XNYS:LRY Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012


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 March 31, 2012
  
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
Commission file 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)
23-7768996
PENNSYLVANIA (Liberty Property Limited Partnership)
23-2766549
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
500 Chesterfield Parkway
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  x    No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):
  
Large Accelerated Filer
x
Accelerated Filer
o
Non-Accelerated Filer
o (Do not check if a smaller reporting company)
Smaller Reporting Company
o
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
On April 30, 2012, 117,337,260 Common Shares of Beneficial Interest, par value $0.001 per share, of Liberty Property Trust were outstanding.



EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2012 of Liberty Property Trust and Liberty Property Limited Partnership. Unless stated otherwise or the context otherwise requires, references to the "Trust”, mean Liberty Property Trust and its consolidated subsidiaries; and references to the “Operating Partnership” mean Liberty Property Limited Partnership and its consolidated subsidiaries. The terms the “Company,” “we”, “our” or “us” mean the Trust and the Operating Partnership, collectively.

The Trust is a self-administered and self-managed Maryland real estate investment trust (a “REIT”). Substantially all of the Trust's assets are owned directly or indirectly, and substantially all of the Trust's operations are conducted directly or indirectly, by its subsidiary, the Operating Partnership, a Pennsylvania limited partnership.

The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 96.8% of the common equity of the Operating Partnership at March 31, 2012. The common units of limited partnership interest in the Operating Partnership (the “Common Units”), other than those owned by the Trust, are exchangeable on a one-for-one basis (subject to anti-dilution protections) for the Trust's Common Shares of Beneficial Interest, $0.001 par value per share (the "Common Shares"). The Company has issued several series of Cumulative Redeemable Preferred Units of the Operating Partnership (the "Preferred Units"). The outstanding Preferred Units of each series are exchangeable on a one-for-one basis after stated dates into a corresponding series of Cumulative Redeemable Preferred Shares of the Trust except for the Series I-2 Preferred Units, which are not convertible or exchangeable into any other securities. The ownership of the holders of Common and Preferred Units is reflected on the Trust's financial statements as "noncontrolling interest - operating partnership" in mezzanine equity and as a component of total equity as "noncontrolling interest - operating partnership."

The financial results of the Operating Partnership are consolidated into the financial statements of the Trust. The Trust has no significant assets other than its investment in the Operating Partnership. The Trust and the Operating Partnership are managed and operated as one entity. The Trust and the Operating Partnership have the same managers.

The Trust's sole business purpose is to act as the general partner of the Operating Partnership. Net proceeds from equity issuances by the Trust are then contributed to the Operating Partnership in exchange for partnership units. The Trust itself does not issue any indebtedness, but guarantees certain of the unsecured debt of the Operating Partnership.

We believe combining the quarterly reports on Form 10-Q of the Trust and the Operating Partnership into this single report results in the following benefits:
enhances investors' understanding of the Trust and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the Company's disclosure applies to both the Trust and the Operating Partnership; and
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

To help investors understand the significant differences between the Trust and the Operating Partnership, this report presents the following separate sections for each of the Trust and the Operating Partnership:
consolidated financial statements;
the following notes to the consolidated financial statements;
Income per Common Share of the Trust and Income per Common Unit of the Operating Partnership;
Other Comprehensive Income of the Trust and Other Comprehensive Income of the Operating Partnership; and
Noncontrolling Interests of the Trust and Limited Partners' Equity of the Operating Partnership.

This report also includes separate Item 4. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of the Trust and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Trust and Operating Partnership are compliant with Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended.





2


Liberty Property Trust/Liberty Property Limited Partnership
Form 10-Q for the period ended March 31, 2012
 
Index
 
Page
 
 
 
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.

3


Index
 
Page
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
 
 
 
 
 
CERTIFICATION OF CEO OF LIBERTY PROPERTY TRUST REQUIRED BY RULE 13A-14(A)
 
 
 
 
 
CERTIFICATION OF CFO OF LIBERTY PROPERTY TRUST REQUIRED BY RULE 13A-14(A)
 
 
 
 
 
CERTIFICATION OF CEO OF LIBERTY PROPERTY TRUST, IN ITS CAPACITY AS THE GENERAL PARTNER OF LIBERTY PROPERTY LIMITED PARTNERSHIP, REQUIRED BY RULE 13A-14(A)
 
 
 
 
 
CERTIFICATION OF CFO OF LIBERTY PROPERTY TRUST, IN ITS CAPACITY AS THE GENERAL PARTNER OF LIBERTY PROPERTY LIMITED PARTNERSHIP, REQUIRED BY RULE 13A-14(A)
 
 
 
 
 
CERTIFICATION OF CEO OF LIBERTY PROPERTY TRUST REQUIRED BY RULE 13A-14(B)
 
 
 
 
 
CERTIFICATION OF CFO OF LIBERTY PROPERTY TRUST REQUIRED BY RULE 13A-14(B)
 
 
 
 
 
CERTIFICATION OF CEO OF LIBERTY PROPERTY TRUST, IN ITS CAPACITY AS THE GENERAL PARTNER OF LIBERTY PROPERTY LIMITED PARTNERSHIP, REQUIRED BY RULE 13A-14(B)
 
 
 
 
 
CERTIFICATION OF CFO OF LIBERTY PROPERTY TRUST, IN ITS CAPACITY AS THE GENERAL PARTNER OF LIBERTY PROPERTY LIMITED PARTNERSHIP, REQUIRED BY RULE 13A-14(B)
 
 
 
 
 
XBRL Instance Document
 
 
 
 
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
XBRL Extension Labels Linkbase
 
 
 
 
 
XBRL Taxonomy Extension Presentation Linkbase Document
 

4


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY TRUST
(In thousands, except share and unit amounts)
 
 
March 31, 2012
 
December 31, 2011
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate:
 
 
 
Land and land improvements
$
854,972

 
$
855,213

Building and improvements
4,117,093

 
4,109,783

Less accumulated depreciation
(1,088,301
)
 
(1,058,283
)
Operating real estate
3,883,764

 
3,906,713

Development in progress
138,634

 
88,848

Land held for development
218,926

 
219,375

Net real estate
4,241,324

 
4,214,936

Cash and cash equivalents
27,650

 
18,204

Restricted cash
39,188

 
63,659

Accounts receivable
9,210

 
8,192

Deferred rent receivable
104,502

 
103,002

Deferred financing and leasing costs, net of accumulated amortization (2012, $128,303; 2011, $123,822)
130,843

 
130,160

Investments in and advances to unconsolidated joint ventures
174,651

 
174,687

Assets held for sale
197,737

 
200,647

Prepaid expenses and other assets
90,189

 
76,186

Total assets
$
5,015,294

 
$
4,989,673

LIABILITIES
 
 
 
Mortgage loans
$
282,716

 
$
290,819

Unsecured notes
1,792,643

 
1,792,643

Credit facility
293,300

 
139,400

Accounts payable
32,310

 
23,418

Accrued interest
33,036

 
24,147

Dividend and distributions payable
57,393

 
56,958

Other liabilities
177,590

 
194,995

Total liabilities
2,668,988

 
2,522,380

Noncontrolling interest - operating partnership - 301,483 preferred units outstanding as of March 31, 2012 and December 31, 2011
7,537

 
7,537

EQUITY
 
 
 
Liberty Property Trust shareholders’ equity
 
 
 
Common shares of beneficial interest, $.001 par value, 183,987,000 shares authorized; 118,264,957 (includes 1,249,909 in treasury) and 117,352,353 (includes 1,249,909 in treasury) shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively
118

 
117

Additional paid-in capital
2,637,861

 
2,617,355

Accumulated other comprehensive income (loss)
1,815

 
(429
)
Distributions in excess of net income
(479,995
)
 
(461,498
)
Common shares in treasury, at cost, 1,249,909 shares as of March 31, 2012 and December 31, 2011
(51,951
)
 
(51,951
)
Total Liberty Property Trust shareholders’ equity
2,107,848

 
2,103,594

Noncontrolling interest – operating partnership
 
 
 
3,808,746 common units outstanding as of March 31, 2012 and December 31, 2011
63,920

 
64,428

5,290,000 and 9,740,000 preferred units outstanding as of March 31, 2012 and December 31, 2011, respectively
163,226

 
287,959

Noncontrolling interest – consolidated joint ventures
3,775

 
3,775

Total equity
2,338,769

 
2,459,756

Total liabilities, noncontrolling interest - operating partnership and equity
$
5,015,294

 
$
4,989,673


See accompanying notes.

5


CONSOLIDATED STATEMENTS OF INCOME OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands, except per share amounts)
 
Three Months Ended
 
March 31, 2012
 
March 31, 2011
OPERATING REVENUE
 
 
 
Rental
$
119,591

 
$
114,724

Operating expense reimbursement
50,346

 
51,410

Total operating revenue
169,937

 
166,134

OPERATING EXPENSE
 
 
 
Rental property
30,440

 
31,750

Real estate taxes
20,782

 
19,489

General and administrative
17,204

 
15,949

Depreciation and amortization
41,367

 
39,077

Total operating expenses
109,793

 
106,265

Operating income
60,144

 
59,869

OTHER INCOME (EXPENSE)
 
 
 
Interest and other income
2,762

 
2,589

Interest expense
(28,476
)
 
(32,889
)
Total other income (expense)
(25,714
)
 
(30,300
)
Income before gain on property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
34,430

 
29,569

Gain on property dispositions
523

 
1,161

Income taxes
(178
)
 
(550
)
Equity in earnings of unconsolidated joint ventures
916

 
534

Income from continuing operations
35,691

 
30,714

Discontinued operations (including net gain on property dispositions of $1,064 and $470 for the three months ended March 31, 2012 and 2011, respectively)
3,911

 
4,229

Net income
39,602

 
34,943

Noncontrolling interest – operating partnership
(2,513
)
 
(6,235
)
Noncontrolling interest – consolidated joint ventures

 
201

Net income available to common shareholders
$
37,089

 
$
28,909

Net income
$
39,602

 
$
34,943

Other comprehensive income
2,317

 
2,144

Comprehensive income
41,919

 
37,087

Less: comprehensive income attributable to noncontrolling interest
(2,586
)
 
(6,306
)
Comprehensive income attributable to common shareholders
$
39,333

 
$
30,781

Earnings per common share
 
 
 
Basic:
 
 
 
Income from continuing operations
$
0.29

 
$
0.21

Income from discontinued operations
0.03

 
0.04

Income per common share – basic
$
0.32

 
$
0.25

Diluted:
 
 
 
Income from continuing operations
$
0.29

 
$
0.21

Income from discontinued operations
0.03

 
0.04

Income per common share – diluted
$
0.32

 
$
0.25

Distributions per common share
$
0.475

 
$
0.475

Weighted average number of common shares outstanding
 
 
 
Basic
115,972

 
114,013

Diluted
116,743

 
114,766

Amounts attributable to common shareholders
 
 
 
Income from continuing operations
$
33,301

 
$
24,820

Discontinued operations
3,788

 
4,089

Net income available to common shareholders
$
37,089

 
$
28,909


See accompanying notes.

6


CONSOLIDATED STATEMENT OF EQUITY OF LIBERTY PROPERTY TRUST
(Unaudited except as noted and in thousands)
 
 
 
COMMON
SHARES OF
BENEFICIAL
INTEREST
 
ADDITIONAL
PAID-IN
CAPITAL
 
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
 
DISTRIBUTIONS
IN EXCESS OF
NET INCOME
 
COMMON
SHARES
HELD
IN
TREASURY
 
TOTAL
LIBERTY
PROPERTY
TRUST
SHAREHOLDERS’
EQUITY
 
NONCONTROLL-
ING INTEREST -
OPERATING
PARTNERSHIP-
COMMON
 
NONCONTROLL-
ING INTEREST -
OPERATING
PARTNERSHIP –
PREFERRED
 
NONCONTROLL-
ING INTEREST -
CONSOLIDATED
JOINT
VENTURES
 
TOTAL
EQUITY
Balance at January 1, 2012 (audited)
 
$
117

 
$
2,617,355

 
$
(429
)
 
$
(461,498
)
 
$
(51,951
)
 
$
2,103,594

 
$
64,428

 
$
287,959

 
$
3,775

 
$
2,459,756

Net proceeds from the issuance of common shares
 
1

 
16,196

 

 

 

 
16,197

 

 

 

 
16,197

Net income
 

 

 

 
37,089

 

 
37,089

 
1,207

 
1,306

 

 
39,602

Distributions
 

 

 

 
(55,586
)
 

 
(55,586
)
 
(1,788
)
 
(5,035
)
 

 
(62,409
)
Share-based compensation
 

 
4,310

 

 

 

 
4,310

 

 

 

 
4,310

Foreign currency translation adjustment
 

 

 
2,244

 

 

 
2,244

 
73

 

 

 
2,317

Redemption of noncontrolling interest - preferred units
 

 

 

 

 

 

 

 
(124,733
)
 

 
(124,733
)
Excess of preferred unit carrying amount over redemption
 

 

 

 

 

 

 

 
3,729

 

 
3,729

Balance at March 31, 2012
 
$
118

 
$
2,637,861

 
$
1,815

 
$
(479,995
)
 
$
(51,951
)
 
$
2,107,848

 
$
63,920

 
$
163,226

 
$
3,775

 
$
2,338,769


See accompanying notes.

7


CONSOLIDATED STATEMENTS OF CASH FLOWS OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands)
 
 
Three Months Ended
 
March 31, 2012
 
March 31, 2011
OPERATING ACTIVITIES
 
 
 
Net income
$
39,602

 
$
34,943

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
41,778

 
44,764

Amortization of deferred financing costs
1,188

 
1,521

Equity in earnings of unconsolidated joint ventures
(916
)
 
(534
)
Distributions from unconsolidated joint ventures
208

 
305

Gain on property dispositions
(1,587
)
 
(1,631
)
Share-based compensation
4,310

 
4,494

Changes in operating assets and liabilities:
 
 
 
Restricted cash
24,604

 
(5,196
)
Accounts receivable
(1,022
)
 
(4,804
)
Deferred rent receivable
(1,484
)
 
(2,678
)
Prepaid expenses and other assets
(6,578
)
 
4,216

Accounts payable
8,893

 
3,177

Accrued interest
8,889

 
3,656

Other liabilities
(25,163
)
 
(6,246
)
Net cash provided by operating activities
92,722

 
75,987

INVESTING ACTIVITIES
 
 
 
Investment in operating properties
(13,243
)
 
(19,058
)
Investments in and advances to unconsolidated joint ventures
(2,702
)
 
(6,507
)
Distributions from unconsolidated joint ventures
3,610

 
2,258

Net proceeds from disposition of properties/land
6,237

 
3,451

Net advances on public reimbursement receivable/escrow
(6,925
)
 
(631
)
Investment in development in progress
(43,405
)
 
(4,093
)
Investment in land held for development
(2,648
)
 
(1,410
)
Investment in deferred leasing costs
(7,983
)
 
(5,790
)
Net cash used in investing activities
(67,059
)
 
(31,780
)
FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of common shares
16,197

 
12,085

Redemption of preferred units
(121,000
)
 

Repayments of unsecured notes

 
(246,500
)
Proceeds from mortgage loans
11,186

 

Repayments of mortgage loans
(19,288
)
 
(25,558
)
Proceeds from credit facility
259,650

 
200,000

Repayments on credit facility
(105,750
)
 

Increase in deferred financing costs
(285
)
 
(12
)
Distribution paid on common shares
(55,149
)
 
(54,284
)
Distribution paid on units
(3,883
)
 
(7,108
)
Net cash used in financing activities
(18,322
)
 
(121,377
)
Net increase (decrease) in cash and cash equivalents
7,341

 
(77,170
)
Increase in cash and cash equivalents related to foreign currency translation
2,105

 
1,472

Cash and cash equivalents at beginning of period
18,204

 
108,409

Cash and cash equivalents at end of period
$
27,650

 
$
32,711


See accompanying notes.

8


CONSOLIDATED BALANCE SHEETS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(In thousands, except unit amounts)
 
 
March 31, 2012
 
December 31, 2011
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate:
 
 
 
Land and land improvements
$
854,972

 
$
855,213

Building and improvements
4,117,093

 
4,109,783

Less accumulated depreciation
(1,088,301
)
 
(1,058,283
)
Operating real estate
3,883,764

 
3,906,713

Development in progress
138,634

 
88,848

Land held for development
218,926

 
219,375

Net real estate
4,241,324

 
4,214,936

Cash and cash equivalents
27,650

 
18,204

Restricted cash
39,188

 
63,659

Accounts receivable
9,210

 
8,192

Deferred rent receivable
104,502

 
103,002

Deferred financing and leasing costs, net of accumulated amortization (2012, $128,303; 2011, $123,822)
130,843

 
130,160

Investments in and advances to unconsolidated joint ventures
174,651

 
174,687

Assets held for sale
197,737

 
200,647

Prepaid expenses and other assets
90,189

 
76,186

Total assets
$
5,015,294

 
$
4,989,673

LIABILITIES
 
 
 
Mortgage loans
$
282,716

 
$
290,819

Unsecured notes
1,792,643

 
1,792,643

Credit facility
293,300

 
139,400

Accounts payable
32,310

 
23,418

Accrued interest
33,036

 
24,147

Distributions payable
57,393

 
56,958

Other liabilities
177,590

 
194,995

Total liabilities
2,668,988

 
2,522,380

Limited partners' equity - 301,483 preferred units outstanding as of March 31, 2012 and December 31, 2011
7,537

 
7,537

OWNERS’ EQUITY
 
 
 
General partner’s equity - 117,015,048 (net of 1,249,909 treasury units) and 116,102,444 (net of 1,249,909 treasury units) common units outstanding as of March 31, 2012 and December 31, 2011, respectively
2,107,848

 
2,103,594

Limited partners’ equity – 3,808,746 common units outstanding as of March 31, 2012 and December 31, 2011
63,920

 
64,428

Limited partners’ equity – 5,290,000 and 9,740,000 preferred units outstanding as of March 31, 2012 and December 31, 2011, respectively
163,226

 
287,959

Noncontrolling interest – consolidated joint ventures
3,775

 
3,775

Total owners’ equity
2,338,769

 
2,459,756

Total liabilities, limited partners' equity and owners’ equity
$
5,015,294

 
$
4,989,673


See accompanying notes.

9


CONSOLIDATED STATEMENTS OF INCOME OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands, except per unit amounts)
 
 
Three Months Ended
 
March 31, 2012
 
March 31, 2011
OPERATING REVENUE
 
 
 
Rental
$
119,591

 
$
114,724

Operating expense reimbursement
50,346

 
51,410

Total operating revenue
169,937

 
166,134

OPERATING EXPENSE
 
 
 
Rental property
30,440

 
31,750

Real estate taxes
20,782

 
19,489

General and administrative
17,204

 
15,949

Depreciation and amortization
41,367

 
39,077

Total operating expenses
109,793

 
106,265

Operating income
60,144

 
59,869

OTHER INCOME (EXPENSE)
 
 
 
Interest and other income
2,762

 
2,589

Interest expense
(28,476
)
 
(32,889
)
Total other income (expense)
(25,714
)
 
(30,300
)
Income before gain on property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
34,430

 
29,569

Gain on property dispositions
523

 
1,161

Income taxes
(178
)
 
(550
)
Equity in earnings of unconsolidated joint ventures
916

 
534

Income from continuing operations
35,691

 
30,714

Discontinued operations (including net gain on property dispositions of $1,064 and $470 for the three months ended March 31, 2012 and 2011, respectively)
3,911

 
4,229

Net income
39,602

 
34,943

Noncontrolling interest – consolidated joint ventures

 
201

Preferred unit distributions
(5,035
)
 
(5,253
)
Excess of preferred unit carrying amount over redemption
3,729

 

Income available to common unitholders
$
38,296

 
$
29,891

Net income
$
39,602

 
$
34,943

Other comprehensive income
2,317

 
2,144

Comprehensive income
$
41,919

 
$
37,087

Earnings per common unit
 
 
 
Basic:
 
 
 
Income from continuing operations
$
0.29

 
$
0.21

Income from discontinued operations
0.03

 
0.04

Income per common unit - basic
$
0.32

 
$
0.25

Diluted:
 
 
 
Income from continuing operations
$
0.29

 
$
0.21

Income from discontinued operations
0.03

 
0.04

Income per common unit - diluted
$
0.32

 
$
0.25

Distributions per common unit
$
0.475

 
$
0.475

Weighted average number of common units outstanding
 
 
 
        Basic
119,781

 
117,942

        Diluted
120,552

 
118,695

Net income allocated to general partners
$
37,089

 
$
28,909

Net income allocated to limited partners
$
2,513

 
$
6,235


See accompanying notes.

10


CONSOLIDATED STATEMENT OF OWNERS’ EQUITY OF LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited except as noted and in thousands)
 
 
GENERAL
PARTNER’S
EQUITY
 
LIMITED
PARTNERS’
EQUITY  –
COMMON
UNITS
 
LIMITED
PARTNERS’
EQUITY  –
PREFERRED
UNITS
 
NONCONTROLLING
INTEREST –
CONSOLIDATED
JOINT VENTURES
 
TOTAL
OWNERS’
EQUITY
Balance at January 1, 2012 (audited)
$
2,103,594

 
$
64,428

 
$
287,959


$
3,775

 
$
2,459,756

Contributions from partners
20,507

 

 



 
20,507

Distributions to partners
(55,586
)
 
(1,788
)
 
(5,035
)


 
(62,409
)
Foreign currency translation adjustment
2,244

 
73

 



 
2,317

Net income
37,089

 
1,207

 
1,306



 
39,602

Redemption of limited partners' preferred units

 

 
(124,733
)
 

 
(124,733
)
Excess of preferred unit carrying amount over redemption

 

 
3,729

 

 
3,729

Balance at March 31, 2012
$
2,107,848

 
$
63,920

 
$
163,226

 
$
3,775

 
$
2,338,769


See accompanying notes.

11


CONSOLIDATED STATEMENTS OF CASH FLOWS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands)
 
 
Three Months Ended
 
March 31, 2012
 
March 31, 2011
OPERATING ACTIVITIES
 
 
 
Net income
$
39,602

 
$
34,943

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
41,778

 
44,764

Amortization of deferred financing costs
1,188

 
1,521

Equity in earnings of unconsolidated joint ventures
(916
)
 
(534
)
Distributions from unconsolidated joint ventures
208

 
305

Gain on property dispositions
(1,587
)
 
(1,631
)
Share-based compensation
4,310

 
4,494

Changes in operating assets and liabilities:
 
 
 
Restricted cash
24,604

 
(5,196
)
Accounts receivable
(1,022
)
 
(4,804
)
Deferred rent receivable
(1,484
)
 
(2,678
)
Prepaid expenses and other assets
(6,578
)
 
4,216

Accounts payable
8,893

 
3,177

Accrued interest
8,889

 
3,656

Other liabilities
(25,163
)
 
(6,246
)
Net cash provided by operating activities
92,722

 
75,987

INVESTING ACTIVITIES
 
 
 
Investment in operating properties
(13,243
)
 
(19,058
)
Investments in and advances to unconsolidated joint ventures
(2,702
)
 
(6,507
)
Distributions from unconsolidated joint ventures
3,610

 
2,258

Net proceeds from disposition of properties/land
6,237

 
3,451

Net advances on public reimbursement receivable/escrow
(6,925
)
 
(631
)
Investment in development in progress
(43,405
)
 
(4,093
)
Investment in land held for development
(2,648
)
 
(1,410
)
Investment in deferred leasing costs
(7,983
)
 
(5,790
)
Net cash used in investing activities
(67,059
)
 
(31,780
)
FINANCING ACTIVITIES
 
 
 
Redemption of preferred units
(121,000
)
 

Repayments of unsecured notes

 
(246,500
)
Proceeds from mortgage loans
11,186

 

Repayments of mortgage loans
(19,288
)
 
(25,558
)
Proceeds from credit facility
259,650

 
200,000

Repayments on credit facility
(105,750
)
 

Increase in deferred financing costs
(285
)
 
(12
)
Capital contributions
16,197

 
12,085

Distributions to partners
(59,032
)
 
(61,392
)
Net cash used in financing activities
(18,322
)
 
(121,377
)
Net increase (decrease) in cash and cash equivalents
7,341

 
(77,170
)
Increase in cash and cash equivalents related to foreign currency translation
2,105

 
1,472

Cash and cash equivalents at beginning of period
18,204

 
108,409

Cash and cash equivalents at end of period
$
27,650

 
$
32,711


See accompanying notes.

12


Liberty Property Trust and Liberty Property Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2012
Note 1: Organization and Basis of Presentation
Organization
Liberty Property Trust (the “Trust”) is a self-administered and self-managed Maryland real estate investment trust (a “REIT”). Substantially all of the Trust’s assets are owned directly or indirectly, and substantially all of the Trust’s operations are conducted directly or indirectly, by its subsidiary, Liberty Property Limited Partnership, a Pennsylvania limited partnership (the “Operating Partnership” and, together with the Trust and their consolidated subsidiaries, the “Company”). The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 96.8% of the common equity of the Operating Partnership at March 31, 2012. The Company provides leasing, property management, development, acquisition, and other tenant-related services for a portfolio of industrial and office properties which are located principally within the Mid-Atlantic, Southeastern, Midwestern and Southwestern United States and the United Kingdom. Unless otherwise indicated, the notes to the Consolidated Financial Statements apply to both the Trust and the Operating Partnership. The terms the "Company,” “we,” “our” or “us” mean the Trust and Operating Partnership collectively.
Basis of Presentation
The accompanying unaudited consolidated financial statements of Company have been prepared in accordance with United States generally accepted accounting principles (“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 Company for the year ended December 31, 2011. 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 the current period presentation including reclassifying the accompanying consolidated statements of income for discontinued operations.
Recently Issued Accounting Standards
ASU 2011-04
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS” (“ASU 2011-04”), which amends Accounting Standards Codification ("ASC") 820, “Fair Value Measurement” to converge US GAAP and International Financial Reporting Standards (“IFRS”) requirements for measuring accounts at fair value, including the disclosures regarding these measurements. ASU 2011-04 was effective for the Company beginning January 1, 2012. The Company's adoption of ASU 2011-04 did not have a material impact on its financial position or results of operations.
ASU 2011-05
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income” (“ASU 2011-05”), which will lead to converging guidance under US GAAP and IFRS related to presentation of comprehensive income. ASU 2011-05 was effective for the Company beginning January 1, 2012 and the provisions of ASU 2011-05 were adopted retrospectively. In adopting ASU 2011-05, the Company is required to disclose the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company's adoption of ASU 2011-05 did not have a material impact on its financial position or results of operations.




13


Note 2: Income per Common Share of the Trust

The following table sets forth the computation of basic and diluted income per common share of the Trust (in thousands except per share amounts):
 
 
For the Three Months Ended
 
For the Three Months Ended
 
March 31, 2012
 
March 31, 2011
 
Income
(Numerator)
 
Weighted
Average
Shares
(Denominator)
 
Per Share
 
Income
(Numerator)
 
Weighted
Average
Shares
(Denominator)
 
Per Share
Basic income from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations net of noncontrolling interest
$
33,301

 
115,972

 
$
0.29

 
$
24,820

 
114,013

 
$
0.21

Dilutive shares for long-term compensation plans

 
771

 
 
 

 
753

 
 
Diluted income from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations net of noncontrolling interest
33,301

 
116,743

 
$
0.29

 
24,820

 
114,766

 
$
0.21

Basic income from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations net of noncontrolling interest
3,788

 
115,972

 
$
0.03

 
4,089

 
114,013

 
$
0.04

Dilutive shares for long-term compensation plans

 
771

 
 
 

 
753

 
 
Diluted income from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations net of noncontrolling interest
3,788

 
116,743

 
$
0.03

 
4,089

 
114,766

 
$
0.04

Basic income per common share
 
 
 
 
 
 
 
 
 
 
 
Net income available to common shareholders
37,089

 
115,972

 
$
0.32

 
28,909

 
114,013

 
$
0.25

Dilutive shares for long-term compensation plans

 
771

 
 
 

 
753

 
 
Diluted income per common share
 
 
 
 
 
 
 
 
 
 
 
Net income available to common shareholders
$
37,089

 
116,743

 
$
0.32

 
$
28,909

 
114,766

 
$
0.25


Dilutive shares for long-term compensation plans represent the unvested common shares outstanding during the year as well as the dilutive effect of outstanding options. The amounts of anti-dilutive options that were excluded from the computation of diluted income per common share for the three months ended March 31, 2012 was 1,384,000 as compared to 1,219,000 for the same period in 2011.
During the three months ended March 31, 2012, 349,000 common shares were issued upon the exercise of options. During the year ended December 31, 2011, 256,000 common shares were issued upon the exercise of options.



14


Note 3: Income per Common Unit of the Operating Partnership

The following table sets forth the computation of basic and diluted income per common unit of the Operating Partnership (in thousands, except per unit amounts):
 
 
For the Three Months Ended
 
For the Three Months Ended
 
March 31, 2012
 
March 31, 2011
 
Income
(Numerator)
 
Weighted
Average Units
(Denominator)
 
Per Unit
 
Income
(Numerator)
 
Weighted
Average Units
(Denominator)
 
Per Unit
Income from continuing operations net of noncontrolling interest
$
35,691

 
 
 
 
 
$
30,915

 
 
 
 
Less: Preferred unit distributions
(5,035
)
 
 
 
 
 
(5,253
)
 
 
 
 
Excess of preferred unit carrying amount over redemption
3,729

 
 
 
 
 

 
 
 
 
Basic income from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations available to common unitholders
34,385

 
119,781

 
$
0.29

 
25,662

 
117,942

 
$
0.21

Dilutive units for long-term compensation plans

 
771

 
 
 

 
753

 
 
Diluted income from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations available to common unitholders
34,385

 
120,552

 
$
0.29

 
25,662

 
118,695

 
$
0.21

Basic income from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations
3,911

 
119,781

 
$
0.03

 
4,229

 
117,942

 
$
0.04

Dilutive units for long-term compensation plans

 
771

 
 
 

 
753

 
 
Diluted income from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations
3,911

 
120,552

 
$
0.03

 
4,229

 
118,695

 
$
0.04

Basic income per common unit
 
 
 
 
 
 
 
 
 
 
 
Income available to common unitholders
38,296

 
119,781

 
$
0.32

 
29,891

 
117,942

 
$
0.25

Diluted units for long-term compensation plans

 
771

 
 
 

 
753

 
 
Diluted income per common unit
 
 
 
 
 
 
 
 
 
 
 
Income available to common unitholders
$
38,296

 
120,552

 
$
0.32

 
$
29,891

 
118,695

 
$
0.25


Dilutive units for long-term compensation plans represent the unvested common units outstanding during the year as well as the dilutive effect of outstanding options. The amounts of anti-dilutive options that were excluded from the computation of diluted income per common unit for the three months ended March 31, 2012 was 1,384,000 as compared to 1,219,000 for the same period in 2011.
During the three months ended March 31, 2012, 349,000 common units were issued upon the exercise of options. During the year ended December 31, 2011, 256,000 common units were issued upon the exercise of options.

Note 4: Other Comprehensive Income of the Trust

The functional currency of the Trust's United Kingdom operations is pounds sterling. The Trust translates the financial statements for the United Kingdom operations into US dollars. Gains and losses resulting from this translation are included in comprehensive income and are included in accumulated other comprehensive income (loss) as a separate component of equity. A proportionate amount of gain or loss is allocated to noncontrolling interest-common units. Accumulated other comprehensive income (loss)

15


consists solely of the foreign currency translation adjustments described above. Upon sale or upon complete or substantially complete liquidation of the Trust's foreign investment, the gain or loss on the sale will include the cumulative translation adjustments that have been previously recorded in accumulated other comprehensive income (loss) and noncontrolling interest-common units.

Note 5: Other Comprehensive Income of the Operating Partnership

The functional currency of the Operating Partnership’s United Kingdom operations is pounds sterling. The Operating Partnership translates the financial statements for the United Kingdom operations into US dollars. Gains and losses resulting from this translation are included in other comprehensive income within general partner’s equity – common units and limited partners’ equity-common units. Upon sale or upon complete or substantially complete liquidation of the Operating Partnership's foreign investment, the gain or loss on the sale will include the cumulative translation adjustments that have been previously recorded in general partner’s equity-common units and limited partners’ equity – common units.

Note 6: Segment Information
The Company operates its portfolio of properties primarily throughout the Mid-Atlantic, Southeastern, Midwestern and Southwestern United States. Additionally, the Company owns certain assets in the United Kingdom. The Company reviews the performance of the portfolio on a geographical basis. As such, the following are considered the Company’s reportable segments:
 
REGIONS
MARKETS
 
 
Northeast
Southeastern PA; Lehigh/Central PA; New Jersey; Maryland
Central
Minnesota; Chicago/Milwaukee; Houston; Arizona
South
Richmond/Hampton Roads; Carolinas; Jacksonville; Orlando; South Florida; Tampa
Metro
Philadelphia; Metro Washington, D.C.
United Kingdom
County of Kent; West Midlands
The Company evaluates the performance of its reportable segments based on net operating income. Net operating income includes operating revenue from external customers, real estate taxes, amortization of lease transaction costs and other operating expenses which relate directly to the management and operation of the assets within each reportable segment.
The Company's accounting policies for the segments are the same as those used in the Company's Consolidated Financial Statements. There are no material inter-segment transactions.

16


The operating information by reportable segment is as follows (in thousands):
 
 
 
For the Three Months Ended
 
 
 
March 31,
 
 
 
2012
 
2011
Operating revenue
 
 
 
 
 
 Northeast - Southeastern PA
 
$
42,195

 
$
45,265

 
 Northeast - Lehigh / Central PA
 
24,077

 
28,200

 
 Northeast - Other
 
17,400

 
18,293

 
 Central
 
32,144

 
31,692

 
 South
 
54,012

 
56,364

 
 Metro
 
8,188

 
7,149

 
 United Kingdom
 
1,162

 
1,132

Segment-level operating revenue
 
179,178

 
188,095

 
 
 
 
 
 
 Reconciliation to total operating revenues
 
 
 
 
 
 Discontinued operations
 
(9,409
)
 
(21,961
)
 
 Other
 
168

 

 Total operating revenue
 
$
169,937

 
$
166,134

 
 
 
 
 
 
 Net operating income
 
 
 
 
 
 
 Northeast - Southeastern PA
 
$
25,170

 
$
25,524

 
 Northeast - Lehigh / Central PA
 
16,195

 
17,449

 
 Northeast - Other
 
9,105

 
9,194

 
 Central
 
17,747

 
17,472

 
 South
 
32,654

 
34,002

 
 Metro
 
5,629

 
5,957

 
 United Kingdom
 
(229
)
 
(49
)
Segment-level net operating income
 
106,271

 
109,549

 
 
 
 
 
 
 Reconciliation to income from continuing operations
 
 
 
 
 
 Interest expense (1)
 
(30,904
)
 
(36,169
)
 
 Depreciation/amortization expense (2)
 
(25,652
)
 
(28,406
)
 
 Gain on property dispositions
 
523

 
1,161

 
 Equity in earnings of unconsolidated joint ventures
 
916

 
534

 
 General and administrative expense (2)
 
(11,550
)
 
(10,449
)
 
 Discontinued operations excluding gain on property dispositions
 
(2,847
)
 
(3,759
)
 
 Income taxes
 
(178
)
 
(550
)
 
 Other
 
(888
)
 
(1,197
)
Income from continuing operations
 
$
35,691

 
$
30,714


(1)
Includes interest on discontinued operations.
(2)
Excludes costs which are included in determining segment-level net operating income.

Note 7: Accounting for the Impairment or Disposal of Long-Lived Assets
The operating results and gain/(loss) on disposition of real estate for properties sold and held for sale are reflected in the consolidated statements of income as discontinued operations. Prior period financial statements have been adjusted for discontinued operations. The proceeds from dispositions of operating properties for the three months ended March 31, 2012 were $6.5 million as compared to $3.6 million for the same period in 2011.
Below is a summary of the results of operations for the properties held for sale and disposed of through the respective disposition dates (in thousands):
 

17


 
For the Three Months Ended
 
March 31, 2012
 
March 31, 2011
Revenues
$
9,409

 
$
21,961

Operating expenses
(4,090
)
 
(9,555
)
Interest and other income
27

 
95

Interest expense
(2,428
)
 
(3,280
)
Depreciation and amortization
(71
)
 
(5,462
)
Income before gain on property dispositions
2,847

 
3,759

Gain on property dispositions
1,064

 
470

Income from discontinued operations
$
3,911

 
$
4,229


Eighteen properties totaling 957,000 square feet in the Company’s Central reportable segment, 16 properties totaling 980,000 square feet in the Company's South reportable segment and 16 properties totaling 633,000 square feet in the Company's Northeast - Other reportable segment were considered to be held for sale as of March 31, 2012. These properties had an aggregate cost basis of $200.8 million as of March 31, 2012 and were subject to contracts for sale for an aggregate of $199.1 million. Forty-nine of these properties were sold subsequent to March 31, 2012 for proceeds of $195.0 million.
Interest expense is allocated to discontinued operations. The allocation of interest expense to discontinued operations was based on the ratio of net assets sold and held for sale (without continuing involvement) to the sum of total net assets plus consolidated debt.
Asset Impairment
During the three months ended March 31, 2012, the Company recognized $57,000 in impairment in the Company's South reportable segment. This impairment is included in discontinued operations in the Company’s consolidated statements of income. The Company determined this impairment through a comparison of the aggregate future cash flows (including quoted offer prices, a Level I input according to the fair value hierarchy established by the FASB in Topic 820, “Fair Value Measurements and Disclosures”) to be generated by the property to the carrying value of the properties. The Company has evaluated each of the properties and land held for development and has determined that there are no additional valuation adjustments necessary at March 31, 2012. During the three months ended March 31, 2011, the Company recognized an impairment charge of $550,000 related a property in the Central reportable segment. This impairment is included in discontinued operations in the Company's consolidated statements of income.
Note 8: Noncontrolling Interests of the Trust
Noncontrolling interests in the accompanying financial statements represent the interests of the common and preferred units in the Operating Partnership not held by the Trust. In addition, noncontrolling interests include third-party ownership interests in consolidated joint venture investments.
Common units
The common units outstanding of the Operating Partnership not held by the Trust as of March 31, 2012 have the same economic characteristics as common shares of the Trust. The 3,808,746 outstanding common units of the Operating Partnership not held by the Trust share proportionately in the net income or loss and in any distributions of the Operating Partnership. The common units of the Operating Partnership not held by the Trust are redeemable at any time at the option of the holder. The Trust, as the sole general partner of the Operating Partnership, may at its option elect to settle the redemption in cash or through the exchange on a one-for-one basis with unregistered common shares of the Trust. The market value of the 3,808,746 outstanding common units based on the closing price of the common shares of the Company at March 31, 2012 was $136.0 million.
Preferred units
The Trust had outstanding the following cumulative redeemable preferred units of the Operating Partnership (the “Equity Preferred Units”) as of March 31, 2012:
 

18


ISSUE
 
AMOUNT
 
UNITS
 
LIQUIDATION
PREFERENCE
 
DIVIDEND
RATE
 
REDEEMABLE
AS OF
 
EXCHANGEABLE AFTER
 
 
(in 000’s)
 
 
 
 
 
 
 
 
Series E
 
$
20,000

 
400

 

$50

 
7.00
%
 
6/16/2010
 
6/16/15 into Series E Cumulative Redeemable Preferred Shares of the Trust
Series F
 
$
17,500

 
350

 

$50

 
6.65
%
 
6/30/2010
 
12/12/15 into Series F Cumulative Redeemable Preferred Shares of the Trust
Series G
 
$
27,000

 
540

 

$50

 
6.70
%
 
12/15/2011
 
12/15/16 into Series G Cumulative Redeemable Preferred Shares of the Trust
Series H
 
$
100,000

 
4,000

 

$25

 
7.40
%
 
8/21/2012
 
8/21/17 into Series H Cumulative Redeemable Preferred Shares of the Trust

The Equity Preferred Units are callable at the Operating Partnership’s option after a stated period of time. The Trust as the sole general partner of the Operating Partnership may at its option elect to settle the redemption for cash or through the exchange on a one-for-one basis with unregistered preferred shares of the Trust.
During the three months ended March 31, 2012, the Company redeemed $32.5 million of outstanding 6.65% Series F Cumulative Redeemable Preferred Units for $26.0 million. Also, the Company redeemed $95.0 million of outstanding 7.45% Series B Cumulative Redeemable Preferred Units at par. In connection with these redemptions, the Company recognized $3.7 million relating to the excess of preferred unit carrying amount over redemption price net of certain costs, which is included in Noncontrolling interest - operating partnership in the Trust's consolidated statements of income.


Note 9: Limited Partners' Equity of the Operating Partnership

Common units
General and limited partners' equity - common units relates to limited partnership interests of the Operating Partnership issued in connection with the formation of the Operating Partnership and certain subsequent acquisitions. The common units outstanding as of March 31, 2012 have the same economic characteristics as common shares of the Trust. The 3,808,746 outstanding common units are the limited partners' equity - common units held by persons and entities other than the Trust, the general partner of the Operating Partnership, which holds a number of common units equal to the number of outstanding common shares of beneficial interest. Both the common units held by the Trust and the common units held by persons and entities other than the Trust are counted in the weighted average number of common units outstanding during any given period. The common units share proportionately in the net income or loss and in any distributions of the Operating Partnership and are exchangeable into the same number of common shares of the Trust. The market value of the 3,808,746 outstanding common units at March 31, 2012 based on the closing price of the common shares of the Company at March 31, 2012 was $136.0 million.

Preferred units
The following are the Equity Preferred Units as of March 31, 2012:

ISSUE
 
AMOUNT
 
UNITS
 
LIQUIDATION
PREFERENCE
 
DIVIDEND
RATE
 
REDEEMABLE
AS OF
 
EXCHANGEABLE AFTER
 
 
(in 000's)
 
 
 
 
 
 
 
 
Series E
 
$
20,000

 
400

 

$50

 
7.00
%
 
6/16/2010
 
6/16/15 into Series E Cumulative Redeemable Preferred Shares of the Trust
Series F
 
$
17,500

 
350

 

$50

 
6.65
%
 
6/30/2010
 
12/12/15 into Series F Cumulative Redeemable Preferred Shares of the Trust
Series G
 
$
27,000

 
540

 

$50

 
6.70
%
 
12/15/2011
 
12/15/16 into Series G Cumulative Redeemable Preferred Shares of the Trust
Series H
 
$
100,000

 
4,000

 

$25

 
7.40
%
 
8/21/2012
 
8/21/17 into Series H Cumulative Redeemable Preferred Shares of the Trust

The Equity Preferred Units are callable at the Operating Partnership's option after a stated period of time. The Trust as the sole general partner of the Operating Partnership may at its option elect to settle the redemption for cash or through the exchange on a one-for-one basis with unregistered preferred shares of the Trust.
During the three months ended March 31, 2012, the Company redeemed $32.5 million of outstanding 6.65% Series F Cumulative Redeemable Preferred Units for $26.0 million. Also, the Company redeemed $95.0 million of outstanding 7.45% Series B

19


Cumulative Redeemable Preferred Units at par. In connection with these redemptions, the Company recognized $3.7 million relating to the excess of preferred unit carrying amount over redemption price net of certain costs.

Note 10: Noncontrolling Interest - Operating Partnership/Limited Partners' Equity - Preferred Units
As of March 31, 2012, the following cumulative preferred units of the Operating Partnership were outstanding:
ISSUE
 
AMOUNT
 
UNITS
 
LIQUIDATION
PREFERENCE
 
DIVIDEND
RATE
 
 
(in 000’s)
 
 
 
 
Series I-2
 
$
7,537

 
301

 
$25
 
6.25
%
The preferred units are callable at the holder's option at any time and are callable at the Operating Partnership's option after a stated period of time for cash.
Preferred distributions related to these units were $118,000 for the three months ended March 31, 2012.

Note 11: Indebtedness

Mortgage Loans
During the three months ended March 31, 2012, the Company used proceeds from its unsecured credit facility together with available cash on hand to repay mortgage loans totaling $17.9 million bearing interest at an average rate of 7.70%.

During the three months ended March 31, 2012, the Company closed on a mortgage with $45.0 million of available funds bearing interest at 4.84%. As of March 31, 2012, the Company had $11.2 million outstanding on this loan. The net proceeds from this mortgage were used for construction costs on a property under development.

Note 12: Disclosure of Fair Value of Financial Instruments
The following disclosure of estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the following estimates are not necessarily indicative of the amounts the Company could have realized on disposition of the financial instruments at March 31, 2012 and December 31, 2011. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued interest, dividend and distributions payable and other liabilities are reasonable estimates of fair value because of the short-term nature of these instruments. The carrying value of the Company's credit facility is also a reasonable estimate of fair value because interest rates float at a rate based on LIBOR.
The Company used a discounted cash flow model to determine the estimated fair value of its debt as of March 31, 2012.  This is a Level 3 fair value calculation. The inputs used in preparing the discounted cash flow model include actual maturity dates and scheduled cash flows as well as estimates for market value discount rates.  The Company updates the discounted cash flow model on a quarterly basis to reflect any changes in the Company's debt holdings and changes to discount rate assumptions.  
The only significant unobservable input in the discounted cash flow model is the discount rate.  For the fair value of the Company's unsecured notes, the Company uses a discount rate based on the indicative new issue pricing provided by lenders.  For the Company's mortgage loans, the Company uses an estimate based on its knowledge of the mortgage market. The weighted average discount rate for the combined unsecured notes and mortgage loans used as of March 31, 2012 was approximately 3.92%. An increase in the discount rate used in the discounted cash flow model would result in a decrease to the fair value of the Company's long-term debt.  A decrease in the discount rate used in the discounted cash flow model would result in an increase to the fair value of the Company's long-term debt.
The following summarizes the changes in the fair value of the Company's long-term debt from December 31, 2011 to March 31, 2012 (in thousands):

20


 
 
Carrying Value
 
Fair Value
 
Fair Value Above (Below) Carrying Value
Long-term debt at December 31, 2011 (1)
 
$
2,083,462

 
$
2,215,219

 
$
131,757

 
 
 
 
 
 
 
Payoffs and amortization of long-term debt
 
(19,289
)
 
(19,289
)
 
 
New long-term debt
 
11,186

 
11,186

 
 
Changes in fair value assumptions
 
 
 
20,377

 
20,377

 
 
 
 
 
 
 
Long-term debt at March 31, 2012 (1)
 
$
2,075,359

 
$
2,227,493

 
$
152,134

(1) Does not include the Company's credit facility.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of March 31, 2012 and December 31, 2011. Although as of the date of this report, management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since March 31, 2012 and current estimates of fair value may differ significantly from the amounts presented herein.
Note 13: Commitments and Contingencies
Environmental Matters
Substantially all of the Properties and land were subject to Phase I Environmental Assessments and when appropriate Phase II Environmental Assessments (collectively, the “Environmental Assessments”) obtained in contemplation of their acquisition by the Company. The Environmental Assessments did not reveal, nor is the Company aware of, any non-compliance with environmental laws, environmental liability or other environmental claim that the Company believes would likely have a material adverse effect on the Company.
Operating Ground Lease Agreements
Future minimum rental payments under the terms of all non-cancelable operating ground leases under which the Company is the lessee, as of March 31, 2012, were as follows (in thousands):
 
Year
Amount
2012
$
120

2013
163

2014
158

2015
153

2016
153

2017 though 2054
5,237

Total
$
5,984


Operating ground lease expense during the three months ended March 31, 2012 was $96,000 as compared to $77,000 for the same period in 2011.
Legal Matters
From time to time, the Company is a party to a variety of legal proceedings, claims and assessments arising in the normal course of business. The Company believes that as of March 31, 2012 there were no legal proceedings, claims or assessments expected to have a material adverse effect on the Company’s business or financial statements.
Other
As of March 31, 2012, the Company had miscellaneous guarantees related to its unconsolidated joint ventures for up to a maximum of $350,000.
As of March 31, 2012, the Company had letter of credit obligations of $6.3 million related to development requirements. The Company believes that it is remote that there will be a draw upon these letter of credit obligations.

21


As of March 31, 2012, the Company had initiated the development of 11 buildings. These buildings are expected to contain a total of 3.2 million square feet of leasable space and represent an anticipated aggregate investment of $294.3 million. At March 31, 2012, Development in progress totaled $138.6 million. In addition, as of March 31, 2012, the Company invested $5.2 million in deferred leasing costs related to these development buildings. Also, the Company has a signed commitment for a build-to-suit development not yet commenced for $6.7 million.
As of March 31, 2012, the Company was committed to $2.1 million in improvements on certain land parcels.
As of March 31, 2012, the Company was obligated to pay for tenant improvements not yet completed for a maximum of $23.9 million.
The Company maintains cash and cash equivalents at financial institutions. The combined account balances at each institution typically exceed FDIC insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes the risk is not significant.
Note 14: Supplemental Disclosure to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flows for the three months ended March 31, 2012 and 2011 (amounts in thousands):
 
 
2012
 
2011
 Write-off of fully depreciated/amortized property and deferred costs
$
7,643

 
$
14,125

 Write-off of depreciated property and deferred costs due to sale
$
3,331

 
$

 Write-off of origination costs related to preferred unit redemption
$
2,771

 
$


Amounts paid in cash for deferred leasing costs incurred in connection with signed leases with tenants are paid in conjunction with improving (acquiring) property, plant and equipment. Such costs are not contained within net real estate. However, they are integral to the completion of a tenant lease and ultimately are related to the improvement and thus the value of the Company’s property, plant and equipment. They are therefore included in investing activities in the Company’s statements of cash flows.


Note 15: Subsequent Events

Subsequent to March 31, 2012, the Company completed the sale of 49 properties totaling 2.5 million square feet of leasable space in Wisconsin, Maryland, Virginia, North Carolina and New Jersey for approximately $195 million. The properties consist primarily of single-story and mid-rise office buildings and high-finish flex properties. The properties were 83% leased at the time of the sale. These properties were considered assets held for sale at March 31, 2012 and therefore the results of operations for these properties are included as discontinued operations in the accompanying statements of income.


22



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Liberty Property Trust (the “Trust”) is a self-administered and self-managed Maryland real estate investment trust (“REIT”). Substantially all of the Trust’s assets are owned directly or indirectly, and substantially all of the Trust’s operations are conducted directly or indirectly, by its subsidiary, Liberty Property Limited Partnership, a Pennsylvania limited partnership (the “Operating Partnership” and, collectively with the Trust and their consolidated subsidiaries, the “Company”).
The Company operates primarily in the Mid-Atlantic, Southeastern, Midwestern and Southwestern United States. Additionally, the Company owns certain assets in the United Kingdom.
As of March 31, 2012, the Company owned and operated 331 industrial and 264 office properties (the “Wholly Owned Properties in Operation”) totaling 65.1 million square feet. In addition, as of March 31, 2012, the Company owned 11 properties under development, which when completed are expected to comprise 3.2 million square feet (the “Wholly Owned Properties under Development”) and 1,447 acres of developable land, substantially all of which is zoned for commercial use. Additionally, as of March 31, 2012, the Company had an ownership interest, through unconsolidated joint ventures, in 47 industrial and 49 office properties totaling 14.2 million square feet (the “JV Properties in Operation” and, together with the Wholly Owned Properties in Operation, the “Properties in Operation”). The Company also has an ownership interest through unconsolidated joint ventures in 615 acres of developable land, substantially all of which is zoned for commercial use. The Company refers to the Wholly Owned Properties under Development and the Properties in Operation collectively as the "Properties." On April 3, 2012, the Company completed the sale of 49 properties totaling 2.5 million square feet of leasable space in Wisconsin, Maryland, Virginia, North Carolina and New Jersey for approximately $195 million. The properties consist primarily of single-story and mid-rise office buildings and high-finish flex properties.
The Company focuses on creating value for shareholders and increasing profitability and cash flow. With respect to its Properties in Operation, the Company endeavors to maintain high occupancy levels while maximizing rental rates and controlling costs. The Company pursues development opportunities that it believes will create value and yield acceptable returns. The Company also acquires properties that it believes will create long-term value, and disposes of properties that no longer fit within the Company’s strategic objectives or in situations where it can optimize cash proceeds. The Company’s strategy with respect to product and market selection is expected generally to favor industrial and metro-office properties and markets with strong demographic and economic fundamentals.
The Company’s operating results depend primarily upon income from rental operations and are substantially influenced by rental demand for the Properties in Operation. The economic disruption that commenced in 2008 continues to adversely impact the Company’s business. Although we have seen some improvement in the general economy, the economy as it impacts our business has not returned to pre-recession levels. Rental demand for the Properties in Operation remained relatively flat for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. During the three months ended March 31, 2012, the Company successfully leased 4.3 million square feet and, as of that date, attained occupancy of 91.2% for the Wholly Owned Properties in Operation and 87.1% for the JV Properties in Operation for a combined occupancy of 90.5% for the Properties in Operation. During the three months ended March 31, 2012, straight line rents on renewal and replacement leases were on average 4.0% lower than rents on expiring leases. At December 31, 2011, occupancy for the Wholly Owned Properties in Operation was 91.9% and for the JV Properties in Operation was 88.7% for a combined occupancy for the Properties in Operation of 91.3%.
Consistent with its strategy, the Company has been an active seller of suburban office properties and it has acquired or commenced development of industrial and metro-office properties. The foregoing activity is anticipated to result in a decline in net cash provided by operating activities until the acquisition properties are stabilized and the development properties are completed and leased. Although the Company anticipates that its investment focus for the remainder of 2012 will be more on acquisitions than dispositions, the Company anticipates that, in the aggregate, for 2012 the net cash provided by operating activities, less customary capital expenditures and leasing transaction costs, will be less than dividend distributions. The Company will continue to evaluate these circumstances in light of its dividend distribution policy.
WHOLLY OWNED CAPITAL ACTIVITY
Acquisitions
During the three months ended March 31, 2012, the Company did not acquire any properties. For 2012, the Company anticipates that wholly owned property acquisitions will range from $100 million to $300 million and believes that certain of its acquired properties will be either vacant or underleased.

Dispositions

23


Disposition activity allows the Company to, among other things, (1) reduce its holdings in certain markets and product types within a market consistent with the Company's strategy; (2) lower the average age of the portfolio; (3) optimize the cash proceeds from the sale of certain assets; and (4) obtain funds for investment activities. During the three months ended March 31, 2012, the Company realized proceeds of $6.5 million from the sale of two operating properties representing 105,000 square feet. For 2012, the Company anticipates that wholly owned property dispositions will range from $250 million to $350 million.
Development
During the three months ended March 31, 2012, the Company did not bring any development projects into service but initiated one Wholly Owned Property under Development with a projected Total Investment of $7.8 million. As of March 31, 2012, the Company had 11 Wholly Owned Properties under Development with a projected Total Investment of $294.3 million. For 2012, the Company anticipates that wholly owned development deliveries will total between $30 million and $70 million and that during 2012 it will commence development on properties with an expected aggregate Total Investment in a range from $200 million to $300 million.
“Total Investment” for a property is defined as the property’s purchase price plus closing costs (in the case of acquisitions if vacant) and management’s estimate, as determined at the time of acquisition, of the cost of necessary building improvements in the case of acquisitions, or land costs and land and building improvement costs in the case of development projects, and, where appropriate, other development costs and carrying costs.
UNCONSOLIDATED JOINT VENTURE CAPITAL ACTIVITY
The Company periodically enters into unconsolidated joint venture relationships in connection with the execution of its real estate operating strategy.
Acquisitions
During the three months March 31, 2012, none of the unconsolidated joint ventures in which the Company held an interest acquired any properties. The Company does not anticipate that any unconsolidated joint ventures in which the Company holds an interest will acquire any properties in 2012.
Dispositions
During the three months ended March 31, 2012, none of the unconsolidated joint ventures in which the Company held an interest sold any properties. The Company does not anticipate that any unconsolidated joint ventures in which the Company holds an interest will dispose of any properties in 2012.
Development
During the three months ended March 31, 2012, none of the unconsolidated joint ventures in which the Company held an interest brought any properties into service or began any development activities. As of March 31, 2012, the Company has no unconsolidated joint venture properties under development. The Company does not anticipate that any unconsolidated joint ventures in which the Company holds an interest will bring any development properties into service or begin any development activities in 2012.



24


PROPERTIES IN OPERATION
The composition of the Company’s Properties in Operation as of March 31, 2012 and 2011 was as follows (square feet in thousands):
 
 
Net Rent
Per Square Foot(1)
 
Straight Line Rent and Operating Expense Reimbursement Per Square Foot(2)
 
Total Square Feet
 
Percent Occupied
 
March 31,
 
March 31,
 
March 31,
 
March 31,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Wholly Owned Properties in Operation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrial-Distribution
$
4.43

 
$
4.51

 
$
5.80

 
$
5.81

 
34,883

 
32,308

 
94.2
%
 
91.2
%
Industrial-Flex
$
9.05

 
$
9.00

 
$
13.20

 
$
12.88

 
9,975

 
11,125

 
87.7
%
 
87.1
%
Office
$
14.51

 
$
14.28

 
$
22.29

 
$
21.94

 
20,241

 
21,779

 
87.8
%
 
89.2
%
 
$
8.13

 
$
8.49

 
$
11.83

 
$
12.33

 
65,099