc. in Camden, New Jersey for an estimated total building cost of $107.1 million, plus overall project infrastructure in the amount of $25.5 million. If we encounter construction delays or unexpected costs in the development of this project or other similar projects, the resulting additional costs incurred and potential payments to the customer would adversely affect our cash flow and net income.
Our development of Comcast Technology Center exposes us to certain risks.
In 2014, the Company entered into two joint ventures with Comcast Corporation for the purpose of developing and owning the Comcast Technology Center located in Philadelphia, Pennsylvania as part of a mixed-use development. The 59-story building will
include 1.3 million square feet of leasable office space and a 222-room Four Seasons Hotel. Projected costs for this development, exclusive of tenant-funded interior improvements, are anticipated to be approximately $932 million. The Company's investment in the project is expected to be approximately $186 million with 20% ownership interests in both joint ventures. The two joint ventures have engaged the Company as the developer of the project pursuant to a Development Agreement by which the Company agrees, in consideration for a development fee, to be responsible for all aspects of the development of the project and to guarantee the timely lien-free completion of construction of the project and the payment, subject to certain exceptions, of any cost overruns incurred in the development of the project. Comcast Corporation has entered into a lease for 100% of the office space in the building.
Development of a project such as the Comcast Technology Center is subject to the general development and construction risks noted above. Those risks are magnified by the size of the project, and include construction risks and cost overrun risks associated with a construction project with the engineering and design complexities of a high rise mixed-use building. If we fail to complete the development of the project in compliance with the deadlines set forth in the lease with Comcast Corporation, or if the costs of development exceed the budgets agreed upon by the joint ventures, the Company could be liable for substantial damages and costs. There is additional risk associated with ownership of a hotel, with which we have no prior experience.
We face risks associated with property acquisitions.
We acquire individual properties and portfolios of properties, in some cases through the acquisition of operating entities, and intend to continue to do so when circumstances warrant.
Our acquisition activities and their success are generally subject to the following risks:
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when we are able to locate a desirable property, competition from other real estate investors may significantly increase the purchase price
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acquired properties may fail to perform as expected
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the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates
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acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures
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we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties and operating entities, into our existing operations, and as a result, our results of operations and financial condition could be adversely affected
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 it, which could adversely affect our cash flow.
Many of our Properties are concentrated in our primary markets, and we therefore may suffer economic harm as a result of adverse conditions in those markets.
Our Properties are located principally in specific geographic areas. Due to the concentration of our Properties in these areas, performance is dependent on economic conditions in these areas. These areas have experienced periods of economic decline.
The value and the marketability of some of our Properties can be increased as the result of tax abatements, tax credit programs, or other governmental incentives.
Certain of our Properties have the benefit of governmental tax incentives aimed at inducing office or industrial users to relocate to blighted or disadvantaged neighborhoods. These incentives typically have specific sunset provisions and may be subject to governmental discretion in the eligibility or award of the applicable incentives. For example, the Pennsylvania Keystone Opportunity Zones applicable to our Properties in the Philadelphia Navy Yard Corporate Center expire on December 31, 2018 or December 31, 2025 (as applicable) and the Grow NJ tax credit program applicable to our properties in the Camden Waterfront project expires on June 30, 2019 and is subject to the approval of each project by certain agencies and officers of the State of New Jersey. The expiration of these incentive programs or the inability of potential tenants or users to be eligible for or to obtain governmental approval of the incentives may have an adverse effect on the value of our Properties and on our cash flow and net income, and may result in impairment charges.
Our Properties may be subject to impairment charges.
We continually evaluate the recoverability of the carrying value of our Properties, whether Development Properties or Properties in Operation, under generally accepted accounting principles. Factors considered in evaluating impairment of our Properties include significant declines in operating revenues, recurring operating losses and other significant adverse changes in general market conditions, and, in the case of Development Properties (including land held for development), the abandonment of a project or the determination by management that future development is unlikely to occur or is unlikely to produce adequate cash flows to recover the carrying value of the Property. Generally, a Property held for investment is not considered impaired if the undiscounted estimated future cash flows of the Property over its estimated holding period are in excess of the Property’s net book value at the balance sheet date. If held for sale, a Property is not considered impaired unless its estimated fair value (less costs to sell) is less than the Property's book value at the balance sheet date. Assumptions used to estimate market values, annual and residual cash flows and estimated holding period of such assets require the judgment of management.
There can be no assurance that we will not take additional charges in the future related to the impairment of our Properties. We believe we have applied reasonable estimates and judgments in determining the proper classification of our Properties. However, these estimates require the use of estimated market values, which are difficult to assess. Should external or internal circumstances change, requiring the need to shorten holding periods or adjust the estimated future cash flows of certain Properties, we could be required to record additional impairment charges. Any future impairment could have a material adverse effect on our results of operations and funds from operations.
We may not be able to access financial markets to obtain capital on a timely basis, or on acceptable terms.
Our ability to access the public debt and equity markets depends on a variety of factors, including:
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general economic conditions affecting these markets
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our own financial structure and performance
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the market's opinion of REITs in general
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the market's opinion of REITs that own properties similar to ours
We may suffer adverse effects as a result of the terms of and covenants relating to our indebtedness.
Required payments on our indebtedness generally are not reduced if the economic performance of our portfolio of Properties declines. If the economic performance of our Properties declines, net income, cash flow from operations and cash available for distribution to shareholders will be reduced. If payments on debt cannot be made, we could sustain a loss, or in the case of mortgages, suffer foreclosures by mortgagees or suffer judgments. Further, some obligations, including our $800 million credit facility and $2.3 billion in unsecured notes issued in past public offerings, contain cross-default and/or cross-acceleration provisions, which means that a default on one obligation may constitute a default on other obligations.
Our credit facility and unsecured debt securities contain customary restrictions, requirements and limitations on our ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt which we must maintain. Our continued ability to borrow under our $800 million credit facility is subject to compliance with our financial and other covenants. In addition, our failure to comply with such covenants could cause a default under this credit facility, and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us, or be available only on unattractive terms.
Our degree of leverage could limit our ability to obtain additional financing.
Our degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes. Our senior unsecured debt is currently rated investment grade by the three major rating agencies. However, there can be no assurance we will be able to maintain this rating, and in the event our senior debt is downgraded from its current rating, we would likely incur higher borrowing costs. Our degree of leverage could also make us more vulnerable to a downturn in business or the economy generally.
Further issuances of equity securities may be dilutive to our existing shareholders.
The interests of our existing shareholders could be diluted if we issue additional equity securities to finance future developments, acquisitions, or repay indebtedness. Our Board of Trustees can authorize the issuance of additional securities without shareholder approval. 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 issuances of common and preferred equity.
An increase in interest rates would increase our interest costs on variable rate debt and could adversely impact our ability to refinance existing debt or dispose of properties in accordance with our strategy.
We currently have, and may incur more, indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will our interest costs, which would adversely affect our cash flow and our ability to pay principal and interest on our debt and our ability to make distributions to our shareholders. Further, rising interest rates could limit our ability to refinance existing debt when it matures.
From time to time, we enter into interest rate swap agreements and other interest rate hedging contracts, including swaps, caps and floors. While these agreements are intended to lessen the impact of rising interest rates on us, they also expose us to the risks that the other parties to the agreements might not perform, or that we could incur significant costs associated with the settlement of the agreements, or that the agreements might be unenforceable and the underlying transactions would fail to qualify as highly-effective cash flow hedges under guidance included in ASC 815 “Derivatives and Hedging.”
In addition, an increase in interest rates could decrease the amounts third parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions.
Property ownership through joint ventures will limit our ability to act exclusively in our interests and may require us to depend on the financial performance of our co-venturers.
From time to time we invest in joint ventures in which we do not hold a controlling interest. These investments involve risks that do not exist with properties in which we own a controlling interest, including the possibility that our partners may, at any time, have business, economic or other objectives that are inconsistent with our objectives. In instances where we lack a controlling interest, our partners may be in a position to require action that is contrary to our objectives. While we seek to negotiate the terms of these joint ventures in a way that secures our ability to act in our best interests, there can be no assurance that those terms will be sufficient to fully protect us against actions contrary to our interests. If the objectives of our partners are inconsistent with ours, we may not in every case be able to act exclusively in our interests.
Additionally, our joint venture partners may experience financial difficulties or change their investment philosophies. This may impair their ability to meet their obligations to the joint venture, such as with respect to providing additional capital, if required. If such a circumstance presented itself we may be required to perform on their behalf, if possible, or suffer a loss of all or a portion of our investment in the joint venture.
We could suffer adverse effects if were to experience security breaches through cyber attacks.
We are subject to risks from security breaches and other significant disruptions of our information technology networks and related systems, which are essential to our business operations. Such breaches and disruptions may occur through cyber attacks or cyber intrusions over the Internet, persons inside our organization or persons with access to systems inside our organization. Certain of our tenants are in the financial and retail industries, which have been particular targets of cyber attacks, and as a result, we may be especially likely to be targeted by cyber attacks. We cannot provide assurance that our activities to maintain the security and integrity of our networks and related systems will be effective. A security breach involving our networks and related systems could disrupt our operations in numerous ways, including by creating difficulties for our tenants that may reflect poorly on us.
Risks Related to the Real Estate Industry
Real estate investments are illiquid, and we may not be able to sell our Properties if and when we determine it is appropriate to do so.
Real estate generally cannot be sold quickly. We may not be able to dispose of our Properties promptly in response to economic or other conditions. In addition, provisions of the Internal Revenue Code of 1986, as amended (the "Code"), limit a REIT's ability to sell properties in some situations when it may be economically advantageous to do so, thereby adversely affecting returns to shareholders and adversely impacting our ability to meet our obligations to the holders of other securities.
We may experience economic harm if any damage to our Properties is not covered by insurance.
We believe all of our Properties are adequately insured with carriers that are adequately capitalized. However, we cannot guarantee that the limits of our current policies will be sufficient in the event of a catastrophe to our Properties or that carriers will be able to honor their obligations. Our existing property and liability policies expire during 2017. We cannot guarantee that we will be able to renew or duplicate our current coverages in adequate amounts or at reasonable prices.
We may suffer losses that are not covered under our comprehensive liability, fire, extended coverage and rental loss insurance policies. For example, we may not be insured for losses resulting from acts of war, certain acts of terrorism, or from certain liabilities. If an uninsured loss or a loss in excess of insured limits should occur, we would nevertheless remain liable for the loss, which could adversely affect cash flow from operations.
Potential liability for environmental contamination could result in substantial costs.
Under federal, state and local environmental laws, ordinances and regulations, we may be required to investigate and clean up the effects of releases of hazardous or toxic substances or petroleum products at our Properties simply because of our current or past ownership or operation of the real estate. If unidentified environmental problems arise, we may have to make substantial payments which could adversely affect our cash flow and our ability to make distributions to our shareholders because:
▪
as owner or operator, we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination
▪
the law typically imposes clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination
▪
even if more than one person may be responsible for the contamination, each person who shares legal liability under the environmental laws may be held responsible for all of the clean-up costs
▪
governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs
These costs could be substantial. The presence of hazardous or toxic substances or petroleum products or the failure to properly remediate contamination may materially and adversely affect our ability to borrow against, sell or rent an affected property. In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination. Changes in laws increasing the potential liability for environmental conditions existing at our Properties may result in significant unanticipated expenditures.
Substantially all of the Company's properties and land were subject to environmental assessments obtained in contemplation of their acquisition by the Company or obtained by predecessor owners prior to the sale of the property or land to the Company. These assessments generally include a visual inspection of the properties and the surrounding areas, an examination of current and historical uses of the properties and the surrounding areas and a review of relevant state, federal and historical documents, but do not involve invasive techniques such as soil and ground water sampling. Where appropriate, on a property-by-property basis, our practice is to have these consultants conduct additional testing, including sampling for asbestos, for lead in drinking water, for soil contamination where underground storage tanks are or were located or where other past site usages create a potential environmental problem, and for contamination in groundwater. Even though these environmental assessments are conducted, there is still the risk that:
▪
the environmental assessments and updates will not identify all potential environmental liabilities
▪
a prior owner created a material environmental condition that is not known to us or the independent consultants preparing the assessments
▪
new environmental liabilities have developed since the environmental assessments were conducted
▪
future uses or conditions such as changes in applicable environmental laws and regulations could result in environmental liability for us
While we test indoor air quality on a regular basis and have an ongoing maintenance program in place to address this aspect of property operations, inquiries about indoor air quality may necessitate special investigation and, depending on the results, remediation. Indoor air quality issues can stem from inadequate ventilation, chemical contaminants from indoor or outdoor sources, pollen, viruses and bacteria. Indoor exposure to chemical or biological contaminants above certain levels can be alleged to be connected to allergic reactions or other health effects and symptoms in susceptible individuals. If these conditions were to occur at one of our Properties, we may need to undertake a targeted remediation program, including without limitation, steps to increase indoor ventilation rates and eliminate sources of contaminants. Such remediation programs could be costly, necessitate the temporary relocation of some or all of the Property's tenants or require rehabilitation of the affected Property.
Our Properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our Properties could require us to undertake a costly remediation program to contain or remove the mold from the affected Property. In addition, the
presence of significant mold could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.
Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make expenditures that adversely impact our operating results.
All of our Properties are required to comply with the Americans with Disabilities Act ("ADA"). The ADA generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers, and non-compliance could result in imposition of fines by the United States government or an award of damages to private litigants, or both. Expenditures related to complying with the provisions of the ADA could adversely affect our results of operations and financial condition and our ability to make distributions to shareholders. In addition, we are required to operate our Properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our Properties. We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to shareholders.
Terrorist attacks and other acts of violence or war may adversely impact our operating results and may affect markets on which our securities are traded.
Terrorist attacks against our Properties, or against the United States or United Kingdom or the interests of the United States or United Kingdom generally, may negatively affect our operations and investments in our securities. Attacks or armed conflicts could have a direct adverse impact on our Properties or operations through damage, destruction, loss or increased security costs. Any terrorism insurance that we obtain may be insufficient to cover the loss for damages to our Properties as a result of terrorist attacks.
Furthermore, any terrorist attacks or armed conflicts could result in increased volatility in or damage to financial markets in the United States or the United Kingdom or the worldwide economy. Adverse economic conditions could affect the ability of our tenants to pay rent, which could have an adverse impact on our operating results.
Risks Related to Our Organization and Structure
We have elected REIT status under the federal tax laws and could suffer adverse consequences if we fail to qualify as a REIT.
We have elected REIT status under federal tax laws and have taken the steps known to us to perfect that status, but we cannot be certain that we qualify or that we will remain qualified. Qualification as a REIT involves the application of highly technical and complex provisions of the Code, as to which there are only limited judicial or administrative interpretations. The complexity of these provisions and of the related regulations is greater in the case of a REIT that holds its assets in partnership form, as we do. Moreover, no assurance can be given that new tax laws will not significantly affect our qualification as a REIT or the federal income tax consequences of such qualification. New laws could be applied retroactively, which means that past operations could be found to be in violation, which would have a negative effect on the business.
If we fail to qualify as a REIT in any taxable year, the distributions to shareholders would not be deductible when computing taxable income. If this happened, we would be subject to federal income tax on our taxable income at regular corporate rates. Also, we could be prevented from qualifying as a REIT for the four years following the year in which we were disqualified. Further, if we requalified as a REIT after failing to qualify, we might have to pay the full corporate-level tax on any unrealized gain in our assets during the period we were not qualified as a REIT. We would then have to distribute to our shareholders the earnings we accumulated while we were not qualified as a REIT. These additional taxes would reduce our funds available for distribution to our shareholders. In addition, while we were disqualified as a REIT, we would not be required by the Code to make distributions to our shareholders. A failure by the Company to qualify as a REIT and the resulting requirement to pay taxes and interest (and perhaps penalties) would cause us to default under various agreements to which we are a party, including under our credit facility, and would have a material adverse effect on our business, prospects, results of operations, earnings, financial condition and our ability to make distributions to shareholders.
Future economic, market, legal, tax or other considerations may lead our Board of Trustees to authorize the revocation of our election to qualify as a REIT. A revocation of our REIT status would require the consent of the holders of a majority of the voting interests of all of our outstanding Common Shares.
Certain trustees and officers of the Trust may not have the same interests as shareholders as to certain tax laws.
Certain trustees and officers of the Trust own Common Units. These units may be exchanged for our Common Shares. The trustees and officers who own those units and have not yet exchanged them for our Common Shares may suffer different and more adverse tax consequences than holders of our Common Shares suffer in certain situations:
▪
when certain of our Properties are sold
▪
when debt on those Properties is refinanced
▪
if we are involved in a tender offer or merger
Because these officers own units and face different consequences than shareholders do, the Trust and those trustees and officers may have different objectives as to these transactions than shareholders do.
Certain aspects of our organization could have the effect of restricting or preventing a change of control of our Company, which could have an adverse effect on the price of our shares.
Our charter contains an ownership limit on shares. To qualify as a REIT, five or fewer individuals cannot own, directly or indirectly, more than 50% in value of the outstanding shares of beneficial interest. To this end, our Declaration of Trust, among other things, generally prohibits any holder of the Trust's shares from owning more than 5% of the Trust's outstanding shares of beneficial interest, unless that holder gets the consent from our Board of Trustees. This limitation could prevent the acquisition of control of the Company by a third party without the consent from our Board of Trustees.
We can issue preferred shares. Our Declaration of Trust authorizes our Board of Trustees to establish the preferences and rights of any shares issued. The issuance of preferred shares could have the effect of delaying, making more difficult or preventing a change of control of the Company, even if a change in control were in the shareholder's interest.
There are limitations on acquisition of and changes in control pursuant to, and fiduciary protections of the Board under Maryland law. The Maryland General Corporation Law ("MGCL") contains provisions which are applicable to the Trust as if the Trust were a corporation. Among these provisions is a section, referred to as the "control share acquisition statute," which eliminates the voting rights of shares acquired in quantities so as to constitute "control shares," as defined under the MGCL. The MGCL also contains provisions applicable to us that are referred to as the "business combination statute," which would generally limit business combinations between the Company and any 10% owners of the Trust's shares or any affiliate thereof. Further, Maryland law provides broad discretion to the Board with respect to its fiduciary duties in considering a change in control of our Company, including that the Board is subject to no greater level of scrutiny in considering a change in control transaction than with respect to any other act by the Board. Finally, the "unsolicited takeovers" provisions of the MGCL permit the Board, without shareholder approval and regardless of what is currently provided in our Declaration of Trust or By-Laws, to implement takeover defenses that our Company does not yet have, including permitting only the Board to fix the size of the Board and permitting only the Board to fill a vacancy on the Board. All of these provisions may have the effect of inhibiting a third party from making an acquisition proposal for our Company or of delaying, deferring or preventing a change in control of the Company under circumstances that otherwise could provide the holders of Common Shares with the opportunity to realize a premium over the then current market price.
Various factors out of our control could hurt the market value of our publicly traded securities.
The value of our publicly traded securities depends on various market conditions, which may change from time to time. In addition to general economic and market conditions and our particular financial condition and performance, the value of our publicly traded securities could be affected by, among other things, the extent of institutional investor interest in us and the market's opinion of REITs in general and, in particular, REITs that own and operate properties similar to ours.
The market value of the equity securities of a REIT may be based primarily upon the market's perception of the REIT's growth potential and its current and future cash distributions, and may be secondarily based upon factors such as the real estate market value of the underlying assets. The failure to meet the market's expectations with regard to future earnings and cash distributions likely would adversely affect the market price of publicly traded securities. Our payment of future dividends will be at the discretion of our Board of Trustees and will depend on numerous factors including our cash flow, financial condition and capital requirements, annual distribution requirements under the REIT provisions of the Code, the general economic environment and such other factors as our Board of Trustees deems relevant. We have reduced our dividend in 2017. In recent years we have been distributing more in dividends than we receive in net cash provided by operating activities less customary tenant improvement and leasing transaction costs. The reduction in our dividend, and, over time, increases in occupancy and rental rates could offset this shortfall. Should market opportunities allow us to accelerate our strategy relating to dispositions (e.g., sale of suburban office) without corresponding
opportunities to reinvest those proceeds in the near term, this shortfall would increase. We will continually evaluate these circumstances opposite our distribution policies.
Rising market interest rates could make an investment in publicly traded securities less attractive. If market interest rates increase, purchasers of publicly traded securities may demand a higher annual yield on the price they pay for their securities. This could adversely affect the market price of publicly traded securities.
Furthermore, changes in tax laws may affect the price of our securities. The current highest marginal ordinary income tax rate is 39.6% and the highest long-term capital gain rate is 20%. Additionally, beginning in 2013, the dividends paid by the Trust to certain individuals are also subject to a separate 3.8% Medicare surtax, payable by the individual. While we do not believe this additional surtax has had a material impact on our publicly traded securities, it is possible that investors may consider alternative investments when combining this surtax with the fact that our dividends are generally non-qualified and potentially already subject to the highest marginal tax rate of 39.6%.
The Protecting Americans from Tax Hikes Act (the “PATH Act"), enacted in December 2015, includes numerous provisions and law changes applicable to REITs with various effective dates beginning as early as 2016. While we continue to expect that this legislation will not have any significant impact on our operations and financial results, we will continue to monitor as new regulatory guidance is issued.
Finally, according to recently released statements by the current administration and Congressional leaders, a top legislative priority of Congress may be significant reform of the Code, including significant changes to the taxation of business entities and their owners. No substantive tax legislation has yet been introduced and the position of the current administration on various tax reform proposals is uncertain. The details, prospects for enactment and the effective date of any such tax reform legislation cannot be predicted. As a result, we can give no assurances that any proposed reform, or any new U.S. federal income tax law, regulation or administrative interpretation thereon, will not adversely affect the Company or its shareholders.
We do not have a shareholder rights plan but are not precluded from adopting one.
Our shareholder rights plan expired in accordance with its terms on December 31, 2007. While we did not extend or renew the plan, we are not prohibited from adopting, without shareholder approval, a shareholder rights plan that may discourage any potential acquirer from acquiring more than a specific percentage of our outstanding Common Shares since, upon this type of acquisition without approval of our Board of Trustees, all other common shareholders would have the right to purchase a specified amount of Common Shares at a substantial discount from market price.
Transactions by the Trust or the Operating Partnership could adversely affect debt holders.
Except with respect to several covenants limiting the incurrence of indebtedness and a covenant requiring the Operating Partnership to maintain a certain unencumbered total asset value, our indentures do not contain any additional provisions that would protect holders of the Operating Partnership's debt securities in the event of (i) a highly leveraged transaction involving the Operating Partnership, (ii) a change of control or (iii) certain reorganizations, restructurings, mergers or similar transactions involving the Operating Partnership or the Trust.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
The Wholly Owned Properties in Operation, as of December 31, 2016, consisted of 450 industrial and 55 office properties. Single tenants occupy 182 Wholly Owned Properties in Operation. These tenants generally require a reduced level of service in connection with the operation or maintenance of these properties. The remaining 323 Wholly Owned Properties in Operation are multi-tenant properties for which the Company renders a range of building, operating and maintenance services.
As of December 31, 2016, the industrial Wholly Owned Properties in Operation were 96.8% leased. The average building size for the industrial Wholly Owned Properties in Operation was approximately 181,000 square feet. As of December 31, 2016, the office Wholly Owned Properties in Operation were 82.9% leased. The average building size for the office Wholly Owned Properties in Operation was approximately 87,000 square feet.
The JV Properties in Operation, as of December 31, 2016, consisted of 49 industrial and 14 office properties. Single tenants occupy 26 JV Properties in Operation. These tenants generally require a reduced level of service in connection with the operation or
maintenance of these properties. The remaining 37 JV Properties in Operation are multi-tenant properties for which the Company renders a range of building, operating and maintenance services.
As of December 31, 2016, the industrial JV Properties in Operation were 95.9% leased. The average building size for the industrial JV Properties in Operation was approximately 224,000 square feet. As of December 31, 2016, the office JV Properties in Operation were 95.7% leased. The average building size for the office JV Properties in Operation was approximately 149,000 square feet.
As of December 31, 2016, the industrial Properties in Operation were 96.7% leased. The average building size for the industrial Properties in Operation was approximately 185,000 square feet. As of December 31, 2016, the office Properties in Operation were 86.8% leased. The average building size for the office Properties in Operation was approximately 100,000 square feet.
A complete listing of the Wholly Owned Properties in Operation appears as Schedule III to the financial statements of the Company included in this Annual Report on Form 10-K. The table below sets forth certain information on the Company's Properties in Operation as of December 31, 2016 (in thousands, except percentages).
(1)
Net rent represents the contractual rent per square foot multiplied by the tenant's square feet leased at December 31, 2016 for tenants in occupancy. As of December 31, 2016, average net rent per square foot for the Wholly Owned Properties in Operation was $5.65 and for the Joint Venture Properties in Operation was $9.00. Net rent does not include the tenant's obligation to pay property operating expenses and real estate taxes. If a tenant at December 31, 2016 was within a free rent period its rent would equal zero for the purposes of this metric.
(2)
Straight line rent and operating expense reimbursement represents the straight line rent including operating expense recoveries per square foot multiplied by the tenant's square feet leased at December 31, 2016 for tenants in occupancy. As of December 31, 2016, average straight line rent and operating expense reimbursement per square foot for the Wholly Owned Properties in Operation was $7.71 and for the Joint Venture Properties in Operation was $12.33.
(3)
Joint Venture Properties in Operation represent the 63 properties owned by unconsolidated joint ventures in which the Company has an interest.
The expiring number of tenants, square feet and annual rent by year for the Properties in Operation as of December 31, 2016 are as follows (in thousands except number of tenants and % of annual rent):
(1)
Net rent represents the contractual rent per square foot multiplied by the tenants' square feet leased on the date of lease expiration for the tenants in occupancy on December 31, 2016. Net rent does not include the tenant's obligation to pay property operating expenses and real estate taxes.
The table below highlights, for the Properties in Operation, the Company's top ten industrial tenants and top ten office tenants as of December 31, 2016. The table reflects, for the tenants in the JV Properties in Operation, the Company's ownership percentage of the respective joint venture.
The table below details the vacancy activity during the year ended December 31, 2016:
(1)
Transaction costs include tenant improvement and lease transaction costs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company was not a party to any material litigation as of December 31, 2016.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND RELATED ISSUER PURCHASES OF EQUITY SECURITIES
The Common Shares are traded on the New York Stock Exchange under the symbol "LPT." There is no established public trading market for the Common Units. The following table sets forth, for the calendar quarters indicated, the high and low closing prices of the Common Shares on the New York Stock Exchange, and the dividends declared per Common Share for such calendar quarter.
As of February 23, 2017, the Common Shares were held by 931 holders of record. Since its initial public offering in 1994, the Company has paid regular and uninterrupted quarterly dividends.
In February 2017, the Company's Board of Trustees declared a quarterly dividend of $0.40 to be paid in April 2017, which represents a reduction from the $0.475 quarterly dividend rate noted above. The payment of future dividends by the Company will be at the discretion of the Board of Trustees and will depend on numerous factors including the Company's cash flow, its financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Code, the general economic environment and such other factors as the Board of Trustees deems relevant. The Company’s Board of Trustees reviews the dividend quarterly, and there can be no assurance about the amount of future quarterly distribution payments.
The following line graph compares the cumulative total shareholder return on Common Shares for the period beginning December 31, 2011 and ended December 31, 2016 with the cumulative total return on the Standard and Poor's 500 Stock Index ("S&P 500") and the NAREIT Equity REIT Total Return Index ("NAREIT Index") over the same period. Total return values for the S&P 500, the NAREIT Index and the Company's Common Shares were calculated based on cumulative total return assuming the investment of $100 in the NAREIT Index, the S&P 500 and the Company's Common Shares on December 31, 2011, and assuming reinvestment of dividends in all cases.
The performance graph above is being furnished as part of this Annual Report solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish the Company’s stockholders with such information and, therefore, is not deemed to be filed, or incorporated by reference in any filing, by the Company or the Operating Partnership under the Securities Act of 1933 or the Securities Exchange Act of 1934.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth Selected Financial Data for the Trust and the Operating Partnership as of and for the five years ended December 31, 2016. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto appearing elsewhere in this report. Certain amounts from prior years have been reclassified to conform to current-year presentation.
(1)
Basic weighted average number of shares includes vested Common Shares (Liberty Property Trust) or Common Units (Liberty Property Limited Partnership) outstanding during the year.
(2)
Diluted weighted average number of shares includes the vested and unvested Common Shares (Liberty Property Trust) or Common Units (Liberty Property Limited Partnership) outstanding during the year as well as the dilutive effect of outstanding options.
(3)
The National Association of Real Estate Investment Trusts ("NAREIT") has issued a standard definition for Funds from operations (as defined below). The Securities and Exchange Commission has agreed to the disclosure of this non-US GAAP financial measure on a per share basis in its Release No. 34-47226, Conditions for Use of Non-US GAAP Financial Measures. The Company believes that the calculation of NAREIT Funds from operations is helpful to investors and management as it is a measure of the Company's operating performance that excludes depreciation and amortization and gains and losses from property dispositions. As a result, year over year comparison of NAREIT Funds from operations reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, providing perspective not immediately apparent from net income. In addition, management believes that NAREIT Funds from operations provides useful information to the investment community about the Company's financial performance when compared to other REITs since NAREIT Funds from operations is generally recognized as the standard for reporting the operating performance of a REIT. NAREIT Funds from operations available to common shareholders is defined by NAREIT as net income (computed in accordance with generally accepted accounting principles ("US GAAP")), excluding gains (or losses) from sales of property and impairment - real estate assets, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. NAREIT Funds from operations available to common shareholders does not represent net income or cash flows from operations as defined by US GAAP and does not necessarily indicate that cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. NAREIT Funds from operations available to common shareholders also does not represent cash flows generated from operating, investing or financing activities as defined by US GAAP. A reconciliation of NAREIT Funds from operations to net income may be found in Item 7
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Liberty Property Trust (the “Trust”) is a self-administered and self-managed Maryland real estate investment trust (“REIT”). Substantially all of the Trust’s assets are owned directly or indirectly, and substantially all of the Trust’s operations are conducted directly or indirectly, by its subsidiary, Liberty Property Limited Partnership, a Pennsylvania limited partnership (the “Operating Partnership” and, collectively with the Trust and their consolidated subsidiaries, the “Company”).
The Company owns and operates industrial properties nationally and owns and operates office properties in a focused group of office markets. Additionally, the Company owns certain assets in the United Kingdom.
As of December 31, 2016, the Company owned and operated 450 industrial and 55 office properties (the “Wholly Owned Properties in Operation”) totaling 86.0 million square feet. In addition, as of December 31, 2016, the Company owned 25 properties under development, which when completed are expected to comprise 5.6 million square feet (the “Wholly Owned Properties under Development”) and 1,643 acres of developable land, substantially all of which is zoned for commercial use. Additionally, as of December 31, 2016, the Company had an ownership interest, through unconsolidated joint ventures, in 49 industrial and 14 office properties totaling 13.1 million square feet (the “JV Properties in Operation” and, together with the Wholly Owned Properties in Operation, the “Properties in Operation”), two properties under development, which when completed are expected to comprise 1.6 million square feet and a 222-room Four Seasons Hotel (the "JV Properties under Development" and, collectively with the Wholly Owned Properties under Development, the "Properties under Development" and, collectively with the Properties in Operation, the "Properties") and 360 acres of developable land, substantially all of which is zoned for commercial use.
The Company focuses on creating value for shareholders and increasing profitability and cash flow. With respect to its Properties in Operation, the Company endeavors to maintain high occupancy levels while maximizing rental rates and controlling costs. The Company pursues development opportunities that it believes will create value and yield acceptable returns. The Company also acquires properties that it believes will create long-term value, and disposes of properties that no longer fit within the Company’s strategic objectives or in situations where it can optimize cash proceeds. The Company expects its strategy with respect to product and market selection to continue to favor industrial and metro-office properties and markets with strong demographic and economic fundamentals. The Company also believes that long-term trends indicate potential erosion in the value of certain suburban office properties in certain markets. Accordingly, the Company has increased its investment in industrial and metro-office properties and markets with strong demographic and economic fundamentals, and has decreased its investment in non-core suburban office properties. Furthermore, the Company has accelerated this strategy during 2016, and to this end has executed the portfolio sale discussed below. The Company anticipates that this strategy will yield benefits over time, including a higher rate of rental growth and a lower level of lease transaction costs and other capital costs for industrial properties as opposed to suburban office properties. The Company also anticipates that this strategy will result in a gradual improvement in the average quality and geographic location of the Company’s properties. The Company believes that the benefits of the strategy will greatly outweigh the short-term reduction in net cash from operating activities that results from the disposition of the suburban office assets. There can be no assurance, however, that the benefits of the Company's strategy will be realized.
The Company’s operating results depend primarily upon income from rental operations and are substantially influenced by rental demand for the Properties in Operation. During the year ended December 31, 2016, straight line rents on renewal and replacement leases were on average 8.7% higher than rents on expiring leases. During the year ended December 31, 2016, the Company leased 26.1 million square feet and as of that date attained occupancy of 96.0% for the Wholly Owned Properties in Operation and 95.9% for the JV Properties in Operation for a combined occupancy of 96.0% for the Properties in Operation. At December 31, 2015, occupancy for the Wholly Owned Properties in Operation was 93.9% and for the JV Properties in Operation was 92.8% for a combined occupancy for the Properties in Operation of 93.7%.
Based on the Company’s current outlook, the Company anticipates that property level operating income for the Same Store (defined below) group of properties will increase for the full year of 2017, compared to 2016, driven primarily by new and renewal leases being executed at higher market rental rates than those of expiring leases, particularly for the Company's industrial properties. The Company expects Same Store occupancy levels to remain relatively consistent with those in 2016.
The Company also anticipates that the effect of the United Kingdom’s exit from the European Union and the resulting change in the foreign exchange rate will not have a material effect on its net income or consolidated balance sheet during 2017.
The assumptions presented above are forward-looking and are based on the Company’s future view of market and general economic conditions, as well as other risks outlined above under the caption “Forward-Looking Statements.” There can be no assurance that the Company’s actual results will not differ materially from assumptions set forth above. The Company assumes no obligation to update these assumptions in the future.
As discussed in further detail in Note 2 to the Company's Consolidated Financial Statements, the Company made certain adjustments to prior periods to recognize additional profits and to reduce the income tax provision related to its land development in the United Kingdom.
Wholly Owned Capital Activity
Acquisitions
During the year ended December 31, 2016, the Company acquired one operating property for an aggregate purchase price of $8.0 million. This property contain 73,000 square feet of leaseable space and was fully leased as of December 31, 2016. The Company also acquired eight parcels of land totaling 216 acres for an aggregate purchase price of $52.9 million.
Dispositions
During the year ended December 31, 2016, the Company realized proceeds of $1.2 billion from the sale of 125 Wholly Owned Properties representing 9.5 million square feet and 36 acres of land, including the sale on October 3, 2016 of a portfolio of 108 Wholly Owned Properties totaling approximately 7.6 million square feet and 26.7 acres of land for $969 million.
Development
During the year ended December 31, 2016, the Company brought into service 18 Wholly Owned Properties under Development representing 5.7 million square feet and a Total Investment of $518.3 million. As of December 31, 2016, the Company had 25 Wholly Owned Properties under Development, which are expected to comprise, upon completion, 5.6 million square feet and are expected to represent a Total Investment of $537.1 million. These Wholly Owned Properties under Development were 22.9% pre-leased as of December 31, 2016.
“Total Investment” for a Property Under Development is defined as the sum of the land costs and the costs of land improvements, building and building improvements, lease transaction costs, and where appropriate, other development costs and carrying costs.
Unconsolidated Joint Venture Activity
The Company periodically enters into unconsolidated joint venture relationships in connection with the execution of its real estate operating strategy.
Acquisitions/Dispositions
During the year ended December 31, 2016, none of the unconsolidated joint ventures in which the Company held an interest acquired any properties or land parcels.
During the year ended December 31, 2016, unconsolidated joint ventures in which the Company holds an interest sold 17 properties containing 1.9 million square feet and 6.8 acres of land for an aggregate of $233.4 million. In addition, due to adverse conditions in the Northern Virginia office market, the fair value of six properties owned by Liberty Washington, LP (an unconsolidated joint venture in which the Company holds a 25% interest) containing 698,000 square feet was determined to be less than the debt encumbering the properties. As a result, during the year ended December 31, 2016, the joint venture cooperated with the mortgage lenders in the transfer of the six properties to the lenders in satisfaction of an aggregate of $112.5 million in nonrecourse mortgage debt. The book values of these properties had been written down to fair value in a prior period.
Consistent with the Company's strategy, from time to time the Company may consider selling assets to or purchasing assets from an unconsolidated joint venture in which the Company holds an interest.
Development
During the year ended December 31, 2016, unconsolidated joint ventures in which the Company held an interest brought into service five JV Properties under Development totaling 1.6 million square feet and representing an aggregate Total Investment of $103.3 million.
As of December 31, 2016, the Company had two JV Properties under Development, which are expected to comprise, upon completion, 1.6 million square feet and a 222-room Four Seasons Hotel and are expected to represent a Total Investment by the joint ventures of $952.5 million. These JV Properties under Development were 81.1% pre-leased as of December 31, 2016.
Included in these totals, joint ventures in which the Company held a 20% interest continued development on the Comcast Technology Center, which is expected to comprise, upon completion, 1.3 million square feet of office space and a 222-room Four Seasons
Hotel and is expected to represent a Total Investment by the joint ventures of $932.0 million. See Note 7 to the Company's Consolidated Financial Statements included in this report.
Forward-Looking Statements
When used throughout this report, the words "believes," "anticipates," "estimates" and "expects" and similar expressions are intended to identify forward-looking statements. Such statements indicate that assumptions have been used that are subject to a number of risks and uncertainties that could cause actual financial results or management plans and objectives to differ materially from those projected or expressed herein, including: the effect of national and regional economic conditions; rental demand; the Company's ability to continue to implement its plans for repositioning the portfolio; the Company's ability to identify, and enter into agreements with, suitable joint venture partners in situations where it believes such arrangements are advantageous; the Company's ability to identify and secure additional properties and sites, both for itself and the joint ventures to which it is a party, that meet its criteria for acquisition or development; the availability and cost of capital; the effect of prevailing market interest rates; risks related to the integration of the operations of entities that we have acquired or may acquire; risks related to litigation; and other risks described in Item 1A. Risk Factors and, from time to time, in the Company's filings with the SEC. Given these uncertainties, readers are cautioned not to place undue reliance on such statements.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("US GAAP"). The preparation of these financial statements requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases these estimates, judgments and assumptions on historical experience and on other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The following critical accounting policies discussion reflects what the Company believes are the more significant estimates, assumptions and judgments used in the preparation of its Consolidated Financial Statements. This discussion of critical accounting policies is intended to supplement the description of the accounting policies in the footnotes to the Company's Consolidated Financial Statements and to provide additional insight into the information used by management when evaluating significant estimates, assumptions and judgments. For further discussion of our significant accounting policies, see Note 2 to the Consolidated Financial Statements included in this report.
Capitalized Costs
Acquisition costs related to the purchase of vacant operating properties and land are capitalized and included in net real estate. During the years ended December 31, 2014 and 2015 and the nine months ended September 30, 2016, acquisition costs related to the purchase of operating properties with in-place tenants were expensed as incurred. Acquisition-related expenses for the nine months ended September 30, 2016 and the years ended December 31, 2015 and 2014 were $172,000, $365,000 and $673,000, respectively. As described further in Note 2 to the Company's Consolidated Financial Statements, on October 1, 2016, the Company early adopted ASU 2017-01, Clarifying the Definition of a Business, which stipulates that acquisition costs related to the purchase of operating properties with in-place tenants should also be capitalized.
Expenditures directly related to the improvement of real estate, including interest and other costs capitalized on development projects and land being readied for development, are included in net real estate and are stated at cost. The Company considers a development property substantially complete upon the completion of tenant build-out, but no later than one year after the completion of major construction activity. These capitalized costs include pre-construction costs essential to the development of the property, construction costs, interest costs, real estate taxes, development related compensation and other costs incurred during the period of development. The determination to capitalize rather than expense costs requires the Company to evaluate the status of the development activity. The total of capitalized compensation costs directly related to the development of property for the years ended December 31, 2016, 2015 and 2014 was $7.2 million, $5.5 million and $5.1 million, respectively.
Certain employees of the Company are compensated for leasing services related to the Company's properties. The compensation directly related to signed leases is capitalized and amortized as a deferred leasing cost. The total of this capitalized compensation was $3.8 million, $4.6 million and $3.9 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Capitalized interest for the years ended December 31, 2016, 2015 and 2014 was $24.1 million, $16.7 million and $13.2 million, respectively.
Revenue Recognition
Rental revenue is recognized on a straight line basis over the noncancelable terms of the respective leases. Deferred rent receivable represents the amount by which straight line rental revenue exceeds rents currently billed in accordance with the lease agreements. Above-market and below-market lease values for acquired properties are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management's estimate of fair market lease rates for each corresponding in-place lease. The capitalized above or below-market lease values are amortized as a component of rental revenue over the remaining term of the respective leases and any bargain renewal option periods, where appropriate.
Revenue and expense associated with service fee development is accounted for under the percentage of completion method. Revenues are recognized on the percentage of completion method based on applicable costs incurred with respect to each development agreement. The Company uses the relative sales value method to allocate costs and recognize profits from service fee development. Under the relative sales value method, estimates of aggregate project revenues and aggregate project costs are used to determine the allocation of project cost of sales and the resulting profit in each accounting period. In subsequent periods, cost of sale allocations and the resulting profits are adjusted to reflect changes in the actual and estimated costs and revenues of each project. Provisions for estimated losses on uncompleted contracts are recognized immediately in the period in which such losses are determined.
Allowance for Doubtful Accounts
The Company continually monitors the liquidity and creditworthiness of its tenants. Based on these reviews, provisions are established, and an allowance for doubtful accounts for estimated losses resulting from the inability of its tenants to make required rental payments is maintained. As of December 31, 2016 and 2015, the Company's allowance for doubtful accounts totaled $7.3 million and $6.9 million, respectively. The Company recognized bad debt expense of $0.6 million, $2.0 million and $1.7 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Impairment of Real Estate
The Company evaluates its real estate investments upon the occurrence of significant adverse changes in operations to assess whether any impairment indicators are present that could affect the recovery of the recorded value. Indicators the Company uses to determine whether an impairment evaluation is necessary include the low occupancy level of the property, holding period for the property, strategic decisions regarding future development plans for a property under development and land held for development and other market factors. If impairment indicators are present, the Company performs an undiscounted cash flow analysis and compares the net carrying amount of the property to the property's estimated undiscounted future cash flow over the anticipated holding period. The Company assesses the expected undiscounted cash flows based upon a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, current market rental rates, changes in market rental rates, operating costs, capitalization rates and holding periods. For these assumptions, the Company considers its experience and historical performance in the various markets and data provided by market research organizations. If any real estate investment is considered impaired, the carrying value of the property is written down to its estimated fair value. The Company estimates fair value based on the discounting of future expected cash flows at a risk adjusted interest rate. During the years ended December 31, 2016, 2015 and 2014, the Company recognized impairment losses of $3.9 million, $18.2 million and $0.1 million, respectively. The determination of whether an impairment exists requires the Company to make estimates, judgments and assumptions about the future cash flows. The Company has applied reasonable estimates and judgments in determining the level of impairments recognized. Should external or internal circumstances change requiring the need to shorten the holding periods or adjust the estimated future cash flows of the Company’s assets, the Company could be required to record impairment charges in the future.
Intangibles
The Company allocates the purchase price of real estate acquired to land, building and improvements and intangibles based on the fair value of each component. The value ascribed to in-place leases is based on the rental rates for the existing leases compared to the Company's estimate of the market lease rates for leases of similar terms and present valuing the difference based on an interest rate which reflects the risks associated with the leases acquired. Origination values are also assigned to in-place leases, and, where appropriate, value is assigned to customer relationships. Origination cost estimates include the costs to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. Additionally, the Company estimates carrying costs during the expected lease-up periods including real estate taxes, other operating expenses and lost rentals at contractual rates. Such amounts are also included in origination costs. The amounts allocated to the intangible relating to in-place leases, which are included in deferred financing and leasing costs or in other liabilities in the accompanying consolidated balance sheets, are amortized to rental income for market rental rate intangibles and to depreciation and amortization for origination costs on a straight line basis over the remaining term of the related leases. In the event that a tenant terminates its lease, the unamortized portion of the intangible is written off.
Investments in Unconsolidated Joint Ventures
The Company analyzes its investments in joint ventures to determine if the joint venture is considered a variable interest entity and would require consolidation. The Company accounts for its investments in unconsolidated joint ventures using the equity method of accounting as the Company exercises significant influence over, but does not control, these entities. These investments are recorded initially at cost and subsequently adjusted for equity in earnings and cash contributions and distributions.
On a periodic basis, management assesses whether there are any indicators that the value of the Company's investments in unconsolidated joint ventures may be impaired. An investment is impaired if management's estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.
Management estimated the fair value of its ownership interest in the joint ventures considering the estimated fair value of the real estate assets owned by the joint ventures and the related indebtedness as well as the working capital assets and liabilities of the joint ventures and the terms of the related joint venture agreements. The Company's estimates of fair value of the real estate assets are based on a discounted cash flow analysis incorporating a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, current market rental rates, changes in market rental rates, operating costs, capitalization rates, holding periods and discount rates. For these assumptions, the Company considered its experience and historical performance in the various markets and data provided by market research organizations. In assessing whether an impairment is other-than-temporary, the Company considers several factors. The longevity and severity of the impairment are considered as well as the expected time for recovery of value to occur, if ever.
During the year ended December 31, 2015 the Company concluded that certain of the properties owned by the Liberty Washington, LP joint venture were impaired and the joint venture recorded an impairment charge. The Company's share of this impairment charge was $11.5 million and is reflected in equity in earnings of unconsolidated joint ventures in the Company's 2015 consolidated statement of comprehensive income.
During the year ended December 31, 2014, the Company concluded that certain of the properties owned by the Liberty Washington, LP joint venture were impaired and the joint venture recorded an impairment charge of $172.7 million. The Company was not required to record its share of this impairment charge through equity in earnings of unconsolidated joint ventures as this amount was previously recognized through an other-than-temporary impairment charge related to this joint venture that was recorded in 2009.
There were no impairments recorded by the unconsolidated joint ventures in which the Company held an interest during the year ended December 31, 2016.
Derivative Instruments and Hedging Activities
Derivative instruments and hedging activities require management to make judgments on the nature of its derivatives and their effectiveness as hedges. These judgments determine if the changes in fair value of the derivative instruments are reported in the consolidated statements of comprehensive income as a component of net income or as a component of other comprehensive income and as a component of equity on the Consolidated Balance Sheets. While management believes its judgments are reasonable, a change in a derivative’s effectiveness as a hedge could materially affect expenses, net income and equity.
Results of Operations
The following discussion is based on the consolidated financial statements of the Company. It compares the results of operations of the Company for the year ended December 31, 2016 with the results of operations of the Company for the year ended December 31, 2015, and the results of operations of the Company for the year ended December 31, 2015 with the results of operations of the Company for the year ended December 31, 2014. As a result of the varying levels of development, acquisition and disposition activities by the Company in 2016, 2015 and 2014, the overall operating results of the Company during such periods are not directly comparable. However, certain data, including the Same Store (as defined below) comparison, do lend themselves to direct comparison.
This information should be read in conjunction with the accompanying consolidated financial statements and notes included elsewhere in this report.
Comparison of Year Ended December 31, 2016 to Year Ended December 31, 2015
Rental Revenue
Rental revenue was $543.4 million for the year ended December 31, 2016 compared to $584.2 million for the same period in 2015. This decrease of $40.8 million was primarily due to the net result of decreased rental revenue related to property dispositions since January 1, 2015 offset by increased rental revenue related to acquisitions and completed development for the same period, as well as an increase of $9.3 million related to the Company's Same Store portfolio (see below).
Operating Expense Reimbursement
Operating expense reimbursement was $190.4 million for the year ended December 31, 2016 compared to $224.6 million for the same period in 2015. This decrease of $34.2 million was primarily due to lower reimbursements associated with an aggregate decrease of $35.8 million in rental property expense and real estate taxes (as detailed below).
Rental Property Expense
Rental property expense was $102.5 million for the year ended December 31, 2016 compared to $132.7 million for the same period in 2015. This decrease of $30.2 million was primarily due to a reduction in expense resulting from the sale of suburban office and high finish flex properties partially offset by increased expenses resulting from the acquisition and completed development of industrial properties. Rental property expense includes utilities, insurance, janitorial, landscaping, snow removal and other costs necessary to maintain a property.
Real Estate Taxes
Real estate taxes were $99.8 million for the year ended December 31, 2016 compared to $105.4 million for the same period in 2015. This decrease of $5.6 million was primarily due to the net result of decreased real estate taxes related to property dispositions since January 1, 2015 offset by increased real estate taxes related to acquisitions and completed development for the same period.
Segments
The Company evaluates the performance of the Wholly Owned Properties in Operation in terms of net operating income by reportable segment (see Note 18 to the Company’s Consolidated Financial Statements for a reconciliation of this measure to net income). Net operating income includes operating revenue from external customers, rental property expense, real estate taxes, amortization of lease transaction costs and other operating expenses which relate directly to the management and operation of the assets within each reportable segment. The following table identifies changes in reportable segment net operating income (dollars in thousands):
Reportable Segment Net Operating Income:
(1)
The increase was primarily due to an increase in occupancy.
(2)
The decrease was primarily due to a decrease in average gross investment in operating real estate.
(3)
The decrease was primarily due to a decrease in the foreign exchange rate.
Same Store
Property level operating income, exclusive of termination fees, for the Same Store properties is identified in the table below.
The Same Store results were affected by changes in occupancy and rental rates as detailed below for the respective periods.
(1)
Represents the average contractual rent per square foot for the year ended December 31, 2016 or 2015 for tenants in occupancy in the Same Store properties. Cash basis 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.
(2)
Represents the average straight line rent and operating expense reimbursement per square foot for the year ended December 31, 2016 or 2015 for tenants in occupancy in the Same Store properties.
Management generally considers the performance of the Same Store properties to be a useful financial performance measure because the results are directly comparable from period to period. In addition, Same Store property level operating income and Same Store cash basis property level operating income are considered by management to be more reliable indicators of the portfolio’s baseline performance. The Same Store properties consist of the 467 properties totaling approximately 76.3 million square feet owned on January 1, 2015. Properties that were acquired, or on which development was completed, during the years ended December 31, 2016 and 2015 are excluded from the Same Store properties. Properties that were acquired, or on which development was completed, are included in Same Store when they have been purchased in the case of acquisitions, and placed into service in the case of completed development, prior to the beginning of the earliest period presented in the comparison. The 125 properties sold during the year ended December 31, 2016 and the 81 properties sold during 2015 are also excluded.
Set forth below is a schedule comparing the property level operating income, on a straight line basis and on a cash basis, for the Same Store properties for the years ended December 31, 2016 and 2015. Same Store property level operating income and cash basis property level operating income are non-US GAAP measures and do not represent income before gain on property dispositions, income taxes and equity in earnings of unconsolidated joint ventures because they do not reflect the consolidated operations of the Company. Investors should review Same Store results, along with Funds from operations (see “Liquidity and Capital Resources” below), US GAAP net income and cash flow from operating activities, investing activities and financing activities when considering
the Company’s operating performance. Also set forth below is a reconciliation of Same Store property level operating income and cash basis property level operating income to net income (in thousands).
(1) Termination fees are fees that the Company agrees to accept in consideration for permitting certain tenants to terminate their leases prior to the contractual expiration date.
Development Service Fee Income and Expense
In the fourth quarter of 2016, the Company entered into an agreement relating to the fee development of an office building at its Camden Waterfront project in Camden, NJ. Project revenues and related costs and expenses are presented on a gross basis as "Development service fee income" and "Development service fee expense" in the Consolidated Statements of Comprehensive Income. Additionally, at the same time, the Company began classifying development fees and expenses relating to its fee development arrangements for certain unconsolidated joint venture projects in a manner consistent with the Camden Waterfront project described above. Previously, development service fee income relating to the Company's unconsolidated joint ventures had been classified as other income and development service fee expense had been classified as general and administrative expense in amounts as follows:
General and Administrative
General and administrative expenses decreased to $68.2 million for the year ended December 31, 2016 compared to $68.7 million for the year ended December 31, 2015. This decrease was partially due to certain expenses which were classified as development service fee expense on the Company's consolidated statements of comprehensive income for the three months ended December 31, 2016, as described above. The decrease was also partially due to a decrease in compensation costs other than severance charges. These decreases were partially offset by an increase of $3.5 million in compensation costs due to severance charges. General and administrative expenses include salaries, wages and incentive compensation for general and administrative staff along with related costs, consulting, marketing, public company expenses, costs associated with the acquisition of properties and other general and administrative costs.
Depreciation and Amortization
Depreciation and amortization decreased to $205.1 million for the year ended December 31, 2016 from $226.6 million for the year ended December 31, 2015. This decrease was primarily due to the net result of decreased depreciation and amortization related to property dispositions since January 1, 2015 offset by increased depreciation and amortization related to acquisitions and completed development for the same period. The decrease was also due to a reduction in amortization of in-place lease intangibles.
Impairment - Real Estate Assets
Impairment - real estate assets decreased to $3.9 million for the year ended December 31, 2016 compared to $18.2 million for the year ended December 31, 2015. The Company recognized impairments related to certain properties in the Company's Maryland, Richmond/Hampton Roads and Cincinnati/Columbus/Indianapolis reportable segments in 2015. The properties related to the Richmond/Hampton Roads reportable segment were subsequently sold. In 2016, the Company recognized impairments related to certain properties in the Company's Minnesota and Chicago-Wisconsin reportable segments. These properties were subsequently sold.
Interest Expense
Interest expense decreased to $115.1 million for the year ended December 31, 2016 from $135.8 million for the year ended December 31, 2015. This decrease was due to the decrease in the average debt outstanding to $3,077.7 million for the year ended December 31, 2016 from $3,202.3 million for the year ended December 31, 2015 as well as a decrease in the weighted average interest rate to 4.2% for the year ended December 31, 2016 from 4.6% for the year ended December 31, 2015. The decrease was also due to an increase in interest capitalized to $24.1 million for the year ended December 31, 2016 compared to $16.7 million for the year ended December 31, 2015.
Equity in Earnings of Unconsolidated Joint Ventures
Equity in earnings of unconsolidated joint ventures increased to $22.0 million for the year ended December 31, 2016 compared to $3.1 million for the year ended December 31, 2015. This increase was primarily due to an increase in the net effect of gain on sale of operating properties offset by impairment losses and also due to gain on debt forgiveness by unconsolidated joint ventures in which the Company holds an interest. The Company's share of gain on sale related to unconsolidated joint ventures was $7.3 million for the year ended December 31, 2016 compared to impairment losses of $11.3 million for the year ended December 31 2015. The Company's share of debt forgiveness gains was $4.2 million for the year ended December 31, 2016. There were no such gains in 2015. These results were also impacted by gains on the sale of land leasehold interests by an unconsolidated joint venture in which the Company holds an interest. The Company's share of these gains was $3.5 million for the year ended December 31, 2016 compared to $5.0 million for the year ended December 31, 2015.
Other
Gain on property dispositions increased to $219.3 million for the year ended December 31, 2016 from $100.3 million for the year ended December 31, 2015. This increase resulted from the volume and composition of sales in 2016 as compared to 2015.
As a result of the foregoing, the Company’s net income increased to $366.1 million for the year ended December 31, 2016 from $245.9 million for the year ended December 31, 2015.
Comparison of Year Ended December 31, 2015 to Year Ended December 31, 2014
Rental Revenue
Rental revenue was $584.2 million for the year ended December 31, 2015 compared to $568.3 million for the same period in 2014. This increase of $15.9 million was primarily due to Prior Year Same Store (as defined below) property rental revenue (increase
of $8.7 million) and termination fees (increase of $3.3 million). These increases reflect the net result of increased rental revenue related to acquisitions and completed development since January 1, 2014 and decreased rental revenue related to property dispositions for the same period.
Termination fees are fees that the Company agrees to accept in consideration for permitting certain tenants to terminate their leases prior to the contractual expiration date. Termination fees are included in rental revenue and if a property is classified as discontinued operations, related termination fees are included in discontinued operations.
Operating Expense Reimbursement
Operating expense reimbursement was $224.6 million for the year ended December 31, 2015 compared to $224.3 million for the same period in 2014. This increase of $0.3 million was primarily due to the increase in average occupancy for the year ended December 31, 2015 compared to the year ended December 31, 2014. Occupancy results impact these amounts as the ability to recover operating expenses corresponds to tenant occupancy. This increase was partially offset by an aggregate decrease of $1.8 million in rental property expense and real estate taxes.
Rental Property Expense
Rental property expense was $132.7 million for the year ended December 31, 2015 compared to $138.1 million for the same period in 2014. This decrease of $5.4 million was primarily due to the sale of suburban office and high finish flex properties partially offset by increased expenses resulting from primarily industrial acquisition and completed development properties. Rental property expense includes utilities, insurance, janitorial, landscaping, snow removal and other costs necessary to maintain a property.
Real Estate Taxes
Real estate taxes were $105.4 million for the year ended December 31, 2015 compared to $101.8 million for the same period in 2014. This increase of $3.6 million was primarily due to an increase in real estate taxes for the Prior Year Same Store group of properties ($3.5 million).
Segments
The Company evaluates the performance of the Wholly Owned Properties in Operation in terms of net operating income by reportable segment (see Note 18 to the Company’s Consolidated Financial Statements for a reconciliation of this measure to net income). Net operating income includes operating revenue from external customers, rental property expense, real estate taxes, amortization of lease transaction costs and other operating expenses which relate directly to the management and operation of the assets within each reportable segment. The following table identifies changes in reportable segment net operating income (dollars in thousands):
Reportable Segment Net Operating Income:
(1)
The increase was primarily due to an increase in occupancy and an increase in average gross investment in operating real estate.
(2)
The decrease was primarily due to a decrease in occupancy and a decrease in average gross investment in operating real estate.
(3)
The increase was primarily due to an increase in average gross investment in operating real estate.
Prior Year Same Store
Property level operating income, exclusive of termination fees, for the Prior Year Same Store properties is identified in the table below.
The Prior Year Same Store results were affected by changes in occupancy and rental rates as detailed below for the respective periods as well as the decrease in the non-recovered portion of the snow removal costs and other weather-related expenses for the respective periods.
(1)
Represents the average contractual rent per square foot for the year ended December 31, 2015 or 2014 for tenants in occupancy in the Same Store properties. Cash basis 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.
(2)
Represents the average straight line rent and operating expense reimbursement per square foot for the year ended December 31, 2015 or 2014 for tenants in occupancy in the Same Store properties.
Management generally considers the performance of the Prior Year Same Store properties to be a useful financial performance measure because the results are directly comparable from period to period. In addition, Prior Year Same Store property level operating income and Prior Year Same Store cash basis property level operating income are considered by management to be more reliable indicators of the portfolio’s baseline performance. The Prior Year Same Store properties consist of the 571 properties totaling approximately 79.0 million square feet owned on January 1, 2014. Properties that were acquired, or on which development was completed, during the years ended December 31, 2015 and 2014 are excluded from the Prior Year Same Store properties. Properties that were acquired, or on which development was completed, are included in Prior Year Same Store when they have been purchased in the case of acquisitions, and placed into service in the case of completed development, prior to the beginning of the earliest period presented in the comparison. The 81 properties sold during the year ended December 31, 2015 and the 65 properties sold during 2014 are also excluded.
Set forth below is a schedule comparing the property level operating income, on a straight line basis and on a cash basis, for the Prior Year Same Store properties for the years ended December 31, 2015 and 2014. Prior Year Same Store property level operating income and cash basis property level operating income are non-US GAAP measures and do not represent income before gain on property dispositions, income taxes and equity in earnings of unconsolidated joint ventures because they do not reflect the consolidated operations of the Company. Investors should review Prior Year Same Store results, along with Funds from operations (see “Liquidity and Capital Resources” below), US GAAP net income and cash flow from operating activities, investing activities and financing activities when considering the Company’s operating performance. Also set forth below is a reconciliation of Prior Year Same Store property level operating income and cash basis property level operating income to net income (in thousands).
(1)Includes termination fees of $8,000 for the year ended December 31, 2014.
General and Administrative
General and administrative expenses increased to $68.7 million for the year ended December 31, 2015 compared to $63.3 million for the year ended December 31, 2014. This increase was primarily due to increases in performance-based compensation and general and administrative costs related to the construction of the Comcast Technology Center. General and administrative expenses include salaries, wages and incentive compensation for general and administrative staff along with related costs, consulting, marketing, public company expenses, costs associated with the acquisition of properties and other general and administrative costs.
Depreciation and Amortization
Depreciation and amortization decreased to $226.6 million for the year ended December 31, 2015 from $231.9 million for the year ended December 31, 2014. This decrease was primarily due to a reduction in amortization of in-place lease intangibles.
Impairment - Real Estate Assets
Impairment - real estate assets increased to $18.2 million for the year ended December 31, 2015 compared to $117,000 for the year ended December 31, 2014. This increase was due to impairments related to certain properties in the Company's Maryland, Richmond/Hampton Roads and Cincinnati/Columbus/Indianapolis reportable segments. The properties related to the Richmond/Hampton Roads reportable segment were subsequently sold.
Interest Expense
Interest expense decreased to $135.8 million for the year ended December 31, 2015 from $151.9 million for the year ended December 31, 2014. This decrease was due to the decrease in the average debt outstanding to $3,202.3 million for the year ended December 31, 2015 from $3,233.1 million for the year ended December 31, 2014 as well as a decrease in the weighted average interest rate to 4.6% for the year ended December 31, 2015 from 5.0% for the year ended December 31, 2014. The decrease was also due to an increase in interest capitalized to $16.7 million for the year ended December 31, 2015 compared to $13.2 million for the year ended December 31, 2014.
Equity in Earnings of Unconsolidated Joint Ventures
Equity in earnings of unconsolidated joint ventures decreased to $3.1 million for the year ended December 31, 2015 compared to $10.3 million for the year ended December 31, 2014. This decrease was primarily due to impairment losses in an unconsolidated joint venture in the Company's Northern Virginia segment, the Company's share of which was $11.5 million for the year ended December 31, 2015. There were no similar impairment losses in 2014.
Other
Gain on property dispositions increased to $100.3 million for the year ended December 31, 2015 from $45.1 million for the year ended December 31, 2014. Income from discontinued operations decreased to zero for the year ended December 31, 2015 from $48.6 million for the year ended December 31, 2014. Year over year changes primarily resulted from aggregate gains on sales for 2015 and 2014 included in gain on property dispositions or discontinued operations which totaled $100.3 million for the year ended December 31, 2015 compared to $91.8 million for the year ended December 31, 2014.
As a result of the foregoing, the Company’s net income increased to $245.9 million for the year ended December 31, 2015 from $224.5 million for the year ended December 31, 2014.
Liquidity and Capital Resources
Overview
The Company seeks to maintain a conservative balance sheet and pursue a strategy of financial flexibility. The Company's liquidity requirements include operating and general and administrative expenses, shareholder distributions, funding its investment in development properties and joint ventures and satisfying interest requirements and debt maturities. The Company believes that proceeds from operating activities, asset sales, its available cash, borrowing capacity from its Credit Facility (as defined below) and its other sources of capital including the public debt and equity markets will provide it with sufficient funds to satisfy these obligations.
Activity
As of December 31, 2016, the Company had cash and cash equivalents of $56.0 million, including $12.4 million in restricted cash.
Net cash provided by operating activities decreased to $333.0 million for the year ended December 31, 2016 from $385.4 million for the year ended December 31, 2015. This $52.4 million decrease was primarily due to a reduction in operating activities related to the properties sold in 2015 and 2016 offset by increases in cash from operating activities for the Same Store portfolio and increased operating results for completed development properties. Net cash flow provided by operating activities is the primary source of liquidity to fund dividends to shareholders, recurring capital expenditures and leasing transaction costs for the Company’s Wholly Owned Properties in Operation.
Net cash provided by investing activities was $613.4 million for the year ended December 31, 2016 compared to net cash used in investing activities of $89.7 million for the year ended December 31, 2015. This $703.1 million difference was primarily due to the proceeds from dispositions in 2016 as compared to 2015. During 2016 the Company sold a portfolio of properties for $969 million.
Net cash used in financing activities was $934.1 million for the year ended December 31, 2016 compared to $327.6 million for the year ended December 31, 2015. This $606.5 million increase was primarily due to net debt repayment activity using the proceeds from the dispositions described above. Net cash used in financing activities includes proceeds from the issuance of equity and debt, net of debt repayments, equity repurchases and shareholder distributions.
The Company is a party to a credit facility with a maximum availability of $800 million (the "Credit Facility"). It matures in March 2018 and has two six-month extensions at the Company's option. The interest rate on borrowings under the Credit Facility fluctuates based upon ratings from Moody's Investor Services, Inc., Standard and Poor's Ratings Group and Fitch, Inc. Based upon the Company’s current credit ratings, borrowings under the new facility bear interest at LIBOR plus 105 basis points. There is also a 20 basis point annual facility fee on the current borrowing capacity. The credit facility contains a competitive bid option, whereby participating lenders bid on the interest rate to be charged. This feature is available for up to 50% of the amount of the facility. As of December 31, 2016, the Company had no outstanding borrowings and $6.9 million of letters of credit issued under the Credit Facility.
In August 2014, the Company used proceeds from its unsecured credit facility together with available cash on hand to repay $200 million of 5.65% senior unsecured notes due August 2014.
In March 2015, the Company used proceeds from its unsecured credit facility together with available cash on hand to repay $300 million of 5.125% senior unsecured notes due March 2015.
In March 2015, the Company issued $400 million of 3.75% senior unsecured notes due 2025. The net proceeds from this issuance were used to repay borrowings under the Company's unsecured credit facility and for general corporate purposes.
In August 2015, the Company used proceeds from its unsecured credit facility to prepay in full without penalty a $105.8 million 7.0% mortgage loan due February 2016.
In December 2015, the Company used proceeds from its unsecured credit facility to prepay in full without penalty a $59.7 million 7.5% mortgage loan due March 2016 and to satisfy $16.0 million in unsecured notes bearing interest at 3.4% due December 2015.
During the year ended December 31, 2015, the Company purchased an aggregate of 2.3 million common shares of the Company for $71.8 million as part of a share repurchase plan.
In September 2016, the Company issued $400 million of 3.25% senior unsecured notes due 2026. The Company used a substantial portion of the net proceeds from these notes to prepay its 5.5% Senior Notes due December 2016 in the amount of $300 million. This prepayment resulted in a $3.8 million loss on debt extinguishment.
In November 2016, the Company used cash generated by the sale of properties (see above) to prepay its 6.625% senior notes due October 2017 in the amount of $296.5 million and its 7.5% medium term notes due January 2018 in the amount of $100.0 million. This prepayment resulted in a $23.3 million loss on debt extinguishment.
During the year ended December 31, 2016, the Company purchased an aggregate of 1.4 million common shares for $40.9 million as part of a share repurchase plan.
The Company funds its development activities and acquisitions with long-term capital sources and proceeds from the disposition of properties. For the year ended December 31, 2016, a portion of these activities were funded through the Credit Facility.
The Company uses debt financing to lower its overall cost of capital in an attempt to increase the return to shareholders. The Company staggers its debt maturities and maintains debt levels it considers to be prudent. In determining its debt levels, the Company considers various financial measures including the debt to gross assets ratio and the fixed charge coverage ratio. As of December 31, 2016, the Company’s debt to gross assets ratio was 36.9% and for the year ended December 31, 2016, the fixed charge coverage ratio was 3.6x. Debt to gross assets equals total long-term debt and borrowings under the Credit Facility divided by total assets plus accumulated depreciation. The fixed charge coverage ratio equals income from continuing operations before property dispositions plus interest expense, depreciation and amortization (including the Company's pro rata share of depreciation and amortization related to unconsolidated joint ventures) and impairment - real estate assets (including the Company's pro rata share of impairment - real estate assets related to unconsolidated joint ventures), divided by interest expense, including capitalized interest, plus distributions on preferred units.
As of December 31, 2016, $276.7 million (including $98.9 million fixed via a swap arrangement - see Note 20 to the Company's Consolidated Financial Statements) in mortgage loans and $2.3 billion in unsecured notes were outstanding with a weighted average interest rate of 4.0%. The interest rates on $2,569.9 million of mortgage loans and unsecured notes are fixed (including those fixed via swap agreements) and range from 3.0% to 6.4%. The weighted average remaining term for the mortgage loans and unsecured notes is 6.7 years.
The Company's contractual obligations, as of December 31, 2016, were as follows (in thousands):
(1)
Includes principal and interest payments. Interest payments assume Credit Facility borrowings and interest rates remain at the December 31, 2016 level until maturity.
(2)
As of December 31, 2016, the Company was committed to approximately $132.6 million in costs related to its agreement to develop, on a fee basis, an office building and infrastructure improvements for American Water Works in Camden, New Jersey, of which $17.2 million has been incurred.
(3)
The Company is contractually committed to build a minimum of 60,000 square feet of building space every two years at the Navy Yard Corporate Center in Philadelphia, with certain rights to defer these biennial requirements. The failure by the Company to meet these milestones could result in the loss of the Company’s exclusive development rights with respect to the Navy Yard Corporate Center.
General
The Company believes that its existing sources of capital will provide sufficient funds to finance its continued development and acquisition activities. The Company's existing sources of capital include the public debt and equity markets, proceeds from secured financing of properties, proceeds from property dispositions, equity capital from joint venture partners, remaining capacity of $125.0 million under the Company's at-the-market equity offering program and net cash provided by operating activities. Additionally, the Company expects to incur variable rate debt, including borrowings under the Credit Facility, from time to time.
The Company's annual Common Share dividend paid was $1.90 per share in 2016, 2015 and 2014. The Company's quarterly dividend was reduced to $0.40 per share ($1.60 per share annualized) beginning with its quarterly dividend payable in April 2017. Future distribution payments by the Company will be paid at the discretion of the Board of Trustees and will depend on the Company's actual funds from operations and cash flows, the Company’s financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors that the Board of Trustees deems relevant. The Company’s Board of Trustees reviews the dividend quarterly, and there can be no assurance about the amount of future quarterly distribution payments.
The Company has an effective S-3 shelf registration statement on file with the SEC pursuant to which the Trust and the Operating Partnership may issue an unlimited amount of equity securities and debt securities.
Off-Balance Sheet Arrangements
As of December 31, 2016, the Company had investments in and advances to unconsolidated joint ventures totaling $245.1 million (see Note 7 to the Company's Consolidated Financial Statements included in this report).
Calculation of Funds from Operations
The National Association of Real Estate Investment Trusts (“NAREIT”) has issued a standard definition for NAREIT Funds from operations (as defined below). The SEC has agreed to the disclosure of this non-US GAAP financial measure on a per share basis in its Release No. 34-47226, Conditions for Use of Non-US GAAP Financial Measures. The Company believes that the calculation of NAREIT Funds from operations is helpful to investors and management as it is a measure of the Company’s operating performance that excludes depreciation and amortization and gains and losses from operating property dispositions. As a result, year over year comparison of NAREIT Funds from operations reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, providing perspective not immediately apparent from net income. In addition, management believes that NAREIT Funds from operations provides useful information to the investment community about the Company’s financial performance when compared to other REITs since NAREIT Funds from operations is generally recognized as the standard for reporting the operating performance of a REIT. NAREIT Funds from operations available to common shareholders is defined by NAREIT as net income (computed in accordance with generally accepted accounting principles (“US GAAP”)), excluding gains (or losses) from sales of property and impairment - real estate assets, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. NAREIT Funds from operations available to common shareholders does not represent net income or cash flows from operations as defined by US GAAP and does not necessarily indicate that cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the Company’s operating performance or to cash flows as a measure of liquidity. NAREIT Funds from operations available to common shareholders also does not represent cash flows generated from operating, investing or financing activities as defined by US GAAP.
NAREIT Funds from operations (“FFO”) available to common shareholders for the year ended December 31, 2016, 2015, and 2014 are as follows (in thousands, except per share amounts):
Inflation
Inflation has remained relatively low in recent years, and as a result, it has not had a significant impact on the Company during this period. To the extent an increase in inflation would result in increased operating costs, such as insurance, real estate taxes and utilities, the majority of the tenants’ leases require the tenants to absorb these costs as part of their rental obligations. In addition, inflation also may have the effect of increasing market rental rates.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's risk management includes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from the results discussed in the forward-looking statements.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued interest, dividends and distributions payable and other liabilities are reasonable estimates of fair value because of the short-term nature of these instruments. The fair value of the Company's long-term debt, which is based on estimates by management and on rates quoted on December 31, 2016 for comparable loans, is greater than the aggregate carrying value by approximately $70.5 million at December 31, 2016.
The Company's primary market risk exposure is to changes in interest rates. The Company is exposed to market risk related to its Credit Facility and certain other indebtedness as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
The Company also uses long-term and medium-term debt as a source of capital. These debt instruments are typically issued at fixed interest rates. When these debt instruments mature, the Company typically refinances such debt at then-existing market interest rates which may be more or less than the interest rates on the maturing debt. In addition, the Company may attempt to reduce interest rate risk associated with an issuance of new debt. Our interest rate risk objective is to limit the impact of interest rate changes on earnings and cash flows and lower our overall borrowing costs. To achieve these objectives, from time to time the Company enters into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. The Company does not hold or issue these derivative contracts for trading or speculative purposes.
If the interest rates for variable rate debt were 100 basis points higher or lower during 2016, the Company's interest expense would have increased or decreased by $2.2 million. If the interest rate for the fixed rate debt maturing in 2017 was 100 basis points higher or lower than its current rate of 5.3%, the Company's interest expense would have increased or decreased by $10,000.
The sensitivity analysis above assumes no changes in the Company's financial structure. It also does not consider future fluctuations in interest rates or the specific actions that might be taken by management to mitigate the impact of such fluctuations.
The Company is also exposed to currency risk on its net investment in the United Kingdom. The Company does not believe that this currency risk exposure is material to its financial statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedule of Liberty Property Trust and Liberty Property Operating Partnership, L.P. and the reports thereon of Ernst & Young LLP, an independent registered public accounting firm, with respect thereto are filed as part of this Annual Report on Form 10-K.
Management's Annual Report on Internal Control Over Financial Reporting
The Trust's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a - 15 (f) and 15d - 15(f). The Trust's internal control system was designed to provide reasonable assurance to the Trust's management and Board of Trustees regarding the preparation and fair presentation of published financial statements.
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of the Trust's internal control over financial reporting as of December 31, 2016. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013 Framework). Based on our assessment we believe that, as of December 31, 2016, the Trust's internal control over financial reporting is effective based on those criteria.
The Trust's independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Trust's internal control over financial reporting, which is included in this Annual Report on Form 10-K.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Report of Independent Registered Public Accounting Firm
The Board of Trustees and Shareholders of Liberty Property Trust
We have audited Liberty Property Trust’s (the “Trust”) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The Trust’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Trust’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Liberty Property Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2016 of Liberty Property Trust and our report dated March 1, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 1, 2017
Report of Independent Registered Public Accounting Firm
The Board of Trustees and Shareholders of Liberty Property Trust
We have audited the accompanying consolidated balance sheets of Liberty Property Trust (the “Trust”) as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and schedules are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Liberty Property Trust at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 19 to the consolidated financial statements, the Company changed its method for reporting discontinued operations effective January 1, 2014. As discussed in Note 2 to the consolidated financial statements, the Company changed its method for determining whether an acquisition is an asset or a business upon the early adoption of Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” effective October 1, 2016.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Liberty Property Trust’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 1, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 1, 2017
Management's Annual Report on Internal Control Over Financial Reporting
The Operating Partnership's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15 (f) and 15d-15(f). The Operating Partnership's internal control system was designed to provide reasonable assurance to the Operating Partnership's management regarding the preparation and fair presentation of published financial statements.
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of the Operating Partnership's internal control over financial reporting as of December 31, 2016. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013 Framework). Based on our assessment we believe that, as of December 31, 2016, the Operating Partnership's internal control over financial reporting is effective based on those criteria.
The Operating Partnership's independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Operating Partnership's internal control over financial reporting, which is included in this Annual Report on Form 10-K.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Report of Independent Registered Public Accounting Firm
The Partners of Liberty Property Limited Partnership
We have audited Liberty Property Limited Partnership’s (the “Operating Partnership”) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The Operating Partnership’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Operating Partnership’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Liberty Property Limited Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, owners' equity, and cash flows for each of the three years in the period ended December 31, 2016 of Liberty Property Limited Partnership and our report dated March 1, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 1, 2017
Report of Independent Registered Public Accounting Firm
The Partners of Liberty Property Limited Partnership
We have audited the accompanying consolidated balance sheets of Liberty Property Limited Partnership (the “Operating Partnership”) as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, owners’ equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and schedules are the responsibility of the Operating Partnership’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Liberty Property Limited Partnership at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 19 to the consolidated financial statements, the Operating Partnership changed its method for reporting discontinued operations effective January 1, 2014. As discussed in Note 2 to the consolidated financial statements, the Operating Partnership changed its method for determining whether an acquisition is an asset or a business upon the early adoption of Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805):Clarifying the Definition of a Business” effective October 1, 2016.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Liberty Property Limited Partnership’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 1, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 1, 2017
CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY TRUST
(In thousands, except share and unit amounts)
See accompanying notes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME OF LIBERTY PROPERTY TRUST
(In thousands, except per share amounts)
See accompanying notes.
CONSOLIDATED STATEMENTS OF EQUITY OF LIBERTY PROPERTY TRUST
(In thousands, except share amounts)
(1) The Company adjusted the January 1, 2014 balances of Accumulated Other Comprehensive (Loss) Income, Distributions in Excess of Net Income, and Noncontrolling Interest - Operating Partnership - Common from previous filings. See Note 2.
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS OF LIBERTY PROPERTY TRUST
(In thousands)
See accompanying notes.
CONSOLIDATED BALANCE SHEETS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(In thousands, except unit amounts)
See accompanying notes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(In thousands, except per unit amounts)
See accompanying notes.
CONSOLIDATED STATEMENTS OF OWNERS’ EQUITY OF LIBERTY PROPERTY LIMITED PARTNERSHIP
(In thousands, except unit amounts)
(1) The Company adjusted the January 1, 2014 balances of General Partner's Equity and Limited Partners' Equity - Common Units from previous filings. See Note 2.
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(In thousands)
See accompanying notes.
Liberty Property Trust and Liberty Property Limited Partnership
Notes to Consolidated Financial Statements
December 31, 2016
1. ORGANIZATION
Liberty Property Trust (the “Trust”) is a self-administered and self-managed Maryland real estate investment trust (a “REIT”). Substantially all of the Trust’s assets are owned directly or indirectly, and substantially all of the Trust’s operations are conducted directly or indirectly, by its subsidiary, Liberty Property Limited Partnership, a Pennsylvania limited partnership (the “Operating Partnership” and, together with the Trust and their consolidated subsidiaries, the “Company”). The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 97.7% of the common equity of the Operating Partnership at December 31, 2016. The Company owns and operates industrial properties nationally and owns and operates office properties in a focused group of office markets. Additionally, the Company owns certain assets in the United Kingdom. Unless otherwise indicated, the notes to the Consolidated Financial Statements apply to both the Trust and the Operating Partnership. The terms the "Company,” “we,” “our” and “us” means the Trust and Operating Partnership collectively.
As of January 1, 2016 under the revised accounting standard Topic 810 (see Recently Issued Accounting Standards below), the Operating Partnership is a variable interest entity ("VIE") of the Trust as the limited partners do not have substantive kick-out or participating rights. The Trust is the primary beneficiary of the Operating Partnership as it has the power to direct the activities of the Operating Partnership and the rights to absorb 97.7% of the net income of the Operating Partnership. The Trust has no significant assets or liabilities other than its investment in the Operating Partnership. As the Operating Partnership is already consolidated in the balance sheets of the Trust, the identification of this entity as a VIE has no impact on the consolidated financial statements of the Trust. In addition, the Company holds a 20% interest in Liberty/Comcast 1701 JFK Boulevard, LP which was determined to be a VIE. The Company determined that it is not the primary beneficiary as the Company and its third party partner share control of the joint venture. The Company's maximum exposure to loss is equal to its equity investment in the joint venture which was $18.7 million and $20.5 million as of December 31, 2016 and 2015, respectively.
All square footage amounts are unaudited.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("US GAAP") requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements of the Company include the Trust, the Operating Partnership, wholly owned subsidiaries and those subsidiaries in which the Company owns a majority voting interest with the ability to control operations of the subsidiaries and where no approval, veto or other important rights have been granted to the noncontrolling shareholders. The Company consolidates joint ventures that are considered to be variable interest entities (“VIEs”) where we are the primary beneficiary. The Company (i) evaluates the sufficiency of the total equity investment at risk, (ii) reviews the voting rights and decision-making authority of the equity investment holders as a group and whether there are any guaranteed returns, protection against losses, or capping of residual returns within the group and (iii) establishes whether activities within the venture are on behalf of an investor with disproportionately few voting rights in making this VIE determination. To the extent that the Company (i) is the sole entity that has the power to direct the activities of the VIE and (ii) has the obligation or rights to absorb the VIE's losses or receive its benefits, then the Company would be the primary beneficiary and would consolidate the VIE.
All significant intercompany transactions and accounts have been eliminated.
Real Estate and Depreciation
The properties are recorded at cost and are depreciated using the straight line method over their estimated useful lives. The estimated useful lives are as follows:
Expenditures directly related to the development and improvement of real estate, including interest and other costs capitalized during development, are included in net real estate and are stated at cost. The capitalized costs include pre-construction costs essential to the development of the property, development and construction costs, interest costs, real estate taxes, development-related salaries and other costs incurred during the period of development. The total of capitalized compensation costs directly related to the development of property for the years ended December 31, 2016, 2015 and 2014 was $7.2 million, $5.5 million and $5.1 million, respectively. Construction related payables at December 31, 2016 and 2015 were $37.1 million and $42.9 million, respectively.
The Company allocates the purchase price of real estate acquired to land, building and improvements and intangibles at the fair value of each component. Lease values for acquired properties are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management's estimate of fair market lease rates for each corresponding in-place lease ("Market Value Intangible"). Origination values are also assigned to in-place leases, and, where appropriate, value is assigned to customer relationships ("Origination Value Intangible").
Acquisition-related costs for vacant properties are capitalized and included in net real estate at cost. Beginning on October 1, 2016, with the Company's adoption of ASU 2017-01 (see below), acquisition-related costs for properties with in-place leases are also capitalized and included in net real estate at cost. Expenditures for maintenance and repairs are charged to operations as incurred.
The Company depreciates the amounts allocated to building and improvements over 40 years and amortizes the amounts allocated to intangibles relating to in-place leases, which are included in deferred financing and leasing costs and other liabilities in the accompanying consolidated balance sheets, over the remaining term of the related leases. Market Value Intangible amortization is recorded as rental revenue. Origination Value Intangible amortization is recorded as depreciation and amortization. This calculation includes both the remaining noncancelable period and any bargain renewal option periods.
Once a property is designated as held for sale, no further depreciation expense is recorded.
The Company evaluates its real estate investments upon occurrence of a significant adverse change in its operations to assess whether any impairment indicators are present that affect the recovery of the recorded value. If indicators of impairment are identified, the Company estimates the future undiscounted cash flows from the use and eventual disposition of the property and compares this amount to the carrying value of the property. If any real estate investment is considered impaired, a loss is recognized to reduce the carrying value of the property to its estimated fair value.
Investments in Unconsolidated Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures using the equity method of accounting as the Company exercises significant influence, but does not control these entities.
Under the equity method of accounting, the net equity investment of the Company is reflected in the accompanying consolidated balance sheets and the Company's share of net income from the joint ventures is included in the accompanying consolidated statements of comprehensive income.
On a periodic basis, management assesses whether there are any indicators that the value of the Company's investments in unconsolidated joint ventures may be other-than-temporarily-impaired. An investment is impaired only if management's estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other-than-temporary. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over the estimated fair value of the investment. The estimated fair value of the investments is determined using a discounted cash flow model which is a Level 3 valuation under ASC 820, "Fair Value Measurement." The Company considers a number of
assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, operating costs, capitalization rates, holding periods and discount rates.
No impairment losses on the Company's investments in unconsolidated joint ventures were recognized during the years ended December 31, 2014, 2015 or 2016.
Cash and Cash Equivalents
Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents.
Restricted Cash
Restricted cash includes tenant security deposits and escrow funds that the Company maintains pursuant to certain mortgage loans. Restricted cash also includes the undistributed proceeds from the sale of residential land in Kent County, United Kingdom.
Accounts Receivable/Deferred Rent Receivable
The Company's accounts receivable are comprised of rents and charges for property operating costs due from tenants. The Company's deferred rent receivable represents the cumulative difference between rent revenue recognized on a straight line basis and contractual payments due under the terms of tenant leases. The Company periodically performs a detailed review of amounts due from tenants to determine if accounts receivable and deferred rent receivable balances are collectible. Based on this review, accounts receivable and deferred rent receivable are reduced by an allowance for doubtful accounts. The Company considers tenant credit quality and payment history and general economic conditions in determining the allowance for doubtful accounts. If the accounts receivable balance or the deferred rent receivable balance is subsequently deemed uncollectible, the receivable and allowance for doubtful account balance are written off.
The allowance for doubtful accounts at December 31, 2016 and 2015 was $7.3 million and $6.9 million, respectively. The Company recognized bad debt expense of $0.6 million, $2.0 million and $1.7 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Revenue Recognition
The Company earns rental income under operating leases with tenants. Rental income is recognized on a straight line basis over the applicable non-cancelable lease term. Operating expense reimbursements consisting of amounts due from tenants for real estate taxes, utilities and other recoverable costs are recognized as revenue in the period in which the corresponding expenses are incurred.
The Company considers any renewal options in determining the lease term. To the extent a lease includes a tenant option to renew or extend the duration of the lease at a fixed or determinable rental rate, the Company evaluates whether or not that option represents a bargain renewal option by analyzing if there is reasonable assurance at lease inception that the tenant will exercise the option because the rental rate is sufficiently lower than the expected rental rate for equivalent property under similar terms and conditions at the exercise date.
Termination fees (included in rental revenue) are fees that the Company has agreed to accept in consideration for permitting certain tenants to terminate their lease prior to the contractual expiration date. The Company recognizes termination fees during the period that landlord services are rendered in accordance with Securities and Exchange Commission Staff Accounting Bulletin 104, "Revenue Recognition," after the following conditions are met:
a.
the termination agreement is executed,
b.
the termination fee is determinable, and
c.
collectability of the termination fee is assured.
In the fourth quarter of 2016, the Company entered into an agreement relating to the fee development of an office building at its Camden Waterfront project in Camden, NJ. Project revenues and related costs and expenses are presented on a gross basis as "Development service fee income" and "Development service fee expense" in the Consolidated Statements of Comprehensive Income. Additionally, at the same time, the Company began classifying development fees and expenses relating to its fee development arrangements for certain unconsolidated joint venture projects in a manner consistent with the Camden project described above. Previously, development service fee income relating to its unconsolidated joint ventures had been classified as other income and development service fee expense had been classified as general and administrative expense in amounts as follows:
Revenue and expense associated with service fee development is accounted for under the percentage of completion method. Revenues are recognized on the percentage of completion method based on applicable costs incurred with respect to each development agreement. The Company uses the relative sales value method to allocate costs and recognize profits from service fee development. Under the relative sales value method, estimates of aggregate project revenues and aggregate project costs are used to determine the allocation of project cost of sales and the resulting profit in each accounting period. In subsequent periods, cost of sale allocations and the resulting profits are adjusted to reflect changes in the actual and estimated costs and revenues of each project. Provisions for estimated losses on uncompleted contracts are recognized immediately in the period in which such losses are determined.
Deferred Financing and Leasing Costs
Costs incurred in connection with the financing of the credit facility or leasing are capitalized and amortized on a straight line basis over the term of the related loan or lease. Costs incurred in connection with the financing of mortgage loans or unsecured notes are reported as a deduction from the face amount of that liability and amortized on a straight line basis over the term of the related loan. Deferred financing cost amortization is reported as interest expense.
Certain employees of the Company are compensated for leasing services related to the Company's properties. The compensation directly related to these leasing services is capitalized and amortized as a deferred leasing cost over the term of the related lease. The total of this capitalized compensation was $3.8 million, $4.6 million and $3.9 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Fair Value of Financial Instruments
ASC 820, Fair Value Measurements and Disclosures, gives guidance on the fair value measurement of a financial asset or liability. Inputs used to develop fair value are classified in one of three categories: Level 1 inputs (quoted prices (unadjusted) in active markets for identical assets or liabilities), Level 2 inputs (inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly) and Level 3 inputs (unobservable inputs for the asset or liability).
The following disclosure of estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the following estimates are not necessarily indicative of the amounts the Company could have realized on disposition of the financial instruments at December 31, 2016 and December 31, 2015. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued interest, dividend and distributions payable and other liabilities are reasonable estimates of fair value because of the short-term nature of these instruments. The carrying value of the outstanding amounts under the Company's credit facility is also a reasonable estimate of fair value because interest rates float at a rate based on LIBOR.
The Company determines the fair value of its interest rate swaps by using the standard methodology of netting discounted future fixed cash payments with the discounted expected variable cash receipts. These variable cash receipts of interest rate swaps are based on expectations of future LIBOR interest rates (forward curves) estimated by observing market LIBOR interest rate curves. This is a Level 2 fair value calculation. Also, credit valuation adjustments are factored into the fair value calculations to account for potential nonperformance risk. These credit valuation adjustments were concluded to be not significant inputs for the fair value calculations for the periods presented. See Note 20 - Derivative Instruments.
The Company used a discounted cash flow model to determine the estimated fair value of its debt as of December 31, 2016 and December 31, 2015. This is a Level 3 fair value calculation. The inputs used in preparing the discounted cash flow model include actual maturity dates and scheduled cash flows as well as estimates for market value discount rates. The Company updates the discounted cash flow model on a quarterly basis to reflect any changes in the Company's debt holdings and changes to discount rate assumptions.
The following summarizes the fair value of the Company's mortgage loans and unsecured notes at December 31, 2015 and December 31, 2016 (in thousands):
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the Company generally is not subject to federal income taxation at the corporate level to the extent it distributes annually at least 100% of its REIT taxable income, as defined in the Code, to its shareholders and satisfies certain other organizational and operational requirements. The Company has met these requirements and, accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate rates (including any alternative minimum tax) and may not be able to qualify as a REIT for the four subsequent taxable years. Even as a REIT, the Company may still be subject to certain state and local income and property taxes, and to federal income and excise taxes on undistributed taxable income.
Several of the Company's subsidiaries are taxable REIT subsidiaries (each a "TRS") and are subject to federal and state income taxes separate from the Company. In general, a TRS may perform additional services for tenants and generally may engage in real estate or non-real estate businesses that are not permitted REIT activities. The Company itself is also subject to tax in certain states and the United Kingdom. Accordingly, the Company recognizes federal, state and foreign income taxes in accordance with US GAAP, as applicable.
There are no uncertain tax positions or possibly significant unrecognized tax benefits that are reasonably expected to occur within the next 12 months. The Company's policy is to recognize interest accrued related to unrecognized benefits in interest expense and penalties in other expense. There were no interest or penalties deducted in any of the years ended December 31, 2016, 2015 and 2014 and no interest and penalties accrued at December 31, 2016 or December 31, 2015 which related to any uncertain tax positions or significant unrecognized tax benefits.
Certain of the Company's taxable REIT subsidiaries had net operating loss carryforwards available of approximately $30.8 million as of December 31, 2016. These carryforwards begin to expire in 2018. The Company has considered future taxable income and has determined that a valuation allowance for the full carrying value of net operating loss carryforwards is appropriate.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, certain state and local jurisdictions, the United Kingdom and (in prior years) Luxembourg. With few exceptions, the Company and its subsidiaries are no longer subject to examination by taxing authorities in these jurisdictions for years prior to 2010.
The Federal tax cost basis of the wholly owned real estate was $6.5 billion and $7.6 billion at December 31, 2016 and 2015, respectively.
Share-Based Compensation
Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employees' requisite service period.
Derivative Financial Instruments
We borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility and certain bank mortgage loans bear interest at variable rates. Our long-term debt typically bears interest at fixed rates. Our interest rate risk management objectives are to limit generally the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We generally do not hold or issue these derivative contracts for trading or speculative purposes. The interest rate on all of our variable rate debt is generally adjusted at one or three month intervals, subject to settlements under interest rate hedge contracts.
Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss (for the Trust) and general partner's equity and limited partners' equity - common units (for the Operating Partnership) and is subsequently reclassified into interest expense in the period that the hedged forecasted transaction affects earnings.
Foreign Currency
The functional currency of the Company's United Kingdom operations is pounds sterling. The Company translates the financial statements for the United Kingdom operations into US dollars. For the Trust, gains and losses resulting from this translation are included in accumulated other comprehensive loss as a separate component of shareholders' equity and a proportionate amount of gain or loss is allocated to noncontrolling interest - operating partnership - common units. For the Operating Partnership, gains and losses resulting from this translation are included in general partner's equity and limited partners' equity - common units. Upon sale or upon complete or substantially complete liquidation of the Company's foreign investment, the gain or loss on the sale will include the cumulative translation adjustments that have been previously recorded in accumulated other comprehensive loss and noncontrolling interest - operating partnership - common units (for the Trust) and in general partner's equity and limited partners' equity - common units (for the Operating Partnership).
Comprehensive Income
Comprehensive income, as reflected on the consolidated statements of comprehensive income, is defined as all changes in equity during each period except for those resulting from investments by or distributions to shareholders. Accumulated other comprehensive loss, as reflected on the Company's consolidated balance sheets and consolidated statements of equity, reflects the effective portion of the cumulative changes in the fair value of derivatives in qualifying cash flow hedge relationships as well as gains and losses resulting from foreign currency translation.
Sales of Real Estate
The Company accounts for the sale of real estate assets and any related gain recognition in accordance with the accounting guidance applicable to sales of real estate, which establishes standards for recognition of profit on all real estate sales transactions, other than retail land sales. The Company recognizes the sale, and associated gain or loss from the disposition, provided that the earnings process is complete and the Company is not obligated to perform significant activities after the sale.
Earnings Per Share of the REIT
Basic earnings per share is calculated by dividing the income available to common shareholders for the period by the weighted average number of common shares outstanding during the period using the two class method. Diluted earnings per share is calculated by dividing the net income available to common shareholders for the period by the weighted average number of common and dilutive securities outstanding during the period.
Earnings Per Unit of the Operating Partnership
Basic earnings per unit is calculated by dividing the income available to common unitholders for the period by the weighted average number of common units outstanding during the period using the two class method. Diluted earnings per unit is calculated by dividing the income available to common unitholders for the period by the weighted average number of common and dilutive securities outstanding during the period.
Recently Issued Accounting Standards
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) ("ASU 2014-15"), which gives guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The new standard is effective for fiscal years ending after December 15, 2016 and for annual and interim periods thereafter. The Company adopted ASU 2014-15 during the fourth quarter of 2016. No additional disclosures were necessary as a result of this adoption.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance (except revenue in the scope of other accounting standards, including standards related to leasing). The standard clarifies the required factors that an entity must consider when recognizing revenue
and requires additional disclosures concerning contracts with customers, judgments concerning revenue recognition, and assets recognized for the costs to obtain or fulfill a contract. The standard also provides guidance regarding the measurement of gains and losses relative to the sale of certain nonfinancial assets, including real estate. ASU 2014-09 is effective for the Company beginning January 1, 2018. The Company has performed an initial assessment of ASU 2014-09 and plans to adopt the standard using the modified retrospective approach. Upon adoption of ASU 2016-02 (see below), the majority of our revenue will be subject to the allocation provisions outlined within the revenue standard. The Company is currently evaluating the specific implementation requirements for allocating the consideration within our contracts in accordance with ASU 2014-09 as well as other transactions subject to ASU 2014-09. The Company does not expect the new standard to have a material impact on the measurement and recognition of gains and losses on the sale of properties.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (Topic 810) ("ASU 2015-02"). The standard requires that all entities re-evaluate and revise consolidation documentation for limited partnerships and similar legal entities. It makes changes to both the variable interest model and voting model. The Company adopted ASU 2015-02 on January 1, 2016. The adoption of ASU 2015-02 did not have a material impact on the Company's financial position and results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for the Company beginning January 1, 2019. Early adoption of ASU 2016-02 is permitted. The standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. For leases in which the Company is the lessor, the standard requires that the lease and non-lease components of the lease agreement should be separated. Revenue related to the lease component of the contract will be recognized on a straight-line basis, while revenue related to the non-lease component will be recognized under the provisions of ASU 2014-09 (see above). For lease agreements longer than one year in which the Company is the lessee, the Company will measure the present value of the future lease payments and recognize a right-of-use asset and corresponding lease liability on its balance sheet. In addition, the new standard states that only direct leasing costs may be capitalized. The Company is evaluating the impact ASU 2016-02 will have on its financial position and results of operations.
In March 2016, the FASB issued ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships ("ASU 2016-05"). ASU 2016-05 states that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under FASB Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 is effective for the Company beginning January 1, 2017. Early adoption of ASU 2016-05 is permitted. The standard allows application on a prospective or modified retrospective basis. The Company does not believe that ASU 2016-05 will have a material impact on its financial position and results of operations.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 is designed to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for the Company beginning January 1, 2017. Early adoption of ASU 2016-09 is permitted. Certain amendments in the standard are to be applied retrospectively and certain amendments are to be applied prospectively. The Company does not believe that ASU 2016-09 will have a material impact on its financial position and results of operations.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 is designed to clarify how entities should classify cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for the Company beginning January 1, 2018. Early adoption of ASU 2016-15 is permitted. The standard requires retrospective application unless it is impracticable to do so. The Company is evaluating the impact ASU 2016-15 will have on its statement of cash flows.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 is designed to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses with application of the standard applied on a prospective basis upon adoption. Early adoption is permitted, including for interim or annual periods for which the financial statements have not been issued or made available for issuance. The Company has elected to early adopt ASU 2017-01 beginning on October 1, 2016. The adoption of ASU 2017-01 did not have a material impact on the Company's financial position or results of operations.
Adjustment of previously reported financial information
The Company became a party to a land development agreement in the United Kingdom also known as Kings Hill in 2003. The agreement between the Company and Kent County Council (“KCC”) provides for the Company’s participation in profits realized from the development and sale of primarily residential land and infrastructure. This development has proceeded in phases with Phase 1 of the project complete, and with Phase 2 of the project nearing completion as of the end of 2016. In August 2015, the
Company also received planning permission to convert, develop and sell certain commercial land at Kings Hill as residential. This additional residential development is known as Phase 3.
The Company has recognized its profit participation from the Kings Hill development as Other Income as KCC’s land has been sold and all related rights and obligations have lapsed over the course of the project. As Phase 2 was coming nearer to completion by the end of 2016, the Company determined that net profit from Kings Hill was not properly recognized in prior periods. The Company determined that the errors resulted largely from incorrect assumptions in its accounting model used to calculate the cost of sales to be recognized when land was sold and all related rights and obligations lapsed and in establishing its UK income tax provision beginning in 2003. In the aggregate, using the current exchange rate as of December 31, 2016, these errors resulted in a cumulative understatement of Other Income of $12.7 million and a cumulative overstatement of Income Taxes of $3.9 million in the current and prior periods.
The net effect of these adjustments from amounts the Company previously reported resulted in a decrease in net income of $0.5 million for the year ended December 31, 2016, an increase in net income of $1.5 million for the year ended December 31, 2015, and an increase in net income of $308,000 for the year ended December 31, 2014. The remaining net impact of these adjustments relates to periods prior to 2014.
In accordance with applicable accounting guidance, an adjustment to the financial statements for each individual prior period presented is required to reflect the correction of the period-specific effects of the change, if material. Based on our evaluation of the relevant quantitative and qualitative factors, we determined the identified corrections are immaterial to the Company’s individual prior period consolidated financial statements; however, the cumulative correction of the prior period errors would be material to the Company's current year Consolidated Statements of Comprehensive Income. Consequently, the Company has adjusted certain prior period amounts to correct these errors.
The tables below summarize the effect of the adjustment to previously reported consolidated financial statements as of December 31, 2015 and for the years ended December 31, 2015 and 2014.
The Company also made changes to the January 1, 2014 balances in the Consolidated Statements of Equity as follows:
3. INCOME PER COMMON SHARE OF THE TRUST
The following table sets forth the computation of basic and diluted income per common share of the Trust (in thousands except per share amounts):
Dilutive shares for long-term compensation plans represent the unvested common shares outstanding during the year as well as the dilutive effect of outstanding options. The amounts of anti-dilutive options that were excluded from the computation of diluted income per common share as the exercise price was higher than the average share price of the Company in 2016, 2015 and 2014 were 755,000, 1.5 million and 850,000, respectively.
During the years ended December 31, 2016, 2015 and 2014, 369,000, 65,000 and 44,000 common shares, respectively, were issued upon the exercise of options.
During the years ended December 31, 2016, 2015 and 2014, individuals acquired 9,044, 14,491 and 3,000 common shares, respectively, in exchange for the same number of common units. These individuals acquired these common units in connection with their contributions to the Operating Partnership of certain assets in prior years. The exchange of common shares for the common units is exempt from the registration requirement of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereunder.
During the years ended December 31, 2016, 2015 and 2014, distributions per common share were $1.90 for each period.
4. INCOME PER COMMON UNIT OF THE OPERATING PARTNERSHIP
The following table sets forth the computation of basic and diluted income per common unit of the Operating Partnership (in thousands, except per unit amounts):
Dilutive units for long-term compensation plans represent the unvested common units outstanding during the year as well as the dilutive effect of outstanding options. The amounts of anti-dilutive options that were excluded from the computation of diluted income per common unit as the exercise price was higher than the average unit price of the Company in 2016, 2015 and 2014 were 755,000, 1.5 million and 850,000, respectively.
During the years ended December 31, 2016, 2015 and 2014, 369,000, 65,000 and 44,000 common units, respectively, were issued upon the exercise of options.
During the years ended December 31, 2016, 2015 and 2014, individuals acquired 9,044, 14,491 and 3,000 common shares of the Trust in exchange for the same number of common units of the Operating Partnership. These individuals acquired these common units in connection with their contributions to the Operating Partnership of certain assets in prior years. The exchange of common shares for the common units is exempt from the registration requirement of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereunder.
During the years ended December 31, 2016, 2015 and 2014, distributions per common unit were $1.90 for each period.
5. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table sets forth the components of Accumulated Other Comprehensive Loss (in thousands):
(1)
Amounts reclassified out of Accumulated Other Comprehensive Loss/General & Limited Partner's Equity into contractual interest expense.
6. REAL ESTATE
The Company owns and operates industrial and office properties. The carrying value of these properties by type as of December 31, 2016 and 2015 is as follows (in thousands):
Depreciation expense was $166.8 million, $181.0 million and $179.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Information on the operating properties the Company sold during the years ended December 31, 2016 and 2015 is as follows:
2016 Sales
2015 Sales
Included in the sales for the year ended December 31, 2015 are 22 properties and three acres of land in the Carolinas/Richmond segment that the Company sold for $110.3 million to a firm in which the brother of David L. Lingerfelt, a member of the Company's Board of Trustees, has an equity interest.
During the year ended December 31, 2015, the Company completed a portfolio sale consisting of 41 properties and 20 acres of land in the Southeastern PA segment. As of December 31, 2016 and 2015 the Company had deferred gain recognition related to this sale in the amount of $14.3 million which is recorded in other liabilities on the accompanying consolidated balance sheets.
Information on the operating properties and land parcels the Company acquired during the years ended December 31, 2016 and 2015 is as follows:
2016 Acquisitions
2015 Acquisitions
7. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
Listed below are the unconsolidated joint ventures in which the Company has a noncontrolling interest. The Company receives fees from these joint ventures for services it provides. These services include property management, leasing, development and administration. These fees are generally included in interest and other income in the accompanying consolidated statements of comprehensive income. For the three months ended December 31, 2016, the Company began including development-related fees in development service income in the consolidated statements of comprehensive income. The Company may also receive a promoted interest if certain return thresholds are met. The accounting policies for the unconsolidated joint ventures in which the Company has a noncontrolling interest are the same as those for the Company.
On a periodic basis, management assesses whether there are any indicators that the value of the properties owned by the unconsolidated joint ventures may be impaired. As detailed below, management has determined that certain assets are impaired as the unconsolidated joint ventures dispose of and anticipate the potential disposition of certain properties prior to the end of their remaining useful lives.
Liberty Venture I, LP
As of December 31, 2016, the Company had a 25% interest in Liberty Venture I, LP, an entity engaged in the ownership of industrial properties in New Jersey. This joint venture is part of the Company's New Jersey reportable segment.
As of December 31, 2016, the joint venture owned 28 industrial properties totaling 4.5 million square feet. The joint venture also had one property under development, which is expected to comprise, upon completion, 302,000 square feet and is expected to represent a Total Investment of $20.5 million.
During the year ended December 31, 2015, the joint venture realized gross proceeds of $8.5 million from the sale of one property totaling 198,000 square feet.
The Company had a receivable from Liberty Venture I, LP for $250,000 and $451,000 as of December 31, 2016 and 2015, respectively. This related party receivable is reflected as prepaid expenses and other assets in the Company's consolidated balance sheets.
During the year ended December 31, 2014, the joint venture acquired three properties comprising 603,000 square feet and 51 acres of land from the Company for $43.0 million. The Company recognized a gain of $2.5 million on this transaction. This gain is included in gain on property dispositions in the Company's consolidated statements of comprehensive income.
The Company recognized $2.3 million, $1.6 million and $1.4 million in fees for services during the years ended December 31, 2016, 2015 and 2014, respectively.
Kings Hill Unit Trust
As of December 31, 2016, the Company had a 20% interest in Kings Hill Unit Trust, an entity engaged in the ownership of office and industrial properties in the County of Kent, United Kingdom. This joint venture is part of the Company's United Kingdom reportable segment.
As of December 31, 2016, the joint venture owned three industrial properties and 11 office properties totaling 490,000 square feet.
The Company had notes receivable from Kings Hill Unit Trust for an aggregate of $4.1 million and $4.7 million as of December 31, 2016 and 2015, respectively. The note receivable bears interest at a rate of 10% and is due in November 2020. These related party receivables are reflected in investments in and advances to unconsolidated joint ventures in the Company's consolidated balance sheets.
The Company had a receivable from Kings Hill Unit Trust for $121,000 and $271,000 as of December 31, 2016 and 2015, respectively. This related party receivable is reflected as prepaid expenses and other assets in the Company's consolidated balance sheets.
The Company recognized $293,000, $304,000 and $285,000 in fees for services during the years ended December 31, 2016, 2015 and 2014, respectively.
Liberty Illinois, LP
As of December 31, 2016, the Company had a 25% interest in Liberty Illinois, LP, an entity primarily engaged in the ownership of industrial properties in Illinois. This joint venture is part of the Company's Chicago/Milwaukee reportable segment.
As of December 31, 2016, the joint venture owned 12 industrial properties totaling 4.9 million square feet and 248 acres of developable land.
During the year ended December 31, 2016, the joint venture sold four properties containing 636,000 square feet for $32.5 million. The Company's share of gain on property dispositions was $1.0 million and is included in equity in earnings of unconsolidated joint ventures in the accompanying consolidated statements of comprehensive income.
The Company had a receivable from Liberty Illinois, LP for $132,000 of December 31, 2016. This related party receivable is reflected as prepaid expenses and other assets in the Company's consolidated balance sheets.
The Company recognized $1.0 million, $1.3 million and $1.0 million in fees for services during the years ended December 31, 2016, 2015 and 2014, respectively.
Liberty Washington, LP
As of December 31, 2016, the Company had a 25% interest in Liberty Washington, LP, an entity engaged in the ownership of office properties in Washington, D.C (and formerly Northern Virginia). This joint venture's properties are part of the Company's DC Metro reportable segment. During the year ended December 31, 2016, the Company divested itself of properties in this joint venture that were located in Northern Virginia (see below). These properties had been part of a reportable segment classified as Other.
As of December 31, 2016, the joint venture owned two office properties totaling 451,000 square feet.
During the year ended December 31, 2016, the joint venture sold 12 properties located in Northern Virginia containing 1.2 million square feet and 6.0 acres of land for $187.2 million.
During the year ended December 31, 2016, due to adverse conditions in the Northern Virginia office market, six properties containing 698,000 square feet were transferred to mortgage lenders in satisfaction of an aggregate of $112.5 million in nonrecourse mortgage loans that were secured by the properties. The book values of these properties had been written down to fair value in prior periods.
Because these loans were nonrecourse, the Company believes that the transfers described above will not have an ongoing effect on its operating results or financial condition.
The Company's share of gain from property dispositions and extinguishment of debt is included in equity in earnings of unconsolidated joint ventures in the accompanying consolidated statements of comprehensive income. During the year ended December 31, 2016, the Company's share of gain from extinguishment of debt was $4.2 million. The Company's share of gain on property dispositions for the year ended December 31, 2016 was $6.0 million.
During the year ended December 31, 2015, the joint venture realized gross proceeds of $5.0 million from the sale of one property totaling 80,000 square feet.
The Company had a receivable from Liberty Washington, LP for $322,000 and $693,000 as of December 31, 2016 and 2015, respectively. This related party receivable is reflected as prepaid expenses and other assets in the Company's consolidated balance sheets.
During the year ended December 31, 2015, the Company concluded that certain of the properties owned by this joint venture were impaired and the joint venture recorded impairment charges of $56.8 million. The Company's share of this impairment charge was $11.5 million. The impairment charges were related to the Company's Northern Virginia reportable segment and the Company's share was included in equity in earnings of unconsolidated joint ventures in the accompanying consolidated statements of comprehensive income. The Company determined these impairments based on third party offer prices. This is a Level 2 fair value calculation.
During the year ended December 31, 2014, the Company concluded that certain of the properties owned by this joint venture were impaired and the joint venture recorded an impairment charge of $172.7 million. The Company was not required to record its share of this impairment charge through equity in earnings of unconsolidated joint ventures as this amount was previously recognized through an other-than-temporary impairment charge related to this joint venture that was recorded in 2009.
The Company recognized $2.0 million, $4.8 million and $4.4 million in fees for services during the years ended December 31, 2016, 2015 and 2014, respectively.
Liberty/Comcast 1701 JFK Boulevard, LP
As of December 31, 2016, the Company had a 20% interest in Liberty/Comcast 1701 JFK Boulevard LP ("Liberty/Comcast"), formerly known as Liberty/Commerz 1701 JFK Boulevard, LP, an entity engaged in the ownership of a 1.25 million square foot office tower in Philadelphia, Pennsylvania. During the year ended December 31, 2015, the limited partnership agreement was amended to replace the general partner and admit a new general partner. As a result of this amendment the Company determined that this joint venture is a VIE. Because the Company and its third party partner share control of the joint venture as both parties have the power to direct its activities, the Company determined that it is not the primary beneficiary and that the equity method of accounting is appropriate. This joint venture is part of the Company's Philadelphia reportable segment.
The Company had a payable to this joint venture for $59,000 as of both December 31, 2016 and 2015. This related party payable is reflected in investments in and advances to unconsolidated joint ventures in the Company's consolidated balance sheets.
The Company had a receivable from this joint venture for $401,000 and $407,000 as of December 31, 2016 and 2015, respectively. This related party receivable is reflected in prepaid expenses and other assets in the Company's consolidated balance sheets.
The Company recognized $2.7 million, $2.7 million and $2.4 million in fees for services during the years ended December 31, 2016, 2015 and 2014 respectively.
Liberty Property 18th & Arch LP and Liberty Property 18th & Arch Hotel, LP
On June 30, 2014, the Company entered into two joint ventures for the purpose of developing and owning the Comcast Technology Center (the "Project") located in Philadelphia, Pennsylvania as part of a mixed-use development. The 59-story building will include 1.3 million square feet of leasable office space (the "Office") and a 222-room Four Seasons Hotel (the "Hotel") (collectively, "Liberty Property 18th and Arch"). Completion of the first phase of the Project is anticipated to be in the third quarter of 2017. Project costs for the development of the Project, exclusive of tenant-funded interior improvements, are anticipated to be approximately $932 million. The Company's investment in the project is expected to be approximately $186 million with 20% ownership interests in both joint ventures. As of December 31, 2016, the Company's investment in these joint ventures was $133.0 million and is reflected in investments in and advances to unconsolidated joint ventures in the Company's consolidated balance sheet. The Company began development on the building during 2014 and as of December 31, 2016, the total development in progress for the joint ventures was $671.0 million. These joint ventures are part of the Company's Philadelphia reportable segment.
The two joint ventures have engaged the Company as the developer of the Project pursuant to a Development Agreement by which the Company agrees, in consideration for a development fee, to be responsible for all aspects of the development of the Project and to guarantee the timely lien-free completion of construction of the Project and the payment, subject to certain exceptions, of any cost overruns incurred in the development of the Project. The Company is accounting for the development of this project using the percentage of completion method. During the years ended December 31, 2016, 2015 and 2014, the Company recognized $4.8 million, $5.1 million and $1.8 million, respectively, in developer and other fees related to the project.
The Company had a receivable from this joint venture of $1.3 million as of December 31, 2016. This receivable is included in prepaid expenses and other assets in the Company's consolidated balance sheets.
The Company had a payable to this joint venture of $1.2 million as of December 31, 2015. This payable is included in other liabilities in the Company's consolidated balance sheets.
During the year ended December 31, 2016, the joint venture sold three residential condominium units located on the 45th floor containing 14,700 square feet for $14.3 million. The Company's share of gain on property dispositions was $0.3 million and is included in equity in earnings of unconsolidated joint ventures in the accompanying consolidated statements of comprehensive income.
The Company will manage and lease the Office and Four Seasons Hotels Limited will manage the Hotel.
Other Joint Ventures
As of December 31, 2016, the Company had a 50% ownership interest in three additional unconsolidated joint ventures. One of these joint ventures has six operating properties and an investment in land held for development and is part of the Company's Orlando reportable segment. One of these joint ventures sold its real estate assets in 2016 and was part of the Company's United Kingdom reportable segment. The sales price was $13.7 million and the Company's share of the loss on sale was $6,000. This amount is included in in equity in earnings of unconsolidated joint ventures in the accompanying consolidated statements of comprehensive income.
One joint venture has a leasehold interest and does not operate or own operating properties and is part of the Company's United Kingdom reportable segment. The Company had a note payable due to this joint venture of $2.3 million and $2.7 million as of December 31, 2016 and 2015, respectively. The note payable is interest free and is due upon written notice from the joint venture. This related party payable is reflected in investments in and advances to unconsolidated joint ventures in the Company's consolidated balance sheets.
Additionally, as of December 31, 2016, the Company had a 20% ownership interest in an unconsolidated joint venture that owns one acre of developable land and is part of the Company's Philadelphia reportable segment.
The Company's share of each of the joint venture's earnings is included in equity in earnings of unconsolidated joint ventures in the accompanying consolidated statements of comprehensive income.
Summary Financial Data
The condensed balance sheets as of December 31, 2016 and 2015 and condensed statements of operations for the years ended December 31, 2016, 2015 and 2014 for Liberty Venture I LP, Kings Hill Unit Trust, Liberty Illinois, LP, Liberty Washington LP, Liberty/Comcast, Liberty Property 18th & Arch, and the other unconsolidated joint ventures are as follows (in thousands):
Condensed Balance Sheets:
Condensed Statements of Operations:
(1)
Differences between the Company's net investment in unconsolidated joint ventures and its underlying equity in the net assets of the venture are primarily a result of impairments related to the Company's investment in unconsolidated joint ventures, the deferral of gains associated with the sales of properties to joint ventures in which the Company retains an ownership interest and loans made to the joint ventures by the Company. These
adjustments have resulted in an aggregate difference reducing the Company's investments in unconsolidated joint ventures by $1.4 million and $4.5 million as of December 31, 2016 and 2015, respectively. Differences between historical cost basis and the basis reflected at the joint venture level (other than loans) are typically depreciated over the life of the related asset.
(2)
Represents the combined results of two joint ventures related to the property at 18th and Arch Streets, Philadelphia.
(3)
Other income/(expense) for this group of joint ventures reflects gains related to the sales of land leasehold interests totaling $7.1 million, $9.9 million and $9.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.
8. DEFERRED FINANCING AND LEASING COSTS
Deferred financing and leasing costs were comprised of the following as of December 31, 2016 and 2015 (in thousands):
Amortization of deferred financing costs was $4.0 million, $4.4 million and $4.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. Amortization of deferred leasing costs and origination value intangible was $37.1 million, $44.2 million and $51.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.
As of December 31, 2016, the remaining weighted-average amortization period was 3.7 years for market value intangible and 4.6 years for origination value intangible.
The table above includes market value intangible assets. There were also $4.4 million and $6.1 million of unamortized market value intangible liabilities as of December 31, 2016 and 2015, respectively. These liabilities are included as other liabilities in the accompanying consolidated balance sheets of the Company. Amortization of the aggregate asset and liability for market value intangible was an expense of $1.6 million, $1.9 million and $2.8 million for the years ended December 31, 2016, 2015, and 2014, respectively. These amounts were included as a decrease in rental revenue in the accompanying consolidated statements of comprehensive income.
The aggregate amortization of net market value intangible assets and liabilities is a decrease (increase) in rental revenue over the next five years and thereafter as follows (in thousands):
The aggregate amortization expense for origination value intangible asset for the next five years and thereafter is as follows (in thousands):
9. INDEBTEDNESS
Overview
Indebtedness consists of mortgage loans, unsecured notes, and borrowings under a credit facility. The weighted average interest rates for the years ended December 31, 2016, 2015 and 2014 were 4.3%, 4.6% and 5.0%, respectively. Interest costs during the years ended December 31, 2016, 2015 and 2014 in the amount of $24.1 million, $16.7 million and $13.2 million, respectively, were capitalized. Cash paid for interest for the years ended December 31, 2016, 2015 and 2014 was $142.7 million, $149.6 million and $164.9 million, respectively.
The Company is subject to financial covenants contained in some of its debt agreements, the most restrictive of which are detailed below under the heading "Credit Facility." As of December 31, 2016, the Company was in compliance with all financial and non-financial covenants.
The scheduled principal amortization and maturities of the Company's mortgage loans, unsecured notes outstanding and the Credit Facility (as defined below) and the related weighted average interest rates at December 31, 2016 are as follows (in thousands, except percentages):
(1)
Includes deferred financing costs, premium/discount and market adjustments.
Mortgage Loans and Unsecured Notes
Mortgage loans with maturities ranging from 2017 to 2033 were collateralized by and in some instances cross-collateralized by properties with a net book value of $540.9 million as of December 31, 2016.
The interest rates on $2,569.9 million of mortgage loans (including $98.9 million fixed via a swap arrangement - see Footnote 20 - Derivative Instruments) and unsecured notes are fixed and range from 3.0% to 6.4%. The weighted average remaining term for the mortgage loans and unsecured notes is 6.7 years.
Credit Facility
The Company has maintained an unsecured credit facility throughout 2014, 2015 and 2016. During that period the Company has replaced, restated and amended its credit facility. This activity has resulted in changes to borrowing capacity, due dates, borrowing costs and covenant calculations. As replaced, restated and amended these credit facilities are referred to below as the "Credit Facility." The interest rate on borrowings under the Credit Facility fluctuates based upon ratings from Moody’s Investors Service, Inc., Standard and Poor’s Ratings Group and Fitch, Inc. Based on the Company's ratings as of December 31, 2016, borrowings under the Credit Facility currently bear interest at LIBOR plus 105 basis points. There is also a 20 basis point annual facility fee on the current borrowing capacity. The Credit Facility provides for the interest rate and facility fee rate to be adjusted up or down based on changes in the credit ratings on the Company's senior unsecured debt. The Credit Facility expires in March 2018 and has two six-month extensions at the Company's option, subject to the payment of a stated fee. The Credit Facility contains a competitive bid option, whereby participating lenders bid on the interest rate to be charged. This feature is available for up to 50% of the amount of the facility. There were no borrowings outstanding under the Credit Facility at December 31, 2016. As of December 31, 2016, letters of credit to third parties totaling $6.9 million had been issued for the account of the Company under this Credit Facility. The total borrowing capacity for the Credit Facility is $800 million and there is an accordion feature for an additional $400 million. The Credit Facility contains financial covenants, certain of which are set forth below:
•
total debt to total assets may not exceed 0.60:1;
•
earnings before interest, taxes, depreciation and amortization to fixed charges may not be less than 1.50:1;
•
unsecured debt to unencumbered asset value must equal or be less than 60%; and
•
unencumbered net operating income to unsecured interest expense must equal or exceed 175%.
Activity
In March 2015, the Company used proceeds from its Credit Facility together with available cash on hand to repay its $300 million 5.125% senior unsecured notes due March 2015.
In March 2015, the Company issued $400 million of 3.75% senior unsecured notes due 2025. The net proceeds from this issuance were used to repay borrowings under the Company's Credit Facility and for general corporate purposes.
In August 2015, the Company used proceeds from its Credit Facility to prepay in full without penalty a $105.8 million 7.0% mortgage loan due February 2016.
In December 2015, the Company used proceeds from its Credit Facility to prepay in full without penalty a $59.7 million 7.5% mortgage loan due March 2016.
In December 2015, the Company used proceeds from its Credit Facility to satisfy $16.0 million in unsecured notes bearing interest at 3.4% due December 2015.
In September 2016, the Company issued $400 million of 3.25% senior unsecured notes due 2026. The Company used a substantial portion of the net proceeds from these notes to prepay its 5.5% Senior Notes due December 2016 in the amount of $300 million. This prepayment resulted in a $3.8 million loss on debt extinguishment.
In November 2016, the Company used cash generated by the sale of properties (see Note 6) to prepay its 6.625% senior notes due October 2017 in the amount of $296.5 million and its 7.5% medium term notes due January 2018 in the amount of $100.0 million. This prepayment resulted in a $23.6 million loss on debt extinguishment.
10. LEASING ACTIVITY
Future minimum rental payments due from tenants under noncancelable operating leases as of December 31, 2016 are as follows (in thousands):
In addition to minimum rental payments, most leases require the tenants to pay for their pro rata share of specified operating expenses. These payments are included as operating expense reimbursement in the accompanying consolidated statements of comprehensive income.
11. NONCONTROLLING INTEREST - OPERATING PARTNERSHIP / LIMITED PARTNERS' EQUITY - PREFERRED UNITS
As of December 31, 2016, the Company had outstanding the following cumulative preferred units of the Operating Partnership:
The preferred units are putable at the holder's option at any time and are callable at the Operating Partnership's option after a stated period of time for cash.
Preferred distributions related to the Series I units were $472,000 for each of the years ended December 31, 2016, 2015 and 2014.
12. SHAREHOLDERS' EQUITY - TRUST
Common Shares
The Company paid to holders of its common shares and holders of its common units distributions of $285.9 million, $289.3 million and $286.9 million during the years ended December 31, 2016, 2015 and 2014, respectively. On a per share basis, the Company paid common share and common unit distributions of $1.90 during each of the years ended December 31, 2016, 2015 and 2014.
The following unaudited table summarizes the taxability of common share distributions (taxability for 2016 is estimated):
The Company's tax return for the year ended December 31, 2016 has not been filed. The taxability information presented for the 2016 distributions is based upon the best available data at the time of this filing. In addition, certain of the Company's prior federal income tax returns may still be subject to examination by various taxing authorities. Because the application of tax laws and regulations is susceptible to varying interpretations, the taxability of distributions being reported here could be changed at a later date as a result of an examination and final determination by such taxing authorities.
Common units
The common units of the Operating Partnership not held by the Trust outstanding as of December 31, 2016 have the same economic characteristics as common shares of the Trust. The 3,530,031 outstanding common units of the Operating Partnership not held by the Trust share proportionately in the net income or loss and in any distributions of the Operating Partnership. The common units of the Operating Partnership not held by the Trust are redeemable at any time at the option of the holder. The Trust, as the sole general partner of the Operating Partnership, may at its option elect to settle the redemption in cash or through the exchange on a one-for-one basis with unregistered common shares of the Trust. The market value of the 3,530,031 outstanding common units based on the closing price of the common shares of the Company at December 31, 2016 was $139.4 million.
No common units were issued in connection with acquisitions during 2016, 2015 or 2014.
Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase Plan under which holders of common shares may elect to automatically reinvest their distributions in additional common shares and may make optional cash payments for additional common shares. The Company may issue additional common shares or repurchase common shares in the open market for purposes of satisfying its obligations under the Dividend Reinvestment and Share Purchase Plan. During the years ended December 31, 2016, 2015, and 2014, 56,426, 1,036,437, and 1,643,536 common shares, respectively, were issued through the Dividend Reinvestment and Share Purchase Plan. The Company used the proceeds to pay down outstanding borrowings under the Company's Credit Facility and for general corporate purposes.
Continuous Equity Offering
The Company has a continuous equity offering program in place for up to $200 million of equity, of which $125 million remains available. The Company did not sell any common shares pursuant to its continuous equity offering program during 2016, 2015 or 2014.
Noncontrolling Interest - Consolidated Joint Ventures
Noncontrolling interest - consolidated joint ventures includes third-party ownership interests in consolidated joint venture investments.
Share Repurchase
In August 2015, the Company’s Board of Trustees authorized a share repurchase plan under which the Company may purchase up to $250 million of the Company’s outstanding common shares. Purchases made pursuant to the program will be made in either the open market or in privately negotiated transactions from time to time as permitted by securities laws and other legal requirements.
During the years ended December 31, 2016 and 2015, the Company purchased an aggregate of 1.4 million and 2.3 million common shares, respectively, for $40.9 million and $71.8 million, respectively, as part of the share repurchase plan.
13. OWNERS' EQUITY - OPERATING PARTNERSHIP
Common Units
General and limited partners' equity - common units relates to limited partnership interests of the Operating Partnership issued in connection with the formation of the Operating Partnership and certain subsequent acquisitions. The common units outstanding as of December 31, 2016 have the same economic characteristics as common shares of the Trust. The 3,530,031 outstanding common units are the limited partners' equity - common units held by persons and entities other than the Trust, the general partner of the Operating Partnership, which holds a number of common units equal to the number of outstanding common shares of beneficial interest. Both the common units held by the Trust and the common units held by persons and entities other than the Trust are counted in the weighted average number of common units outstanding during any given period. The 3,530,031 outstanding common units share proportionately in the net income or loss and in any distributions of the Operating Partnership and are exchangeable into the same number of common shares of the Trust. The market value of the 3,530,031 outstanding common units at December 31, 2016 based on the closing price of the common shares of the Company at December 31, 2016 was $139.4 million.
No common units were issued in connection with acquisitions during 2016, 2015 or 2014.
Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase Plan under which holders of common shares may elect to automatically reinvest their distributions in additional common shares and may make optional cash payments for additional common shares. The Company may issue additional common shares or repurchase common shares in the open market for purposes of satisfying its obligations under the Dividend Reinvestment and Share Purchase Plan. During the years ended December 31, 2016, 2015, and 2014, 56,426, 1,036,437, and 1,643,536 common shares, respectively, were issued through the Dividend Reinvestment and Share Purchase Plan. A corresponding number of common units were issued by the Operating Partnership. The Company used the proceeds to pay down outstanding borrowings under the Company's Credit Facility and for general corporate purposes.
Noncontrolling Interest - Consolidated Joint Ventures
Noncontrolling interest - consolidated joint ventures includes third-party ownership interests in consolidated joint venture investments.
Share Repurchase
In August 2015, the Company’s Board of Trustees authorized a share repurchase plan under which the Company may purchase up to $250 million of the Company’s outstanding common shares. Purchases made pursuant to the program will be made in either the open market or in privately negotiated transactions from time to time as permitted by securities laws and other legal requirements.
During the years ended December 31, 2016 and 2015, the Company purchased an aggregate of 1.4 million and 2.3 million common shares, respectively, for $40.9 million and $71.8 million, respectively, as part of the share repurchase plan. In connection with these repurchases, an equal number of common units were repurchased by the Operating Partnership from the Trust.
14. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan for the benefit of its full-time employees. The Company matches the employees' contributions up to 3% of the employees' salary and may also make annual discretionary contributions. Total 401(k) expense recognized by the Company was $874,000, $1,038,000 and $943,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
15. SHARE-BASED COMPENSATION
Compensation Plans
The Company has a share-based compensation plan (the "Plan") which is utilized to compensate key employees and non-employee trustees. The plan was last amended and restated in 2014. Pursuant to the Plan, grants of stock options, restricted shares and restricted stock units have been made. The Company has authorized the grant of shares and options under the Plan of up to 21.1 million common shares of the Company.
The Company capitalized $1.2 million, $0.9 million and $1.0 million in share-based compensation costs for the years ended December 31, 2016, 2015, and 2014, respectively.
Options
All options granted have a 10-year term and most options vest and are expensed over a 3-year period, with options to purchase up to 20% of the shares exercisable after the first anniversary, up to 50% after the second anniversary and 100% after the third anniversary of the date of grant.
Share-based compensation cost related to options for the years ended December 31, 2016, 2015 and 2014 was $165,000, $1.5 million and $1.8 million, respectively. No new options were issued during the year ended December 31, 2016.
The fair value of share option awards is estimated on the date of the grant using the Black-Scholes option valuation model. The following weighted-average assumptions were utilized in calculating the fair value of options granted during the periods indicated:
The historical volatility factor is based on the Company's historical monthly share prices. The weighted-average expected life is based on the contractual term of the options as well as the historical periods held before exercise.
A summary of the Company's share option activity and related information for the year ended December 31, 2016 follows:
The weighted average fair value of options granted during the years ended December 31, 2015 and 2014 was $4.11 and $4.09, respectively. Exercise prices for options outstanding as of December 31, 2016 ranged from $20.32 to $49.74. At December 31, 2016, the weighted average remaining contractual life of the options outstanding and exercisable was 5.3 years and 4.4 years, respectively.
During the years ended December 31, 2016, 2015 and 2014, the total intrinsic value of share options exercised (the difference between the market price at exercise and the price paid by the individual to exercise the option) was $3.5 million, $364,000 and $310,000, respectively. As of December 31, 2016, 316,000 of the options outstanding and exercisable had an exercise price higher than the closing price of the Company's common shares and are considered to have no intrinsic value at that date. As of December 31, 2016, 1.1 million options outstanding and exercisable had an exercise price lower than the closing price of the Company's common shares. The aggregate intrinsic value of these options was $6.4 million at that date. The total cash received from the exercise of options for the years ended December 31, 2016, 2015 and 2014 was $14.4 million, $2.1 million and $1.4 million, respectively.
As of December 31, 2016, there was $85,000 of unrecognized compensation costs related to nonvested options granted under the Plan. That cost is expected to be recognized over a weighted average period of 0.5 years.
Long Term Incentive Shares ("LTI")
Restricted LTI share grants made under the Plan are valued at the grant date fair value, which is the market price of the underlying common shares, and vest ratably over either a 3-year or 5-year period beginning with the first anniversary of the grant and subject to certain accelerated vesting due to the age and years of service of certain employees.
During 2016, 2015 and 2014, the Company granted restricted stock units to the executive officers pursuant to the Plan.
For the chief executive officer's award, a portion of the restricted stock units will vest up to 272% at the end of a 3-year period. For the other executives, a portion of the restricted stock units will vest up to 200% at the end of a 3-year period. A portion ("First Portion") of the award vests based on whether the Company's total return exceeds the average total returns of a selected group of peer companies. The grant date fair value of the First Portion was calculated based on a Monte Carlo simulation model and was determined to be 174%, 110% and 157% of the market value of a common share as of the grant date ("Market Value") for the chief executive officer and 136%, 90% and 125% of the Market Value for the other executives for the 2016, 2015 and 2014 grants, respectively. A separate grant was made to the Company's incoming Chief Financial Officer when he joined the Company, and the grant date fair value of this award's First Portion was determined to be 160% of the Market Value as of the grant date. The First Portion is amortized over the respective 3-year period subject to certain accelerated vesting due to the age and years of service of certain executive officers.
For the 2014 and 2015 grants, another portion of the award vests based on the Company's funds from operations. Targets are established for each of the 3 years in the relevant award period. Depending on how each year's performance compares to the projected performance for that year, the restricted stock units are deemed earned and will vest at the end of the award period. The fair value of this portion is based on the market value of a common share as of the grant date and is being amortized to expense during the period from grant date to the vesting dates, adjusting for the expected level of vesting that is anticipated to occur at those dates also subject to certain accelerated vesting provisions as described above. This component of the award was discontinued with the 2016 award.
For the 2016 award, the second portion of the award for the executive officers, other than the incoming Chief Financial Officer, vests at the end of three years based on continued employment. The second portion of the Chief Financial Officer's award vests ratably over three years.
The key assumptions used in the Monte Carlo simulations are as follows:
The volatility factor is based on the Company's historical daily share prices.
Share-based compensation cost related to restricted LTI share grants for the years ended December 31, 2016, 2015 and 2014 was $12.2 million, $10.0 million and $9.0 million, respectively.
The Company's restricted LTI share activity for the year ended December 31, 2016 is as follows:
The weighted average fair value of restricted shares granted during the years ended December 31, 2016, 2015 and 2014 was $32.48, $35.14 and $37.13 per share, respectively. As of December 31, 2016, there was $8.6 million of total unrecognized compensation cost related to nonvested shares granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.2 years. The total fair value of restricted shares vested during the years ended December 31, 2016, 2015 and 2014 was $9.0 million, $7.4 million and $9.3 million, respectively.
Bonus Shares
During the years ended December 31, 2016, 2015 and 2014, the Plan provided that employees of the Company could elect to receive bonuses or commissions in the form of common shares in lieu of cash ("Bonus Shares"). By making such election, the employee received shares equal to 120% of the cash value of the bonus or commission, less applicable withholding tax. Bonus Shares issued for the years ended December 31, 2016, 2015 and 2014 were 140,376, 111,700 and 103,834, respectively. Share-based compensation cost related to Bonus Shares for the years ended December 31, 2016, 2015 and 2014 was $4.7 million, $3.9 million and $3.9 million, respectively.
Profit Sharing
The Plan provides that employees of the Company, below the officer level, may receive up to 5% of base pay in the form of cash contributions to an investment account depending on Company performance. Compensation cost related to the profit sharing plan for the years ended December 31, 2016, 2015 and 2014 was $669,000, $965,000 and $543,000 respectively.
Remaining Reserved Common Shares under the Plan
An additional 5,264,285, 5,574,605 and 6,100,098 common shares were reserved for issuance for future grants under the Plan at December 31, 2016, 2015 and 2014, respectively.
Employee Share Purchase Plan
The Company registered 750,000 common shares under the Securities Act of 1933, as amended, in connection with an employee share purchase plan ("ESPP"). The ESPP enables eligible employees to purchase shares of the Company, in amounts up to 10% of the employee's salary, at a 15% discount to fair market value. There were 11,022, 13,127 and 12,612 shares issued, in accordance with the ESPP, during the years ended December 31, 2016, 2015 and 2014, respectively. Share-based compensation cost related to the ESPP for the years ended December 31, 2016, 2015 and 2014 was $122,000, $62,000 and $104,000, respectively.
16. COMMITMENTS AND CONTINGENCIES
Environmental Matters
Substantially all of the Company's properties and land were subject to Phase I Environmental Assessments and when appropriate Phase II Environmental Assessments (collectively, the “Environmental Assessments”) obtained in contemplation of their acquisition by the Company or obtained by predecessor owners prior to the sale of the property or land to the Company. The Environmental Assessments did not reveal, nor is the Company aware of, any non-compliance with environmental laws, environmental liability or other environmental claim that the Company believes would likely have a material adverse effect on the Company.
Operating Ground Lease Agreements
Future minimum rental payments under the terms of all non-cancelable operating ground leases under which the Company is the lessee, as of December 31, 2016, were as follows (in thousands):
Operating ground lease expense incurred by the Company during the years December 31, 2016, 2015 and 2014 totaled $1.0 million, $815,000 and $454,000, respectively.
Legal Matters
From time to time, the Company is a party to a variety of legal proceedings, claims and assessments arising in the normal course of business. The Company believes that as of December 31, 2016 there were no legal proceedings, claims or assessments expected to have a material adverse effect on the Company’s business or financial statements.
Other
As of December 31, 2016, the Company had letter of credit obligations of $6.9 million related to development requirements. The Company believes that it is remote that there will be a draw upon these letter of credit obligations.
As of December 31, 2016, the Company had 25 buildings under development. These buildings are expected to contain a total of 5.6 million square feet of leaseable space and represent an anticipated aggregate investment of $537.1 million. At December 31, 2016, Development in Progress totaled $267.5 million. In addition, as of December 31, 2016, the Company had invested $7.5 million in deferred leasing costs related to these development buildings.
As of December 31, 2016, the Company was committed to $15.0 million in improvements on certain buildings and land parcels.
As of December 31, 2016, the Company was obligated to pay for tenant improvements not yet completed for a maximum of $31.3 million.
As of December 31, 2016, the Company was committed to $11.3 million in future land purchases. The Company expects to complete these purchases during the year ended December 31, 2017.
As of December 31, 2016, the Company was committed to fund up to $4 million for tenant improvements and leasing commissions under a loan to the buyer of certain of the Company's properties.
Unconsolidated joint ventures in which the Company holds an interest, and in another case an unrelated third party, have engaged the Company as the developer of its development properties pursuant to development agreements. The Company agrees, in consideration for a development fee, to be responsible for all aspects of the development of the properties and to guarantee the timely lien-free completion of construction of the properties and the payment, subject to certain exceptions, of any cost overruns incurred in the development of the properties.
The Company is currently developing two buildings for its unconsolidated joint ventures which represent an anticipated aggregate investment by the joint ventures of $952.5 million.
As of December 31, 2016, the Company was also committed to approximately $132.6 million in costs related to its agreement to develop, on a fee basis, an office building and infrastructure improvements for American Water Works in Camden, New Jersey. As of December 31, 2016, $17.2 million of these costs had been incurred.
The Company maintains cash and cash equivalents at financial institutions. The combined account balances at each institution typically exceed FDIC insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes the risk is not significant.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of quarterly results of operations for the years ended December 31, 2016 and 2015 follows (in thousands, except for per share data):
(1)
The sum of quarterly financial data may vary from the annual data due to rounding.
(2)
Amounts include adjustment of previously reported financial information as discussed in Note 2.
18. SEGMENT INFORMATION
The Company owns and operates industrial properties nationally and owns and operates office properties in a focused group of office markets. Additionally, the Company owns certain assets in the United Kingdom. At December 31, 2016, the Company's reportable segments were based on the Company's method of internal reporting and were as follows:
•Carolinas/Richmond;
•Chicago/Milwaukee;
•Florida
•Houston;
•Lehigh/Central PA;
•Minnesota;
•Philadelphia;
•Southeastern PA; and
•United Kingdom.
Certain other segments are aggregated into an "Other" category which includes the reportable segments: Arizona; Atlanta; Cincinnati/Columbus/Indianapolis; Dallas; DC Metro; New Jersey; Southern California; and other.
Comparative prior periods have been restated to reflect current segment disclosures.
The Company evaluates the performance of its reportable segments based on net operating income. Net operating income includes operating revenue from external customers, real estate taxes, amortization of lease transaction costs and other operating expenses which relate directly to the management and operation of the assets within each reportable segment.
The Company's accounting policies for the segments are the same as those used in the Company's consolidated financial statements.
There are no material inter-segment transactions.
The operating information by reportable segment is as follows (in thousands):
(1) Prior to the fourth quarter of 2016, development service fee income had been classified as other income and development service fee expense had been classified as general and administrative expense. See Note 2.
(2) Includes activity on discontinued operations.
(3) Excludes costs which are included in determining segment-level net operating income.
The amount of depreciation and amortization expense related to tenant improvement and lease transaction costs within each reporting segment for the net operating income calculation is as follows (in thousands):
The Company's operating revenue by product type and by reportable segment for the years ended December 31, 2016, 2015 and 2014 is as follows (in thousands):
The Company's total assets by reportable segment as of December 31, 2016 and 2015 is as follows (in thousands):
The Company's real estate assets by reportable segment as of December 31, 2016 and 2015 is as follows (in thousands):
The Company incurred the following costs related to its long-lived assets for the years ended December 31, 2016, 2015 and 2014 (in thousands):
19. ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In November 2013, the Company entered into an Agreement of Sale and Purchase pursuant to which the Company agreed to sell 97 operating properties containing an aggregate of 6.6 million square feet and 159 acres of land for $697.3 million (the "Portfolio Sale"). In December 2013, the Company closed on the first of two planned settlements under this agreement. The proceeds from the first settlement were $367.7 million and included 49 properties totaling approximately 4.0 million square feet of space and 140 acres of land. In January 2014, the Company closed on the remaining settlement for proceeds of $329.6 million which consisted of 23 properties totaling 1.4 million square feet and 19 acres of land in the DC Metro reportable segment, 24 properties and 1.2 million square feet in the New Jersey reportable segment and one property totaling 37,000 square feet in the Company's Southeastern PA reportable segment. All of the operating properties in the Portfolio Sale were considered held for sale as of December 31, 2013.
Prior to the adoption of Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08") on January 1, 2014, the results of operations for all operating properties sold or held for sale during the reported periods were shown under discontinued operations on the consolidated statements of comprehensive income. Under ASU 2014-08, operating properties that were sold or classified as held for sale before the adoption of ASU 2014-08 continue to be classified as discontinued operations. Accordingly, operating properties previously reported as discontinued operations (including the Portfolio Sale) will continue to be presented as discontinued operations on the consolidated statements of comprehensive income for all periods presented. Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale or when the component or group of components is disposed of by sale or other than by sale.
A summary of the results of operations for the properties classified as discontinued operations through the respective disposition dates is as follows (in thousands):
Interest expense has been allocated to discontinued operations. The allocation of interest expense to discontinued operations was based on the ratio of net assets sold and held for sale (without continuing involvement) to the sum of total net assets plus consolidated debt.
In October 2016, the Company completed the sale of a portfolio of 108 properties totaling approximately 7.6 million square feet and 26.7 acres of land for $969 million for a net gain of $179.1 million. As this sale did not represent a strategic shift for the Company, it is not classified as discontinued operations
A summary of net income (excluding gain on sale) related to this portfolio is as follows (in thousands):
Assets Held for Sale
Two parcels of land in the Company's Florida reportable segment totaling 12.5 acres were considered held for sale as of December 31, 2016.
Asset Impairment
The Company disposes of and anticipates the potential disposition of certain properties prior to the end of their remaining useful lives. During the years ended December 31, 2016, 2015 and 2014, the Company recognized impairment losses of $3.9 million, $18.2 million and $0.1 million, respectively. The impairment losses are for operating properties or land parcels and were in the reportable segments and for the amounts as indicated below (in thousands):
The Company determined these impairments based on third party offer prices and quoted offer prices for comparable transactions which are Level 2 and Level 3 inputs, respectively, according to the fair value hierarchy established in ASC 820. These measurements have occurred throughout the respective periods as circumstances arise, and the resulting estimates of fair value are not necessarily reflective of measurements at the period’s end. The Company has evaluated each of its properties and land held for development and has determined that there were no additional valuation adjustments necessary at December 31, 2016. The Company applied reasonable estimates and judgments in determining the level of impairments recognized. Should external or internal circumstances change requiring the need to shorten the holding periods or adjust the estimated future cash flows of the Company’s assets, the Company could be required to record impairment charges in the future.
20. DERIVATIVE INSTRUMENTS
The Company borrows funds at a combination of fixed and variable rates. Borrowings under the Company's revolving credit facility and certain bank mortgage loans bear interest at variable rates. Our long-term debt typically bears interest at fixed rates. The Company's interest rate risk management objectives are to limit generally the impact of interest rate changes on earnings and cash flows and to lower the Company's overall borrowing costs. To achieve these objectives, from time to time, the Company enters into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. The Company generally does not hold or issue these derivative contracts for trading or speculative purposes. The interest rate on all of the Company's variable rate debt is generally adjusted at one or three month intervals, subject to settlements under interest rate hedge contracts.
Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss (for the Trust) and general partner's equity and limited partners' equity - common units (for the Operating Partnership) and is subsequently reclassified into interest expense in the period that the hedged forecasted transaction affects earnings.
The Company determines the fair value of its interest rate swaps by using the standard methodology of netting discounted future fixed cash payments with the discounted expected variable cash receipts. These variable cash receipts of interest rate swaps are based on expectations of future LIBOR interest rates (forward curves) estimated by observing market LIBOR interest rate curves. This is a Level 2 fair value calculation. Also, credit valuation adjustments are factored into the fair value calculations to account for potential nonperformance risk. These credit valuation adjustments were concluded to be not significant inputs for the fair value calculations for the periods presented.
The Company holds an interest in three interest rate swap contracts (“Swaps”) that eliminate the impact of changes in interest rates on the payments required under variable rate mortgages that were also assumed. The Swaps had aggregate notional amounts of $98.9 million and $101.4 million at December 31, 2016 and 2015, respectively, and expire at various dates between 2018 and 2020.
The Company accounts for the effective portion of changes in the fair value of a derivative in accumulated other comprehensive loss and subsequently reclassifies the effective portion to earnings over the term that the hedged transaction affects earnings. The Company accounts for the ineffective portion of changes in the fair value of a derivative directly in earnings.
The following table presents the location in the financial statements of the gains or losses recognized related to the Company’s cash flow hedges for the year ended December 31, 2016, 2015, and 2014 (in thousands):
The fair value of the interest rate swaps in the amount of $4.9 million and $7.1 million as of December 31, 2016 and 2015, respectively, is included in other liabilities in the accompanying consolidated balance sheets. The Company estimates that $0.6 million will be reclassified from accumulated other comprehensive loss as an increase to interest expense over the next twelve months.
The Company has agreements with its derivative counterparties that contain a provision whereby if the Company defaults on any of its indebtedness, including defaults where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. If the Company were to breach any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the agreements at their termination value including accrued interest for approximately $4.9 million.
21. SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED STATEMENT OF CASH FLOWS
The following are supplemental disclosures to the statements of cash flows for the years ended December 31, 2016, 2015 and 2014 (amounts in thousands):
Amounts paid in cash for deferred leasing costs incurred in connection with signed leases with tenants are paid in conjunction with improving (acquiring) property, plant and equipment. Such costs are not contained within net real estate. However, they are integral to the completion of a tenant lease and ultimately are related to the improvement and thus the value of the Company’s property, plant and equipment. They are therefore included in investing activities in the Company’s consolidated statements of cash flows.
Liberty Property Trust and Liberty Property Limited Partnership
Schedule II (in thousands)
The following table details the activity for the allowance for doubtful accounts.
* Denotes property is collateralized under mortgages with Athene, New York Life and Wells Fargo totaling $218.8 million.
(1) Does not include deferred financing costs and market adjustments.
(2) Includes foreign currency changes and write-offs of certain fully depreciated assets and net of impairment charges.
SCHEDULE III
LIBERTY PROPERTY TRUST AND LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
(In thousands)
A summary of activity for real estate and accumulated depreciation is as follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Controls and Procedures with respect to the Trust
(a) Evaluation of Disclosure Controls and Procedures
The Trust’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the Trust’s Chief Executive Officer and Chief Financial Officer have concluded that the Trust’s disclosure controls and procedures, as of the end of the period covered by this report, were effective to provide reasonable assurance that information required to be disclosed by the Trust in its reports filed or submitted under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms and (ii) accumulated and communicated to the Trust’s management, including its principal executive and principal financial officers, or persons performing similar function, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in the Trust’s internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected or are reasonable likely to materially affect the Company’s internal control over financial reporting.
Controls and Procedures with respect to the Operating Partnership
(a) Evaluation of Disclosure Controls and Procedures
The Trust’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, on behalf of the Trust in its capacity as the general partner of the Operating Partnership, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the Trust’s Chief Executive Officer and Chief Financial Officer have concluded that the Operating Partnership’s disclosure controls and procedures, as of the end of the period covered by this report, were effective to provide reasonable assurance that information required to be disclosed by the Operating Partnership in its reports filed or submitted under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms and (ii) accumulated and communicated to the Trust’s management, including its principal executive and principal financial officers, or persons performing similar function, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in the Operating Partnership’s internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected or are reasonable likely to materially affect the Operating Partnership’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 shall be included in the Proxy Statement to be filed relating to the Company's 2017 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 shall be included in the Proxy Statement to be filed relating to the Company's 2017 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required by Item 12 shall be included in the Proxy Statement to be filed relating to the Company's 2017 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND TRUSTEE INDEPENDENCE
The information required by Item 13 shall be included in the Proxy Statement to be filed relating to the Company's 2017 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 shall be included in the Proxy Statement to be filed relating to the Company's 2017 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Liberty Property Trust and Liberty Property Limited Partnership are included in Item 8.
1. REPORTS OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND CONSOLIDATED FINANCIAL STATEMENTS
Management's Annual Report on Internal Control Over Financial Reporting - Liberty Property Trust
Reports of Independent Registered Public Accounting Firm - Liberty Property Trust
Management's Annual Report on Internal Control Over Financial Reporting - Liberty Property Limited Partnership
Reports of Independent Registered Public Accounting Firm - Liberty Property Limited Partnership
Financial Statements - Liberty Property Trust
Balance Sheets:
Liberty Property Trust Consolidated as of December 31, 2016 and 2015
Statements of Comprehensive Income:
Liberty Property Trust Consolidated for the years ended December 31, 2016 , 2015 and 2014
Statements of Equity:
Liberty Property Trust Consolidated for the years ended December 31, 2016 , 2015 and 2014
Statements of Cash Flows:
Liberty Property Trust Consolidated for the years ended December 31, 2016 , 2015 and 2014
Financial Statements - Liberty Property Limited Partnership
Balance Sheets:
Liberty Property Limited Partnership Consolidated as of December 31, 2016 and 2015
Statements of Comprehensive Income:
Liberty Property Limited Partnership Consolidated for the years ended December 31, 2016 , 2015 and 2014
Statements of Owners' Equity:
Liberty Property Limited Partnership Consolidated for the years ended December 31, 2016 , 2015 and 2014
Statements of Cash Flows:
Liberty Property Limited Partnership Consolidated for the years ended December 31, 2016 , 2015 and 2014
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES:
Schedule II - Allowance for Doubtful Accounts for Liberty Property Trust and Liberty Property Limited Partnership
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2016 for Liberty Property Trust and Liberty Property Limited Partnership
All other schedules are omitted because they are either not required or the required information is shown in the financial statements or notes thereto.
3. EXHIBITS
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed.
____________
*
Filed herewith.
**
Furnished herewith
+
Confidential treatment has been granted by the Securities and Exchange Commission with respect to portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
@
Compensatory plan or arrangement.
$
The Company will file supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIBERTY PROPERTY TRUST
Date: March 1, 2017 By: /s/ WILLIAM P. HANKOWSKY
--------------------
WILLIAM P. HANKOWSKY
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIBERTY PROPERTY LIMITED PARTNERSHIP
Date: March 1, 2017 By: /s/ WILLIAM P. HANKOWSKY
--------------------
WILLIAM P. HANKOWSKY
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX