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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2003

OR

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

For the transition period from _______________ to __________________

     
Commission file numbers:   1-13130 (Liberty Property Trust)
    1-13132 (Liberty Property Limited Partnership)


LIBERTY PROPERTY TRUST
LIBERTY PROPERTY LIMITED PARTNERSHIP


(Exact name of registrants as specified in their governing documents)

     
MARYLAND (Liberty Property Trust)
PENNSYLVANIA (Liberty Property Limited Partnership)
  23-7768996
23-2766549

 
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification Number)
     
65 Valley Stream Parkway, Suite 100,
Malvern, Pennsylvania
   
19355

 
(Address of Principal Executive Offices)   (Zip Code)
     
Registrants’ Telephone Number, Including Area Code   (610) 648-1700

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ NO o

On November 6, 2003, 80,121,300 Common Shares of Beneficial Interest, par value $.001 per share, of Liberty Property Trust were outstanding.

 


 

Liberty Property Trust/Liberty Property Limited Partnership
Form 10-Q for the period ended September 30, 2003

                 
Index         Page  

       
 
Part I.
  Financial Information        
Item 1.
  Financial Statements (unaudited)        
       
Consolidated balance sheets of Liberty Property Trust at September 30, 2003 and December 31, 2002
    3  
       
Consolidated statements of operations of Liberty Property Trust for the three months ended September 30, 2003 and September 30, 2002
    4  
       
Consolidated statements of operations of Liberty Property Trust for the nine months ended September 30, 2003 and September 30, 2002
    5  
       
Consolidated statements of cash flows of Liberty Property Trust for the nine months ended September 30, 2003 and September 30, 2002
    6  
       
Notes to Consolidated Financial Statements for Liberty Property Trust
    7  
       
Consolidated balance sheets of Liberty Property Limited Partnership at September 30, 2003 and December 31, 2002
    12  
       
Consolidated statements of operations of Liberty Property Limited Partnership for the three months ended September 30, 2003 and September 30, 2002
    13  
       
Consolidated statements of operations of Liberty Property Limited Partnership for the nine months ended September 30, 2003 and September 30, 2002
    14  
       
Consolidated statements of cash flows of Liberty Property Limited Partnership for the nine months ended September 30, 2003 and September 30, 2002
    15  
       
Notes to Consolidated Financial Statements for Liberty Property Limited Partnership
    16  
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     20  
Item 3.
  Quantitative and Qualitative Disclosures about Market Risks     27  
Item 4.
  Controls and Procedures     27  
Part II.
  Other Information     29  
Signatures for Liberty Property Trust     31  
Signatures for Liberty Property Limited Partnership     32  
Exhibit Index     33  

2


 

CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY TRUST
(In thousands, except share amounts)

                   
      September 30, 2003     December 31, 2002  
     
   
 
      (Unaudited)          
ASSETS
               
Real estate:
               
 
Land and land improvements
  $ 551,989     $ 504,808  
 
Buildings and improvements
    3,295,038       3,048,676  
 
Less accumulated depreciation
    (559,918 )     (485,206 )
 
 
   
 
Operating real estate
    3,287,109       3,068,278  
 
Development in progress
    33,241       163,379  
Land held for development
    165,837       163,142  
 
 
   
 
Net real estate
    3,486,187       3,394,799  
 
Cash and cash equivalents
    43,750       11,071  
Accounts receivable
    6,032       14,349  
Deferred rent receivable
    55,629       48,775  
Deferred financing and leasing costs, net of accumulated amortization (2003, $85,002; 2002, $75,833)
    82,459       71,544  
Investment in unconsolidated joint ventures
    17,861       14,963  
Prepaid expenses and other assets
    63,908       71,560  
 
 
   
 
Total assets
  $ 3,755,826     $ 3,627,061  
 
 
   
 
LIABILITIES
               
Mortgage loans
  $ 360,741     $ 315,263  
Unsecured notes
    1,405,000       1,418,924  
Credit facility
    152,000       132,000  
Accounts payable
    40,800       24,116  
Accrued interest
    19,889       32,571  
Dividend payable
    50,326       48,040  
Other liabilities
    94,419       91,315  
 
 
   
 
Total liabilities
    2,123,175       2,062,229  
 
Minority interest
    204,694       208,439  
 
SHAREHOLDERS’ EQUITY
               
Common shares of beneficial interest, $.001 par value, 191,200,000 shares authorized, 79,671,693 (includes 59,100 in treasury) and 76,484,612 (includes 59,100 in treasury) shares issued and outstanding as of September 30, 2003 and December 31, 2002, respectively
    80       76  
Additional paid-in capital
    1,499,155       1,410,900  
Accumulated other comprehensive income
    6,239       4,804  
Unearned compensation
    (3,752 )     (1,750 )
Distributions in excess of net income
    (72,438 )     (56,310 )
Common shares in treasury, at cost, 59,100 shares as of September 30, 2003 and December 31, 2002
    (1,327 )     (1,327 )
 
 
   
 
Total shareholders’ equity
    1,427,957       1,356,393  
 
 
   
 
Total liabilities and shareholders’ equity
  $ 3,755,826     $ 3,627,061  
 
 
   
 

See accompanying notes.

3


 

CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands, except per share amounts)

                   
      Three Months Ended  
     
 
      September 30, 2003     September 30, 2002  
     
   
 
              (Restated)  
REVENUE
               
Rental
  $ 114,778     $ 113,191  
Operating expense reimbursement
    43,092       40,811  
Equity in earnings of unconsolidated joint ventures
    440        
Interest and other
    1,486       2,088  
 
 
   
 
Total revenue
    159,796       156,090  
 
 
   
 
EXPENSES
               
Rental property
    30,489       27,178  
Real estate taxes
    16,348       15,779  
Interest
    31,153       29,147  
General and administrative
    6,542       5,088  
Depreciation and amortization
    30,735       27,938  
 
 
   
 
Total expenses
    115,267       105,130  
 
 
   
 
Income before property dispositions, income taxes and minority interest
    44,529       50,960  
Loss on property dispositions
    (312 )     (5,414 )
Income taxes
    (526 )     (184 )
Minority interest
    (4,965 )     (5,000 )
 
 
   
 
Income from continuing operations
    38,726       40,362  
Discontinued operations net of minority interest (including net gain on property dispositions of $418 for the quarter ended September 30, 2003 and $528 for the quarter ended September 30, 2002)
    383       1,278  
 
 
   
 
Net income
    39,109       41,640  
Preferred share distributions
          (1,742 )
Excess of preferred share redemption over carrying amount
          (4,186 )
 
 
   
 
Income available to common shareholders
  $ 39,109     $ 35,712  
 
 
   
 
Earnings per share
               
 
Basic:
               
 
Income from continuing operations
  $ 0.49     $ 0.45  
 
Income from discontinued operations
    0.01       0.02  
 
 
   
 
 
Income per common share — basic
  $ 0.50     $ 0.47  
 
 
   
 
 
Diluted:
               
 
Income from continuing operations
  $ 0.48     $ 0.45  
 
Income from discontinued operations
    0.01       0.02  
 
 
   
 
 
Income per common share — diluted
  $ 0.49     $ 0.47  
 
 
   
 
Distributions per common share
  $ 0.605     $ 0.60  
 
 
   
 
Weighted average number of common shares outstanding
               
 
Basic
    78,949       75,451  
 
Diluted
    80,317       76,651  
 
 
   
 

See accompanying notes.

4


 

CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands, except per share amounts)

                   
      Nine Months Ended  
     
 
      September 30, 2003     September 30, 2002  
     
   
 
              (Restated)  
REVENUE
               
Rental
  $ 336,846     $ 324,929  
Operating expense reimbursement
    127,594       119,875  
Equity in earnings of unconsolidated joint ventures
    1,355        
Interest and other
    5,637       5,692  
 
 
   
 
Total revenue
    471,432       450,496  
 
 
   
 
EXPENSES
               
Rental property
    90,921       82,077  
Real estate taxes
    46,560       44,571  
Interest
    92,587       85,222  
General and administrative
    20,749       16,414  
Depreciation and amortization
    90,662       81,512  
 
 
   
 
Total expenses
    341,479       309,796  
 
 
   
 
Income before property dispositions, income taxes and minority interest
    129,953       140,700  
Gain (loss) on property dispositions
    292       (4,172 )
Income taxes
    (1,587 )     (462 )
Minority interest
    (15,235 )     (15,530 )
 
 
   
 
Income from continuing operations
    113,423       120,536  
Discontinued operations net of minority interest (including net gain on property dispositions of $11,668 for the nine months ended September 30, 2003 and $6,197 for the nine months ended September 30, 2002)
    12,302       7,808  
 
 
   
 
Net income
    125,725       128,344  
Preferred share distributions
          (7,242 )
Excess of preferred share redemption over carrying amount
          (4,186 )
 
 
   
 
Income available to common shareholders
  $ 125,725     $ 116,916  
 
 
   
 
Earnings per share
               
Basic:
               
 
Income from continuing operations
  $ 1.45     $ 1.46  
 
Income from discontinued operations
    0.16       0.11  
 
 
   
 
 
Income per common share — basic
  $ 1.61     $ 1.57  
 
 
   
 
 
Diluted:
               
 
Income from continuing operations
  $ 1.43     $ 1.44  
 
Income from discontinued operations
    0.16       0.10  
 
 
   
 
 
Income per common share — diluted
  $ 1.59     $ 1.54  
 
 
   
 
Distributions per common share
  $ 1.805     $ 1.78  
 
 
   
 
Weighted average number of common shares outstanding
               
 
Basic
    77,939       74,663  
 
Diluted
    79,164       75,972  
 
 
   
 

See accompanying notes.

5


 

CONSOLIDATED STATEMENTS OF CASH FLOWS OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands)

                   
      Nine Months Ended  
     
 
      September 30, 2003     September 30, 2002  
     
   
 
OPERATING ACTIVITIES
               
Net income
  $ 125,725     $ 128,344  
Adjustments to reconcile net income to net cash provided by operating activities:
               
 
Depreciation and amortization
    91,069       82,393  
 
Amortization of deferred financing costs
    3,027       2,881  
 
Equity in earnings of unconsolidated joint ventures
    (1,355 )      
 
Minority interest in net income
    15,819       15,928  
 
Gain on property dispositions
    (11,960 )     (2,025 )
 
Noncash compensation
    2,496       1,654  
Changes in operating assets and liabilities:
               
 
Accounts receivable
    8,533       3,170  
 
Deferred rent receivable
    (6,854 )     (8,096 )
 
Prepaid expenses and other assets
    (11,260 )     (25,416 )
 
Accounts payable
    (3,035 )     16,789  
 
Accrued interest
    (12,682 )     (11,194 )
 
Other liabilities
    3,104       12,383  
 
 
   
 
Net cash provided by operating activities
    202,627       216,811  
 
 
   
 
INVESTING ACTIVITIES
               
Investment in properties
    (68,324 )     (79,797 )
Cash paid for business, net of cash acquired
    16,627        
Investment in unconsolidated joint ventures
    (3,099 )      
Distributions from unconsolidated joint ventures
    2,707        
Proceeds from disposition of properties/land
    42,333       61,843  
Investment in development in progress
    (43,422 )     (133,706 )
Investment in land held for development
    (11,829 )     (24,405 )
Increase in deferred leasing costs
    (16,987 )     (16,129 )
 
 
   
 
Net cash used in investing activities
    (81,994 )     (192,194 )
 
 
   
 
FINANCING ACTIVITIES
               
Net proceeds from issuance of common shares
    83,701       51,985  
Proceeds from issuance of preferred units
          22,954  
Proceeds from issuance of unsecured notes
    3,683       150,000  
Repayments of unsecured notes
    (23,739 )     (100,000 )
Redemption of preferred shares
          (125,063 )
Proceeds from mortgage loans
    924       3,446  
Repayments of mortgage loans
    (8,623 )     (5,834 )
Proceeds from credit facility
    327,850       391,000  
Repayments on credit facility
    (307,850 )     (256,000 )
Increase in deferred financing costs
    (2,563 )     (1,823 )
Distributions paid on common shares
    (139,204 )     (131,469 )
Distributions paid on preferred shares
          (9,075 )
Distributions paid on units
    (20,579 )     (15,398 )
 
 
   
 
Net cash used in financing activities
    (86,400 )     (25,277 )
 
 
   
 
Increase (decrease) in cash and cash equivalents
    34,233       (660 )
Effect of exchange rate changes on cash
    (1,554 )     (3,124 )
Cash and cash equivalents at beginning of period
    11,071       19,390  
 
 
   
 
Cash and cash equivalents at end of period
  $ 43,750     $ 15,606  
 
 
   
 
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
               
Write-off of fully depreciated property and deferred costs
  $ 11,801     $ 3,565  
Acquisition of properties
    (15,284 )      
Assumption of mortgage loans
    15,284        
Issuance of operating partnership units for property acquisition
    1,151        
 
 
   
 

See accompanying notes.

6


 

Liberty Property Trust
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2003

Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements of Liberty Property Trust (the “Trust”) and its subsidiaries, including Liberty Property Limited Partnership (the “Operating Partnership”) (the Trust, Operating Partnership and their respective subsidiaries referred to collectively as the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of the Trust and the Operating Partnership for the year ended December 31, 2002. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial statements for these interim periods have been included. The results of interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. Certain amounts from prior periods have been reclassified to conform to current period presentation. Results for the three and nine months ended September 30, 2002 have been restated to reflect recent guidance and clarifications by the Securities and Exchange Commission (“SEC”). The SEC’s July 31, 2003 clarification of certain issues surrounding the Financial Standards Board’s (“FASB”) EITF Topic D-42, “The Effect on 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.

Income per Share
The following table sets forth the computation of basic and diluted income per common share for the three and nine months ended September 30, 2003 and 2002 (in thousands except per share amounts):

                                                   
      For the Three Months Ended September 30, 2003     For the Three Months Ended September 30, 2002  
     
   
 
              Weighted                     Weighted        
              Average                     Average        
      Income     Shares     Per Share     Income     Shares     Per Share  
      (Numerator)     (Denominator)     Amount     (Numerator)     (Denominator)     Amount  
     
   
   
   
   
   
 
Net income
  $ 39,109                     $ 41,640                  
Less: Preferred share distributions
                          (1,742 )                
 
Excess of preferred share redemption over carrying amount
                          (4,186 )                
 
 
                   
                 
Basic income per common share
                                               
 
Income available to common shareholders
    39,109       78,949     $ 0.50       35,712       75,451     $ 0.47  
 
                 
                   
 
Dilutive shares for long-term compensation plans
          1,368                     1,200          
 
 
   
           
   
         
Diluted income per common share
                                               
 
Income available to common shareholders and assumed conversions
  $ 39,109       80,317     $ 0.49     $ 35,712       76,651     $ 0.47  
 
 
   
   
   
   
   
 

7


 

                                                   
      For the Nine Months Ended September 30, 2003     For the Nine Months Ended September 30, 2002  
     
   
 
              Weighted                     Weighted        
              Average                     Average        
      Income     Shares     Per Share     Income     Shares     Per Share  
      (Numerator)     (Denominator)     Amount     (Numerator)     (Denominator)     Amount  
     
   
   
   
   
   
 
Net income
  $ 125,725                     $ 128,344                  
Less: Preferred share distributions
                          (7,242 )                
 
Excess of preferred share redemption over carrying amount
                          (4,186 )                
 
 
                   
                 
Basic income per common share
 
Income available to common shareholders
    125,725       77,939     $ 1.61       116,916       74,663     $ 1.57  
 
                 
                   
 
Dilutive shares for long-term compensation plans
          1,225                     1,309          
 
 
   
           
   
         
Diluted income per common share
                                               
 
Income available to common shareholders and assumed conversions
  $ 125,725       79,164     $ 1.59     $ 116,916       75,972     $ 1.54  
 
 
   
   
   
   
   
 

Stock Based Compensation
At September 30, 2003, the Company had a share-based employee compensation plan. 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 is reflected in 2002 net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common share on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of the FASB’s Statement of Financial Standards (“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 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.

                                   
      Three Months Ended     Nine Months Ended  
     
   
 
      September 30,     September 30,  
     
   
 
      2003     2002     2003     2002  
     
   
   
   
 
Income available to common shareholders
  $ 39,109     $ 35,712     $ 125,725     $ 116,916  
Add: Share-based employee compensation expense included in reported net income
    23             372        
Deduct: Total share-based employee compensation expense determined under fair value based method for all awards
    (344 )     (558 )     (1,184 )     (1,577 )
 
 
   
   
   
 
Pro forma net income
  $ 38,788     $ 35,154     $ 124,913     $ 115,339  
 
 
   
   
   
 
Earnings per share:
                               
 
Basic-as reported
  $ 0.50     $ 0.47     $ 1.61     $ 1.57  
 
Basic-pro forma
  $ 0.49     $ 0.47     $ 1.60     $ 1.54  
 
Diluted-as reported
  $ 0.49     $ 0.47     $ 1.59     $ 1.54  
 
Diluted-pro forma
  $ 0.48     $ 0.46     $ 1.58     $ 1.52  

Foreign Operations
The functional currency for the Company’s United Kingdom operation is pounds sterling. The United Kingdom operations translate their financial statements into US dollars prior to the consolidation of these financial statements with those of the Company. Gains and losses resulting from this translation are included in accumulated other comprehensive income as a separate component of shareholders’ equity. Comprehensive income was $0.6 million and $2.0 million for the three months ended September 30, 2003 and 2002, respectively. Comprehensive income was $1.0 million and $7.0 million for the nine months ended September 30, 2003 and 2002, respectively.

8


 

Note 2: Organization

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 the Operating Partnership. The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 95.6% of the common equity of the Operating Partnership at September 30, 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 Southeastern, Mid-Atlantic and Midwestern United States.

Note 3: Segment Information

The Company reviews the performance of the portfolio on a geographical basis. The following regions are considered the Company’s reportable segments: Southeastern Pennsylvania; New Jersey; Lehigh Valley, Pennsylvania; Virginia; the Carolinas; Jacksonville, Florida; Minneapolis, Minnesota; Detroit, Michigan; and all others combined (including Maryland; Tampa, Florida; South Florida; and the United Kingdom). The Company’s reportable segments are distinct business units which are each managed separately in order to concentrate market knowledge within a geographical area. Within these reportable segments, the Company derives its revenues from its two product types: industrial properties and office properties.

The Company evaluates the 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):

                                                                                 
For the Three Months Ended September 30, 2003

    SE Pennsyl.     New Jersey     Lehigh Valley     Virginia     The Carolinas     Jacksonville     Minnesota     Michigan     All Others     Total  
   
   
   
   
   
   
   
   
   
   
 
Real estate related revenues
    $ 45,339       $ 8,850       $ 18,042       $ 12,831       $ 10,973       $ 12,576       $ 12,278       $ 17,652       $ 19,329       $ 157,870  
Rental property expenses and real estate taxes
    13,071       3,087       4,620       3,456       2,539       3,460       4,857       5,972       5,775       46,837  
 
   
     
     
     
     
     
     
     
     
     
 
Property level operating income
    $ 32,268       $ 5,763       $ 13,422       $ 9,375       $ 8,434       $ 9,116       $ 7,421       $ 11,680       $ 13,554       111,033  
 
 
     
     
     
     
     
     
     
     
         
Other income/expenses, net                             66,504  
 
                                                                           
 
Income before property dispositions, income taxes and minority interest                             44,529  
Loss on disposition of properties                             (312 )
Income taxes                             (526 )
Minority interest                             (4,965 )
Discontinued operations net of minority interest                             383  
 
                                                                         
 
Income available to common shareholders                             $ 39,109  
 
                                                                           
 
                                                                                 
For the Three Months Ended September 30, 2002

    SE Pennsyl.     New Jersey     Lehigh Valley     Virginia     The Carolinas     Jacksonville     Minnesota     Michigan     All Others     Total  
   
   
   
   
   
   
   
   
   
   
 
Real estate related revenues
    $ 45,197       $ 12,060       $ 18,993       $ 12,704       $ 8,442       $ 11,259       $ 12,497       $ 17,588       $ 15,262       $ 154,002  
Rental property expenses and real estate taxes
    12,343       3,672       3,390       3,061       2,441       2,986       4,694       5,923       4,447       42,957  
 
   
     
     
     
     
     
     
     
     
     
 
Property level operating income
    $ 32,854       $ 8,388       $ 15,603       $ 9,643       $ 6,001       $ 8,273       $ 7,803       $ 11,665       $ 10,815       111,045  
 
   
     
     
     
     
     
     
     
     
         
Other income/expenses, net                             60,085  
 
                                                                           
 
Income before property dispositions, income taxes and minority interest                             50,960  
Loss on disposition of properties                             (5,414 )
Income taxes                             (184 )
Minority interest                             (5,000 )
Discontinued operations net of minority interest                             1,278  
Preferred share distributions                             (1,742 )
Excess of preferred share redemption over carrying amount (See Note 1)                             (4,186 )
 
                                                                           
 
Income available to common shareholders                             $ 35,712  
 
                                                                           
 

9


 

                                                                                 
For the Nine Months Ended September 30, 2003

    SE Pennsyl.     New Jersey     Lehigh Valley     Virginia     The Carolinas     Jacksonville     Minnesota     Michigan     All Others     Total  
   
   
   
   
   
   
   
   
   
   
 
Real estate related revenues
    $ 142,448       $ 25,991       $ 50,150       $ 38,399       $ 28,725       $ 36,930       $ 37,834       $ 49,767       $ 54,196       $ 464,440  
Rental property expenses and real estate taxes
    40,820       8,964       13,145       10,378       7,646       9,862       14,388       16,553       15,725       137,481  
 
 
   
   
   
   
   
   
   
   
         
Property level operating income
    $ 101,628       $ 17,027       $ 37,005       $ 28,021       $ 21,079       $ 27,068       $ 23,446       $ 33,214       $ 38,471       326,959  
 
 
   
   
   
   
   
   
   
   
         
Other income/expenses, net                             197,006  
 
                                                                           
 
Income before property dispositions, income taxes and minority interest                             129,953  
Gain on disposition of properties                             292  
Income taxes                             (1,587 )
Minority interest                             (15,235 )
Discontinued operations net of minority interest                             12,302  
 
                                                                           
 
Income available to common shareholders                             $ 125,725  
 
                                                                           
 
                                                                                 
For the Nine Months Ended September 30, 2002

    SE Pennsyl.     New Jersey     Lehigh Valley     Virginia     The Carolinas     Jacksonville     Minnesota     Michigan     All Others     Total  
   
   
   
   
   
   
   
   
   
   
 
Real estate related revenues
    $ 133,782       $ 34,830       $ 48,515       $ 37,419       $ 25,276       $ 33,811       $ 37,561       $ 48,946       $ 44,664       $ 444,804  
Rental property expenses and real estate taxes
    37,235       10,844       9,825       9,225       7,366       8,520       14,115       16,310       13,208       126,648  
 
   
     
     
     
     
     
     
     
     
     
 
Property level operating income
    $ 96,547       $ 23,986       $ 38,690       $ 28,194       $ 17,910       $ 25,291       $ 23,446       $ 32,636       $ 31,456       318,156  
 
   
     
     
     
     
     
     
     
     
         
Other income/expenses, net                             177,456  
 
                                                                           
 
Income before property dispositions, income taxes and minority interest                             140,700  
Loss on disposition of properties                             (4,172 )
Income taxes                             (462 )
Minority interest                             (15,530 )
Discontinued operations net of minority interest                             7,808  
Preferred share distributions                             (7,242 )
Excess of preferred share redemption over carrying amount (See Note 1)                             (4,186 )
 
                                                                           
 
Income available to common shareholders                             $ 116,916  
 
                                                                         
 

Note 4: SFAS No. 144, “Accounting For The Impairment Or Disposal Of Long-Lived Assets"

In accordance with SFAS No. 144, which the Company adopted on January 1, 2002, net income and gain/(loss) on the 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 the disposition of properties for the three and nine months ended September 30, 2003 were $1.3 million and $39.8 million as compared to $3.5 million and $27.3 million for the same period in 2002. Below is a summary of the results of operations of the properties disposed of through the respective disposition dates (in thousands):

                                 
    Three Months Ended     Nine Months Ended  
   
   
 
    September 30,     September 30,  
   
   
 
    2003     2002     2003     2002  
   
   
   
   
 
Revenues
  $ 29     $ 1,569     $ 2,420     $ 4,361  
Operating expenses
    (39 )     (229 )     (426 )     (769 )
Interest expense
    (4 )     (261 )     (369 )     (702 )
Depreciation and amortization
    (3 )     (266 )     (407 )     (881 )
 
 
   
   
   
 
Income from operations
  $ (17 )   $ 813     $ 1,218     $ 2,009  
 
 
   
   
   
 

Gain or loss on disposition on sales of land and development properties continue to be reflected as a component of income from continuing operations.

Note 5: Credit Facility

During the nine months ended September 30, 2003, the Company replaced its unsecured revolving credit facility with a new facility which matures in January 2006. Capacity under the facility was reduced from $450 million to

10


 

$350 million. Based on the Company’s present ratings, borrowings under the facility bear interest at LIBOR plus 70 basis points, reduced from LIBOR plus 105 basis points for the facility prior to its renewal.

Note 6: Impact of Recently 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 December 15, 2003. 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. The Company is monitoring the deferred provisions of SFAS No. 150 and at this time does not expect its financial position or results of operations to be materially affected.

Note 7: Purchase of Rouse Kent Limited (“RKL”)

In July 2003, the Company exercised its option to purchase RKL for nominal consideration. As a result of the purchase, the Company’s assets and liabilities increased by approximately $60 million.

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.

11


 

CONSOLIDATED BALANCE SHEETS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(In thousands)

                     
        September 30, 2003     December 31, 2002  
       
   
 
        (Unaudited)          
ASSETS
               
Real estate:
               
 
Land and land improvements
  $ 551,989     $ 504,808  
 
Buildings and improvements
    3,295,038       3,048,676  
 
Less accumulated depreciation
    (559,918 )     (485,206 )
 
 
   
 
Operating real estate
    3,287,109       3,068,278  
 
Development in progress
    33,241       163,379  
Land held for development
    165,837       163,142  
 
 
   
 
Net real estate
    3,486,187       3,394,799  
 
Cash and cash equivalents
    43,750       11,071  
Accounts receivable
    6,032       14,349  
Deferred rent receivable
    55,629       48,775  
Deferred financing and leasing costs, net of accumulated amortization (2003, $85,002; 2002, $75,833)
    82,459       71,544  
Investment in unconsolidated joint ventures
    17,861       14,963  
Prepaid expenses and other assets
    63,908       71,560  
 
 
   
 
Total assets
  $ 3,755,826     $ 3,627,061  
 
 
   
 
LIABILITIES
               
Mortgage loans
  $ 360,741     $ 315,263  
Unsecured notes
    1,405,000       1,418,924  
Credit facility
    152,000       132,000  
Accounts payable
    40,800       24,116  
Accrued interest
    19,889       32,571  
Distribution payable
    50,326       48,040  
Other liabilities
    94,419       91,315  
 
 
   
 
Total liabilities
    2,123,175       2,062,229  
 
Minority interest
    2,858       7,054  
 
OWNERS’ EQUITY
               
General partner’s equity - common units
    1,421,718       1,351,589  
Limited partners’ equity - preferred units
    135,471       135,471  
   
- common units
    66,365       65,914  
Accumulated other comprehensive income
    6,239       4,804  
 
 
   
 
Total owners’ equity
    1,629,793       1,557,778  
 
 
   
 
Total liabilities and owners’ equity
  $ 3,755,826     $ 3,627,061  
 
 
   
 

See accompanying notes.

12


 

CONSOLIDATED STATEMENTS OF OPERATIONS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands, except per unit amounts)

                   
      Three Months Ended  
     
 
      September 30, 2003     September 30, 2002  
     
   
 
              (Restated)  
REVENUE
               
Rental
  $ 114,778     $ 113,191  
Operating expense reimbursement
    43,092       40,811  
Equity in earnings of unconsolidated joint ventures
    440        
Interest and other
    1,486       2,088  
 
 
   
 
Total revenue
    159,796       156,090  
 
 
   
 
EXPENSES
               
Rental property
    30,489       27,178  
Real estate taxes
    16,348       15,779  
Interest expense
    31,153       29,147  
General and administrative
    6,542       5,088  
Depreciation and amortization
    30,735       27,938  
 
 
   
 
Total expenses
    115,267       105,130  
 
 
   
 
Income before property dispositions, income taxes and minority interest
    44,529       50,960  
Loss on property dispositions
    (312 )     (5,414 )
Income taxes
    (526 )     (184 )
Minority interest
    (36 )      
 
 
   
 
Income from continuing operations
    43,655       45,362  
Discontinued operations (including net gain on property dispositions of $418 for the quarter ended September 30, 2003 and $528 for the quarter ended September 30, 2002)
    401       1,341  
 
 
   
 
Net income
    44,056       46,703  
Preferred unit distributions
    (3,104 )     (4,846 )
Excess of preferred unit redemption over carrying amount
          (4,186 )
 
 
   
 
Income available to common unitholders
  $ 40,952     $ 37,671  
 
 
   
 
Earnings per unit
               
 
Basic:
               
 
Income from continuing operations
  $ 0.49     $ 0.45  
 
Income from discontinued operations
    0.01       0.02  
 
 
   
 
 
Income per common unit — basic
  $ 0.50     $ 0.47  
 
 
   
 
 
Diluted:
               
 
Income from continuing operations
  $ 0.48     $ 0.45  
 
Income from discontinued operations
    0.01       0.02  
 
 
   
 
 
Income per common unit — diluted
  $ 0.49     $ 0.47  
 
 
   
 
Distributions per common unit
  $ 0.605     $ 0.60  
 
 
   
 
Weighted average number of common units outstanding
               
 
Basic
    82,647       79,316  
 
Diluted
    84,015       80,441  
 
 
   
 

See accompanying notes.

13


 

CONSOLIDATED STATEMENTS OF OPERATIONS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands, except per unit amounts)

                   
      Nine Months Ended  
     
 
      September 30, 2003     September 30, 2002  
     
   
 
              (Restated)  
REVENUE
               
Rental
  $ 336,846     $ 324,929  
Operating expense reimbursement
    127,594       119,875  
Equity in earnings of unconsolidated joint ventures
    1,355        
Interest and other
    5,637       5,692  
 
 
   
 
Total revenue
    471,432       450,496  
 
 
   
 
EXPENSES
               
Rental property
    90,921       82,077  
Real estate taxes
    46,560       44,571  
Interest expense
    92,587       85,222  
General and administrative
    20,749       16,414  
Depreciation and amortization
    90,662       81,512  
 
 
   
 
Total expenses
    341,479       309,796  
 
 
   
 
Income before property dispositions, income taxes and minority interest
    129,953       140,700  
Gain (loss) on property dispositions
    292       (4,172 )
Income taxes
    (1,587 )     (462 )
Minority interest
    (554 )     (1,235 )
 
 
   
 
Income from continuing operations
    128,104       134,831  
Discontinued operations (including net gain on property dispositions of $11,668 for the nine months ended September 30, 2003 and $6,197 for the nine months ended September 30, 2002)
    12,886       8,206  
 
 
   
 
Net income
    140,990       143,037  
Preferred unit distributions
    (9,312 )     (15,757 )
Excess of preferred unit redemption over carrying amount
          (4,186 )
 
 
   
 
Income available to common unitholders
  $ 131,678     $ 123,094  
 
 
   
 
Earnings per unit
               
 
Basic:
               
 
Income from continuing operations
  $ 1.45     $ 1.46  
 
Income from discontinued operations
    0.16       0.11  
 
 
   
 
 
Income per common unit — basic
  $ 1.61     $ 1.57  
 
 
   
 
 
Diluted:
               
 
Income from continuing operations
  $ 1.43     $ 1.44  
 
Income from discontinued operations
    0.16       0.10  
 
 
   
 
 
Income per common unit — diluted
  $ 1.59     $ 1.54  
 
 
   
 
Distributions per common unit
  $ 1.805     $ 1.78  
 
 
   
 
Weighted average number of common units outstanding
               
 
Basic
    81,630       78,519  
 
Diluted
    82,855       79,828  
 
 
   
 

See accompanying notes.

14


 

CONSOLIDATED STATEMENTS OF CASH FLOWS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands)

                     
        Nine Months Ended  
       
 
        September 30, 2003     September 30, 2002  
       
   
 
OPERATING ACTIVITIES
               
Net income
  $ 140,990     $ 143,037  
Adjustments to reconcile net income to net cash provided by operating activities:
               
 
Depreciation and amortization
    91,069       82,393  
 
Amortization of deferred financing costs
    3,027       2,881  
 
Equity in earnings of unconsolidated joint ventures
    (1,355 )      
 
Minority interest in net income
    554       1,235  
 
Gain on property dispositions
    (11,960 )     (2,025 )
 
Noncash compensation
    2,496       1,654  
Changes in operating assets and liabilities:
               
 
Accounts receivable
    8,533       3,170  
   
Deferred rent receivable
    (6,854 )     (8,096 )
 
Prepaid expenses and other assets
    (11,260 )     (25,416 )
 
Accounts payable
    (3,035 )     16,789  
 
Accrued interest
    (12,682 )     (11,194 )
 
Other liabilities
    3,104       12,383  
 
 
   
 
Net cash provided by operating activities
    202,627       216,811  
 
 
   
 
INVESTING ACTIVITIES
               
Investment in properties
    (68,324 )     (79,797 )
Cash paid for business, net of cash acquired
    16,627        
Investment in unconsolidated joint ventures
    (3,099 )      
Distributions from unconsolidated joint ventures
    2,707        
Proceeds from disposition of properties/land
    42,333       61,843  
Investment in development in progress
    (43,422 )     (133,706 )
Increase in land held for development
    (11,829 )     (24,405 )
Increase in deferred leasing costs
    (16,987 )     (16,129 )
 
 
   
 
Net cash used in investing activities
    (81,994 )     (192,194 )
 
 
   
 
FINANCING ACTIVITIES
               
Redemption of preferred units
          (125,063 )
Proceeds from issuance of unsecured notes
    3,683       150,000  
Repayments of unsecured notes
    (23,739 )     (100,000 )
Proceeds from mortgage loans
    924       3,446  
Repayments of mortgage loans
    (8,623 )     (5,834 )
Proceeds from credit facility
    327,850       391,000  
Repayments on credit facility
    (307,850 )     (256,000 )
Increase in deferred financing costs
    (2,563 )     (1,823 )
Capital contributions
    83,701       74,939  
Distributions to partners
    (159,783 )     (155,942 )
 
 
   
 
Net cash used in financing activities
    (86,400 )     (25,277 )
 
 
   
 
Increase (decrease) in cash and cash equivalents
    34,233       (660 )
Effect of exchange rate changes on cash
    (1,554 )     (3,124 )
Cash and cash equivalents at beginning of period
    11,071       19,390  
 
 
   
 
Cash and cash equivalents at end of period
  $ 43,750     $ 15,606  
 
 
   
 
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
               
Write-off of fully depreciated property and deferred costs
  $ 11,801     $ 3,565  
Acquisition of properties
    (15,284 )      
Assumption of mortgage loans
    15,284        
Issuance of operating partnership units for property acquisition
    1,151        
 
 
   
 

See accompanying notes.

15


 

Liberty Property Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2003

Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements of Liberty Property Limited Partnership (the “Operating Partnership”) and its direct and indirect subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of the Trust and the Operating Partnership for the year ended December 31, 2002. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial statements for these interim periods have been included. The results of interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. Certain amounts from prior periods have been reclassified to conform to current period presentation. Results for the three and nine months ended September 30, 2002 have been restated to reflect recent guidance and clarifications by the Securities and Exchange Commission (“SEC”). The SEC’s July 31, 2003 clarification of certain issues surrounding the Financial Accounting Standards Board’s (“FASB”) EITF Topic D-42, “The Effect on Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,” requires the excess of preferred unit redemption over carrying amount to be classified as a reduction in income available to common unitholders.

Income per Unit
The following table sets forth the computation of basic and diluted income per common unit for the three and nine months ended September 30, 2003 and 2002 (in thousands except per unit amounts):

                                                   
      For the Three Months Ended September 30, 2003     For the Three Months Ended September 30, 2002  
     
   
 
              Weighted                     Weighted        
              Average                     Average        
      Income     Units     Per Unit     Income     Units     Per Unit  
      (Numerator)     (Denominator)     Amount     (Numerator)     (Denominator)     Amount  
     
   
   
   
   
   
 
Net income
  $ 44,056                     $ 46,703                  
Less: Preferred unit distributions
    (3,104 )                     (4,846 )                
 
Excess of preferred unit redemption over carrying amount
                          (4,186 )                
 
 
                   
                 
Basic income per common unit
                               
 
Income available to common unitholders
    40,952       82,647     $ 0.50       37,671       79,316     $ 0.47  
 
                 
                   
 
Dilutive units for long-term compensation plans
          1,368                     1,125          
 
 
   
           
   
         
Diluted income per common unit
                           
 
Income available to common unitholders and assumed conversions
  $ 40,952       84,015     $ 0.49     $ 37,671       80,441     $ 0.47  
 
 
   
   
   
   
   
 

16


 

                                                   
      For the Nine Months Ended September 30, 2003     For the Nine Months Ended September 30, 2002  
     
   
 
              Weighted                     Weighted        
              Average                     Average        
      Income     Units     Per Unit     Income     Units     Per Unit  
      (Numerator)     (Denominator)     Amount     (Numerator)     (Denominator)     Amount  
     
   
   
   
   
   
 
Net income
  $ 140,990                     $ 143,037                  
Less: Preferred unit distributions
    (9,312 )                     (15,757 )                
 
Excess of preferred unit redemption over carrying amount
                          (4,186 )                
 
 
                   
                 
Basic income per common unit
                               
 
Income available to common unitholders
    131,678       81,630     $ 1.61       123,094       78,519     $ 1.57  
 
                 
                   
 
Dilutive units for long-term compensation plans
          1,225                     1,309          
 
 
   
           
   
         
Diluted income per common unit
                           
 
Income available to common unitholders and assumed conversions
  $ 131,678       82,855     $ 1.59     $ 123,094       79,828     $ 1.54  
 
 
   
   
   
   
   
 

Foreign Operations
The functional currency for the Company’s United Kingdom operation is pounds sterling. The United Kingdom operations translate their financial statements into US dollars prior to the consolidation of these financial statements with those of the Company. Gains and losses resulting from this translation are included in accumulated other comprehensive income as a separate component of shareholders’ equity. Comprehensive income was $0.6 million and $2.0 million for the three months ended September 30, 2003 and 2002, respectively. Comprehensive income was $1.0 million and $7.0 million for the nine months ended September 30, 2003 and 2002, respectively.

Note 2: Organization

Liberty Property Trust (the “Trust”), the general partner of Liberty Property Limited Partnership, 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 the Operating Partnership (the Trust, Operating Partnership and their respective subsidiaries, referred to collectively as, the “Company”). The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 95.6% of the common equity of the Operating Partnership at September 30, 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 Southeastern, Mid-Atlantic and Midwestern United States.

Note 3: Segment Information

The Company reviews the performance of the portfolio on a geographical basis. The following regions are considered the Company’s reportable segments: Southeastern Pennsylvania; New Jersey; Lehigh Valley, Pennsylvania; Virginia; the Carolinas; Jacksonville, Florida; Minneapolis, Minnesota; Detroit, Michigan; and all others combined (including Maryland; Tampa, Florida; South Florida; and the United Kingdom). The Company’s reportable segments are distinct business units which are each managed separately in order to concentrate market knowledge within a geographical area. Within these reportable segments, the Company derives its revenues from its two product types: industrial properties and office properties.

The Company evaluates the 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 for the Operating Partnership by segment is as follows (in thousands):

17


 

                                                                                 
For the Three Months Ended September 30, 2003

    SE Pennsyl.     New Jersey     Lehigh Valley     Virginia     The Carolinas     Jacksonville     Minnesota     Michigan     All Others     Total  
   
   
   
   
   
   
   
   
   
   
 
Real estate related revenues
  $ 45,339     $ 8,850     $ 18,042     $ 12,831     $ 10,973     $ 12,576     $ 12,278     $ 17,652     $ 19,329     $ 157,870  
Rental property expenses and real estate taxes
    13,071       3,087       4,620       3,456       2,539       3,460       4,857       5,972       5,775       46,837  
 
   
     
     
     
     
     
     
     
     
     
 
Property level operating income
  $ 32,268     $ 5,763     $ 13,422     $ 9,375     $ 8,434     $ 9,116     $ 7,421     $ 11,680     $ 13,554       111,033  
 
   
     
     
     
     
     
     
     
     
         
Other income/expenses, net                             66,504  
 
                                                                           
 
Income before property disposition and minority interest                             44,529  
Loss on disposition of properties                             (312 )
Income taxes                             (526 )
Minority interest                             (36 )
Discontinued operations                             401  
Preferred unit distributions                             (3,104 )
 
                                                                           
 
Income available to common unitholders                           $ 40,952  
 
                                                                           
 
                                                                                 
For the Three Months Ended September 30, 2002

    SE Pennsyl.     New Jersey     Lehigh Valley     Virginia     The Carolinas     Jacksonville     Minnesota     Michigan     All Others     Total  
   
   
   
   
   
   
   
   
   
   
 
Real estate related revenues
  $ 45,197     $ 12,060     $ 18,993     $ 12,704     $ 8,442     $ 11,259     $ 12,497     $ 17,588     $ 15,262     $ 154,002  
Rental property expenses and real estate taxes
    12,343       3,672       3,390       3,061       2,441       2,986       4,694       5,923       4,447       42,957  
 
   
     
     
     
     
     
     
     
     
     
 
Property level operating income
  $ 32,854     $ 8,388     $ 15,603     $ 9,643     $ 6,001     $ 8,273     $ 7,803     $ 11,665     $ 10,815       111,045  
 
   
     
     
     
     
     
     
     
     
         
Other income/expenses, net                             60,085  
 
                                                                           
 
Income before property dispositions and minority interest                             50,960  
Loss on disposition of properties                             (5,414 )
Income taxes                             (184 )
Minority interest                             -  
Discontinued operations                             1,341  
Preferred unit distributions                             (4,846 )
Excess of preferred unit redemption over carrying amount (See Note 1)                             (4,186 )
 
                                                                           
 
Income available to common unitholders                           $ 37,671  
 
                                                                           
 
                                                                                 
For the Nine Months Ended September 30, 2003

    SE Pennsyl.     New Jersey     Lehigh Valley     Virginia     The Carolinas     Jacksonville     Minnesota     Michigan     All Others     Total  
   
   
   
   
   
   
   
   
   
   
 
Real estate related revenues
  $ 142,448     $ 25,991     $ 50,150     $ 38,399     $ 28,725     $ 36,930     $ 37,834     $ 49,767     $ 54,196     $ 464,440  
Rental property expenses and real estate taxes
    40,820       8,964       13,145       10,378       7,646       9,862       14,388       16,553       15,725       137,481  
 
   
     
     
     
     
     
     
     
     
     
 
Property level operating income
  $ 101,628     $ 17,027     $ 37,005     $ 28,021     $ 21,079     $ 27,068     $ 23,446     $ 33,214     $ 38,471       326,959  
 
   
     
     
     
     
     
     
     
     
         
Other income/expenses, net                             197,006  
 
                                                                           
 
Income before property disposition and minority interest                             129,953  
Gain on disposition of properties                             292  
Income taxes                             (1,587 )
Minority interest                             (554 )
Discontinued operations                             12,886  
Preferred unit distributions                             (9,312 )
 
                                                                           
 
Income available to common unitholders                           $ 131,678  
 
                                                                           
 
                                                                                 
For the Nine Months Ended September 30, 2002

    SE Pennsyl.     New Jersey     Lehigh Valley     Virginia     The Carolinas     Jacksonville     Minnesota     Michigan     All Others     Total  
   
   
   
   
   
   
   
   
   
   
 
Real estate related revenues
  $ 133,782     $ 34,830     $ 48,515     $ 37,419     $ 25,276     $ 33,811     $ 37,561     $ 48,946     $ 44,664     $ 444,804  
Rental property expenses and real estate taxes
    37,235       10,844       9,825       9,225       7,366       8,520       14,115       16,310       13,208       126,648  
 
   
     
     
     
     
     
     
     
     
     
 
Property level operating income
  $ 96,547     $ 23,986     $ 38,690     $ 28,194     $ 17,910     $ 25,291     $ 23,446     $ 32,636     $ 31,456       318,156  
 
   
     
     
     
     
     
     
     
     
         
Other income/expenses, net                             177,456  
 
                                                                           
 
Income before property dispositions and minority interest                             140,700  
Loss on disposition of properties                             (4,172 )
Income taxes                             (462 )
Minority interest                             (1,235 )
Discontinued operations                             8,206  
Preferred unit distributions                             (15,757 )
Excess of preferred unit redemption over carrying amount (See Note 1)                             (4,186 )
 
                                                                           
 
Income available to common unitholders                           $ 123,094  
 
                                                                           
 

18


 

Note 4: SFAS No. 144, “Accounting For The Impairment Or Disposal Of Long-Lived Assets"

In accordance with SFAS No. 144, which the Company adopted on January 1, 2002, net income and gain/(loss) on the 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 the disposition of properties for the three and nine months ended September 30, 2003 were $1.3 million and $39.8 million as compared to $3.5 million and $27.3 million for the same period in 2002. Below is a summary of the results of operations of the properties disposed of through the respective disposition dates (in thousands):

                                 
    Three Months Ended     Nine Months Ended  
   
   
 
    September 30,     September 30,  
   
   
 
    2003     2002     2003     2002  
   
   
   
   
 
Revenues
  $ 29     $ 1,569     $ 2,420     $ 4,361  
Operating expenses
    (39 )     (229 )     (426 )     (769 )
Interest expense
    (4 )     (261 )     (369 )     (702 )
Depreciation and amortization
    (3 )     (266 )     (407 )     (881 )
 
 
   
   
   
 
Income from operations
  $ (17 )   $ 813     $ 1,218     $ 2,009  
 
 
   
   
   
 

Gain or loss on disposition on sales of land and development properties continue to be reflected as a component of income from continuing operations.

Note 5: Credit Facility

During the nine months ended September 30, 2003, the Company replaced its unsecured revolving credit facility with a new facility which matures in January 2006. Capacity under the facility was reduced from $450 million to $350 million. Based on the Company’s present ratings, borrowings under the facility bear interest at LIBOR plus 70 basis points, reduced from LIBOR plus 105 basis points for the facility prior to its renewal.

Note 6: Impact of Recently 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 December 15, 2003. 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. The Company is monitoring the deferred provisions of SFAS No. 150 and at this time does not expect its financial position or results of operations to be materially affected.

Note 7: Purchase of Rouse Kent Limited (“RKL”)

In July 2003, the Company exercised its option to purchase RKL for nominal consideration. As a result of the purchase, the Company’s assets and liabilities increased by approximately $60 million.

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.

19


 

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

OVERVIEW

The Company owns and operates office and industrial real estate. As of September 30, 2003, the Company’s portfolio consisted of 663 industrial and office properties (the “Properties in Operation”) totaling approximately 53 million square feet. In addition, the Company had nine properties under development (the “Properties under Development” and, together with the Properties in Operation, the “Properties”) and owned 1,095 acres of land, substantially all of which is zoned for commercial use.

The Company focuses on creating value for shareholders and increasing profitability and cash flow. With respect to its Properties in Operation, the Company endeavors to maintain high occupancy levels while increasing rental rates. The Company pursues development opportunities that it believes will create value and yield high returns. The Company also acquires properties that it believes will create long-term value, and disposes of Properties that no longer fit within the Company’s strategic objectives or in situations where it can optimize cash proceeds. The Company’s operating results depend primarily upon income from rental operations and are substantially influenced by rental demand for the Properties in Operation.

In 2002 and for the nine months ended September 30, 2003, the continued general slowdown in the economy negatively affected occupancy rates. Additionally, the imbalance between supply of and demand for rental properties resulted in a decline in rental rates for newly executed leases. The negative occupancy and rental rate trend has been continuing for several quarters and as a result, property level operating income from the “Same Store” (properties owned since January 1, 2002) group of properties, exclusive of Termination Fees, has decreased. “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. Additionally, tenant improvement and other lease transaction costs on renewal and replacement leases have increased.

The continued economic slowdown has also limited the Company’s ability to achieve growth in operating income from its development activity. The decline in demand for real estate has reduced the amount of development the Company is undertaking.

As noted above, the Company also seeks to acquire and dispose of Properties in appropriate circumstances. The Company anticipates that it will continue to pursue select acquisition and disposition opportunities.

The composition of the Company’s Properties in Operation as of September 30, 2003 and 2002 is as follows (in thousands, except dollars and percentages):

                                                                 
    Net Rent              
    Per Square Foot     Total Square Feet     Percent Occupied  
   
   
   
 
Type   9/30/03     9/30/02     9/30/03     9/30/02     9/30/03     12/31/02     9/30/02     12/31/01  
   
   
   
   
   
   
   
   
 
Industrial-Distribution
  $ 4.48     $ 4.53       21,356       22,513       92.5 %     90.7 %     91.3 %     96.7 %
Industrial-Flex
  $ 8.78     $ 8.85       13,341       13,362       91.3 %     91.8 %     90.4 %     93.3 %
Office
  $ 14.53     $ 14.20       18,082       16,739       89.7 %     89.9 %     89.9 %     91.3 %
 
 
   
   
   
   
 
 
 
TOTAL
  $ 8.95     $ 8.68       52,779       52,614       91.2 %     90.7 %     90.6 %     94.1 %
 
 
   
   
   
   
 
 
 

Geographic segment data for the three and nine months ended September 30, 2003 and 2002 is included in Note 3 to the Liberty Property Trust and Liberty Property Limited Partnership financial statements.

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 Securities and

20


 

Exchange Commission (“SEC”). Given these uncertainties, readers are cautioned not to place undue reliance on such statements.

CRITICAL ACCOUNTING POLICIES

Refer to the Company’s 2002 Annual Report on Form 10-K for a discussion of critical accounting policies which include capitalized costs, allowances for doubtful accounts and impairment of real estate. During the three and nine months ended September 30, 2003 and 2002, there were no material changes to these policies.

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 three and nine months ended September 30, 2003 with the results of operations of the Company for the three and nine months ended September 30, 2002. 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 (see reconciliation to comparable GAAP financial measure below).

This information should be read in conjunction with the accompanying consolidated financial statements and notes included elsewhere in this report.

Comparison of the Three and Nine Months Ended September 30, 2003 to the Three and Nine Months Ended September 30, 2002.

Total revenue (principally rental revenue and operating expense reimbursement) increased to $159.8 million for the three months ended September 30, 2003 from $156.1 million for the three months ended September 30, 2002 and increased to $471.4 million for the nine months ended September 30, 2003 from $450.5 million for the nine months ended September 30, 2002. These increases are primarily due to the change in Termination Fees and the net increased investment in properties developed or acquired, net of dispositions, during the years 2002 and 2003. The average gross investment in operating real estate owned for the three months ended September 30, 2003 was $3,776.7 million as compared to $3,507.9 million for the three months ended September 30, 2002 and for the nine months ended September 30, 2003 was $3,690.6 million as compared to $3,437.4 million for the nine months ended September 30, 2002.

The operating expense recovery percentage (the ratio of operating expense reimbursement to rental property expenses and real estate taxes) decreased to 92.0% for the three months ended September 30, 2003 from 95.0% for the three months ended September 30, 2002, and to 92.8% for the nine months ended September 30, 2003 from 94.7% for the nine months ended September 30, 2002. This reduction is consistent with a reduction in average occupancy.

Rental property and real estate tax expenses increased to $46.8 million for the three months ended September 30, 2003 from $43.0 million for the three months ended September 30, 2002 and increased to $137.5 million for the nine months ended September 30, 2003 from $126.6 million for the nine months ended September 30, 2002. These increases are due to the increase in the investment in Properties owned during the respective periods and because of the increased snow removal and utility costs relating to 2003’s severe winter.

Property level operating income, exclusive of Termination Fees, for the Same Store properties decreased by $1.8 million for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002, on a straight line basis (which recognizes rental revenue evenly over the life of the lease), and decreased by $1.6 million for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002, on a cash basis. These decreases of 1.9% and 1.7%, respectively, are primarily due to decreases in rental rates.

Property level operating income, exclusive of Termination Fees, for the Same Store properties decreased by $7.9 million for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002, on a straight line basis, and decreased by $7.3 million for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002, on a cash basis. These decreases of 2.7% and 2.6%, respectively, are

21


 

due to decreases in average occupancy and decreases in rental rates. At September 30, 2003, the occupancy of the Same Store portfolio was 92.3% as compared to 91.3% at September 30, 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 three and nine months ended September 30, 2003 and 2002 (in thousands):

                                   
      Three Months Ended     Nine Months Ended  
     
   
 
      September 30,     September 30,  
     
   
 
      2003     2002     2003     2002  
     
   
   
   
 
Same Store:
                               
Rental revenue
  $ 97,100     $ 97,727     $ 291,416     $ 295,966  
 
 
   
   
   
 
Operating expenses:
                               
 
Rental property expense
    27,456       25,504       84,466       77,843  
 
Real estate taxes
    14,378       14,032       41,329       40,014  
 
Operating expense recovery
    (39,043 )     (37,927 )     (117,454 )     (112,843 )
 
 
   
   
   
 
Unrecovered operating expenses
    2,791       1,609       8,341       5,014  
 
 
   
   
   
 
Property level operating income
    94,309       96,118       283,075       290,952  
Less straight line rent
    1,685       1,865       5,669       6,255  
 
 
   
   
   
 
Cash basis property level operating income
  $ 92,624     $ 94,253     $ 277,406     $ 284,697  
 
 
   
   
   
 
                         
Reconciliation of non GAAP financial measure:
                               
Property level operating income
  $ 94,309     $ 96,118     $ 283,075     $ 290,952  
Termination fees
    3,805       7,167       12,287       8,138  
Other income/expenses, net
    (53,585 )     (52,325 )     (165,409 )     (158,390 )
 
 
   
   
   
 
Income before property dispositions, income taxes and minority interest
  $ 44,529     $ 50,960     $ 129,953     $ 140,700  
 
 
   
   
   
 

Management generally considers Same Store property level operating income on a straight line and cash basis a useful financial performance measure because the results of the Same Store group (properties owned since January 1, 2002) are directly comparable period to period. 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.

General and administrative expenses increased to $6.5 million for the three months ended September 30, 2003 from $5.1 million for the three months ended September 30, 2002 and increased to $20.7 million for the nine months ended September 30, 2003 from $16.4 million for the nine months ended September 30, 2002. The increase for the three months ended September 30, 2003 as compared to the same period in 2002 is primarily due to costs related to the Company’s enterprise resource planning (“ERP”) initiative to update company wide accounting and business process software and due to increased general and administrative expenses due to the consolidation of RKL. The increase for the nine months ended September 30, 2003 as compared to the same period in 2002 is primarily due to the Company’s ERP initiative and due to the accelerated vesting of restricted stock and options related to the death of former Chairman Willard G. Rouse III totaling approximately $1.9 million.

Depreciation and amortization expenses increased to $30.7 million for the three months ended September 30, 2003 from $27.9 million for the three months ended September 30, 2002 and increased to $90.7 million for the nine months ended September 30, 2003 from $81.5 million for the nine months ended September 30, 2002. These increases are due to the increase in the investment in Properties owned during the respective periods.

Interest expense increased to $31.2 million for the three months ended September 30, 2003 from $29.1 million for the three months ended September 30, 2002 and increased to $92.6 million for the nine months ended September 30, 2003 from $85.2 million for the nine months ended September 30, 2002. These increases are due to the increases in the average debt outstanding for the respective periods, which was $1,877.2 million for the three months ended

22


 

September 30, 2003 as compared to $1,846.2 million for the three months ended September 30, 2002 and $1,880.4 million for the nine months ended September 30, 2003 as compared to $1,809.1 million for the same period in 2002. These increases were partially offset by decreases in the weighted average interest rates for the periods, which were 6.9% for the three months ended September 30, 2003 compared to 7.0% for the three months ended September 30, 2002, and 7.0% for the nine months ended September 30, 2003 compared to 7.1% for the same period in 2002. Interest expense also increased because, as noted below, less interest was capitalized during the three and nine months ended September 30, 2003 compared to the same periods in 2002 due to the decrease in development in progress.

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 three months ended September 30, 2003 decreased to $2.5 million from $3.8 million for the three months ended September 30, 2002 and decreased to $8.1 million for the nine months ended September 30, 2003 from $13.2 million for the nine months ended September 30, 2002. Included in capitalized interest costs are the interest costs relating to the Company’s $62.6 million investment (as of September 30, 2003) in its proposed downtown Philadelphia office tower. Capitalized development related salaries and benefits historically represent approximately 1% of the cost of developed properties brought into service. These amounts are not included in general and administrative expenses as discussed above.

Implementation of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” requires that the operating results for real estate sold after December 31, 2001 should be reflected as discontinued operations. 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.

During the three months ended September 30, 2003, the Company realized a net loss on property dispositions of $312,000 due to the sale of one parcel of land. For the nine months ended September 30, 2003, the Company realized a net gain on property dispositions of $292,000 due to the sale of three parcels of land and additional proceeds from a 2002 property disposition. For the three months ended September 30, 2002, the Company realized a loss on property dispositions of $5.4 million due to the sale of three parcels of land and a $6.0 million write-down of assets held for sale to their net realizable value less costs to sell. For the nine months ended September 30, 2002, the Company realized a loss on property dispositions of $4.2 million due to the sale of eight parcels of land, the sale of a property and the write-down of assets held for sale, as discussed above.

In accordance with SFAS No. 144, net income and gain/(loss) on dispositions of real estate for properties sold subsequent to December 31, 2001 are reflected in the consolidated statements of operations as discontinued operations for all periods presented. The decrease in income from discontinued operations of $895,000 for the three months ended September 30, 2003, as compared to the same period in 2002, is primarily due to the greater number of properties included in the three months ended September 30, 2002 as compared to 2003. The increase in income from discontinued operations of $4.5 million for the nine months ended September 30, 2003 as compared to the same period in 2002 is primarily due to the larger gain on the disposition of properties sold in 2003 as compared to 2002.

The Company is taxed as a REIT for federal income tax purposes and is not generally required to pay federal income taxes if minimum distribution and income, asset and shareholder tests are met. However, 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 in the United Kingdom. Accordingly, the Company has recognized federal, state and United Kingdom income taxes in accordance with US GAAP, as applicable. Income taxes increased to $0.5 million for the three months ended September 30, 2003 from $0.2 million for the three months ended September 30, 2002 and increased to $1.6 million for the nine months ended September 30, 2003 from $0.5 million for the nine months ended September 30, 2002. The increase in income taxes is primarily due to the increase in taxable income in those states and the United Kingdom in which the Company is subject to tax.

As a result of the foregoing, the Company’s net income decreased to $39.1 million for the three months ended September 30, 2003 from $41.6 million for the three months ended September 30, 2002 and net income decreased to $125.7 million for the nine months ended September 30, 2003 from $128.3 million for the nine months ended September 30, 2002.

23


 

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2003, the Company had cash and cash equivalents of $43.8 million, including $18.0 million in restricted cash.

Net cash flow provided by operating activities decreased to $202.6 million for the nine months ended September 30, 2003 from $216.8 million for the nine months ended September 30, 2002. This $14.2 million decrease is 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 decreased to $82.0 million for the nine months ended September 30, 2003 from $192.2 million for the nine months ended September 30, 2002. This decrease primarily resulted from a decrease in investment in development in progress and land held for development in 2003, which is consistent with the diminished opportunity to develop property due to the general slowdown in the economy. These decreases are partially offset by the reduced level of disposition activity during 2003.

Net cash used in financing activities increased to $86.4 million for the nine months ended September 30, 2003 as compared to $25.3 million for the nine months ended September 30, 2002. This $61.1 million increase was primarily due to a reduced level of net borrowings under mortgages, unsecured note obligations and the Company’s credit facility offset by the redemption of preferred shares during the nine months ended September 30, 2002. Net cash provided by or used in financing activities includes proceeds from the issuance of equity and debt net of debt repayments and shareholder distributions. Cash provided by financing activities is a source of capital utilized by the Company to fund investment activities and the decrease in such funding activities for 2003 is consistent with the decrease in the level of the Company’s investment activities as described above.

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, which was replaced in January 2003, with a $350 million unsecured 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 September 30, 2003 the Company’s debt to gross assets ratio was 44.4%, and the earnings to fixed charge coverage ratio was 2.9x. 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 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 units.

As of September 30, 2003, $360.7 million in mortgage loans and $1,405.0 million in unsecured notes were outstanding with a weighted average interest rate of 7.3%. The interest rates on $1,703.5 million of mortgage loans and unsecured notes are fixed and range up to 8.8%. Interest rates on $62.2 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 5.9 years.

24


 

The scheduled maturities and principal amortization of the Company’s mortgage loans, unsecured notes and borrowings under the $350 million Credit Facility and the related weighted average interest rates as of September 30, 2003 are as follows (in thousands, except percentages):

                                                 
    Mortgages                                
   
                            Weighted  
    Principal     Principal     Unsecured     Credit             Average  
    Amortization     Maturities     Notes     Facility     Total     Interest Rate  
   
   
   
   
   
   
 
2003 (3 months)
  $ 2,073     $ 970     $ 50,000     $     $ 53,043       6.9 %
2004
    8,943       58,436       100,000             167,379       6.4 %
2005
    7,854       115,039                   122,893       7.6 %
2006
    5,705       42,314       100,000       152,000       300,019       4.4 %
2007
    4,921             100,000             104,921       7.3 %
2008
    4,553       34,724                   39,277       7.2 %
2009
    2,212       42,119       270,000             314,331       7.8 %
2010
    1,559             200,000             201,559       8.5 %
2011
    1,324       3,533       250,000             254,857       7.3 %
2012
    352       24,110       235,000             259,462       6.5 %
2018
                100,000             100,000       7.5 %
 
 
   
   
   
   
   
 
 
  $ 39,496     $ 321,245     $ 1,405,000     $ 152,000     $ 1,917,741       6.9 %
 
 
   
   
   
   
   
 

The Company anticipates that it will refinance or retire these maturities through its available sources of capital.

General

The Company has continued to focus on the performance of the Same Store portfolio. In addition, the Company has continued to pursue development and acquisition opportunities and the strategic disposition of certain properties. The Company attempts to outperform in its markets by maintaining higher than market occupancy levels and obtaining higher than market rental rates.

The expiring square feet and annual net rent by year for the Properties in Operation as of September 30, 2003 are as follows (in thousands):

                                                                 
    Industrial-     Industrial-              
    Distribution     Flex     Office     Total  
   
   
   
   
 
    Square     Annual     Square     Annual     Square     Annual     Square     Annual  
    Feet     Net Rent     Feet     Net Rent     Feet     Net Rent     Feet     Net Rent  
   
   
   
   
   
   
   
   
 
2003 (3 months)
    424     $ 1,893       763     $ 5,412       708     $ 8,593       1,895     $ 15,898  
2004
    1,791       8,513       2,167       18,477       1,987       28,256       5,945       55,246  
2005
    2,378       12,053       1,722       15,264       2,949       42,579       7,049       69,896  
2006
    2,471       11,104       1,940       21,008       1,275       18,786       5,686       50,898  
2007
    2,723       11,975       1,284       12,681       1,642       24,740       5,649       49,396  
2008
    2,925       12,804       2,122       20,965       2,101       31,709       7,148       65,478  
Thereafter
    7,036       39,053       2,179       23,072       5,559       105,882       14,774       168,007  
 
 
   
   
   
   
   
   
   
 
TOTAL
    19,748     $ 97,395       12,177     $ 116,879       16,221     $ 260,545       48,146     $ 474,819  
 
 
   
   
   
   
   
   
   
 

The Company believes that its existing sources of capital will provide sufficient funds to finance its continued development and acquisition activities. The scheduled deliveries of the 798,000 square feet of Properties under Development as of September 30, 2003 are as follows (in thousands, except percentages):

                                                 
    Square Feet              
   
    Percent        
Scheduled   Industrial-     Industrial-                     Leased at     Total  
In-Service Date   Distribution     Flex     Office     Total     September 30, 2003     Investment  

 
   
   
   
   
   
 
1st Quarter 2004
    262             88       350       98.4 %   $ 17,014  
2nd Quarter 2004
          75       35       110       100.0 %     12,377  
3rd Quarter 2004
                31       31       78.8 %     4,904  
2nd Quarter 2005
                207       207       30.7 %     27,517  
3rd Quarter 2005
                100       100       78.0 %     17,465  
 
 
   
   
   
   
 
 
TOTAL
    262       75       461       798       77.7 %   $ 79,277  
 
 
   
   
   
   
 
 

25


 

In July 2003, the Company exercised its option to purchase RKL for nominal consideration. As a result of the purchase, the Company’s assets and liabilities increased by approximately $60 million. 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.

The Company’s existing sources of capital include the public debt and equity markets, proceeds from Property dispositions and net cash provided by operating activities. Additionally, the Company expects to incur variable rate debt, including borrowings under the $350 million Credit Facility from time to time.

The Board of Trustees has authorized a share repurchase program under which the Company may purchase up to $100 million of the Company’s Common Shares, preferred shares or convertible debentures. Through September 30, 2003, the Company purchased 59,100 Common Shares and purchased convertible debentures exchangeable into 877,950 Common Shares. The total cost for the purchase of the Common Shares and convertible debentures was approximately $21.9 million. The convertible debentures matured in 2001.

The Company has an effective S-3 shelf registration statement on file with the SEC (the “Shelf Registration Statement”). As of November 6, 2003, pursuant to the Shelf Registration Statement, the Trust had the capacity to issue up to $688.4 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

In 2002 the Company partnered with the Public Employees’ Retirement Association of Colorado on a $123 million joint venture consisting of the Company’s southern New Jersey industrial portfolio. The Company sold or contributed 28 industrial distribution Properties totaling approximately 3.1 million leaseable square feet and approximately 43 acres of developable land. The Company retained a 25% ownership interest in the venture, and realized proceeds of approximately $109 million from the transaction. The Company will receive development, leasing and property management fees, and may receive a promoted interest if certain return thresholds are met. The venture is financed with approximately 60% leverage.

During the nine months ended September 30, 2003 the Company contributed to the venture one additional industrial distribution property totaling approximately 374,000 leaseable square feet for a Total Investment of $15.6 million. “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 improvements in the case of acquisitions, or land costs and land and building improvement costs in the case of development projects, and when appropriate, other development costs and carrying costs.

Calculation of Funds from Operations

Management generally considers Funds from operations available to common shareholders a useful financial performance measure of the operating performance of an equity 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 available to common shareholders for the three and nine months ended September 30, 2003 and 2002 are as follows:

26


 

                                 
    Three Months Ended   Nine Months Ended
   
 
    September 30,   September 30,
   
 
    2003      2002   2003      2002
   
 
 
 
            (Restated)           (Restated)
Net income
  $ 39,109     $ 41,640     $ 125,725     $ 128,344  
Preferred share distributions
          (1,742 )           (7,242 )
Excess of preferred share redemption over carrying amount
          (4,186 )           (4,186 )
 
 
   
   
   
 
Income available to common shareholders
    39,109       35,712       125,725       116,916  
Adjustments:
                               
Minority interest excluding preferred unit distributions
    1,843       1,959       5,953       6,178  
Depreciation and amortization of unconsolidated joint ventures
    168             495        
Depreciation and amortization
    30,162       27,787       89,408       81,151  
Impairment loss
          (6,017 )           (6,017 )
Loss (gain) on property dispositions
    (106 )     4,886       (11,377 )     479  
 
 
   
   
   
 
Funds from operations available to common shareholders
  $ 71,176     $ 64,327     $ 210,204     $ 198,707  
 
 
   
   
   
 
Funds from operations per common share — diluted
  $ 0.85     $ 0.80     $ 2.54     $ 2.49  
 
 
   
   
   
 
Weighted average shares
    84,015       80,441       82,855       79,828  
 
 
   
   
   
 

Income available to common shareholders for the three and nine months ended September 30, 2002 has been restated to reflect recent guidance and clarifications by the SEC. The SEC’s July 31, 2003 clarification of certain issues surrounding FASB-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 three months ended September 30, 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 3: Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes to the Company’s exposure to market risk since its Annual Report on Form 10-K for the year ended December 31, 2002.

Item 4: Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

27


 

(b) Changes in Internal Control Over Financial Reporting

No change in the Company’s internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

28


 

Part II: Other Information

Item 1. Legal Proceedings

     None.

Item 2. Changes in Securities and Use of Proceeds

     None.

Item 3. Defaults upon Senior Securities

     None.

Item 4. Submission of Matters to a Vote of Security Holders

     None.

Item 5. Other Information

     None.

Item 6. Exhibits and Reports on Form 8-K

     a. Exhibits

     
31.1*   Certifications of the Chief Executive Officer of Liberty Property Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934.
     
31.2*   Certifications of the Chief Financial Officer of Liberty Property Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934.
     
31.3*   Certifications of the Chief Executive Officer of Liberty Property Trust, in its capacity as the general partner of Liberty Property Limited Partnership, required by Rule 13a-14(a) under the Securities Exchange Act of 1934.
     
31.4*   Certifications of the Chief Financial Officer of Liberty Property Trust, in its capacity as the general partner of Liberty Property Limited Partnership, required by Rule 13a-14(a) under the Securities Exchange Act of 1934.
     
32.1*   Certifications of the Chief Executive Officer of Liberty Property Trust required under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
     
32.2*   Certifications of the Chief Financial Officer of Liberty Property Trust required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

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Item 6. Exhibits and Reports on Form 8-K — Continued

     a. Exhibits — Continued

     
32.3*   Certifications of the Chief Executive Officer of Liberty Property Trust, in its capacity as the general partner of Liberty Property Limited Partnership, required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
     
32.4*   Certifications of the Chief Financial Officer of Liberty Property Trust, in its capacity as the general partner of Liberty Property Limited Partnership, required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

     b. Reports of Form 8-K

During the quarter ended September 30, 2003 the Registrant filed the following Current Report on Form 8-K:

     
    Current Report on Form 8-K dated July 22, 2003 reporting items 7 and 9 and containing as an Exhibit the Press Release dated July 21, 2003 issued by Liberty Property Trust and Liberty Property Limited Partnership.


        * Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LIBERTY PROPERTY TRUST

     
/s/ WILLIAM P. HANKOWSKY   November 12, 2003

 
William P. Hankowsky
President and Chief Executive Officer
  Date
     
/s/ GEORGE J. ALBURGER, JR.   November 12, 2003

 
George J. Alburger, Jr.
Executive Vice President and Chief Financial Officer
  Date

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LIBERTY PROPERTY LIMITED PARTNERSHIP
BY: Liberty Property Trust
General Partner

     
/s/ WILLIAM P. HANKOWSKY   November 12, 2003

 
William P. Hankowsky
President and Chief Executive Officer
  Date
     
/s/ GEORGE J. ALBURGER, JR.   November 12, 2003

 
George J. Alburger, Jr.
Executive Vice President and Chief Financial Officer
  Date

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EXHIBIT INDEX

     
EXHIBIT NO. DESCRIPTION                                                                                      


31.1   Certifications of the Chief Executive Officer of Liberty Property Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934.
     
31.2   Certifications of the Chief Financial Officer of Liberty Property Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934.
     
31.3   Certifications of the Chief Executive Officer of Liberty Property Trust, in its capacity as the general partner of Liberty Property Limited Partnership, required by Rule 13a-14(a) under the Securities Exchange Act of 1934.
     
31.4   Certifications of the Chief Financial Officer of Liberty Property Trust, in its capacity as the general partner of Liberty Property Limited Partnership, required by Rule 13a-14(a) under the Securities Exchange Act of 1934.
     
32.1   Certifications of the Chief Executive Officer of Liberty Property Trust required under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
     
32.2   Certifications of the Chief Financial Officer of Liberty Property Trust required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
     
32.3   Certifications of the Chief Executive Officer of Liberty Property Trust, in its capacity as the general partner of Liberty Property Limited Partnership, required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
     
32.4   Certifications of the Chief Financial Officer of Liberty Property Trust, in its capacity as the general partner of Liberty Property Limited Partnership, required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

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