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, 2003, the Company’s portfolio consisted of 673 industrial and office properties (the “Properties in Operation”) totaling approximately 53.7 million square feet. In addition, at that date, the Company had 15 properties under development (the “Properties Under Development” and, together with the Properties in Operation, the “Properties”), and owned 1,079 acres of land, substantially all zoned for commercial use. As of December 31, 2003, the Company also owned interests in five joint ventures which held interests in 30 properties and 53 acres of developable land.
The Company provides leasing, property management, development, acquisition and other tenant-related services for the Properties in Operation. The Company’s 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 are multi-story and single-story office buildings located principally in suburban mixed-use developments or office parks. Substantially all of the Company’s Properties are located in prime business locations within established business communities offering excellent access to interstate highway systems.
The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 95.7% of the common equity of the Operating Partnership at December 31, 2003. The common units of limited partnership interest in the Operating Partnership (the “Common Units”) are exchangeable on a one-for-one basis (subject to antidilution protections) for the Trust’s Common Shares of Beneficial Interest, $0.001 par value per share (the “Common Shares”). The Common Units held by the limited partners were exchangeable for approximately 3.7 million Common Shares on December 31, 2003. The Company has issued Series B, C, and D Cumulative Redeemable Preferred Units of the Operating Partnership (the “Preferred Units”). The Preferred Units are exchangeable on a one-for-one basis after a stated date into Cumulative Redeemable Preferred Shares. Collectively, the ownership of the holders of Common and Preferred Units is reflected on the Trust’s financial statements as minority interest.
The Company’s executive offices are located at 65 Valley Stream Parkway, Malvern, Pennsylvania 19355. The telephone number is (610) 648-1700.
In addition to this annual report on Form 10-K, the Company files periodic and current reports, proxy statements and other information with the SEC. 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. You may also read and copy any document the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system (“EDGAR”) via electronic means, including the SEC’s home page on the Internet, 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, chief accounting 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 to its Investor Relations Department at the address set forth above.
Management and Employees
The Company’s 399 employees (as of February 24, 2004) are under the direction of 19 senior executives, who, on average, have been affiliated with the Company and the Predecessor for 14 years. The Company and the Predecessor have developed and managed commercial real estate for the past 31 years. The Company’s in-house leasing and property management staff operates in markets where it has a significant presence. This structure
enables the Company 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. At December 31, 2003, the Company’s reportable segments were based on the Company’s method of internal reporting and are as follows:
REPORTABLE SEGMENTS
MARKETS
Delaware Valley
Southeastern Pennsylvania, New Jersey
Midwest
Lehigh Valley, Michigan, Minnesota, Milwaukee/Chicago
Mid-Atlantic
Maryland, Piedmont Triad, Greenville, S.C., Richmond/Roanoke, Virginia Beach
Florida
Jacksonville, Orlando, Boca Raton, Tampa, Texas
United Kingdom
County of Kent
Business Objective and Strategies for Growth
The Company’s business objective is to maximize long-term profitability for its shareholders by being a recognized leader in commercial real estate through the ownership, management, development, and acquisition, of superior office and industrial properties. The Company intends to achieve this objective through offering office and industrial properties in multiple markets and operating as a leading landlord in the industry. The Company believes that this objective will provide the benefits of enhanced investment opportunities, economies of scale, risk diversification both in terms of geographic market and real estate product type, access to capital, and the ability to attract and retain personnel. The Company also strives to be a leading provider of customer service, providing an exceptional and positive customer experience. 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 recognized quality provider of five products (industrial properties, including big box warehouse, multi-tenant industrial, and flex/R&D, and office properties, including single-story office and multi-story office). When the Company’s marketing efforts identify opportunities, the Company will, in appropriate instances, pursue other office and industrial product types including high rise office towers.
Markets
The Company operates primarily in the Mid-Atlantic, Southeastern and Midwestern United States. Additionally, the Company owns certain assets in the United Kingdom. The Company’s goal is to operate in each of its markets with an appropriate product mix of office and industrial properties. The Company seeks to have a presence that allows it to be viewed as a significant participant in each market. The Company’s efforts emphasize business park development and asset aggregation. The Company gathers information from internal sources and independent third parties and analyzes this information to support its evaluation of markets and market conditions.
Organizational Plan
The Company seeks to maintain a management organization which 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 regarded real estate company through recruiting, training, and retaining capable people. The structure is designed to support a local office entrepreneurial platform operating within a value-added corporate structure.
The Company upgrades its information technology periodically to keep pace with advances in available technology. The Company commenced a process in 2003 of implementing an enterprise resource planning system. The system has been launched and will continue to be implemented throughout the Company in 2004.
Internal Growth Strategies
The Company seeks to maximize the profitability of the 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 its tenants to meet their lease obligations.
Increase Rental Rates
Current general economic conditions have resulted in significant downward pressure on rental rates and market rental rates have declined on a year over year basis. Nonetheless, the Company seeks to generate increased cash flow from the Properties in Operation through annual contractual increases in rental rates under its leases. The leases in effect with respect to the Properties in Operation as of December 31, 2003 provide for contractual rental increases that are expected to contribute an additional $4.6 million to the Company’s cash flow for the year ending December 31, 2004. The Company intends to continue to negotiate for annual contractual rental rate increases in its leases.
Cost Controls
The Company seeks to identify best practices across operating platforms in order to enhance cost savings and other efficiencies. The Company also employs an annual capital improvement and preventative maintenance program designed to reduce the operating costs of the Properties and maintain the long-term value of the Properties.
Customer Service Initiatives
The Company seeks to achieve high tenant retention through a comprehensive customer service program, which is designed to provide an exceptional and positive customer 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 customer satisfaction.
External Growth Strategies
The Company seeks to maximize long-term profitability for its shareholders through the development, acquisition and disposition of properties.
Development
The Company pursues attractive development opportunities, focusing primarily on high-quality suburban industrial and office properties within its existing markets. When the Company’s marketing efforts identify opportunities, the Company will pursue urban opportunities and development opportunities outside of the Company’s established markets. The Company and its Predecessor have developed over 45 million square feet of commercial real estate during the past 31 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, 2003, the Company completed five build-to-suit projects, one build-to-suit expansion, and four inventory projects totaling approximately 1.3 million square feet of leaseable space and representing an aggregate Total Investment, as defined below, of approximately $204.7 million. As of December 31, 2003, these completed development properties were approximately 87.8% leased. The “Total Investment” for a Property is defined as the Property’s purchase price plus closing costs and management’s estimate, as determined at the time of acquisition, of the cost of necessary building improvements in the case of acquisitions, or land costs and land and building improvement costs in the case of development projects, and, where appropriate, other development costs and carrying costs.
As of December 31, 2003 the Company had 15 Properties Under Development which are expected to generate, upon completion, approximately 1.5 million leaseable square feet and are expected to represent a Total Investment of approximately $132.4 million. Approximately 62.1% of such leaseable space was pre-leased as of December 31, 2003. The scheduled deliveries of the 1.5 million square feet of leaseable space in Properties Under Development are as follows (in thousands, except percentages):
The Company believes that, because it is a fully integrated real estate firm, its base of commercially zoned land in existing industrial and business parks provides a competitive advantage for future development activities. As
of December 31, 2003, the Company owned 1,079 acres of land held for development, substantially all 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’s land holdings include land in Philadelphia’s central business district which is being readied for development in connection with a proposed office tower. The Company anticipates that its land holdings would support, as and when developed, approximately 12.1 million leaseable square feet. The Company’s investment in land held for development as of December 31, 2003 was $162.5 million.
Acquisitions/Dispositions
The Company seeks to acquire properties consistent with its business objectives and strategies. The Company executes its acquisition strategy by purchasing properties which management believes will create shareholder value over the long-term.
During the year ended December 31, 2003, the Company acquired 16 properties comprising approximately 1.6 million leaseable square feet for a Total Investment of $110.4 million.
The Company disposes of Properties and land held for development which 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, 2003, the Company sold ten Properties in Operation and one development property comprising approximately 0.6 million square feet of leaseable space, and nine parcels of land, for $52.4 million.
Joint Ventures
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 fund its development and acquisition capital requirements. In some instances, joint venture partnerships provide the Company with additional local market or product type expertise. As of December 31, 2003, the Company had investments in four unconsolidated joint ventures, totaling $19.6 million. In addition, the Company has an investment in one consolidated joint venture which owns assets approximating $36.0 million.
United Kingdom Operations
The Company’s United Kingdom operation includes 16 Properties in Operation and one development property in the County of Kent, England. The 16 Properties in Operation and the one development property are located in a 650-acre, mixed commercial and residential community known as “Kings Hill,” which is approximately 25 miles southeast of London. The community has been developed over the past decade by a joint venture between the County of Kent and Rouse Kent Limited (“RKL”). During 2003, the Company exercised its option to purchase RKL for nominal consideration. The development agreement with the County of Kent allows RKL to develop additional commercial space and to participate in proceeds from the sale of residential land parcels to homebuilders.
The Company has also invested in two joint ventures to develop projects in separate locations in England and one joint venture which owns a Property in Operation. The Company believes that its development expertise, its access to capital and its relationship with tenants engaged in international business will create opportunities to service the needs of these tenants in both the United States and the United Kingdom. To date, these investments have been joint ventures with established real estate developers in the United Kingdom.
The Company continues to pursue its investment in Kings Hill and to identify other development and acquisition opportunities in the United Kingdom.
Subsequent Events
The Company intends to continue to pursue its development, acquisition and disposition strategies. The Company is currently in various stages of discussions and negotiations with respect to development, acquisition and disposition projects. The consummation of these or any other future developments, acquisitions or dispositions, if any, and the pace at which developments may be completed and acquisitions and dispositions made cannot be guaranteed.
Risk Factors
The Company’s results from operations and the ability to make distributions to our shareholders and pay debt service on 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 on page 4.
Risks Related to Our Business
Adverse events concerning our existing tenants, or negative market conditions that may affect our existing tenants could have an adverse impact on our ability to attract new tenants, relet space, collect rent or renew leases, and thus could adversely affect our cash flow from operations and inhibit growth.
Our cash flow from operations depends on the 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:
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lack of demand for space in the areas where our Properties are located
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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
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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
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economic or physical decline of the areas where our Properties are located
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potential risk of functional obsolescence of our Properties over time
At any time, any of our tenants may experience a downturn in its business that may weaken its financial condition. As a result, a tenant may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of the tenant’s lease and material losses to our Company.
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 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 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 terms than we are able to offer.
If the availability of land or high quality properties in our markets diminishes, our operating results could be adversely affected.
We may experience increased operating costs, which could adversely affect our operations.
Our Properties are subject to increases in operating expenses such as insurance, cleaning, electricity, heating, ventilation and air conditioning, administrative costs and other costs associated with security, landscaping, repairs and maintenance of our Properties. 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 at the same time 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 where warranted by market conditions. The decline in demand for real estate has reduced the amount of development we are undertaking. We have a number of ongoing development projects and a number of land projects being readied for development.
These projects include the proposed One Pennsylvania Plaza project, a proposed 1.3 million square foot office tower in Philadelphia’s central business district, which is discussed below.
Additionally, our general construction and development activities include the risks that:
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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 for that property
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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 because we may not be able to increase rents to compensate for the increase in construction costs
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some developments may fail to achieve expectations, possibly making them unprofitable
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we may be unable to obtain, or 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 determine to alter or discontinue our development efforts, future costs of the investment may be expensed as incurred rather than capitalized and we may determine the investment is impaired resulting in a loss
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we may expend funds on and devote management’s time to projects which we do not complete
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occupancy rates and rents at newly completed properties may fluctuate depending on a number of factors, including market and economic conditions, and may result in lower than projected rental rates with the result that our investment is not profitable
Our One Pennsylvania Plaza project is subject to a number of risks related to its development, construction and leasing.
The One Pennsylvania Plaza project represents an investment, as of December 31, 2003, of approximately $64.5 million. The Company acquired the land for the project in late 2000 with the intention to build a state of the art office tower to meet identified demand for office space in Philadelphia arising from a series of lease expirations of large commercial tenants in Philadelphia’s central business district during the 2005 to 2007 time frame. The project faces numerous challenges, including market conditions characterized by soft tenant demand. This condition has had an adverse impact on market rental rates and the resale value of Class A office buildings. Additionally, another new office tower project (725,000 square feet) located near the central business district has announced that it has substantial pre-leasing commitments. Although the Company does not believe that, as a result of its location, the other proposed tower is directly competitive with One Pennsylvania Plaza, the other tower does offer state and local tax incentives that may make it attractive to certain tenants and therefore creates additional leasing alternatives for tenants that will further weaken the rental market in the central business district.
The Company is currently exploring its ability to offer similar tax incentives by having its project site designated a Keystone Opportunity Zone or a Keystone Opportunity Improvement Zone (individually or collectively a “KOZ”) by the Commonwealth of Pennsylvania and the City of Philadelphia. A KOZ offers tax abatements or credits to companies that relocate or remain in KOZs. Specifically, businesses within the KOZ typically do not pay city or state taxes (i.e. real estate and corporate taxes). A KOZ designation requires an extensive approval process at the local and state level, as well as legislative approval and, once made, is effective for 15 years. The proposal to designate the Company’s project site as a KOZ has provoked extensive public debate and opposition from owners of existing office buildings. The designation of the project site as a KOZ would be helpful in attracting certain types of tenants who would be able to qualify for the benefits of the KOZ because they meet certain requirements.
As previously noted, the Company anticipates that it will attempt to attract tenants from among the substantial number of tenants whose leases expire in Philadelphia’s central business district during the period from 2005 to 2007. In order to benefit from this opportunity, substantial leasing of One Pennsylvania Plaza would need to occur during 2004. The Company will not commence construction without an acceptable level of pre-leasing.
Development of a project such as One Pennsylvania Plaza is subject to the general development and construction risks noted above. Those risks are magnified by the size of the project, anticipated to be approximately $425 million, and include construction risks associated with undertaking a construction project with the engineering and design complexities of a 58-story office tower. The project also bears the investment risk that the market value of this 1.3 million square foot office tower may not support the construction costs of $330 per square foot. Recent sales prices for several modern office towers, which were constructed on average 15 years ago, in Philadelphia’s central business district, are estimated to be an average price of $183 per square foot.
If the Company is unsuccessful in its leasing efforts, it may postpone, downsize or abandon the project with the result that future costs of the investment may be expensed as incurred rather than capitalized, and the Company may determine its investment is impaired, resulting in a loss.
The Company has not commenced construction of this project but is in detailed discussions with various prospective tenants, some of which would lease enough space to justify the commencement of construction. However at this time, the Company has not entered into a lease with any tenant and cannot give any assurance that it will do so.
We face risks associated with property acquisitions.
We acquire individual properties and portfolios of properties, and intend to continue to do so. Our acquisition activities and their success are subject to the following risks:
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when we are able to locate a desired 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, 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 in the Mid-Atlantic, Southeastern and Midwestern United States. 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.
We may not be able to access financial markets to obtain capital on a timely basis, or on acceptable terms.
In order to qualify as a REIT for federal income tax purposes, we are required to distribute at least 90% of taxable income to shareholders each year, and thus cannot reinvest this portion of income in the business. As a result, retained cash flows are somewhat limited and we rely on proceeds from Property dispositions and third party capital sources for a portion of our capital needs, including capital for acquisitions and development. The public debt and equity markets are among the sources we rely on. There is no guarantee that we will be able to access these markets, or any other source of capital. The 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 like 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 the portfolio declines. If the economic performance 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 $350 million credit facility and unsecured notes, as well as, at December 31, 2003, approximately $125.7 million in outstanding mortgage indebtedness, contain cross-default and/or cross-acceleration provisions, which means that a default on one obligation may constitute a default on other obligations.
We anticipate that only a small portion of the principal of our debt will be repaid prior to maturity. Therefore, we are likely to need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of our existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as the proceeds of sales of assets or new equity securities, our cash flow will not be sufficient to repay all maturing debt in years when significant “balloon” payments come due.
Our credit facility and unsecured debt securities contain customary restrictions, requirements and other 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 $350 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 or affect the market price of our common stock.
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 current 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 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.
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.
Property ownership through joint ventures will limit our ability to act exclusively in our interests.
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 co-venturers are inconsistent with ours, we may not in every case be able to act exclusively in our interests.
We may suffer economic harm if our enterprise resource planning software implementation experiences interruptions or delays.
On January 1, 2004 we launched an enterprise resource planning system for our business. It is anticipated that the enterprise resource planning system will continue to be implemented throughout the Company in 2004. The objective of the new information technology system is to improve our performance by achieving a number of specific financial and operational measures. The new information technology system has been designed to provide us with a stable, long-term platform enabling us to deliver value to our tenants through information sharing and electronic commerce as these issues become more important in future periods.
Enterprise resource planning implementations are challenging initiatives that carry substantial project risk in the areas of cost overruns, project delays and business interruption. Failure to properly implement the new information technology system could have an adverse impact on our operating results.
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 Properties promptly in response to economic or other conditions. In addition, provisions of the Internal Revenue 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 carry insurance coverage on our Properties of the type and in amounts that we believe are in line with coverage customarily obtained by owners of similar properties. We believe all of our Properties are adequately insured. However, we cannot guarantee that the limits of our current policies will be sufficient in the event of a catastrophe to our Properties. Our existing property and liability policies expire in May 2004. 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 environmental liabilities. If an uninsured loss or a loss in excess of insured limits should occur, we could lose capital invested in a Property, as well as any future revenue from the Property. We would nevertheless remain obligated on any mortgage indebtedness or other obligations related to the Property.
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.
It is our policy to retain independent environmental consultants to conduct Phase I environmental site assessments and asbestos surveys with respect to our acquisition of properties. 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 did 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 U.S. 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.
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 Internal Revenue Code (the “Code”), as to which there are only limited judicial or administrative interpretations. The complexity of these provisions and of the related income tax 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 Internal Revenue 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 cause our Board of Trustees to revoke our election to qualify as a REIT. This decision requires the consent of the holders of a majority of the voting interests of all of our outstanding Common Shares.
Risks associated with potential borrowings necessary to make distributions to qualify as a REIT.
We intend to make distributions to shareholders to comply with the distribution provisions of the Code necessary to maintain qualification as a REIT and to avoid income taxes and the non-deductible excise tax. Under certain circumstances, we may be required to borrow funds to meet the distribution requirements necessary to achieve the tax benefits associated with qualifying as a REIT. In such circumstances, we might need to borrow funds to avoid adverse tax consequences, even if our management believes that the prevailing market conditions are not generally favorable for such borrowings or that such borrowings would not be advisable in the absence of such tax considerations.
Certain officers of the Trust may not have the same interests as shareholders as to certain tax laws.
Certain officers of the Trust own Common Units. These units may be exchanged for our Common Shares. The 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
The Trust also owns units in the Operating Partnership. Because the Trust, as well as the certain officers who own units, face different consequences than shareholders do, the Trust and those 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 the Board of Trustees. This limitation could prevent the acquisition of control of the Company by a third party without the consent from the Board of Trustees.
We have a staggered board and certain restrictive nominating procedures. The Board of Trustees has three classes of trustees. The term of office of one class expires each year. Trustees for each class are elected for three-year terms as that class’ term expires. The terms of the Class I, Class II and Class III trustees expire in 2004, 2005 and 2006, respectively. Any nominee for trustee must be selected under the nominating provisions contained in our Declaration of Trust and By-Laws. The staggered terms for trustees and the nominating procedures may affect shareholders’ ability to take control of the Company, even if a change in control was in the shareholders’ interest.
The Company can issue preferred shares. Our Declaration of Trust authorizes the 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 was in the shareholders’ interest.
We have a poison pill. Under the shareholder rights plan, rights are issued along with each of the Trust’s Common Shares. Holders of these rights can purchase, under certain conditions, a portion of a preferred share of beneficial interest, or receive Common Shares of the Trust, or common shares of an entity acquiring us, or other consideration, having a value equal to twice the exercise price of the right. The exercise price of the right is $200. This arrangement is often called a “poison pill.” Our poison pill could have the effect of delaying or preventing a change of control of the Company, even if a change in control was in the shareholders’ 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.
General market conditions could change for the worse. 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 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.
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.
Transactions by the Trust of 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 provisions that would protect holders of the Operating Partnership’s debt securities in the event of (i) a highly leveraged or similar transaction involving the Operating Partnership, the management of the Operating Partnership or the Trust, or any affiliate of any these parties, (ii) a change of control, or (iii) certain reorganizations, restructuring, mergers or similar transactions involving the Operating Partnership or the Trust.
ITEM 2.
ITEM 2. PROPERTIES
The Properties in Operation, as of December 31, 2003, consisted of 406 industrial and 267 office properties. Single tenants completely occupy 237 Properties in Operation. The Company generally provides a reduced level of service in connection with the operation or maintenance of these properties. The remaining 436 of the Company’s Properties in Operation are multi-tenant properties for which the Company renders a range of building, operating and maintenance services.
As of December 31, 2003, the industrial Properties in Operation were 92.9% leased. The average building size for the industrial Properties in Operation is 86,386 square feet. As of December 31, 2003, the office Properties in Operation were approximately 89.6% leased. The average building size for the office Properties in Operation is 69,654 square feet.
A complete listing of the Properties in Operation appears as Schedule III to the financial statements of the Company included in this report. The table below sets forth certain information on the Company’s Properties in Operation as of December 31, 2003 (in thousands, except percentages).
The expiring square feet and annual net rent by year for the above Properties in Operation as of December 31, 2003 are as follows (in thousands, except percentages):
The table below highlights the Company’s top ten office tenants and the top ten industrial tenants.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The ownership of property and provision of services to the public entails an inherent risk of liability. Although the Company is engaged in litigation incidental to its business, there is no legal proceeding to which it is a party which, in the opinion of management, will materially adversely affect the results of the Company’s operations. The Company carries liability insurance against certain types of claims that management believes meets industry standards; however, there can be no assurance that any future legal proceedings (including any related judgments, settlements or costs) will not materially adversely affect the Company’s financial condition, liquidity, or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2003.
PART II
ITEM 5.
ITEM 5.
MARKET FOR THE REGISTRANTS’ COMMON EQUITY AND RELATED SHAREHOLDERS’ MATTERS
The Common Shares are traded on the New York Stock Exchange under the symbol “LRY.” 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 24, 2004, the Common Shares were held by 1,292 holders of record. Since its initial public offering, the Company has paid regular and uninterrupted quarterly dividends.
Although the Company currently anticipates that comparable cash dividends will continue to be paid in the future, 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 Internal Revenue Code of 1986, as amended, and such other factors as the Board of Trustees deems relevant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth Selected Financial Data for Liberty Property Trust and Liberty Property Limited Partnership as of and for the years ended December 31, 2003, 2002, 2001, 2000, and 1999. 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)
Income available to common shareholders for the year ended December 31, 2002 was restated ($4.2 million) as a result of SEC guidance requiring the excess of redemption over carrying value associated with a redeemed preferred share offering to be treated as a reduction in income available to common shareholders.
(2)
Basic weighted average number of shares includes only vested Common Shares outstanding during the year.
(3)
Diluted weighted average number of shares outstanding includes the dilutive effect of outstanding options for the year ended December 31, 2003 and 2002. For the year ended December 31, 2001 such number includes the dilutive effect of outstanding options and the dilutive effect of Convertible Debentures (the “Convertible Debentures”) see Note 6 to the Company’s financial statements. For the years ended December 31, 2000, and 1999, such number includes the dilutive effect of outstanding options yet excludes Common Shares issuable upon conversion of the Convertible Debentures, because to do so would have been antidilutive. The Convertible Debentures matured in July 2001.
(4)
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-GAAP financial measure on a per share basis in its Release No. 34-47226, Conditions for Use of Non-GAAP Financial Measures. The Company believes that the calculation of 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
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 Funds from operations provides useful information to the investment community about the Company’s financial performance when compared to other REIT’s since Funds from operations is generally recognized as the standard for reporting the operating performance of a REIT. Funds from operations available to common shareholders is defined by NAREIT as net income (computed in accordance with generally accepted accounting principles (“GAAP”)), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations available to common shareholders does not represent net income or cash flows from operations as defined by 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. Funds from operations available to common shareholders also does not represent cash flows generated from operating, investing or financing activities as defined by GAAP.
(5)
During the year ended December 31, 2003, NAREIT published guidance requiring impairment writedowns to be included in Funds from operations available to common shareholders. As a result, Funds from operations available to common shareholders for the year ended December 31, 2002 decreased by $11.3 million. Additionally, 2002’s Funds from operations available to common shareholders was reduced by the $4.2 million excess of preferred share redemption over carrying amount. See footnote (1) above.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company owns and operates 406 industrial and 267 office Properties located primarily in the Mid-Atlantic, Southeastern and Midwestern United States.
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 increasing rental rates. The Company pursues development opportunities that it believes will create value and yield high returns. The Company also acquires properties which it believes will create long-term value, and disposes of Properties which no longer fit within the Company’s strategic objectives or in situations where it can optimize cash proceeds. The Company’s operating results depend primarily upon income from rental operations and are substantially influenced by rental demand for the Properties in Operation.
In 2003 the Company experienced the effects of a generally slow economy and a particularly difficult real estate market for landlords. These circumstances impacted many aspects of the Company’s business.
Our Properties in Operation, which represents over 90% of our revenue, were subjected to market conditions characterized by an oversupply of leaseable space and soft demand. These conditions resulted in downward pressure on rental rates and upward pressure on lease transaction costs related to tenant inducements (e.g. tenant improvement costs). In the face of these conditions, the Company successfully leased 12.5 million square feet and attained occupancy of 91.8%, which it believes represents performance which is substantially better than market. However, property level operating income for the “Same Store” properties (properties owned since January 1, 2002) declined when compared to year end 2002 by 2.1% on a straight line basis and 1.9% on a cash basis. The trend as to occupancy, rental rate and transaction costs remained generally consistent from quarter to quarter in 2003. See further discussion of Same Store results below. The Company believes that, although 2004 will be a year of transition, these trends for the Properties in Operation - downward pressure on rents, upward pressure on transaction costs - will continue in the aggregate, notwithstanding improvements in some markets. Nevertheless, the Company is hopeful that it will see some improvement in overall occupancy in the latter part of the year.
The conditions in 2003 for the acquisition of properties were very competitive. The Company, however, acquired 16 buildings representing 1.6 million square feet and a Total Investment of $110.4 million. These acquisitions generally served to increase the presence or balance the product mix in markets the Company believes to have significant potential. In 2004, the Company believes that the level of acquisitions will be in the $100 to $200 million range and will represent a positive contribution to earnings.
Dispositions of Properties which no longer fit within the Company’s strategic objectives or in situations where it can optimize cash proceeds continued in 2003. During 2003, the Company sold $40.8 million in operating Properties. The Company anticipates that dispositions will continue at this level or moderately higher in 2004.
In 2003, the Company continued to pursue development opportunities, although principally on a build-to-suit basis. The Company delivered $204.7 million of development properties and initiated development of $143.8 million. This “pipeline” of development properties is at a relatively low level as compared to the Company’s historical pace of development. The Company believes that in 2004 build-to-suit activity will continue and that conditions in certain markets may support the initiation of inventory projects (i.e. projects that are less than 75% leased prior to the commencement of construction). The Company is also hopeful that it will be in a position in 2004 to initiate its proposed high-rise in Philadelphia’s central business district, One Pennsylvania Plaza. The Company is in detailed discussions with various prospective tenants, some of whom are significant enough to justify the commencement of the development of the proposed 1.3 million square foot office tower. However, at this time, the Company has not entered into a lease with any tenant. The land and project costs associated with this project represent a substantial investment by the Company.
Results for the year ended December 31, 2002 have been restated to reflect guidance and clarifications by the Securities and Exchange Commission (“SEC”). The SEC’s July 31, 2003 clarification of certain issues surrounding EITF Topic D-42, “The Effect on the Calculation of Earnings Per Share for the Redemption or Induced Conversion of Preferred Stock,” requires the excess of preferred share redemption over carrying amount to be classified as a reduction in income available to common shareholders. The Company redeemed its Series A Preferred Shares during the third quarter of 2002, and recorded the redemption in accordance with GAAP at that time. The application of the guidance has resulted in a $.05 decrease in income per common share - diluted for the year ended December 31, 2002.
Forward-Looking Statements
When used throughout this report, the words “believes,” “anticipates,” 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 which 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 identify and secure additional properties and sites that meet its criteria for acquisition or development; the availability and cost of capital; and the effect of prevailing market interest rates; and other risks described 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 accounting principles generally accepted in the United States. 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 Company believes the following critical policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements.
Capitalized Costs
Expenditures directly related to the acquisition, or 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 from the completion of major construction activity. The capitalized costs include pre-construction costs essential to the development of the property, construction costs, interest costs, real estate taxes, development related salaries and other costs incurred during the period of development. Capitalized development related salaries and benefits historically represent approximately 1% of the cost of developed properties brought into service. The determination to capitalize rather than expense costs requires the Company to evaluate the status of the development activity. Capitalized interest for the year ended December 31, 2003 was $10.9 million. Included in capitalized interest costs are the interest costs relating to the Company’s $64.5 million investment (as of December 31, 2003) in its proposed office tower in Philadelphia’s central business district.
Allowance for Doubtful Accounts
The Company monitors the liquidity and creditworthiness of its tenants on an on-going basis. 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, 2003 and 2002, the Company’s allowance for doubtful accounts totaled $5.7 million and $6.2 million, respectively. For the year ended December 31, 2003, the Company’s bad debt expense totaled $1.8 million as compared to $2.6 million for the year ended December 31, 2002, or 0.3% of operating revenue for 2003 compared to 0.4% for 2002.
Impairment of Real Estate
The Company evaluates its real estate investments upon occurrence of significant adverse changes in operations to assess whether any impairment indicators are present that affect the recovery of the recorded value. If any real estate investment is considered impaired, a loss is provided to reduce the carrying value of the property to its estimated fair value. The Company recognized a $5.3 million asset impairment loss in 2002 on three parcels of land. In addition, during the year ended December 31, 2002, the Company recognized a $6.0 million impairment loss on assets held for sale. This loss was subsequently realized during 2002 upon the disposal of those assets held for sale. The determination of whether impairment exists requires the Company to make estimates, judgments and assumptions about the future utility of the assets. The Company has evaluated each of the Properties and land held for development and has determined that there are no additional valuation adjustments that need to be made at December 31, 2003.
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, 2003 with the results of operations of the Company for the year ended December 31, 2002, and the results of operations of the Company for the year ended
December 31, 2002 with the results of operations of the Company for the year ended December 31, 2001. As a result of the varying level of development, acquisition and disposition activities by the Company in 2003 and 2002, the overall operating results of the Company during such periods are not directly comparable. However, certain data, including the Same Store 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, 2003 to Year Ended December 31, 2002.
The Company’s average gross investment in operating real estate owned for the year ended December 31, 2003 increased to $3,737.7 million from $3,465.4 million at December 31, 2002. This increase resulted from the increased investment in real estate acquired or developed, partially offset by Property dispositions. This increased investment in operating real estate resulted in increases in rental revenue, rental property operating expenses and real estate taxes, and depreciation and amortization expense. Interest expense also increased due to the increased borrowings used to fund this increased investment in real estate.
Total operating revenue increased to $625.0 million for the year ended December 31, 2003 from $593.4 million for the year ended December 31, 2002. This $31.6 million increase was primarily due to the net increase in investment in real estate. In addition, during 2003, the Company accepted “Termination Fees” totaling $14.1 million as compared to $8.4 million for the same period in 2002. “Termination Fees” are fees that the Company has agreed 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.
Property level operating income, exclusive of Termination Fees, for the Same Store properties decreased to $377.6 million for the year ended December 31, 2003 from $385.9 million for the year ended December 31, 2002, on a straight line basis (which recognizes rental revenue evenly over the life of the lease), and decreased to $370.5 million for the year ended December 31, 2003 from $377.5 million for the year ended December 31, 2002 on a cash basis. These decreases of 2.1% and 1.9%, respectively, are primarily due to decreases in rental rates. At December 31, 2003, the occupancy of the Same Store portfolio was flat as compared to December 31, 2002 at 92.4%.
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. Management further believes that the performance comparison should exclude Termination Fees since they are more event specific and are not representative of ordinary performance results. In addition, Same Store property level operating income exclusive of Termination Fees is considered, by management, to be a more reliable indicator of the portfolio’s baseline performance. The Same Store properties consist of the 603 properties totaling approximately 46.6 million square feet owned since January 1, 2002.
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, 2003 and 2002. Same Store property level income is a non-GAAP measure and does not represent income before property dispositions, income taxes and minority interest because it does not reflect the consolidated operations of the Company. Investors should review Same Store results, along with Funds from operations (see Liquidity and Resource section), GAAP net income and cash flow from operating activities, investing activities and financing activities when trying to understand the equity REIT’s operating performance. Also, set forth below is a reconciliation of Same Store property level operating income to net income.
The Company evaluates the performance of the Properties in Operation by reportable segment (see Note 13 to the Company’s financial statements). The property level operating income for the United Kingdom and Florida segments increased by 43.1% and 14.3%, respectively, for the year ended December 31, 2003 as compared to 2002. The increase in the United Kingdom is due to the purchase of Rouse Kent Limited on July 1, 2003. The increase in Florida is due to an increase in occupancy during 2003 as compared to 2002. These increases are partially offset by a decrease in the operating results of the Delaware Valley segment due to the disposition of Properties during the fourth quarter of 2002 to Liberty Venture I, LP (see Note 4 to the Company’s financial statements).
General and administrative expenses increased to $28.4 million for the year ended December 31, 2003 from $21.9 million for the year ended December 31, 2002. These increases are primarily due to costs relating to the Company’s investment in an enterprise resource planning initiative to update company wide accounting and business process software and due to the expense from the accelerated vesting of restricted stock and options related to the death of former Chairman Willard G. Rouse III.
Costs directly related to the development of rental properties and land being readied for development are capitalized. Capitalized development costs include interest, development related salaries, property taxes, insurance and other directly identifiable costs during the period of development. Capitalized interest for the year ended December 31, 2003 was $10.9 million as compared to $16.5 million for the year ended December 31, 2002. Included in capitalized interest costs are the interest costs relating to the Company’s $64.5 million investment (as of December 31, 2003) in its proposed office tower in Philadelphia’s central business district. Capitalized development related salaries and benefits historically represent approximately 1% of the cost of developed properties brought into service.
As a result of the foregoing, the Company’s net income increased to $163.6 million for the year ended December 31, 2003 from $161.7 million for the year ended December 31, 2002.
Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001.
The Company’s average gross investment in operating real estate owned for the year ended December 31, 2002 increased to $3,465.4 million from $3,301.9 million at December 31, 2001. This increase resulted from the increased investment in real estate acquired or developed, partially offset by Property dispositions. This
increased investment in operating real estate resulted in increases in rental revenue, rental property operating expenses and real estate taxes, and depreciation and amortization expense. Interest expense also increased due to the increased borrowings used to fund this increased investment in real estate.
Total operating revenue increased to $593.4 million for the year ended December 31, 2002 from $572.9 million for the year ended December 31, 2001. This $20.5 million increase was primarily due to the net increase in investment in real estate as discussed above. In addition, during 2002, the Company accepted Termination Fees totaling $8.4 million as compared to $0.4 million for the same period in 2001. Termination Fees are included in rental revenue.
Property level operating income, exclusive of Termination Fees, for the “Prior Year Same Store” (as defined below) properties decreased to $356.9 million for the year ended December 31, 2002 from $363.3 million for the year ended December 31, 2001, on a straight line basis and decreased to $351.2 million for the year ended December 31, 2002 from $355.5 million for the year ended December 31, 2001 on a cash basis. These decreases of 1.8% and 1.2%, respectively, are primarily due to decreases in occupancy. At December 31, 2002, the occupancy of the Prior Year Same Store portfolio was 91.9% as compared to 94.1% December 31, 2001.
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. Management further believes that the performance comparison should exclude Termination Fees since they are more event specific and are not representative of ordinary performance results. In addition, Prior Year Same Store property level operating income exclusive of Termination Fees is considered, by management, to be a more reliable indicator of the portfolio’s baseline performance. The Prior Year Same Store properties consist of the 581 properties totaling approximately 43.0 million square feet owned since January 1, 2001.
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, 2002 and 2001. Prior Year Same Store property level income is a non-GAAP measure and does not represent income before property dispositions, income taxes and minority interest because it does not reflect the consolidated operations of the Company. Investors should review Prior Year Same Store results, along with Funds from operations (see Liquidity and Resource section), GAAP net income and cash flow from operating activities, investing activities and financing activities when trying to understand the equity REIT’s operating performance. Also, set forth below is a reconciliation of Prior Year Same Store property level operating income to net income.
General and administrative expenses increased to $21.9 million for the year ended December 31, 2002 from $20.7 million for the year ended December 31, 2001. These increases are primarily due to annual salary increases and the ongoing funding of marketing initiatives.
Costs directly related to the development of rental properties and land being readied for development are capitalized. Capitalized development costs include interest, salaries, property taxes, insurance and other directly identifiable costs during the period of development. Capitalized interest for the year ended December 31, 2002 was $16.5 million as compared to $22.3 million for the year ended December 31, 2001. Included in capitalized interest costs were the interest costs relating to the Company’s $57.3 million investment (as of December 31, 2002) in its proposed office tower in Philadelphia’s central business district. Capitalized salaries and benefits historically represent approximately 1% of the cost of developed properties brought into service.
As a result of the foregoing, the Company’s net income decreased to $161.7 million for the year ended December 31, 2002 from $166.5 million for the year ended December 31, 2001.
Liquidity and Capital Resources
As of December 31, 2003, the Company had cash and cash equivalents of $37.1 million, including $15.3 million in cash held in escrow.
Net cash flow provided by operating activities decreased to $260.7 million for the year ended December 31, 2003 from $288.2 million for the year ended December 31, 2002. This $27.5 million decrease was primarily due to fluctuations in operating assets and liabilities during the respective periods. Net cash flow provided by operations is the primary source of liquidity to fund distributions to shareholders and for the recurring capital expenditures and leasing transaction costs for the Company’s Properties in Operation.
Net cash used in investing activities increased to $192.0 million for the year ended December 31, 2003 from $165.6 million for the year ended December 31, 2002. This increase primarily resulted from an increased investment in properties compared to activity in 2002 and the decreased disposition activity in 2003, offset by decreased investment in development in progress and land held for development.
Net cash used by financing activities decreased to $58.1 million for the year ended December 31, 2003 from $131.8 million for the year ended December 31, 2002. This $73.7 million decrease was primarily due to the redemption of preferred shares in 2002. Net cash provided by or used by financing activities includes proceeds from the issuance of equity and debt, net of debt repayments, shareholder distributions, and the redemption of preferred shares. Cash provided by financing activities is a source of capital utilized by the Company to fund investment activities.
The Company believes that its cash flow from operations is adequate to fund its operating needs.
The Company funds its development and acquisitions with long-term capital sources including proceeds from the disposition of Properties. For the year ended December 31, 2002, these activities were funded through a $450 million unsecured credit facility (the “$450 million Credit Facility”), which was replaced in January 2003, with a $350 million Credit Facility (the “$350 million Credit Facility”). The interest rate on borrowings under the $350 million Credit Facility fluctuates based upon ratings from Moody’s Investors Service, Inc. (“Moody’s”), Standard and Poor’s Ratings Group (“S&P”) and Fitch, Inc. (“Fitch”). The current ratings for the Company’s senior unsecured debt are Baa2, BBB and BBB from Moody’s, S&P and Fitch, respectively. At these ratings, the interest rate for borrowings under the $350 million Credit Facility is 70 basis points over LIBOR. The $350 million Credit Facility expires in January 2006.
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 earnings to fixed charge coverage ratio. As of December 31, 2003 the Company’s debt to gross assets ratio was 42.7%, and the earnings to fixed charge coverage ratio was 2.8x. Debt to gross assets equals total long-term debt and borrowings under the $350 million Credit Facility divided by total assets plus accumulated depreciation. Earnings to fixed charges equals income from continuing operations before property dispositions and minority interest, including operating activity from discontinued operations, plus interest expense and depreciation and amortization, divided by interest expense, including capitalized interest, plus distributions on preferred shares and units.
As of December 31, 2003, $363.9 million in mortgage loans and $1,355.0 million in unsecured notes were outstanding with a weighted average interest rate of 7.3%. The interest rates on $1,652.4 million of mortgage loans and unsecured notes are fixed and range from 6.0% to 8.8%. Interest rates on $66.5 million of mortgage
loans float with the base rate of the respective lending bank or a municipal bond index. The weighted average remaining term for the mortgage loans and unsecured notes is 5.8 years.
In 2004, $100.0 million principal amount of unsecured debt bearing interest at 7.1% will mature. In addition, $61.8 million in mortgage loans with various interest rates will mature during 2004. The Company anticipates that it will refinance or retire these maturities through its available sources of capital.
The Company’s contractual obligations, as of December 31, 2003, are as follows (in thousands):
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 Property dispositions and net cash provided from operating activities. Additionally, the Company expects to incur variable rate debt, including borrowings under the $350 million Credit Facility from time to time.
In 2003, the Company received approximately $99.5 million in net proceeds from the issuance of 2.7 million Common Shares. The Company used the net proceeds from the issuance of Common Shares to pay down borrowings under the $350 million Credit Facility which was used to fund development and acquisition activity.
In September 2003, the quarterly Common Share dividend was increased to $0.605 per share from $0.60 per share. The Company’s annual Common Share dividend paid was $2.405 per share, $2.37 per share and $2.30 per share in 2003, 2002 and 2001, respectively. In 2003, the Company’s dividend payout ratio was approximately 72% of Funds from operations (as defined below).
The Company has an effective S-3 shelf registration statement on file with the SEC (the “Shelf Registration Statement”). As of February 24, 2004, pursuant to the Shelf Registration Statement, the Trust had the capacity to issue up to $586.1 million in equity securities and the Operating Partnership had the capacity to issue up to $324.3 million in debt securities.
Investment in Unconsolidated Joint Ventures
As of December 31, 2003, the Company had investments in four unconsolidated joint ventures, totaling $19.6 million.
Calculation of Funds from Operations
The National Association of Real Estate Investment Trusts (“NAREIT”) has issued a standard definition for Funds from operations (as defined below). The SEC has agreed to the disclosure of this non-GAAP financial measure on a per share basis in its Release No. 34-47226, Conditions for Use of Non-GAAP Financial Measures. The Company believes that the calculation of 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 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 Funds from operations provides useful information to the investment community about the Company’s financial performance when compared to other REIT’s since Funds from operations is generally recognized as the standard for reporting the operating performance of a REIT. Funds from operations available to common shareholders is defined by NAREIT as net income (computed in accordance with generally accepted accounting principles (“GAAP”)), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations available to common shareholders does not represent net income or cash flows
from operations as defined by 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. Funds from operations available to common shareholders also does not represent cash flows generated from operating, investing or financing activities as defined by GAAP. Funds from operations (“FFO”) available to common shareholders for the years ended December 31, 2003, 2002 and 2001 are as follows (in thousands, except per share amounts):
(1) For the year ended December 31, 2001, add interest and amortization of deferred financing costs on debentures of $2,587 to calculate diluted Funds from operations available to common shareholders per weighted average share.
(2) Income available to common shareholders for the year ended December 31, 2002 has been restated to reflect recent guidance and clarifications by the SEC. The SEC’s July 31, 2003 clarification of certain issues surrounding EITF Topic D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,” requires the excess of preferred share redemption over carrying amount to be classified as a reduction in income available to
common shareholders. The Company redeemed its Series A Preferred Shares during the year ended December 31, 2002, and recorded the redemption in accordance with US GAAP at the time.
In addition, on October 1, 2003, the National Association of Real Estate Investment Trusts published guidance requiring impairment write-downs to be included in Funds from operations available to common shareholders.
Inflation
Inflation has remained relatively low during the last three years, and as a result, it has not had a significant impact on the Company during this period. The $350 million Credit Facility bears interest at a variable rate; therefore, the amount of interest payable under the $350 million Credit Facility will be influenced by changes in short-term interest rates, which tend to be sensitive to inflation. To the extent an increase in inflation would result in increased operating costs, such as in insurance, real estate taxes and utilities, substantially all 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 Company’s primary market risk exposure is to changes in interest rates.
The Company is exposed to market risk related to its $350 million 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 interest on the $350 million Credit Facility and such other indebtedness is subject to fluctuations in the market.
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 a forecasted issuance of new debt. In order to reduce interest rate risk associated with these transactions, the Company occasionally enters into interest rate protection agreements.
If the interest rates for variable rate debt were 100 basis points higher or lower during 2003, the Company’s interest expense would have been increased or decreased by approximately $1.7 million. If the interest rate for the fixed rate debt maturing in 2004 was 100 basis points higher or lower than its current rate of 7.1%, the Company’s interest expense would be increased or decreased by approximately $600,000.
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 $130.0 million 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 dual presentation of financial statements for the Company is required by the Securities and Exchange Commission. The Company is comprised of two Securities and Exchange Commission registrants: Liberty Property Trust and Liberty Property Limited Partnership. Accordingly, financial statements are required for each registrant. The financial information contained within the two sets of financial statements is essentially the same.
REPORT OF INDEPENDENT AUDITORS
To The Board of Trustees and Shareholders
Liberty Property Trust
We have audited the accompanying consolidated balance sheets of Liberty Property Trust (the “Trust”) as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders equity, and cash flows for the period ended December 31, 2003. Our audits also included the financial statements and schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Liberty Property Trust at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2, in 2003, the Trust changed its accounting for stock-based employee compensation and adopted the provisions of EITF Topic D-42 - The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock. As discussed in Note 14, in 2002 the Trust adopted the provisions of Statement of Financial Accounting Standards No. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets.
Philadelphia, Pennsylvania
February 6, 2004
/s/ Ernst & Young LLP
CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY TRUST
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
See accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY TRUST
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY OF LIBERTY PROPERTY TRUST
(IN THOUSANDS)
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS OF LIBERTY PROPERTY TRUST
(IN THOUSANDS)
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF LIBERTY PROPERTY TRUST
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 95.7% of the common equity of the Operating Partnership at December 31, 2003. The Company provides leasing, property management, development, acquisition, and other tenant-related services for a portfolio of industrial and office properties which are located principally within the Mid-Atlantic, Southeastern, and Midwestern United States.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 and 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 minority shareholders. All significant intercompany transactions and accounts have been eliminated.
Reclassifications
Certain amounts from prior years have been restated to conform to current-year presentation.
Real Estate and Depreciation
The Properties are recorded at the lower of cost or fair value and are depreciated using the straight line method over their estimated useful lives. The estimated useful lives are as follows:
Buildings and improvements
40 years (blended)
Equipment
5-10 years
Tenant improvements
Term of the related lease
Expenditures directly related to acquisition, or 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, salaries and other costs incurred during the period of development. Expenditures for maintenance and repairs are charged to operations as incurred.
In accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Standards (“SFAS”) No. 141, “Business Combinations,” the Company allocates the purchase price of real estate to land, building and improvements and intangibles based on the relative fair value of each component. The value ascribed to in-place leases is based on the rental rates for the existing leases compared to market rent for leases of similar terms and present valuing the difference based on market interest rates. Origination values are also assigned to in-place leases, and, where appropriate, value is assigned to customer relationships. The Company depreciates the amounts allocated to building and improvements over 40 years and the amounts allocated to intangible assets relating to in-place leases, which are included in Deferred financing and leasing costs in the accompanying balance sheet, over the remaining term of the related leases.
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 any real estate investment is considered impaired, a loss is recognized to reduce the carrying value of the property to its estimated fair value.
Investment in Unconsolidated Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures under 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 Consolidated Balance Sheet
and the Company’s share of net income from the joint venture is included on the Consolidated Statement of Operations.
Cash and Cash Equivalents
Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents.
Revenues
The Company earns rental income under operating leases with tenants. Rental income is recognized on a straight line basis over the applicable 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.
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 in accordance with Staff Accounting Bulletin 101 when the following conditions are met:
a)
the termination agreement is executed,
b)
the termination fee is determinable,
c)
all landlord services, pursuant to the terminated lease, have been rendered,
d)
collectibility of the termination fee is assured.
Deferred Financing and Leasing Costs
Costs incurred in connection with financing or leasing are capitalized and amortized over the term of the related loan or lease. Deferred financing cost amortization is reported as interest expense. Intangible assets related to acquired in-place leases are amortized over the terms of the related leases.
Income per Common Share
The following table sets forth the computation of basic and diluted income per common share (in thousands, except per share amounts):
Basic income per common share for the year ended December 31, 2001 would be $2.20 if the debenture conversions which occurred in 2001 had occurred on January 1, 2001. The Convertible Debentures matured in 2001.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and other assets and liabilities are reasonable estimates of fair values because of the short-term maturities of these investments. The fair value of the Company’s long-term debt, which is based on estimates by management and on rates quoted on December 31, 2003 for comparable loans, exceeds the aggregate carrying value by approximately $283.1 million at December 31, 2003.
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 90% of its REIT taxable income (95% for the years prior to January 1, 2001), as defined in the Code, to its shareholders and satisfies certain other requirements. The Company has met these requirements and, accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements.
Several of the Company’s subsidiaries are taxable REIT subsidiaries and are subject to federal income taxes. The Company is also taxed in certain states and the United Kingdom. Accordingly, the Company has recognized federal, state and United Kingdom income taxes in accordance with US GAAP, as applicable.
The Federal tax cost basis of the real estate at December 31, 2003 was approximately $4.1 billion.
Stock-Based Compensation
The Company has a share-based employee compensation plan as fully described in Note 10. Prior to 2003, the Company accounted for the plan under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. No share-based employee compensation cost was reflected in the 2002 or 2001 net income, as all options granted under this plan had an intrinsic value of zero on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of the FASB’s SFAS No. 123, “Accounting for Stock-Based Compensation”, prospectively to all employee option awards granted, modified, or settled after January 1, 2003. Option awards under the Company’s plan vest over three years. Therefore, the cost related to share-based employee compensation included in the determination of net income for 2001, 2002 and 2003 is less than that which would have been recognized if the fair value based method had been applied to all option awards since the original effective date of SFAS No. 123.
Foreign Currency Translation
The functional currency for the Company’s United Kingdom operations is pounds sterling. The Company translates their financial statements into US dollars. Gains and losses resulting from this translation do not impact the results of operations and are included in accumulated other comprehensive income as a separate component of shareholders’ equity.
Newly Issued Accounting Standards
In January 2003, the FASB issued Financial Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities”. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The FASB deferred the effective date for existing variable interest entities to periods ending after March 15, 2004. FIN No. 46 requires that a variable interest entity be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The Company continues to evaluate the impact of FIN No. 46, but does not expect the implementation to materially affect its financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. Certain provisions of this statement are effective for financial instruments entered into or modified after May 31, 2003 and otherwise effective at the beginning of the first interim period beginning June 15, 2003. Other provisions of this statement have been deferred indefinitely. The Company was not impacted by the currently effective provisions of SFAS No. 150.
Income available to common shareholders for the year ended December 31, 2002 has been restated to reflect guidance and clarification of certain issues surrounding EITF Topic D-42, “The Effect on Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,” issued July 2003, which requires the excess of preferred share redemption over carrying amount to be classified as a reduction in income available to common shareholders. The effect of the accounting change on income available to common shareholders as previously reported for 2002 is as follows (in thousands, except per share amounts):
At December 31, 2003 and 2002, the Company owned and operated industrial and office properties located principally in suburban mixed-use developments or business parks. The carrying value of these properties by type is as follows (in thousands):
Depreciation expense was $105.6 million in 2003, $93.1 million in 2002, and $88.2 million in 2001.
As of December 31, 2003, the Company has commenced development on 15 properties, which upon completion are expected to comprise approximately 1.5 million square feet of leaseable space. As of December 31, 2003, approximately $56.9 million has been expended for the development of these projects and an additional $75.5 million is estimated to be required for completion.
4.
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
On November 18, 2002, the Company entered into a joint venture agreement (“Liberty Venture I, LP”) with the Public Employees’ Retirement Association of Colorado. The Company sold or contributed 28 properties with a net book value of $127.5 million to the joint venture in exchange for a 25% ownership interest in the joint venture and $108.8 million in cash. The Company’s share of the joint venture earnings is included in equity in earnings of unconsolidated joint ventures in the accompanying statement of operations. The Company will provide development, leasing and property management services for a fee, and may receive a promoted interest if certain return thresholds are met.
During the year ended December 31, 2003, the Company contributed one additional industrial distribution property to the venture with a net book value of approximately $15.6 million.
The condensed balance sheets as of December 31, 2003 and 2002 and statements of operations for Liberty Venture I, LP, for the period from inception to December 31, 2002 and for the year ended December 31, 2003 are as follows (in thousands):
5.
RELATED PARTY TRANSACTIONS
During the year ended December 31, 2003, the Company exercised its option to purchase Rouse Kent Limited (“RKL”) for nominal consideration. As a result of the purchase, the Company’s assets and liabilities increased by approximately $60 million. The operations of RKL are included in the consolidated financial statements from July 1, 2003 through December 31, 2003.
RKL owns six buildings which contain 210,000 square feet of leaseable space and has planning permission for the development of additional commercial space. RKL is party to a contract with the County of Kent which contract entitles RKL to participate in proceeds realized from the sale of residential land parcels to homebuilders
Pursuant to agreements, the Company provided management services with respect to RKL for the six months ended June 30, 2003, for $150,000 per quarter and for the years ended December 31, 2002 and 2001, for $600,000 per year. In addition, the Company paid a fee to RKL for management services which it provided for the Company’s properties owned in the United Kingdom. For the six months ended June 30, 2003, the fees for these services were $223,000 and for the years ended December 31, 2002 and 2001, the fees for these services were $662,000 and $376,000, respectively. The Company recognized interest income on notes receivable from RKL of $1.9 million for the six months ended June 30, 2003 and $3.3 million and $2.2 million for the years ended December 31, 2002 and 2001, respectively.
Indebtedness consists of mortgage loans, unsecured notes, borrowings under the credit facility, as defined below and convertible debentures (which matured in 2001). The weighted average interest rates for the years ended December 31, 2003, 2002, and 2001, were approximately 6.9%, 7.1%, and 7.5%, respectively. Interest expense for the years ended December 31, 2003, 2002, and 2001, aggregated $123.9 million, $116.6 million, and $111.2 million, respectively. Interest costs during these periods of $10.9 million, $16.5 million, and $22.3 million, respectively, were capitalized. Cash paid for interest for the years ended December 31, 2003, 2002, and 2001, was $132.5 million, $128.4 million, and $128.4 million, respectively.
The Company is subject to financial covenants contained in some of the debt agreements, the most restrictive of which are detailed below under the heading “Credit Facility”. The Company is in compliance with the financial covenants.
Mortgage Loans, Unsecured Notes
Mortgage loans with maturities ranging from 2004 to 2012 are collateralized by and in some instances cross-collateralized by properties with a net book value of $502.4 million.
As of December 31, 2003, $363.9 million in mortgage loans and $1,355.0 million in unsecured notes were outstanding. The interest rates on $1,652.4 million of mortgage loans and unsecured notes are fixed and range from 6.0% to 8.8%. Interest rates on $66.5 million of mortgage loans float with the base rate of the respective lending bank or a municipal bond index. The weighted average remaining term for the mortgage loans and unsecured notes is 5.8 years.
Credit Facility
For the year ended December 31, 2002, the Company utilized a $450 million unsecured credit facility (the “$450 million Credit Facility”). The interest rate on borrowings under the $450 million Credit Facility fluctuated based on senior debt ratings from Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Ratings Group (“S&P”) and Fitch, Inc. (“Fitch”).
In January 2003, the Company obtained a new $350 million unsecured credit facility (the “$350 million Credit Facility”), replacing the $450 million Credit Facility. Based on the Company’s current ratings, the interest rate on the $350 million Credit Facility is 70 basis points over the LIBOR rate (1.8% at December 31, 2003). There is also a 20 basis point facility fee on the current borrowing capacity. The current ratings for the Company’s senior unsecured debt are Baa2, BBB, and BBB from Moody’s, S&P, and Fitch, respectively. The $350 million 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 $150 million of borrowings. The $350 million Credit Facility has an accordion feature which enables the Company to increase the facility to $450 million. The $350 million Credit Facility contains financial covenants, certain of which are set forth below:
The $350 million Credit Facility expires in January 2006. The $350 million Credit Facility provides for up to $50 million denominated in Pounds Sterling or Euros.
The scheduled maturities of principal amortization of the Company’s mortgage loans, $350 million Credit Facility and the unsecured notes outstanding and the related weighted average interest rates are as follows (in thousands, except percentages):
Convertible Debentures
The Convertible Debentures, which matured on July 1, 2001, were exchangeable for Common Shares of beneficial interest of the Trust (the “Common Shares”) at a rate of one Common Share for each $20 outstanding principal amount of Convertible Debentures, subject to certain adjustments.
Future minimum rental payments due from tenants under noncancelable operating leases as of December 31, 2003 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 statements of operations.
8.
SHAREHOLDERS’ EQUITY
Common Shares
The Company paid to holders of Common Shares and holders of Common Units distributions of $196.2 million, $186.1 million, and $171.5 million, during the years ended December 31, 2003, 2002, and 2001, respectively. On a per share basis, the Company paid Common Share and Unit distributions of $2.405, $2.37, and $2.30 during the years ended December 31, 2003, 2002, and 2001, respectively.
For federal income tax purposes, the following table summarizes the portions of the Common Share distributions relating to return of capital, ordinary income, and capital gains:
The Company’s federal income tax returns are subject to examination by taxing authorities. Because the application of tax laws and regulations is susceptible to varying interpretations, the taxability of distributions could be changed at a later date upon final determination by taxing authorities.
Treasury Shares
The Board of Trustees authorized a share repurchase plan under which the Company may purchase up to $100 million of the Company’s Common Shares and preferred shares (as defined below). In 1999, the Company repurchased 59,100 of its Common Shares for $1.3 million.
Preferred Shares
The Series A Cumulative Redeemable Preferred Shares (the “Preferred Shares”), which were redeemed on August 28, 2002, were non-voting and had a liquidation preference of $25.00 per share. The Preferred Shares were redeemed for $125 million.
The Company paid Preferred Share distributions of $9.1 million and $11.0 million for the years ended December 31, 2002 and 2001, respectively. On a per share basis, the Company paid preferred share distributions of $1.82 and $2.20 for the years ended December 31, 2002 and 2001.
For federal income tax purposes, the following table summarizes the portions of the preferred shares distributions relating to return of capital, ordinary income and capital gains:
Minority Interest
Minority interest in the accompanying consolidated financial statements represents the interests of the Common and Preferred Units in Liberty Property Limited Partnership not held by the Trust. Minority interest is adjusted at each period end to reflect the ownership percentage of the Common and Preferred unitholders at that time. A minority interest reclassification occurs between minority interest and shareholders’ equity each period there is a transaction involving ownership interests in Liberty Property Limited Partnership. In addition, minority interest includes third-party ownership interests in two consolidated joint venture investments in the United Kingdom. No Common Units were issued in connection with acquisitions in 2001 or 2002. During 2003, 33,682 Common units were issued in connection with an acquisition. The common limited partnership interests outstanding as of December 31, 2003 have the same economic characteristics as would 3,698,203 Common Shares. The common limited partnership interests 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 Company has outstanding the following Cumulative Redeemable Preferred Units of the Operating Partnership, (the “Preferred Units”):
The Company paid the following Preferred Unit distributions for the year ended December 31:
Shareholder Rights Plan
In December 1997, the Board of Trustees of the Company adopted a shareholder rights plan (the “Shareholder Rights Plan”). Under the Shareholder Rights Plan, one Right (as defined in the Shareholder Rights Plan) was attached to each outstanding Common Share at the close of business on December 31, 1997. In addition, a Right will be attached to each share of Common Stock issued in the future. Each Right entitles the registered holder to purchase from the Company, under certain conditions, a unit (a “Rights Plan Unit”) consisting of one one-thousandth of a share of a Series A Junior Participating Preferred Share, $0.0001 par value, (the “Junior Preferred Stock”), of the Company, for $100 per Rights Plan Unit, subject to adjustment. The Rights become exercisable only if a person or group of affiliated or associated persons (an “Acquiring Person”) acquires, or obtains the right to acquire, beneficial ownership of Common Shares or other voting securities (“Voting Stock”) that have 10% or more of the voting power of the outstanding shares of Voting Stock, or if an Acquiring Person commences to make a tender offer or exchange offer to acquire beneficial ownership of Voting Stock that has 10% or more of the voting power of the outstanding shares of Voting Stock. The Rights are redeemable by the Company at a price of $0.0001 per Right. If not exercised or redeemed, all Rights will expire on December 31, 2007.
Dividend Reinvestment 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 financing its obligations under the Dividend Reinvestment and Share Purchase Plan. During the years ended December 31, 2003, 2002, and 2001, 2,056,482, 1,693,837 and 482,822 Common Shares, respectively, were issued through the Dividend Reinvestment and Share Purchase Plan.
9.
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 expense recognized by the Company was $406,000, $409,000 and $453,000 for the years ended 2003, 2002 and 2001, respectively.
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 at a 15% discount to fair market value. A total of 9,766, 8,977 and 3,613 common shares were issued, in accordance with the ESPP, during the years ended December 31, 2003, 2002 and 2001, respectively.
The Company’s Share Incentive Plan (“Share Incentive Plan”), as amended, has authorized the grant of options to executive officers, other key employees, non-employee trustees and consultants of up to 9,926,256 shares of the Company’s Common Shares. All options granted have 10-year terms and vest 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.
The cost related to share-based employee compensation included in the determination of net income for 2003, 2002 and 2001 is less than that which would have been recognized if the fair value based method had been applied to all option awards since the original effective date of SFAS No. 123.
The fair value for the employee option awards was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2003, 2002, and 2001:
The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested option awards in each period (in thousands, except per share amounts).
Pro forma disclosures are not likely to be representative of the effects on reported net income for future years because of the staggered vesting periods of the options.
A summary of the Company’s share option activity, and related information for the years ended December 31, 2003, 2002, and 2001 follows:
Exercise prices for options outstanding as of December 31, 2003 ranged from $19.75 to $34.98. The weighted-average remaining contractual life of those options is 6.6 years.
Grants of 115,987, 44,134 and 1,255 restricted shares were made under the Share Incentive Plan during the years ended December 31, 2003, 2002 and 2001, respectively. These restricted shares vest ratably over a 5-year period beginning with the anniversary date of the grant.
An additional 1,241,632, 1,691,578, and 3,349,421 Common Shares were reserved for issuance for future grants under the Share Incentive Plan at December 31, 2003, 2002 and 2001, respectively.
Substantially all of the 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. The Environmental Assessments consisted of, among other activities, a visual inspection of each Property and its neighborhood and a check of pertinent public records. 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.
Although the Company is engaged in litigation incidental to its business, there is no legal proceeding to which it is a party which, in the opinion of management, will materially adversely affect the results of the Company’s operations.
The Company is obligated to make additional capital contributions of approximately $3.4 million in conjunction with two of the Company’s unconsolidated joint ventures.
12.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of quarterly results of operations for the years ended December 31, 2003 and 2002 follows. Certain 2003 and 2002 amounts have been reclassified to conform to the current presentation of discontinued operations (in thousands, except per share amounts).
A reconciliation of the restatement of quarter ended September 30, 2002, in accordance with EITF Topic D-42, is as follows (in thousands):
The Company operates its portfolio of properties primarily throughout the Mid-Atlantic, Southeastern and Midwestern United States. Additionally, the Company owns certain assets in the United Kingdom. The Company reviews the performance of the portfolio on a geographical basis, as such, the following regions are considered the Company’s reportable segments:
REPORTABLE SEGMENTS
MARKETS
Delaware Valley
Southeastern Pennsylvania, New Jersey
Midwest
Mid-Atlantic
Lehigh Valley, Michigan, Minnesota, Milwaukee/Chicago
Maryland, Piedmont Triad, Greenville, S.C., Richmond/Roanoke, Virginia Beach
Florida
Jacksonville, Orlando, Boca Raton, Tampa, Texas
United Kingdom
County of Kent
The Company’s reportable segments are distinct business units which are each managed separately in order to concentrate market knowledge within a geographic area. Within these reportable segments, the Company derives its revenues from its two product types: industrial properties and office properties.
The Company evaluates performance of the reportable segments based on property level operating income, which is calculated as rental revenue and operating expense reimbursement less rental property expenses and real estate taxes. The accounting policies of the reportable segments are the same as those for the Company on a consolidated basis. The operating information by segment is as follows (in thousands):
The Company has restated segment information for the years ended December 31, 2002 and 2001 to reflect a change in the Company’s method of internal reporting.
Discontinued Operations
In accordance with SFAS No. 144 which the Company adopted on January 1, 2002, net income and gain/(loss) on disposition of real estate for properties sold subsequent to December 31, 2001 are reflected in the consolidated statements of operations as discontinued operations. The proceeds from dispositions of Operating Properties were $40.8 million and $38.4 million for the years ended December 31, 2003 and 2002, respectively. Below is a summary of the results of operations of the properties disposed of through the respective disposition dates (in thousands):
Sales occurring before December 31, 2001, as well as sales of land and development properties continue to be reflected as a component of income from continuing operations.
Asset Impairment
In accordance with SFAS No. 144, the Company recognized a $5.3 million impairment loss on three parcels of land during the year ended December 31, 2002. This impairment is included in the caption gain (loss) on property dispositions as a component of income from continuing operations. In addition, during the year ended December 31, 2002, the Company recognized a $6.0 million impairment loss on assets held for sale. This loss was subsequently realized during 2002 upon the disposal of those assets held for sale. The Company determined this impairment through a comparison of the aggregate future undiscounted cash flows to be generated by the properties to the carrying value of the properties. The Company has evaluated each of the properties and land held for development and has determined that there are no additional valuation adjustments necessary at December 31, 2003.
LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
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LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
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LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
*
Denotes property is collateralized under mortgages with Nationwide, Principal Mutual, American General, New York Life, Manufacturer’s Life, USG Annuity and Life and Jackson National Life totalling $264.2 million.
SCHEDULE III
LIBERTY PROPERTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
(In thousands)
A summary of activity for real estate and accumulated depreciation is as follows:
REPORT OF INDEPENDENT AUDITORS
To The Partners
Liberty Property Limited Partnership
We have audited the accompanying consolidated balance sheets of Liberty Property Limited Partnership (the “Operating Partnership”) as of December 31, 2003 and 2002, and the related consolidated statements of operations, owners’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Operating Partnership’s management. Our responsibility is to express an opinion on these statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Liberty Property Limited Partnership at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2, in 2003, the Operating Partnership changed its accounting for employee compensation and adopted the provisions of EITF Topic D-42 - The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock. As discussed in Note 12, in 2002 the Operating Partnership adopted the provisions of Statement of Financial Accounting Standards No. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets.
Philadelphia, Pennsylvania
/s/ Ernst & Young LLP
February 6, 2004
CONSOLIDATED BALANCE SHEETS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(IN THOUSANDS)
See accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS 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)
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(IN THOUSANDS)
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
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 95.7% of the common equity of the Operating Partnership at December 31, 2003. The Company provides leasing, property management, development, acquisition, and other tenant-related services for a portfolio of industrial and office properties which are located principally within the Mid-Atlantic, Southeastern, and Midwestern United States.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 and 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 minority shareholders. All significant intercompany transactions and accounts have been eliminated.
Reclassifications
Certain amounts from prior years have been restated to conform to current-year presentation.
Real Estate and Depreciation
The Properties are recorded at the lower of cost or fair value and are depreciated using the straight line method over their estimated useful lives. The estimated lives are as follows:
Buildings and improvements
40 years (blended)
Equipment
5-10 years
Tenant improvements
Term of the related lease
Expenditures directly related to acquisition, or 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, salaries and other costs incurred during the period of development. Expenditures for maintenance and repairs are charged to operations as incurred.
In accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Standards (‘SFAS”) No. 141, “Business Combinations,” the Company allocates the purchase price of real estate to land, building and improvements and intangibles based on the relative fair value of each component. The value ascribed to in-place leases is based on the rental rates for the existing leases compared to market rent for leases of similar terms and present valuing the difference based on market interest rates. Origination values are also assigned to in-place leases, and, where appropriate, value is assigned to customer relationships. The Company depreciates the amounts allocated to building and improvements over 40 years and the amounts allocated to intangible assets relating to in-place leases, which are included in Deferred financing and leasing costs in the accompanying balance sheet, over the remaining term of the related leases.
The Company evaluates its real estate investments upon occurrence of significant adverse changes in their operations to assess whether any impairment indicators are present that affect the recovery of the recorded value. If any real estate investment is considered impaired, a loss is provided to reduce the carrying value of the property to its estimated fair value.
Investment in Unconsolidated Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures under 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 on the Consolidated Balance Sheet
and the Company’s share of net income from the joint venture is included on the Consolidated Statement of Operations.
Cash and Cash Equivalents
Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents.
Revenues
The Company earns rental income under operating leases with tenants. Rental income is recognized on a straight line basis over the applicable 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.
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 in accordance with Staff Accounting Bulletin 101 when the following conditions are met:
e)
the termination agreement is executed,
f)
the termination fee is determinable,
g)
all landlord services, pursuant to the terminated lease, have been rendered,
h)
collectibility of the termination fee is assured.
Deferred Financing and Leasing Costs
Costs incurred in connection with financing or leasing are capitalized and amortized over the term of the related loan or lease. Amortization of deferred financing costs is reported as interest expense. Intangible assets related to acquired in-place leases are amortized over the terms of the related leases.
Income per Common Unit
The following table sets forth the computation of basic and diluted income per common unit (in thousands, except per unit amounts):
Basic income per common unit for the year ended December 31, 2001 would be $2.20 if the debenture conversions which occurred in 2001 had occurred on January 1, 2001. The Convertible Debentures matured in 2001.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and other assets and liabilities are reasonable estimates of fair values because of the short-term maturities of these investments. The fair value of the Company’s long-term debt, which is based on estimates by management and on rates quoted on December 31, 2003 for comparable loans, exceeds the aggregate carrying value by approximately $283.1 million at December 31, 2003.
Income Taxes
In conformity with the Internal Revenue Code and applicable state and local tax statutes, taxable income or loss of the Operating Partnership is required to be reported in the tax returns of the partners in accordance with the terms of the Partnership Agreement. However, the Company is taxed in certain states and the United Kingdom. Accordingly, the Company has recognized federal, state and local taxes in accordance with US GAAP, as applicable.
Stock-Based Compensation
The Trust has a share-based employee compensation plan and as such the Operating Partnership absorbs a proportionate share of the related compensation expense. Prior to 2003, the Trust accounted for the plan under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. No share-based employee compensation cost was reflected in the 2002 or 2001 net income, as all options granted under this plan had an intrinsic value of zero on the date of grant. Effective January 1, 2003, the Trust adopted the fair value recognition provisions of the FASB’s SFAS No. 123, “Accounting for Stock-Based Compensation”, prospectively to all employee option awards granted, modified, or settled after January 1, 2003. Option awards under the Trust’s plan vest over three years. Therefore, the cost related to share-based employee compensation included in the determination of net income for 2001, 2002 and 2003 is less than that which would have been recognized if the fair value based method had been applied to all option awards since the original effective date of SFAS No. 123.
The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested option awards in each period (in thousands, except per unit amounts).
Pro forma disclosures are not likely to be representative of the effects on reported net income for future years because of the staggered vesting periods of the options.
Foreign Currency Translation
The functional currency for the Company’s United Kingdom operations is pounds sterling. The Company translates their financial statements into US dollars. Gains and losses resulting from this translation do not impact the results of operations and are included in general partner’s equity.
Newly Issued Accounting Standards
In January 2003, the FASB issued Financial Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities”. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The FASB deferred the effective date for existing variable interest entities to periods ending after March 15, 2004. FIN No. 46 requires that a variable interest entity be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The Company continues to evaluate the impact of FIN No. 46, but does not expect the implementation to materially affect its financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. Certain provisions of this statement are effective for financial instruments entered into or modified after May 31, 2003 and otherwise effective at the beginning of the first interim period beginning June 15, 2003. Other provisions of this statement have been deferred indefinitely. The Company was not impacted by the currently effective provisions of SFAS No. 150.
Income available to common unitholders for the year ended December 31, 2002 has been restated to reflect guidance and clarification of certain issues surrounding EITF Topic D-42, “The Effect on Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,” issued July 2003, which requires the excess of preferred share redemption over carrying amount to be classified as a reduction in income available to common unitholders. The effect of the accounting change on income available to common unitholders as previously reported for 2002 is as follows (in thousands, except per unit amounts):
At December 31, 2003 and 2002, the Company owned and operated industrial and office properties located principally in suburban mixed-use developments or business parks. The carrying value of these properties by type is as follows (in thousands):
Depreciation expense was $105.6 million in 2003, $93.1 million in 2002, and $88.2 million in 2001.
As of December 31, 2003, the Company has commenced development on 15 properties, which upon completion are expected to comprise approximately 1.5 million square feet of leaseable space. As of December 31, 2003 approximately $56.9 million has been expended for the development of these projects and an additional $75.5 million is estimated to be required for completion.
4.
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
On November 18, 2002, the Company entered into a joint venture agreement (“Liberty Venture I, LP”) with the Public Employees’ Retirement Association of Colorado. The Company sold or contributed 28 properties with a net book value of $127.5 million to the joint venture in exchange for a 25% ownership interest in the joint venture and $108.8 million in cash. The Company’s share of the joint venture earnings is included in equity in earnings of unconsolidated joint ventures in the accompanying statement of operations. The Company will
provide development, leasing and property management services for a fee, and may receive a promoted interest if certain return thresholds are met.
During the year ended December 31, 2003, the Company contributed one additional industrial distribution property to the venture with a net book value of approximately $15.6 million.
The condensed balance sheets as of December 31, 2003 and 2002 and statements of operations for Liberty Venture I, LP, for the period from inception to December 31, 2002 and for the year ended December 31, 2003 are as follows (in thousands):
5.
RELATED PARTY TRANSACTIONS
During the year ended December 31, 2003, the Company exercised its option to purchase Rouse Kent Limited (“RKL”) for nominal consideration. As a result of the purchase, the Company’s assets and liabilities increased by approximately $60 million. The operations of RKL are included in the consolidated financial statements from July 1, 2003 through December 31, 2003.
RKL owns six buildings which contain 210,000 square feet of leaseable space and has planning permission for the development of additional commercial space. RKL is party to a contract with the County of Kent which contract entitles RKL to participate in proceeds realized from the sale of residential land parcels to homebuilders.
Pursuant to agreements, the Company provided management services with respect to RKL for the six months ended June 30, 2003 for $150,000 per quarter and for the years ended December 31, 2002, and 2001 for $600,000 per year. In addition, the Company paid a fee to RKL for management services which it provided for the Company’s properties owned in the United Kingdom. For the six months ended June 30, 2003, the fees for these services were $223,000 and for the years ended December 31, 2002, and 2001, the fees for these services were $662,000 and $376,000, respectively. The Company recognized interest income on notes receivable from RKL of $1.9 million for the six months ended June 30, 2003, and $3.3 million and $2.2 million for the years ended December 31, 2002, and 2001, respectively.
Indebtedness consists of mortgage loans, unsecured notes, borrowings under the credit facility, as defined below and convertible debentures (which matured in 2001). The weighted average interest rates for the years ended December 31, 2003, 2002, and 2001, were approximately 6.9%, 7.1% and 7.5%, respectively. Interest expense for the years ended December 31, 2003, 2002, and 2001, aggregated $123.9 million, $116.6 million and $111.2 million, respectively. Interest costs during these periods of $10.9 million, $16.5 million and $22.3 million, respectively, were capitalized. Cash paid for interest for the years ended December 31, 2003, 2002, and 2001, was $132.5 million, $128.4 million and $128.4 million, respectively.
The Company is subject to financial covenants contained in some of the debt agreements, the most restrictive of which are detailed below under the heading “Credit Facility”. The Company is in compliance with the financial covenants.
Mortgage Loans, Unsecured Notes
Mortgage loans with maturities ranging from 2004 to 2012 are collateralized by and in some instances cross-collateralized by properties with a net book value of $502.4 million.
As of December 31, 2003, $363.9 million in mortgage loans and $1,355.0 million in unsecured notes were outstanding. The interest rates on $1,652.4 million of mortgage loans and unsecured notes are fixed and range from 6.0% to 8.8%. Interest rates on $66.5 million of mortgage loans float with the base rate of the respective lending bank or a municipal bond index. The weighted average remaining term for the mortgage loans and unsecured notes is 5.8 years.
Credit Facility
For the year ended December 31, 2002, the Company utilized a $450 million unsecured credit facility (the “$450 million Credit Facility”). The interest rate on borrowings under the $450 million Credit Facility fluctuated based on senior debt ratings from Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Ratings Group (“S&P”), and Fitch, Inc. (“Fitch”).
In January 2003, the Company obtained the $350 million unsecured credit facility (the “$350 million Credit Facility”), replacing the $450 million Credit Facility. Based on the Company’s current ratings, the interest rate on the $350 million Credit Facility is 70 basis points over the LIBOR rate (1.8% at December 31, 2003). There is also a 20 basis point facility fee on the current borrowing capacity. The current ratings for the Company’s senior unsecured debt are Baa2, BBB and BBB from Moody’s, S&P, and Fitch respectively. The $350 million 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 $150 million of borrowings. The $350 million Credit Facility has an accordion feature which enables the Company to increase the facility to $450 million. The $350 million Credit Facility contains financial covenants, certain of which are set forth below:
The $350 million Credit Facility expires in January 2006. The $350 million Credit Facility provides for up to $50 million denominated in Pounds Sterling or Euros.
The scheduled maturities of principal amortization of the Company’s mortgage loans, $350 million Credit Facility and unsecured notes outstanding and the related weighted average interest rates are as follows (in thousands, except percentages):
Convertible Debentures
The Convertible Debentures, which matured on July 1, 2001, were exchangeable for Common Shares of beneficial interest of the Trust (the “Common Shares”) at a rate of one Common Share for each $20 outstanding principal amount of Convertible Debentures, subject to certain adjustments.
Future minimum rental payments due from tenants under noncancelable operating leases as of December 31, 2003 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 statements of operations.
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 Company and certain subsequent acquisitions. No common units were issued in connection with acquisitions in 2001 or 2002. During 2003, 33,682 Common Units were issued in connection with an acquisition. The common limited partnership interests outstanding as of December 31, 2003 have the same economic characteristics as would 3,698,203 Common Shares. The interests in the Limited Partnership 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.
Preferred Units
The Company has outstanding the following Cumulative Redeemable Preferred Units of the Operating Partnership, (the “Preferred Units”):
The Company paid the following Preferred Unit distributions for the year ended December 31:
Minority Interest
Minority interest includes third-party ownership interests in consolidated joint venture investments.
9.
COMMITMENTS AND CONTINGENCIES
Substantially all of the 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. The Environmental Assessments consisted of, among other activities, a visual inspection of each Property and its neighborhood and a check of pertinent public records. 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.
Although the Company is engaged in litigation incidental to its business, there is no legal proceeding to which it is a party which, in the opinion of management, will materially adversely affect the results of the Company’s operations.
The Company is obligated to make additional capital contributions of approximately $3.4 million in conjunction with two of the Company’s unconsolidated joint ventures.
10.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of quarterly results of operations for the years ended December 31, 2003 and 2002 follows. Certain 2003 and 2002 amounts have been reclassified to conform to the current presentation of discontinued operations (in thousands, except per unit amounts):
A reconciliation of the restatement of quarter ended September 30, 2002, in accordance with EITF Topic D-42, is as follows (in thousands):
The Company operates its portfolio of properties primarily throughout the Mid-Atlantic, Southeastern, and Midwestern United States. Additionally, the Company owns certain assets in the United Kingdom. The Company reviews the performance of the portfolio on a geographical basis, as such, the following regions are considered the Company’s reportable segments:
REPORTABLE SEGMENTS
MARKETS
Delaware Valley
Southeastern Pennsylvania, New Jersey
Midwest
Lehigh Valley, Michigan, Minnesota, Milwaukee/Chicago
Mid-Atlantic
Maryland, Piedmont Triad, Greenville, S.C., Richmond/Roanoke, Virginia Beach
Florida
Jacksonville, Orlando, Boca Raton, Tampa, Texas
United Kingdom
County of Kent
The Company’s reportable segments are distinct business units which are each managed separately in order to concentrate market knowledge within a geographic area. Within these reportable segments, the Company derives its revenues from its two product types: industrial properties and office properties.
The Company evaluates performance of the reportable segments based on property level operating income, which is calculated as rental revenue and operating expense reimbursement less rental expenses and real estate taxes. The accounting policies of the reportable segments are the same as those for the Company on a consolidated basis. The operating information by segment is as follows (in thousands):
The Company has restated segment information for the years ended December 31, 2002 and 2001 to reflect a change in the Company’s method of internal reporting.
Discontinued Operations
In accordance with SFAS No. 144 which the Company adopted on January 1, 2002, net income and gain/(loss) on disposition of real estate for properties sold subsequent to December 31, 2001 are reflected in the consolidated statements of operations as discontinued operations. The proceeds from dispositions of operating properties were $40.8 million and $38.4 million for the years ended December 31, 2003 and 2002, respectively. Below is a summary of the results of operations of the properties disposed of through the respective disposition dates (in thousands):
Sales occurring before December 31, 2001, as well as sales of land and development properties continue to be reflected as a component of income from continuing operations.
Asset Impairment
In accordance with SFAS No. 144 the Company recognized a $5.3 million impairment loss on three parcels of land. This impairment is included in the caption gain (loss) on property dispositions as a component of income from continuing operations. In addition, during the year ended December 31, 2002, the Company recognized a $6.0 million impairment loss on assets held for sale. This loss was subsequently realized during 2002 upon the disposal of those assets held for sale. The Company determined this impairment through a comparison of the aggregate future undiscounted cash flows to be generated by the properties to the carrying value of the properties. The Company has evaluated each of the Properties and land held for development and has determined that there are no additional valuation adjustments necessary at December 31, 2003.
LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
LIBERTY PROPERTY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
*
Denotes property is collateralized under mortgages with Nationwide, Principal Mutual, American General, New York Life, Manufacturer’s Life, USG Annuity and Life and Jackson National Life totalling $264.2 million.
SCHEDULE III
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
Evaluation of Disclosure Controls and Procedures
The Company’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 Exchange Act) as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that its disclosure controls and procedures, as of the end of the period covered by this report, are functioning effectively to provide reasonable assurance that information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that are filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
It should be noted that the design of any system of controls is based in part on certain assumptions about the likelihood of future events. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute assurance, that the objectives of the control system will be met.
Changes in Internal Controls
There are no significant changes in internal controls or other factors that could significantly affect the Company’s internal controls subsequent to the date of our evaluation.
PART III
ITEM 10.
ITEM 10.
TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The information required by Item 10 shall be included in the Proxy Statement to be filed relating to the Company’s 2004 Annual Meeting of Shareholders and is incorporated herein by reference.
The information required by Item 11
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 shall be included in the Proxy Statement to be filed relating to the Company’s 2004 Annual Meeting of Shareholders and is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by Item 12 shall be included in the Proxy Statement to be filed relating to the Company’s 2004 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 shall be included in the Proxy Statement to be filed relating to the Company’s 2004 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 2004 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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 AUDITORS AND CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors - Liberty Property Trust
Financial Statements - Liberty Property Trust
Balance Sheets:
Liberty Property Trust Consolidated as of December 31, 2003 and 2002
Statements of Operations:
Liberty Property Trust Consolidated for the years ended December 31, 2003, 2002 and 2001
Statements of Shareholders’ Equity:
Liberty Property Trust Consolidated for the years ended December 31, 2003, 2002 and 2001
Statements of Cash Flows:
Liberty Property Trust Consolidated for the years ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements - Liberty Property Trust
Report of Independent Auditors - Liberty Property Limited Partnership
Financial Statements - Liberty Property Limited Partnership
Balance Sheets:
Liberty Property Limited Partnership Consolidated as of December 31, 2003 and
Statements of Operations:
Liberty Property Limited Partnership Consolidated for the years ended December 31, 2003, 2002 and 2001
Statements of Owners’ Equity:
Liberty Property Limited Partnership Consolidated for the years ended December 31, 2003, 2002 and 2001
Statements of Cash Flows:
Liberty Property Limited Partnership Consolidated for the years ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements - Liberty Property Limited Partnership
2.
FINANCIAL STATEMENT SCHEDULES:
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2003 for Liberty Property Trust
All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2003 for Liberty Property Limited Partnership
All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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 10, 2004
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 in the capacities and on the dates indicated.
/s/ WILLIAM P. HANKOWSKY
Chairman of the Board of Trustees, President and Chief Executive Officer
(Principal Executive Officer)
March 10, 2004
William P. Hankowsky
/s/ GEORGE J. ALBURGER, JR.
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
March 10, 2004
George J. Alburger, Jr.
/s/ M. LEANNE LACHMAN
Trustee
March 10, 2004
M. Leanne Lachman
/s/ FREDERICK F. BUCHHOLZ
Trustee
March 10, 2004
Frederick F. Buchholz
/s/ J. ANTHONY HAYDEN
Trustee
March 10, 2004
J. Anthony Hayden
/s/ DAVID L. LINGERFELT
Trustee
March 10, 2004
David L. Lingerfelt
/s/ JOHN A. MILLER, CLU
Trustee
March 10, 2004
John A. Miller, CLU
/s/ STEPHEN B. SIEGEL
Trustee
March 10, 2004
Stephen B. Siegel
/s/ THOMAS C. DELOACH, JR.
Trustee
March 10, 2004
Thomas C. DeLoach, Jr.
/s/ DANIEL P. GARTON
Trustee
March 10, 2004
Daniel P. Garton
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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
BY: Liberty Property Trust
General Partner
Date: March 10, 2004
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 in the capacities and on the dates indicated.
/s/ WILLIAM P. HANKOWSKY
Chairman of the Board of Trustees, President and Chief Executive Officer
Trustee of the General Partner
March 10, 2004
William P. Hankowsky
/s/ M. LEANNE LACHMAN
Trustee of the General Partner
March 10, 2004
M. Leanne Lachman
/s/ FREDERICK F. BUCHHOLZ
Trustee of the General Partner
March 10, 2004
Frederick F. Buchholz
/s/ J. ANTHONY HAYDEN
Trustee of the General Partner
March 10, 2004
J. Anthony Hayden
/s/ DAVID L. LINGERFELT
Trustee of the General Partner
March 10, 2004
David L. Lingerfelt
/s/ JOHN A. MILLER, CLU
Trustee of the General Partner
March 10, 2004
John A. Miller, CLU
/s/ STEPHEN B. SIEGEL
Trustee of the General Partner
March 10, 2004
Stephen B. Siegel
/s/ THOMAS C. DELOACH, JR.
Trustee of the General Partner
March 10, 2004
Thomas C. DeLoach, Jr.
/s/ DANIEL P. GARTON
Trustee of the General Partner
March 10, 2004
Daniel P. Garton
EXHIBIT INDEX