1
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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number: 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)
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 X NO
On October 23, 1997, 42,588,615 Common Shares of Beneficial Interest, par value
$.001 per share, of Liberty Property Trust were outstanding.
1
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LIBERTY PROPERTY TRUST/LIBERTY PROPERTY LIMITED PARTNERSHIP
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997
INDEX
- -----
Part I. Financial Information
- ------------------------------
Item 1. Financial Statements (unaudited) Page
----
Consolidated balance sheet of Liberty Property
Trust at September 30, 1997 and December 31, 1996. 4
Consolidated statement of operations of Liberty
Property Trust for the three months ended September
30, 1997 and September 30, 1996. 5
Consolidated statement of operations of Liberty
Property Trust for the nine months ended September 30,
1997 and September 30, 1996. 6
Consolidated statement of cash flows of Liberty
Property Trust for the nine months ended September 30,
1997 and September 30, 1996. 7
Notes to consolidated financial statements for
Liberty Property Trust. 8-9
Consolidated balance sheet of Liberty Property
Limited Partnership at September 30, 1997 and
December 31, 1996. 10
Consolidated statement of operations of Liberty
Property Limited Partnership for the three months
ended September 30, 1997 and September 30, 1996. 11
Consolidated statement of operations of Liberty
Property Limited Partnership for the nine months
ended September 30, 1997 and September 30, 1996. 12
Consolidated statement of cash flows of Liberty
Property Limited Partnership for the nine months
ended September 30, 1997 and September 30, 1996. 13
Notes to consolidated financial statements for
Liberty Property Limited Partnership. 14-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15-20
Part II. Other Information 20-21
- --------------------------
Signatures 22
2
3
- --------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report on Form 10-Q contain statements that are or will be forward-looking, such
as statements relating to acquisitions and other business development
activities, future capital expenditures, financing sources and availability, and
the effects of regulation (including environmental regulation) and competition.
Such forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by, or on behalf of, the Company. These risks and uncertainties include,
but are not limited to, uncertainties affecting real estate businesses generally
(such as entry into new leases, renewals of leases and dependence on tenants'
business operations), risks relating to acquisition, construction and
development activities, possible environmental liabilities, risks relating to
leverage and debt service (including availability of financing terms acceptable
to the Company and sensitivity of the Company's operations to fluctuations in
interest rates), the potential for the use of borrowings to make distributions
necessary to qualify as a REIT, dependence on the primary markets in which the
Company's properties are located, the existence of complex regulations relating
to status as a REIT and the adverse consequences of the failure to qualify as a
REIT and the potential adverse impact of market interest rates on the market
price for the Company's securities.
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CONSOLIDATED BALANCE SHEET OF LIBERTY PROPERTY TRUST
(IN THOUSANDS)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
ASSETS
Real estate:
Land and land improvements $ 209,510 $ 140,196
Buildings and improvements 1,355,614 908,835
Less accumulated depreciation (139,847) (119,151)
---------- ----------
Operating real estate 1,425,277 929,880
Development in progress 143,433 85,628
Land held for development 56,839 44,054
---------- ----------
Net real estate 1,625,549 l,059,562
Cash and cash equivalents 24,097 19,612
Accounts receivable 14,212 8,707
Deferred financing and leasing costs, net of
accumulated amortization (1997, $38,411;
1996, $30,985) 29,439 27,013
Prepaid expenses and other assets 41,902 37,718
---------- ----------
Total assets $1,735,199 $1,152,612
========== ==========
LIABILITIES
Mortgage loans $ 391,055 $ 240,803
Unsecured notes 200,000 -
Lines of credit 146,000 266,692
Subordinated debentures 114,820 171,214
Accounts payable 12,588 6,294
Accrued interest 4,394 7,411
Dividend payable 21,271 14,248
Other liabilities 48,380 28,923
---------- ----------
Total liabilities 938,508 735,585
Minority interest 66,430 41,495
SHAREHOLDERS' EQUITY
Series A preferred shares ($.001 par value); 5,000
shares authorized; 5,000 shares issued and
outstanding as of September 30, 1997 125,000 -
Common shares of beneficial interest, $.001 par value,
200,000 shares authorized, 42,522 and 31,400
shares issued and outstanding as of September 30,
1997 and December 31, 1996, respectively 43 31
Additional paid-in capital 606,309 370,813
Unearned compensation (1,091) (1,408)
Retained earnings - 6,096
---------- ----------
Total shareholders' equity 730,261 375,532
---------- ----------
Total liabilities and shareholders' equity $1,735,199 $1,152,612
========== ==========
See accompanying notes.
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CONSOLIDATED STATEMENT OF OPERATIONS OF LIBERTY PROPERTY TRUST
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE THREE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
REVENUE
Rental $ 45,241 $28,921
Operating expense reimbursement 15,331 9,336
Management fees 205 324
Interest and other 1,654 958
-------- --------
Total revenue 62,431 39,539
-------- --------
OPERATING EXPENSES
Rental property expenses 11,934 7,523
Real estate taxes 4,815 3,004
General and administrative 2,820 2,094
Depreciation and amortization 11,499 7,261
-------- --------
Total operating expenses 31,068 19,882
-------- --------
Operating income 31,363 19,657
Premium on debenture conversion 98 637
Write off of deferred financing costs 353 -
Interest expense 13,341 9,707
-------- --------
Income before minority interest 17,571 9,313
Minority interest 1,590 943
-------- --------
Net income $ 15,981 $ 8,370
======== ========
Preferred dividend 1,497 -
-------- --------
Income available to common shareholders $ 14,484 $ 8,370
======== ========
Net income per common share - primary $ 0.35 $ 0.28
======== ========
Dividends declared per common share $ 0.42 $ 0.41
======== ========
Weighted average number of common shares outstanding 41,661 29,994
======== ========
See accompanying notes.
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CONSOLIDATED STATEMENT OF OPERATIONS OF LIBERTY PROPERTY TRUST
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
REVENUE
Rental $ 119,223 $ 82,019
Operating expense reimbursement 38,121 26,463
Management fees 516 1,190
Interest and other 2,244 3,080
--------- --------
Total revenue 160,104 112,752
--------- --------
OPERATING EXPENSES
Rental property expenses 29,849 22,158
Real estate taxes 12,297 8,176
General and administrative 7,602 5,681
Depreciation and amortization 28,787 20,435
--------- --------
Total operating expenses 78,535 56,450
--------- --------
Operating income 81,569 56,302
Premium on debenture conversion 98 1,027
Write off of deferred financing costs 2,919 -
Interest expense 37,252 28,274
--------- --------
Income before minority interest 41,300 27,001
Minority interest 3,815 2,833
--------- --------
Net income $ 37,485 $ 24,168
========= ========
Preferred dividend 1,497 -
--------- --------
Income available to common shareholders $ 35,988 $ 24,168
========= ========
Net income per common share - primary $ 0.93 $ 0.83
========= ========
Dividends declared per common share $ 1.24 $ 1.21
========= ========
Weighted average number of common shares outstanding 38,551 29,176
========= ========
See accompanying notes.
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CONSOLIDATED STATEMENT OF CASH FLOWS OF LIBERTY PROPERTY TRUST
(UNAUDITED AND IN THOUSANDS)
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
OPERATING ACTIVITIES
Net income $ 37,485 $ 24,168
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 28,787 20,435
Amortization of deferred financing costs 6,353 3,428
Minority interest in net income 3,815 2,833
Loss (gain) on sale 543 (577)
Noncash compensation 317 477
Changes in operating assets and liabilities:
Accounts receivable (5,505) (509)
Prepaid expense and other assets (4,455) (11,469)
Accounts payable 6,294 995
Accrued interest on existing debt (3,017) (5,432)
Other liabilities 20,143 6,947
----------- ---------
Net cash provided by operating activities 90,760 41,296
----------- ---------
INVESTING ACTIVITIES
Investment in properties (372,900) (55,529)
Investment in development in progress (144,295) (73,862)
Investment in land held for development (12,785) (8,799)
Increase in deferred leasing costs (6,096) (4,100)
----------- ---------
Net cash used in investing activities (536,076) (142,290)
----------- ---------
FINANCING ACTIVITIES
Net proceeds from sale of common stock 187,592 -
Proceeds from issuance of preferred shares 125,000 -
Proceeds from issuance of unsecured notes 200,000 -
Proceeds from mortgage loans 124,815 39,650
Repayments of mortgage loans (7,855) (8,544)
Proceeds from lines of credit 600,017 143,374
Repayments on lines of credit (720,709) (38,650)
Increase in deposits on pending acquisitions (146) 2,252
Increase in deferred financing costs (7,807) (1,169)
Dividends (46,705) (34,567)
Distributions to partners (4,401) (4,008)
----------- ---------
Net cash provided by financing activities 449,801 98,338
Increase (decrease) in cash and cash equivalents 4,485 (2,656)
Cash and cash equivalents at beginning of period 19,612 10,629
----------- ---------
Cash and cash equivalents at end of period $ 24,097 $ 7,973
=========== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Write-off of fully depreciated property and
deferred costs $ 6,232 $ 638
Acquisition of properties (89,494) -
Disposition of properties 27,410 -
Assumption of mortgage loans 33,292 -
Issuance of operating partnership units 28,792 -
Noncash compensation 686 353
Conversion of subordinated debentures 56,394 46,275
=========== =========
See accompanying notes.
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LIBERTY PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
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 generally accepted accounting principles 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 generally accepted accounting principles 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,
1996. 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 restated to conform to
current period presentation.
In February, 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement 128 on the calculation
of primary and fully diluted earnings per share for the quarter and the nine
months ended September 30, 1997 and 1996 is not expected to be material.
Note 2 - Organization
- ---------------------
The Trust, a self-administered and self-managed real estate investment trust (a
"REIT"), was formed in the State of Maryland on March 28, 1994 and commenced
operations on June 23, 1994 upon completion of its initial public offering (the
"Share Offering"). The Trust conducts all of its operations through the
Operating Partnership. At September 30, 1997, the Trust owned an 90.68% interest
in the Operating Partnership as its sole general partner and a .02% interest as
a limited partner. Concurrent with the Share Offering, the Operating Partnership
completed a public offering of Exchangeable Subordinated Debentures (the
"Debentures") due 2001. The Debentures are guaranteed by the Trust. The
Debentures are exchangeable, at the option of the holder thereof, at
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any time prior to maturity, into Common Shares at a rate of one share for each
$20 outstanding principal amount of Debentures, subject to certain adjustments.
The Company completed a follow-on offering (the "Follow-on Offering") on March
24, 1997 of 7,500,000 Common Shares. On April 1, 1997, the overallotment option
was exercised, resulting in the issuance of an additional 750,000 Common Shares.
On August 11, 1997, the Company completed a public offering of 5,000,000 shares
of Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the
"Preferred Offering"). The Series A Preferred Shares are payable at the rate of
8.8% per annum of the $25 liquidation preference. The preferred shares are
redeemable at the option of the Company at any time on or after July 30, 2002 at
$25 per share.
On August 14, 1997, the Operating Partnership completed a $200 million offering
of unsecured notes, (the "Senior Note Offering"). The unsecured notes are
comprised of $100 million principal amount of 7.10% Senior Notes due August 15,
2004 and $100 million principal amount of 7.25% Senior Notes due August 15,
2007.
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CONSOLIDATED BALANCE SHEET OF LIBERTY PROPERTY LIMITED PARTNERSHIP
(IN THOUSANDS)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
ASSETS
Real estate:
Land and land improvements $ 209,510 $ 140,196
Buildings and improvements 1,355,614 908,835
Less accumulated depreciation (139,847) (119,151)
---------- ----------
Operating real estate 1,425,277 929,880
Development in progress 143,433 85,628
Land held for development 56,839 44,054
---------- ----------
Net real estate 1,625,549 l,059,562
Cash and cash equivalents 24,097 19,612
Accounts receivable 14,212 8,707
Deferred financing and leasing costs, net of
accumulated amortization (1997, $38,411;
1996, $30,985) 29,439 27,013
Prepaid expenses and other assets 41,902 37,718
---------- ----------
Total assets $1,735,199 $1,152,612
========== ==========
LIABILITIES
Mortgage loans $ 391,055 $ 240,803
Unsecured notes 200,000 -
Lines of credit 146,000 266,692
Subordinated debentures 114,820 171,214
Accounts payable 12,588 6,294
Accrued interest 4,394 7,411
Dividend payable 21,271 14,248
Other liabilities 48,380 28,923
---------- ----------
Total liabilities 938,508 735,585
OWNERS' EQUITY
General partner's equity 730,261 375,532
Limited partners' equity 66,430 41,495
---------- ----------
Total owners' equity 796,691 417,027
---------- ----------
Total liabilities and owners' equity $1,735,199 $1,152,612
========== ==========
See accompanying notes.
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CONSOLIDATED STATEMENT OF OPERATIONS OF LIBERTY PROPERTY LIMITED PARTNERSHIP
(UNAUDITED AND IN THOUSANDS)
THREE THREE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
REVENUE
Rental $ 45,241 $ 28,921
Operating expense reimbursement 15,331 9,336
Management fees 205 324
Interest and other 1,654 958
-------- --------
Total revenue 62,431 39,539
-------- --------
OPERATING EXPENSES
Rental property expenses 11,934 7,523
Real estate taxes 4,815 3,004
General and administrative 2,820 2,094
Depreciation and amortization 11,499 7,261
-------- --------
Total operating expenses 31,068 19,882
-------- --------
Operating income 31,363 19,657
Premium on debenture conversion 98 637
Write off of deferred financing costs 353 -
Interest expense 13,341 9,707
-------- --------
Net income $ 17,571 $ 9,313
======== ========
Net income allocated to general partner $ 15,981 $ 8,370
Net income allocated to limited partners 1,590 943
======== ========
See accompanying notes.
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CONSOLIDATED STATEMENT OF OPERATIONS OF LIBERTY PROPERTY LIMITED PARTNERSHIP
(UNAUDITED AND IN THOUSANDS)
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
REVENUE
Rental $ 119,223 $ 82,019
Operating expense reimbursement 38,121 26,463
Management fees 516 1,190
Interest and other 2,244 3,080
-------- --------
Total revenue 160,104 112,752
-------- --------
OPERATING EXPENSES
Rental property expenses 29,849 22,158
Real estate taxes 12,297 8,176
General and administrative 7,602 5,681
Depreciation and amortization 28,787 20,435
-------- --------
Total operating expenses 78,535 56,450
-------- --------
Operating income 81,569 56,302
Premium on debenture conversion 98 1,027
Write off of deferred financing costs 2,919 -
Interest expense 37,252 28,274
-------- --------
Net income $ 41,300 $ 27,001
======== ========
Net income allocated to general partner $ 37,485 $ 24,168
Net income allocated to limited partners 3,815 2,833
======== ========
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CONSOLIDATED STATEMENT OF CASH FLOWS OF LIBERTY PROPERTY LIMITED PARTNERSHIP
(UNAUDITED AND IN THOUSANDS)
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
OPERATING ACTIVITIES
Net income $ 41,300 $ 27,001
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 28,787 20,435
Amortization of deferred financing costs 6,353 3,428
Loss (gain) on sale 543 (577)
Noncash compensation 317 477
Changes in operating assets and liabilities:
Accounts receivable (5,505) (509)
Prepaid expense and other assets (4,455) (11,469)
Accounts payable 6,294 995
Accrued interest on existing debt (3,017) (5,432)
Other liabilities 20,143 6,947
--------- ---------
Net cash provided by operating activities 90,760 41,296
--------- ---------
INVESTING ACTIVITIES
Investment in properties (372,900) (55,529)
Investment in development in progress (144,295) (73,862)
Investment in land held for development (12,785) (8,799)
Increase in deferred leasing costs (6,096) (4,100)
--------- ---------
Net cash used in investing activities (536,076) (142,290)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of unsecured notes 200,000 -
Proceeds from mortgage loans 124,815 39,650
Repayments of mortgage loans (7,855) (8,544)
Proceeds from lines of credit 600,017 143,374
Repayments on lines of credit (720,709) (38,650)
Increase in deposits on pending acquisitions (146) 2,252
Increase in deferred financing costs (7,807) (1,169)
Capital contributions 312,592 -
Distributions to partners (51,106) (38,575)
--------- ---------
Net cash provided by financing activities 449,801 98,338
Increase (decrease) in cash and cash equivalents 4,485 (2,656)
Cash and cash equivalents at beginning of period 19,612 10,629
--------- ---------
Cash and cash equivalents at end of period $ 24,097 $ 7,973
========== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Write-off of fully depreciated property and
deferred costs $ 6,232 $ 638
Acquisition of properties (89,494) -
Disposition of properties 27,410 -
Assumption of mortgage loans 33,292 -
Issuance of operating partnership units 28,792 -
Noncash compensation 686 353
Conversion of subordinated debentures 56,394 46,275
========= =========
See accompanying notes.
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LIBERTY PROPERTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
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 generally accepted accounting
principles 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 generally accepted accounting
principles 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, 1996. 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 restated to conform to current period presentation.
NOTE 2 - ORGANIZATION
- ---------------------
Liberty Property Trust (the "Trust", and together with the Operating Partnership
referred to as the "Company"), a self-administered and self-managed real estate
investment trust (a "REIT"), was formed in the State of Maryland on March 28,
1994 and commenced operations on June 23, 1994 upon completion of its initial
public offering (the "Share Offering"). The Trust conducts all of its operations
through the Operating Partnership. At September 30, 1997, the Trust owned an a
90.68% interest in the Operating Partnership as its sole general partner and a
.02% interest as a limited partner. Concurrent with the Share Offering, the
Operating Partnership completed a public offering of Exchangeable Subordinated
Debentures (the "Debentures") due 2001. The Debentures are guaranteed by the
Trust. The Debentures are exchangeable, at the option of the holder thereof, at
any time prior to maturity, into Common Shares at a rate of one share for each
$20 outstanding principal amount of Debentures, subject to certain adjustments.
The Company completed a follow-on offering (the "Follow-on Offering") on March
24, 1997 of 7,500,000 Common Shares. On April 1, 1997, the overallotment option
was exercised, resulting in the issuance of an additional 750,000 Common Shares.
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On August 11, 1997, the Company completed a public offering of 5,000,000 shares
of Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the
"Preferred Offering"). The Series A Preferred Shares are payable at the rate of
8.8% per annum of the $25 liquidation preference. The preferred shares are
redeemable at the option of the Company at any time on or after July 30, 2002 at
$25 per share.
On August 14, 1997, the Operating Partnership completed a $200 million offering
of unsecured notes, (the "Senior Note Offering"). The unsecured notes are
comprised of $100 million principal amount of 7.10% Senior Notes due August 15,
2004 and $100 million principal amount of 7.25% Senior Notes due August 15,
2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
The following discussion compares the activities of the Company for the three
and nine months ended September 30, 1997 (unaudited) with the activities of the
Company for the three and nine months ended September 30, 1996 (unaudited). As
used herein, the term "Company" includes the Trust, the Operating Partnership
and their subsidiaries.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes included elsewhere in this report.
RESULTS OF OPERATIONS
- ---------------------
For the three and nine months ended September 30, 1997 compared to the three and
nine months ended September 30, 1996.
- -----------------------------------------------------------------------
Rental revenues increased from $28.9 million to $45.2 million, or by 56% for the
three months ended September 30, 1996 to 1997 and increased from $82.0 million
to $119.2 million, or by 45% for the nine months ended September 30, 1996 to
1997. These increases are primarily due to the increase in the number of
properties in operation ("Operating Properties") during the respective periods.
As of September 30, 1996, the Company had 242 Operating Properties and as of
September 30, 1997, the Company had 380 Operating Properties. From January 1,
1996 through June 30, 1996 and from July 1, 1996 through September 30, 1996, the
Company acquired or completed the development on 22 properties and 12
properties, respectively, for a Total Investment of approximately $80.1 million
and $36.7 million, respectively. From January 1, 1997 through June 30, 1997 and
July 1, 1997 through September 30, 1997, the Company acquired or completed the
development on 72 properties and 56 properties, respectively, for a Total
Investment of approximately $418.4 million and $137.5 million, respectively. The
"Total Investment" for a property is defined as the property's purchase price
plus closing costs and management's estimate, as determined at the time of
acquisition, of the cost of necessary building improvements in the case of
acquisitions, or land costs and land and building improvement costs in the case
of
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development projects, and where appropriate, other development costs and
carrying costs required to reach rent commencement.
Operating expense reimbursement increased from $9.3 million to $15.3 million for
the three months ended September 30, 1996 to 1997 and from $26.5 million to
$38.1 million for the nine months ended September 30, 1996 to 1997. These
increases are a result of the reimbursement from tenants for increases in rental
property expenses and real estate taxes. The operating expense recovery
percentage (the ratio of operating expense reimbursement to rental property
expenses and real estate taxes) increased from 88.7% for the three months ended
September 30, 1996 to 91.5% for the three months ended September 30, 1997 and
from 87.2% for the nine months ended September 30, 1996 to 90.4% for the nine
months ended September 30, 1997, due to the increase in occupancy.
Rental property and real estate tax expenses increased from $10.5 million to
$16.7 million for the three months ended September 30, 1996 to 1997 and from
$30.3 million to $42.1 million for the nine months ended September 30, 1996 to
1997. These increases are due to the increase in the number of properties owned
during the respective periods, partly offset by a reduction in snow removal and
other seasonal operating costs during the mild 1997 winter compared to the
severe 1996 winter.
Property level operating income for the "Same Store" properties (properties
owned as of January 1, 1996) increased from $70.7 million to $74.2 million for
the nine months ended September 30, 1996 to 1997, an increase of 5.1%. This
increase is due principally to increases in the rental rates for the properties
and increases in occupancy.
Set forth below is a schedule comparing the property level operating income for
the Same Store properties for the nine month periods ended September 30, 1997
and 1996.
NINE MONTHS ENDED
---------------------------------------
(IN THOUSANDS)
---------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
Rental revenue $77,018 $73,771
Operating expense reimbursement 22,448 22,693
------- -------
99,466 96,464
Rental property expenses 18,196 18,749
Real estate taxes 7,039 7,054
------- -------
Property level operating income $74,231 $70,661
======= =======
General and administrative expenses increased from $2.1 million for the three
months ended September 30, 1996 to $2.8 million for the three months ended
September 30, 1997, and from $5.7 million for the nine
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months ended September 30, 1996 to $7.6 million for the nine months ended
September 30, 1997, due to the increase in personnel and other related overhead
costs necessitated by the increase in the number of properties owned during the
respective periods.
Depreciation and amortization expense increased from $7.3 million for the three
months ended September 30, 1996 to $11.5 million for the three months ended
September 30, 1997 and from $20.4 million for the nine months ended September
30, 1996 to $28.8 million for the nine months ended September 30, 1997. This
increase is due to an increase in the number of properties owned during the
respective periods.
Interest expense increased from $9.7 million for the three months ended
September 30, 1996 to $13.3 million for the three months ended September 30,
1997 and from $28.3 million for the nine months ended September 30, 1996 to
$37.3 million for the nine months ended September 30, 1997. This increase is due
to an increase in the average debt outstanding for the third quarter of 1996
compared to the third quarter of 1997, which equalled $549.3 million and $841.4
million, respectively, and for the nine months ended September 30, 1996 to
September 30, 1997, which equalled $518.7 million and $765.3 million,
respectively, partially offset by reduced interest rates. Further, for the three
and nine months ended September 30, 1997, approximately $353,000 and $2.9
million, respectively, in deferred financing costs were written off as a result
of the termination of the secured Lines of Credit.
As a result of the foregoing, the Company's operating income increased from
$19.7 million for the three months ended September 30, 1996 to $31.4 million for
the three months ended September 30, 1997 and increased from $56.3 million for
the nine months ended September 30, 1996 to $81.6 million for the nine months
ended September 30, 1997. In addition, income before minority interest for the
three months increased from $9.3 million for the three months ended September
30, 1996 to $17.6 million for the three months ended September 30, 1997 and from
$27.0 million for the nine months ended September 30, 1996 to $41.3 million for
the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash and cash equivalents of $24.1
million.
Net cash flow provided by operating activities increased from $41.3 million for
the nine months ended September 30, 1996, to $90.8 million for the nine months
ended September 30, 1997. This $49.5 million increase was primarily due to the
cash provided by the additional Operating Properties in service during the
latter period.
Net cash used in investing activities increased from $142.3 million for the nine
months ended September 30, 1996, to $536.1 million for the nine months ended
September 30, 1997. This increase primarily resulted from increased acquisition
activity in the first nine months of 1997, including the acquisition of a
portfolio of 16 properties in the Minneapolis, Minnesota marketplace, a
portfolio of 14 properties in the
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South Carolina marketplace, and two portfolios of 13 and 28 properties,
respectively, in the Detroit, Michigan marketplace. This increase is also due to
an increased level of investment in development and land.
Net cash provided by financing activities increased from $98.3 million for the
nine months ended September 30, 1996, to $449.8 million for the nine months
ended September 30, 1997. This increase was primarily attributable to the
Follow-On Offering and the exercise of the overallotment option which was
completed on March 24, 1997 and April 1, 1997, respectively, which resulted in
the issuance of 8,250,000 Common Shares, the Preferred Offering which was
completed on August 11, 1997 which resulted in the issuance of 5,000,000
preferred shares, and the Senior Notes Offering which was completed on August
14, 1997 which resulted in the issuance of $200 million of unsecured notes. The
net proceeds of these offerings were approximately $191.7 million, $120.8
million and $198.0 million respectively.
The Company believes that its undistributed cash flow from operations is
adequate to fund its short-term liquidity requirements.
The Company has funded its long-term liquidity requirements such as property
acquisition and development activities primarily through secured line of credit
facilities (the "Lines of Credit"). During the second quarter of 1997, the
Company replaced these secured facilities with a $325.0 million unsecured line
of credit (the "Line of Credit").
The interest rate on borrowings under the Line of Credit fluctuates based upon
the Company's leverage levels or ratings from Moody's Investors Service
("Moody's") and Standard & Poor's ("S&P"). On June 23, 1997, Moody's raised its
prospective senior debt rating of the Company to Baa3 from Ba2 and on July 22,
1997, S&P assigned a BBB- prospective senior debt rating to the Company. At
these ratings, the interest rate for borrowings under the Line of Credit is 110
basis points over LIBOR.
Periodically, the Company pays down borrowings on the Line of Credit with funds
from long term capital sources. In the third quarter of 1997, the Company used
approximately $268.0 million of the proceeds from the Preferred Offering and
Senior Notes Offering to paydown the Line of Credit. The Company has entered
into a treasury rate lock agreement, with a notional amount of $100 million, to
hedge against possible fluctuations in interest rates in anticipation of a debt
issuance in the fourth quarter of 1997 for a 10 to 15 year term.
As of September 30, 1997, $391.1 million in mortgage loans were outstanding with
maturities ranging from 1998 to 2013. The interest rates on $352.2 million of
mortgage loans are fixed and range from 6% to 9%. Interest rates on $38.8
million of mortgage loans float with LIBOR or prime, of which $19.3 million is
subject to certain caps. The weighted average interest rate for the mortgage
loans is 7.7%, and the weighted average life is 7.8 years.
General
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The Company expects to incur variable rate debt, including borrowings under the
Credit Facility, from time to time. The Company believes that its existing
sources of capital will provide sufficient funds to finance its continued
acquisition and development activities. In this regard, the Company continues to
evaluate its long term capital sources which generally include the availability
of debt financing and access to equity.
In July 1995, the Company filed a shelf registration with the Securities and
Exchange Commission that enabled the Company to offer up to an aggregate of
$350.0 million of securities, including common stock, preferred stock and debt
(the "Initial Shelf Registration"). On November 27, 1995, the Company completed
a follow-on public offering of 7,200,000 common shares resulting in proceeds of
$140.4 million.
On October 15, 1996, the Company filed a Registration Statement of 1,000,000
shares to be issued through a Dividend Reinvestment and Share Purchase Plan.
On February 21, 1997, the Company filed a shelf registration with the Securities
and Exchange Commission that enables the Company to offer up to an aggregate of
$850.0 million of securities, including common stock, preferred stock and debt
(the "Second Shelf Registration"). On March 24, 1997, the Company completed the
Follow-on Offering which resulted in the issuance of an additional 7,500,000
Common Shares, and on April 1, 1997, the overallotment option was exercised,
resulting in the issuance of an additional 750,000 Common Shares. The issuance
of these Common Shares resulted in net proceeds of $191.7 million. Collectively,
the Initial Shelf Registration and the Second Shelf Registration are referred to
as the "Shelf Registration".
On August 11, 1997, the Company completed the Preferred Offering which resulted
in the issuance of 5,000,000 Shares of Series A Cumulative Redeemable Preferred
Shares. The issuance of these Preferred Shares resulted in net proceeds of
$120.8 million. The aggregate net proceeds of the Preferred Offering were
contributed upon receipt to the Operating Partnership in exchange for preferred
partnership interests in the Operating Partnership, the economic terms of which
are substantially identical to the Preferred Shares.
On August 14, 1997, the Company completed the Senior Note Offering which
resulted in the issuance of $200.0 million of unsecured notes. The issuance of
these Senior Notes resulted in the net proceeds of $198.0 million.
Presently, the Shelf Registration provides Liberty Property Trust and Liberty
Property Limited Partnership with the ability to offer up to $354.4 million of
securities and $200.0 million of securities, respectively.
Calculation of Funds from Operations
Management considers Funds from Operations an appropriate measure of the
performance of an equity REIT. Funds from Operations is defined by NAREIT as net
income or loss (computed in accordance with generally accepted accounting
principles), excluding gains or losses from debt restructuring and sales of
property plus real estate related depreciation and amortization excluding the
amortization and excluding
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significant non-recurring events that materially distort the comparative
measurement of the Company's performance over time. Funds from Operations should
not be considered as an alternative to net income or as an alternative to cash
flow as a measure of liquidity. Funds from Operations for the three and nine
months ended September 30, 1997 and 1996 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
(IN THOUSANDS) (IN THOUSANDS)
------------------- -------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1997 1996
-------- -------- -------- --------
Income available to common shareholders $ 14,484 $ 8,370 $ 35,988 $ 24,168
Add Back:
Minority interest 1,590 943 3,815 2,833
Depreciation and amortization 11,374 7,170 28,442 20,197
(Gain) loss on sale (600) (200) 543 (577)
Premium on debenture conversion 98 637 98 1,027
Write off of deferred financing costs 353 - 2,919 -
======== ======== ======== ========
Funds from operations $ 27,299 $ 16,920 $ 71,805 $ 47,648
======== ======== ======== ========
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 Line of Credit bears interest at a variable rate; therefore, the amount of
interest payable under the Line of Credit 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.
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
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Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3.1.1 Second Restated and Amended Agreement of Limited Partnership
of Liberty Property Limited Partnership, dated as of October
22, 1997.
10.1 Indenture, dated as of August 14, 1997, between Liberty
Property Limited Partnership, as Obligor, and The First
National Bank of Chicago, as Trustee (the "First Indenture").
10.2 First Supplemental Indenture, dated as of August 14, 1997,
between Liberty Property Limited Partnership, as Issuer, and
The First National Bank of Chicago, as Trustee, supplementing
the First Indenture and relating to $100,000,000 principal
amount of the 7.10% Senior Notes due 2004 and $100,000,000
principal amount of the 7.25% Senior Notes due 2007 of
Liberty Property Limited Partnership.
10.3 Senior Indenture, dated as of October 24, 1997, between
Liberty Property Limited Partnership, as Obligor, and The
First National Bank of Chicago, as Trustee (the "Second
Indenture").
10.4 First Supplemental Indenture, dated as of October 24, 1997,
between Liberty Property Limited Partnership, as Issuer, and
The First National Bank of Chicago, as Trustee, supplementing
the Second Indenture and relating to the Fixed Rate and
Floating Rate Medium-Term Notes due Nine Months or More
from Date of Issue of Liberty Property Limited Partnership.
10.5 Distribution Agreement, dated October 24, 1997, between
Liberty Property Trust and Liberty Property Limited
Partnership, as Transaction Entities, and Lehman Brothers
Inc. Donaldson, Lufkin & Jenrette Securities Corporation,
First Chicago Capital Markets, Inc., J.P. Morgan Securities
Inc. and UBS Securities LLC, as Agents.
10.6 Form of Subordinated Indenture between Liberty Property
Limited Partnership, as Obligor, and The First National Bank
of Chicago, as Trustee.
27 Financial Data Schedule (EDGAR VERSION ONLY)
b. Reports on Form 8-K
During the quarterly period ended September 30, 1997, the registrants filed four
Current Reports on Form 8-K: (i) report dated July 7, 1997, reporting Items 2
and 7 and containing the Statement of Operating Revenues and Certain Operating
Expenses for the Detroit Properties (as defined therein); (ii) report dated
August 5, 1997, reporting Item 5; (iii) report dated August 11, 1997, reporting
Item 5; and (iv) report dated August 15, 1997, reporting Item 5.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIBERTY PROPERTY TRUST
/s/ JOSEPH P. DENNY October 28, 1997
- --------------------------------- --------------------------
Joseph P. Denny Date
President
/s/ GEORGE J. ALBURGER, JR. October 28, 1997
- --------------------------------- --------------------------
George J. Alburger, Jr. Date
Chief Financial Officer
LIBERTY PROPERTY LIMITED PARTNERSHIP
By: LIBERTY PROPERTY TRUST, GENERAL PARTNER
/s/ JOSEPH P. DENNY October 28, 1997
- ---------------------------------- -------------------------
Joseph P. Denny Date
President
/s/ GEORGE J. ALBURGER, JR. October 28, 1997
- ---------------------------------- -------------------------
George J. Alburger, Jr. Date
Chief Financial Officer
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