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 June 30, 1999
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 (I.R.S. Employer
incorporation or organization) 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 August 5, 1999, 66,686,706 Common Shares of Beneficial Interest, par
value $.001 per share, of Liberty Property Trust were outstanding.
LIBERTY PROPERTY TRUST/LIBERTY PROPERTY LIMITED PARTNERSHIP
FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999
INDEX
- -----
Part I. Financial Information
- -------------------------------
Item 1. Financial Statements (unaudited) Page
----
Consolidated balance sheets of Liberty Property
Trust at June 30, 1999 and December 31, 1998. 4
Consolidated statements of operations of Liberty
Property Trust for the three months ended June
30, 1999 and June 30, 1998. 5
Consolidated statements of operations of Liberty
Property Trust for the six months ended June
30, 1999 and June 30, 1998. 6
Consolidated statements of cash flows of Liberty
Property Trust for the six months ended June
30, 1999 and June 30, 1998. 7
Notes to consolidated financial statements for
Liberty Property Trust. 8
Consolidated balance sheets of Liberty Property
Limited Partnership at June 30, 1999 and
December 31, 1998. 12
Consolidated statements of operations of Liberty
Property Limited Partnership for the three months
ended June 30, 1999 and June 30, 1998. 13
Consolidated statements of operations of Liberty
Property Limited Partnership for the six months
ended June 30, 1999 and June 30, 1998. 14
Consolidated statements of cash flows of Liberty
Property Limited Partnership for the six months
ended June 30, 1999 and June 30, 1998. 15
Notes to consolidated financial statements for
Liberty Property Limited Partnership. 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 19
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 27
Part II. Other Information
- ---------------------------
Signatures 30
Exhibit Index 31
- -2-
- -----------------------------
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,
dispositions and other business development and development activities,
future capital expenditures, the costs and risks associated with the Year
2000 issue, 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, Liberty Property
Trust and Liberty Property Limited Partnership (together, 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, the potential
adverse impact of market interest rates on the market price for the
Company's securities and risks relating to the Year 2000 issue.
- -3-
CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY TRUST
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(UNAUDITED)
ASSETS
Real estate:
Land and land improvements $ 394,392 $ 366,853
Buildings and improvements 2,494,110 2,378,272
Less accumulated depreciation (238,883) (209,023)
---------- ----------
Operating real estate 2,649,619 2,536,102
Development in progress 183,716 207,563
Land held for development 87,479 75,454
---------- ----------
Net real estate 2,920,814 2,819,119
Cash and cash equivalents 33,555 14,391
Accounts receivable 5,780 15,391
Deferred financing and leasing costs,
net of accumulated amortization
(1999, $54,979; 1998, $49,390) 45,298 39,475
Prepaid expenses and other assets 36,958 44,995
---------- ----------
Total assets $3,042,405 $2,933,371
========== ==========
LIABILITIES
Mortgage loans $ 386,150 $ 413,224
Unsecured notes 1,030,000 645,000
Credit facility - 264,000
Convertible debentures 96,729 101,619
Accounts payable 24,125 20,216
Accrued interest 22,728 18,263
Dividend payable 33,907 33,734
Other liabilities 61,964 69,025
---------- ----------
Total liabilities 1,655,603 1,565,081
Minority interest 95,967 101,254
SHAREHOLDERS' EQUITY
8.80% Series A cumulative redeemable preferred
shares, $.001 par value, 5,000,000 shares
authorized, issued and outstanding as of
June 30, 1999 and December 31, 1998 120,814 120,814
Common shares of beneficial interest, $.001
par value, 200,000,000 shares authorized,
66,340,165 and 65,645,340 shares issued
and outstanding as of June 30, 1999
and December 31, 1998, respectively 66 66
Additional paid-in capital 1,182,433 1,168,663
Unearned compensation (1,026) (562)
Dividends in excess of net income (11,452) (21,945)
---------- -----------
Total shareholders' equity 1,290,835 1,267,036
---------- -----------
Total liabilities and shareholders' equity $3,042,405 $2,933,371
========== ===========
See accompanying notes.
- -4-
CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY TRUST
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE THREE
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
-------------- --------------
REVENUE
Rental $ 84,250 $ 68,018
Operating expense reimbursement 29,510 23,124
Management fees 150 150
Gain (loss) on sale 11,942 (1,048)
Interest and other 1,290 1,164
--------- ---------
Total revenue 127,142 91,408
--------- ---------
OPERATING EXPENSES
Rental property expenses 20,641 16,723
Real estate taxes 10,048 7,518
General and administrative 3,931 3,697
Depreciation and amortization 20,437 16,520
--------- ---------
Total operating expenses 55,057 44,458
--------- ---------
Operating income 72,085 46,950
Interest expense 25,822 18,853
--------- ---------
Income before minority interest 46,263 28,097
Minority interest 3,011 2,061
--------- ---------
Net income 43,252 26,036
Preferred distributions 2,750 2,750
--------- ---------
Income available to common shareholders $ 40,502 $ 23,286
========= =========
Income per common share - basic $ 0.61 $ 0.39
========= =========
Income per common share - diluted $ 0.60 $ 0.39
========= =========
Distributions declared per common share $ 0.45 $ 0.42
========= =========
Weighted average number of common shares
outstanding - basic 66,308 59,715
========= =========
Weighted average number of common shares
outstanding - diluted 71,412 60,049
========= =========
See accompanying notes.
- -5-
CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY TRUST
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
-------------- --------------
REVENUE
Rental $165,718 $129,033
Operating expense reimbursement 59,033 43,374
Management fees 300 297
Gain (loss) on sale 13,211 (1,048)
Interest and other 2,369 2,371
--------- ---------
Total revenue 240,631 174,027
--------- ---------
OPERATING EXPENSES
Rental property expenses 41,834 31,639
Real estate taxes 19,825 14,537
General and administrative 7,916 7,047
Depreciation and amortization 40,580 30,739
--------- ---------
Total operating expenses 110,155 83,962
--------- ---------
Operating income 130,476 90,065
Interest expense 49,575 35,419
--------- ---------
Income before minority interest 80,901 54,646
Minority interest 5,221 3,870
--------- ---------
Net income 75,680 50,776
Preferred distributions 5,500 5,500
--------- ---------
Income available to common shareholders $ 70,180 $ 45,276
========= =========
Income per common share - basic $ 1.06 $ 0.79
========= =========
Income per common share - diluted $ 1.05 $ 0.78
========= =========
Distributions declared per common share $ 0.90 $ 0.84
========= =========
Weighted average number of common shares
outstanding - basic 66,163 57,509
========= =========
Weighted average number of common shares
outstanding - diluted 71,314 57,870
========= =========
See accompanying notes.
- -6-
CONSOLIDATED STATEMENTS OF CASH FLOWS OF LIBERTY PROPERTY TRUST
(UNAUDITED AND IN THOUSANDS)
SIX SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
-------------- --------------
OPERATING ACTIVITIES
Net income $ 75,680 $ 50,776
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 40,580 30,739
Amortization of deferred financing costs 3,126 2,193
Minority interest in net income 5,221 3,870
(Gain) loss on sale (13,211) 1,048
Noncash compensation 1,495 996
Changes in operating assets and liabilities:
Accounts receivable 9,611 (1,016)
Prepaid expenses and other assets 7,356 (1,682)
Accounts payable 3,909 6,656
Accrued interest 4,465 5,700
Other liabilities (7,061) 9,278
---------- ---------
Net cash provided by operating activities 131,171 108,558
---------- ---------
INVESTING ACTIVITIES
Investment in properties (41,114) (369,316)
Proceeds from disposition of properties 62,976 12,753
Investment in development in progress (119,035) (141,995)
Investment in land held for development (23,725) (21,642)
Increase in deferred leasing costs (7,464) (6,023)
---------- ---------
Net cash used in investing activities (128,362) (526,223)
---------- ---------
FINANCING ACTIVITIES
Net proceeds from issuance of common shares 1,054 197,616
Proceeds from issuance of unsecured notes 385,000 275,000
Repayments of mortgage loans (30,892) (11,505)
Proceeds from credit facility 83,024 421,000
Repayments on credit facility (347,024) (423,000)
Increase in deferred financing costs (5,264) (530)
Distributions paid on common shares (59,373) (46,008)
Distributions paid on preferred shares (5,500) (5,500)
Distributions paid on units (4,670) (4,145)
---------- ---------
Net cash provided by financing activities 16,355 402,928
Increase (decrease) in cash and cash equivalents 19,164 (14,737)
Cash and cash equivalents at beginning of period 14,391 55,079
---------- ---------
Cash and cash equivalents at end of period $ 33,555 $ 40,342
========== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Write-off of fully depreciated property and
deferred costs $ 7,666 $ 2,768
Acquisition of properties (3,818) (82,064)
Assumption of mortgage loans 3,818 63,918
Issuance of operating partnership units - 18,146
Conversion of convertible debentures 4,779 3,831
========== =========
See accompanying notes.
- -7-
LIBERTY PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
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, 1998. 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.
The following table sets forth the computation of basic and diluted
income per common share for the three and six month periods ended June
30, 1999 and 1998:
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, 1999 ENDED JUNE 30, 1998
------------------------------------- -------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income $ 43,252 $ 26,036
Less: Preferred
distributions 2,750 2,750
-------- --------
Basic income per
common share
Income available
to common share-
holders 40,502 66,308 $ 0.61 23,286 59,715 $ 0.39
======= =======
Effect of dilutive
securities
Options - 265 - 334
Debentures 2,421 4,839 - -
-------- ------- -------- -------
Diluted income per
common share
Income available
to common share-
holders and assumed
conversions $ 42,923 71,412 $ 0.60 $ 23,286 60,049 $ 0.39
======== ======= ======= ======== ======= =======
- -8-
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 1999 ENDED JUNE 30, 1998
------------------------------------- -------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income $ 75,680 $ 50,776
Less: Preferred
distributions 5,500 5,500
-------- --------
Basic income per
common share
Income available
to common share-
holders 70,180 66,163 $ 1.06 45,276 57,509 $ 0.79
======= =======
Effect of dilutive
securities
Options - 229 - 361
Debentures 4,859 4,922 - -
-------- ------- -------- -------
Diluted income per
common share
Income available
to common share-
holders and assumed
conversions $ 75,039 71,314 $ 1.05 $ 45,276 57,870 $ 0.78
======== ======= ======= ======== ======= =======
Diluted income per common share includes the weighted average common
shares, the dilutive effect of the outstanding options, and the dilutive
effect of the conversion of the Exchangeable Subordinated Debentures due
2001 of the Operating Partnership (the "Convertible Debentures") into
common shares.
NOTE 2 - 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, the "Company"). The Trust is the sole general
partner and also a limited partner of the Operating Partnership, with a
combined equity interest in the Operating Partnership of 93.1% at June
30, 1999. The Company provides leasing, property management,
development, acquisition, construction management and design management
for a portfolio of industrial and office properties which are located
principally within the Southeastern, Mid-Atlantic and Midwestern United
States.
In 1998, the Company received $296.3 million in aggregate net proceeds
from the issuance of Common Shares and $292.1 million in aggregate net
proceeds from the issuance of unsecured notes. The Company used the
aggregate net proceeds from the sale of Common Shares and the unsecured
notes to fund the Company's activities, including paying down the Credit
Facility, which funds acquisition and development activity.
On January 15, 1999, the Company closed on a $135 million, two-year
unsecured term loan. The interest rate for the loan is 135 basis points
over LIBOR.
On April 20, 1999, the Company sold $250 million principal amount of
7.75% notes due 2009. The aggregate net proceeds from such issuance was
approximately $246.0 million.
- -9-
On July 28, 1999, the Company completed a private placement of 3.8
million Series B Cumulative Redeemable Preferred Units of the Operating
Partnership. The Series B Preferred Units are payable at the rate of
9.25% per annum of the $25 liquidation preference, and are redeemable at
the option of the Company at any time on or after July 28, 2004 at $25
per share.
NOTE 3 - SEGMENT INFORMATION
- ----------------------------
Liberty Property Trust operates its portfolio of properties throughout
the Southeastern, Mid-Atlantic and Midwestern United States. The
Company reviews performance of the portfolio on a geographical basis, as
such, the following regions are considered the Company's reportable
segments: Southeastern Pennsylvania; New Jersey; Lehigh Valley,
Pennsylvania; Virginia; the Carolinas; Jacksonville, Florida; Detroit,
Michigan; and all others, which includes Maryland; Tampa, Florida; South
Florida; Minneapolis, Minnesota; and the United Kingdom. The Company's
reportable segments are distinct business units which are each managed
separately in order to concentrate market knowledge within a
geographical area. Within these reportable segments, the Company
derives its revenues from its two product types: industrial properties
and office properties.
The Company evaluates performance of the reportable segments based on
property-level net operating income, which is calculated as rental
revenue and operating expense reimbursement less rental property
expenses and real estate taxes. The accounting policies of the
reportable segments are the same as those for the Company on a
consolidated basis. The operating information by segment is as follows
(in thousands):
FOR THE THREE MONTHS ENDED JUNE 30, 1999
- ------------------------------------------------------------------------------------------------------------------------
SE New Lehigh The
Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total
-------- -------- -------- -------- --------- ------------ -------- ---------- --------
Real-estate
related revenues $29,036 $10,671 $10,883 $ 9,991 $ 9,346 $ 9,941 $12,501 $21,391 $113,760
Rental property
expenses and
real estate taxes 7,853 3,131 2,248 1,925 2,677 2,202 4,321 6,332 30,689
-------- -------- -------- -------- -------- -------- -------- -------- --------
Property-level net
operating income 21,183 7,540 8,635 8,066 6,669 7,739 8,180 15,059 83,071
Other income/
expenses, net 36,808
--------
Income before
minority interest 46,263
Minority interest 3,011
Preferred distributions 2,750
--------
Income available
to common shareholders $ 40,502
========
- -10-
FOR THE THREE MONTHS ENDED JUNE 30, 1998
- ------------------------------------------------------------------------------------------------------------------------
SE New Lehigh The
Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total
-------- -------- -------- -------- --------- ------------ -------- ---------- --------
Real-estate
related revenues $23,059 $ 9,811 $ 9,407 $ 8,705 $ 8,212 $ 9,023 $ 8,943 $13,982 $91,142
Rental property
expenses and
real estate taxes 6,230 2,466 1,802 2,042 2,339 2,053 3,136 4,173 24,241
-------- -------- -------- -------- -------- -------- -------- -------- --------
Property-level net
operating income 16,829 7,345 7,605 6,663 5,873 6,970 5,807 9,809 66,901
Other income/
expenses, net 38,804
--------
Income before
minority interest 28,097
Minority interest 2,061
Preferred distributions 2,750
--------
Income available
to common shareholders $23,286
========
FOR THE SIX MONTHS ENDED JUNE 30, 1999
- ------------------------------------------------------------------------------------------------------
SE New Lehigh The
Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total
-------- -------- -------- -------- --------- ------------ -------- ---------- --------
Real-estate
related revenues $55,844 $22,326 $21,622 $19,969 $18,856 $19,822 $24,187 $42,125 $224,751
Rental property
expenses and
real estate taxes 15,703 6,603 4,625 4,189 5,401 4,498 8,058 12,582 61,659
-------- -------- -------- -------- -------- -------- -------- -------- --------
Property-level net
operating income 40,141 15,723 16,997 15,780 13,455 15,324 16,129 29,543 163,092
Other income/
expenses, net 82,191
--------
Income before
minority interest 80,901
Minority interest 5,221
Preferred distributions 5,500
--------
Income available
to common shareholders $ 70,180
========
FOR THE SIX MONTHS ENDED JUNE 30, 1998
- ------------------------------------------------------------------------------------------------------
SE New Lehigh The
Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total
-------- -------- -------- -------- --------- ------------ -------- ---------- --------
Real-estate
related revenues $45,779 $17,407 $18,258 $16,672 $14,541 $16,950 $16,875 $25,925 $172,407
Rental property
expenses and
real estate taxes 12,851 4,650 3,545 3,737 4,039 3,797 5,887 7,670 46,176
-------- -------- -------- -------- -------- -------- -------- -------- --------
Property-level net
operating income 32,928 12,757 14,713 12,935 10,502 13,153 10,988 18,255 126,231
Other income/
expenses, net 71,585
--------
Income before
minority interest 54,646
Minority interest 3,870
Preferred distributions 5,500
--------
Income available
to common shareholders $ 45,276
========
- -11-
CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY LIMITED PARTNERSHIP
(IN THOUSANDS)
JUNE 30, 1999 DECEMBER 31, 1998
---------------- -----------------
(UNAUDITED)
ASSETS
Real estate:
Land and land improvements $ 394,392 $ 366,853
Buildings and improvements 2,494,110 2,378,272
Less accumulated depreciation (238,883) (209,023)
---------- ----------
Operating real estate 2,649,619 2,536,102
Development in progress 183,716 207,563
Land held for development 87,479 75,454
---------- ----------
Net real estate 2,920,814 2,819,119
Cash and cash equivalents 33,555 14,391
Accounts receivable 5,780 15,391
Deferred financing and leasing costs,
net of accumulated amortization
(1999, $54,979; 1998, $49,390) 45,298 39,475
Prepaid expenses and other assets 36,958 44,995
---------- ----------
Total assets $3,042,405 $2,933,371
========== ==========
LIABILITIES
Mortgage loans $ 386,150 $ 413,224
Unsecured notes 1,030,000 645,000
Credit facility - 264,000
Convertible debentures 96,729 101,619
Accounts payable 24,125 20,216
Accrued interest 22,728 18,263
Dividend payable 33,907 33,734
Other liabilities 61,964 69,025
---------- ----------
Total liabilities 1,655,603 1,565,081
OWNERS' EQUITY
General partner's equity-preferred units 120,814 120,814
-common units 1,170,021 1,146,222
Limited partners' equity 95,967 101,254
---------- ----------
Total owners' equity 1,386,802 1,368,290
---------- ----------
Total liabilities and owners' equity $3,042,405 $2,933,371
========== ==========
See accompanying notes.
- -12-
CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY LIMITED PARTNERSHIP
(UNAUDITED AND IN THOUSANDS)
THREE THREE
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
--------------- --------------
REVENUE
Rental $ 84,250 $ 68,018
Operating expense reimbursement 29,510 23,124
Management fees 150 150
Gain (loss) on sale 11,942 (1,048)
Interest and other 1,290 1,164
----------- ---------
Total revenue 127,142 91,408
----------- ---------
OPERATING EXPENSES
Rental property expenses 20,641 16,723
Real estate taxes 10,048 7,518
General and administrative 3,931 3,697
Depreciation and amortization 20,437 16,520
----------- ---------
Total operating expenses 55,057 44,458
----------- ---------
Operating income 72,085 46,950
Interest expense 25,822 18,853
----------- ---------
Net income 46,263 28,097
Net income allocated to general partner - preferred units 2,750 2,750
----------- ---------
Net income available to partners - common interest $ 43,513 $ 25,347
=========== =========
Net income allocated to general partner - common units $ 40,502 $ 23,286
=========== =========
Net income allocated to limited partners $ 3,011 $ 2,061
=========== =========
See accompanying notes.
- -13-
CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY LIMITED PARTNERSHIP
(UNAUDITED AND IN THOUSANDS)
SIX SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
--------------- -------------
REVENUE
Rental $165,718 $129,033
Operating expense reimbursement 59,033 43,374
Management fees 300 297
Gain (loss) on sale 13,211 (1,048)
Interest and other 2,369 2,371
----------- ---------
Total revenue 240,631 174,027
----------- ---------
OPERATING EXPENSES
Rental property expenses 41,834 31,639
Real estate taxes 19,825 14,537
General and administrative 7,916 7,047
Depreciation and amortization 40,580 30,739
----------- ---------
Total operating expenses 110,155 83,962
----------- ---------
Operating income 130,476 90,065
Interest expense 49,575 35,419
----------- ---------
Net income 80,901 54,646
Net income allocated to general partner - preferred units 5,500 5,500
----------- ---------
Net income available to partners - common interest $ 75,401 $ 49,146
=========== =========
Net income allocated to general partner - common units $ 70,180 $ 45,276
=========== =========
Net income allocated to limited partners $ 5,221 $ 3,870
=========== =========
See accompanying notes.
- -14-
CONSOLIDATED STATEMENTS OF CASH FLOWS OF LIBERTY PROPERTY LIMITED PARTNERSHIP
(UNAUDITED AND IN THOUSANDS)
SIX SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
-------------- --------------
OPERATING ACTIVITIES
Net income $ 80,901 $ 54,646
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 40,580 30,739
Amortization of deferred financing costs 3,126 2,193
Gain (loss) on sale (13,211) 1,048
Noncash compensation 1,495 996
Changes in operating assets and liabilities:
Accounts receivable 9,611 (1,016)
Prepaid expenses and other assets 7,356 (1,682)
Accounts payable 3,909 6,656
Accrued interest 4,465 5,700
Other liabilities (7,061) 9,278
---------- ---------
Net cash provided by operating activities 131,171 108,558
---------- ---------
INVESTING ACTIVITIES
Investment in properties (41,114) (369,316)
Proceeds from disposition of properties 62,976 12,753
Investment in development in progress (119,035) (141,995)
Investment in land held for development (23,725) (21,642)
Increase in deferred leasing costs (7,464) (6,023)
---------- ---------
Net cash used in investing activities (128,362) (526,223)
---------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of unsecured notes 385,000 275,000
Repayments of mortgage loans (30,892) (11,505)
Proceeds from credit facility 83,024 421,000
Repayments on credit facility (347,024) (423,000)
Increase in deferred financing costs (5,264) (530)
Capital contributions 1,054 197,616
Distributions to partners (69,543) (55,653)
---------- ---------
Net cash provided by financing activities 16,355 402,928
Increase (decrease) in cash and cash equivalents 19,164 (14,737)
Cash and cash equivalents at beginning of period 14,391 55,079
---------- ---------
Cash and cash equivalents at end of period $ 33,555 $ 40,342
========== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Write-off of fully depreciated property and
deferred costs $ 7,666 $ 2,768
Acquisition of properties (3,818) (82,064)
Assumption of mortgage loans 3,818 63,918
Issuance of operating partnership units - 18,146
Conversion of convertible debentures 4,779 3,831
========== =========
See accompanying notes.
- -15-
LIBERTY PROPERTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
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, 1998. 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 presentations.
NOTE 2 - 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 its consolidated subsidiaries, the
"Company"). The Trust is the sole general partner and also a limited
partner of the Operating Partnership, with a combined equity interest in
the Operating Partnership of 93.1% at June 30, 1999. The Company
provides leasing, property management, acquisition, development,
construction management and design management for a portfolio of
industrial and office properties which are located principally within the
Southeastern, Mid-Atlantic and Midwestern United States.
In 1998, the Company received $296.3 million in aggregate net proceeds
from the issuance of Common Shares and $292.1 million in aggregate net
proceeds from the issuance of unsecured notes. The Company used the
aggregate net proceeds from the sale of Common Shares and the unsecured
notes to fund the Company's activities, including paying down the Credit
Facility, which funds acquisition and development activity.
On January 15, 1999, the Company closed on a $135 million, two-year
unsecured term loan. The interest rate for the loan is 135 basis points
over LIBOR.
On April 20, 1999, the Company sold $250 million principal amount of
7.75% notes due 2009. The aggregate net proceeds from such issuance was
approximately $246.0 million.
- -16-
On July 28, 1999, the Company completed a private placement of 3.8
million Series B Cumulative Redeemable Preferred Units of the Operating
Partnership. The Series B Preferred Units are payable at the rate of
9.25% per annum of the $25 liquidation preference, and are redeemable at
the option of the Company at any time on or after July 28, 2004 at $25
per share.
NOTE 3 - SEGMENT INFORMATION
- ----------------------------
Liberty Property Limited Partnership operates its portfolio of
properties throughout the Southeastern, Mid-Atlantic and Midwestern
United States. The Company reviews performance of the portfolio on a
geographical basis, as such, the following regions are considered the
Company's reportable segments: Southeastern Pennsylvania; New Jersey;
Lehigh Valley, Pennsylvania; Virginia; the Carolinas; Jacksonville,
Florida; Detroit, Michigan; and all others which includes Maryland;
Tampa, Florida; South Florida; Minneapolis, Minnesota; and the United
Kingdom. The Company's reportable segments are distinct business units
which are each managed separately in order to concentrate market
knowledge within a geographical area. Within these reportable segments,
the Company derives its revenues from its two product types: industrial
and office properties.
The Company evaluates performance of the reportable segments based on
property-level net operating income, which is calculated as rental
revenue and operating expense reimbursement less rental property
expenses and real estate taxes. The accounting policies of the
reportable segments are the same as those for the Company on a
consolidated basis. The operating information by segment is as follows
(in thousands):
FOR THE THREE MONTHS ENDED JUNE 30, 1999
- -----------------------------------------------------------------------------------------------------
SE New Lehigh The
Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total
-------- -------- -------- -------- --------- ------------ -------- ---------- --------
Real-estate
related revenues $29,036 $10,671 $10,883 $ 9,991 $ 9,346 $ 9,941 $12,501 $21,391 $113,760
Rental property
expenses and
real estate taxes 7,853 3,131 2,248 1,925 2,677 2,202 4,321 6,332 30,689
-------- -------- -------- -------- -------- -------- -------- -------- --------
Property-level net
operating income 21,183 7,540 8,635 8,066 6,669 7,739 8,180 15,059 83,071
Other income/
expenses, net 36,808
--------
Net income 46,263
Net income allocated to general partner - preferred units 2,750
--------
Net income allocated to partners - common interest $ 43,513
========
Net income allocated to general partner - common units $ 40,502
========
Net income allocated to limited partners $ 3,011
========
- -17-
FOR THE THREE MONTHS ENDED JUNE 30, 1998
- ------------------------------------------------------------------------------------------------------
SE New Lehigh The
Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total
-------- -------- -------- -------- --------- ------------ -------- ---------- -------
Real-estate
related revenues $23,059 $ 9,811 $ 9,407 $ 8,705 $ 8,212 $ 9,023 $ 8,943 $13,982 $91,142
Rental property
expenses and
real estate taxes 6,230 2,466 1,802 2,042 2,339 2,053 3,136 4,173 24,241
-------- -------- -------- -------- -------- -------- -------- -------- --------
Property-level net
operating income 16,829 7,345 7,605 6,663 5,873 6,970 5,807 9,809 66,901
Other income/
expenses, net 38,804
--------
Net income 28,097
Net income allocated to general partner - preferred units 2,750
--------
Net income allocated to partners - common interest $25,347
========
Net income allocated to general partner - common units $23,286
========
Net income allocated to limited partners $ 2,061
========
FOR THE SIX MONTHS ENDED JUNE 30, 1999
- -----------------------------------------------------------------------------------------------------
SE New Lehigh The
Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total
-------- -------- -------- -------- --------- ------------ -------- ---------- --------
Real-estate
related revenues $55,844 $22,326 $21,622 $19,969 $18,856 $19,822 $24,187 $42,125 $224,751
Rental property
expenses and
real estate taxes 15,703 6,603 4,625 4,189 5,401 4,498 8,058 12,582 61,659
-------- -------- -------- -------- -------- -------- -------- -------- --------
Property-level net
operating income 40,141 15,723 16,997 15,780 13,455 15,324 16,129 29,543 163,092
Other income/
expenses, net 82,191
--------
Net income 80,901
Net income allocated to general partner - preferred units 5,500
--------
Net income allocated to partners - common interest $ 75,401
========
Net income allocated to general partner - common units $ 70,180
========
Net income allocated to limited partners $ 5,221
========
FOR THE SIX MONTHS ENDED JUNE 30, 1998
- -----------------------------------------------------------------------------------------------------
SE New Lehigh The
Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total
-------- -------- -------- -------- --------- ------------ -------- ---------- --------
Real-estate
related revenues $45,779 $17,407 $18,258 $16,672 $14,541 $16,950 $16,875 $25,925 $172,407
Rental property
expenses and
real estate taxes 12,851 4,650 3,545 3,737 4,039 3,797 5,887 7,670 46,176
-------- -------- -------- -------- -------- -------- -------- -------- --------
Property-level net
operating income 32,928 12,757 14,713 12,935 10,502 13,153 10,988 18,255 126,231
Other income/
expenses, net 71,585
--------
Net income 54,646
Net income allocated to general partner - preferred units 5,500
--------
Net income allocated to partners - common interest $ 49,146
========
Net income allocated to general partner - common units $ 45,276
========
Net income allocated to limited partners $ 3,870
========
- -18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------
OVERVIEW
The following discussion and analysis is based on a consolidated view of
the Company. Geographic segment data for the three and six month periods
ended June 30, 1999 and 1998 is included in Note 3 of the Notes to the
Liberty Property Trust and Liberty Property Limited Partnership Financial
Statements, respectively.
In 1999, the Company has continued to pursue development and acquisition
opportunities and has continued to focus on increasing the cash flow from
its Properties in Operation by increasing property occupancy and
increasing rental rates.
The composition of the Company's properties in operation as of June 30,
1999 and 1998 is as follows (in thousands):
TOTAL PERCENT OF TOTAL
SQUARE FEET SQUARE FEET PERCENT OCCUPIED
----------------- ---------------- -----------------
JUNE 30, JUNE 30, JUNE 30,
TYPE 1999 1998 1999 1998 1999 1998
- ------------------------- ------- ------- ------- ------- ------- -------
Industrial - Distribution 19,228 17,556 42.2% 44.5% 94.8% 95.2%
Industrial - Flex 13,032 10,934 28.6% 27.7% 94.6% 93.5%
Office 13,267 10,990 29.2% 27.8% 93.5% 96.3%
------- ------ ------- ------- ------- -------
Total 45,527 39,480 100.0% 100.0% 94.4% 95.0%
====== ====== ====== ====== ====== ======
The expiring square feet and annual base rent by year for the properties
in operation as of June 30, 1999 are as follows (in thousands):
INDUSTRIAL-
DISTRIBUTION INDUSTRIAL-FLEX OFFICE TOTAL
------------------ ------------------ ------------------ ------------------
SQUARE ANNUAL SQUARE ANNUAL SQUARE ANNUAL SQUARE ANNUAL
YEAR FEET BASE RENT FEET BASE RENT FEET BASE RENT FEET BASE RENT
- ---------- ------ --------- ------ --------- ------ --------- ------ ---------
1999 1,575 $ 7,278 1,448 $ 10,528 1,207 $ 12,826 4,230 $ 30,632
2000 1,725 7,893 2,442 18,188 1,908 23,367 6,075 49,448
2001 2,925 13,118 2,086 14,680 1,552 19,835 6,563 47,633
2002 3,398 14,406 1,633 12,779 1,251 15,130 6,282 42,315
2003 1,687 7,861 1,930 17,910 1,240 16,698 4,857 42,469
2004 1,347 6,542 878 8,328 888 12,860 3,113 27,730
Thereafter 5,569 27,982 1,915 20,798 4,363 64,838 11,847 113,618
------ ------- ------ --------- ------ --------- ------ --------
Total 18,226 $85,080 12,332 $103,211 12,409 $165,554 42,967 $353,845
====== ======= ====== ========= ====== ========= ====== ========
- -19-
The scheduled deliveries of the 2.8 million square feet of properties
under development as of June 30, 1999 are as follows (in thousands):
SQUARE FEET
-----------------------------
SCHEDULED IND- IND- PERCENT PRE-LEASED
IN-SERVICE DATE DIST. FLEX OFFICE TOTAL JUNE 30, 1999 TOTAL INVESTMENT
- ---------------- ------ ------ ------- ------ ------------------ ----------------
3rd Quarter 1999 250 157 187 594 91.3% $ 38,833
4th Quarter 1999 171 - 517 688 78.7% 90,068
1st Quarter 2000 - - 297 297 100.0% 39,775
2nd Quarter 2000 - 99 154 253 21.4% 28,449
Thereafter 522 85 339 946 13.4% 64,780
------ ------ ------- ------ ------ ----------
Total 943 341 1,494 2,778 56.2% $261,905
====== ====== ======= ====== ====== ==========
RESULTS OF OPERATIONS
- ---------------------
The following discussion is based on the consolidated financial
statements of the Company. It compares the results of operations of the
Company for the three and six months ended June 30, 1999 (unaudited) with
the results of operations of the Company for the three and six months
ended June 30, 1998 (unaudited). As a result of the significant level of
acquisition, disposition and development activities by the Company in
1999 and 1998, the overall operating results of the Company during such
periods are not directly comparable. However, certain data, including
the "Same Store" comparison, do lend themselves to direct comparison. 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.
For the three and six months ended June 30, 1999 compared to the three
and six months ended June 30, 1998.
- -----------------------------------------------------------------------
Total revenue (principally rental revenue and operating expense
reimbursement) increased to $127.1 million from $91.4 million for the
three months ended June 30, 1999 compared to 1998, and increased to
$240.6 million from $174.0 million for the six months ended June 30, 1999
compared to 1998. These increases are primarily due to the increase in
the number of properties in operation during the respective periods. As
of June 30, 1998, the Company had 540 properties in operation and, as of
June 30, 1999, the Company had 627 properties in operation. From January
1, 1998 through March 31, 1998, and from April 1, 1998 through June 30,
1998, the Company acquired or completed the development on 55 properties
and 48 properties, respectively, for Total Investments (as defined below)
of approximately $301.6 million and $224.8 million, respectively. From
January 1, 1999 through March 31, 1999, and from April 1, 1999 through
June 30, 1999, the Company acquired or completed the development on 19
properties and 15 properties, respectively, for Total Investments of
approximately $71.2 million and $120.0 million, respectively. Offsetting
the increases in the number of properties acquired and developed and the
related Total Investments during the periods were property dispositions.
From January 1, 1998 through March 31, 1998, the Company did not sell any
properties. From April 1, 1998 through June 30, 1998, the Company sold 5
properties for net proceeds of approximately $11.7 million. From January
1, 1999 through March 31, 1999, and from April 1, 1999 through June 30,
- -20-
1999, the Company sold 2 and 14 properties, respectively, for net
proceeds of approximately $8.7 million and $51.3 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 development projects, and where
appropriate, other development costs and carrying costs required to reach
rent commencement.
Rental property and real estate tax expenses increased to $30.7 million
from $24.2 million for the three months ended June 30, 1999 compared to
1998, and to $61.7 million from $46.2 million for the six months ended
June 30, 1999 compared to 1998. These increases are due to the increase
in the number of properties owned during the respective periods.
Property-level operating income for the "Same Store" properties
(properties owned as of January 1, 1998) increased to $110.5 million for
the six months ended June 30, 1999 from $106.9 million for the six months
ended June 30, 1998, with straightlining (which recognizes rental revenue
evenly over the life of the lease), and increased to $109.0 million for
the six months ended June 30, 1999 from $104.8 million for the six months
ended June 30, 1998, without straightlining. These increases of 3.3% and
3.9%, respectively, are due to increases in the rental rates for the
properties.
Set forth below is a schedule comparing the property-level operating
income for the Same Store properties for the six month periods ended June
30, 1999 and 1998 (in thousands).
WITH STRAIGHTLINING WITHOUT STRAIGHTLINING
----------------------------- -----------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- --------------
Rental Revenue $112,797 $109,361 $111,238 $107,258
Operating expense reimbursement 40,749 36,699 40,749 36,699
-------- -------- -------- --------
153,546 146,060 151,987 143,957
Rental property expenses 29,755 27,156 29,755 27,156
Real estate taxes 13,274 11,957 13,274 11,957
-------- -------- -------- --------
Property level operating income $110,517 $106,947 $108,958 $104,844
======== ======== ======== ========
General and administrative expenses increased to $3.9 million for the
three months ended June 30, 1999 from $3.7 million for the three months
ended June 30, 1998, and to $7.9 million for the six months ended June
30, 1999 from $7.0 million for the six months ended June 30, 1998, 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. These increases are somewhat mitigated by the benefit of
certain economies of scale experienced by the Company in owning and
operating the increased number of properties.
Depreciation and amortization expense increased to $20.4 million for the
three months ended June 30, 1999 from $16.5 million for the three months
ended June 30, 1998, and to $40.6 million for the six months ended June
30, 1999 from $30.7 million for the six months ended June 30, 1998.
- -21-
These increases are due to an increase in the number of properties owned
during the respective periods.
Interest expense increased to $25.8 million for the three months ended
June 30, 1999 from $18.9 million for the three months ended June 30,
1998, and to $49.6 million for the six months ended June 30, 1999 from
$35.4 million for the six months ended June 30, 1998. These increases
are due to an increase in the average debt outstanding for the respective
periods which was $1,497.2 million for the second quarter of 1999
compared to $1,220.3 million for the second quarter of 1998, and $1,472.7
million for the first six months of 1999 compared to $1,133.6 million for
the first six months of 1998. These increases are offset by decreases in
the weighted average interest rates for the periods, to 7.2% for the
second quarter June 30, 1999 from 7.3% for the second quarter June 30,
1998, and to 7.2% for the first six months of 1999 from 7.3% for the
first six months of 1998.
As a result of the foregoing, the Company's operating income increased to
$72.1 million for the three months ended June 30, 1999 from $47.0 million
for the three months ended June 30, 1998, and to $130.5 million for the
six months ended June 30, 1999 from $90.1 million for the six months
ended June 30, 1998. In addition, income before minority interest
increased to $46.3 million for the three months ended June 30, 1999 from
$28.1 million for the three months ended June 30, 1998, and to $80.9
million for six months ended June 30, 1999 from $54.6 million for the six
months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash and cash equivalents of $33.6
million.
Net cash flow provided by operating activities increased to $131.2
million for the six months ended June 30, 1999 from $108.6 million for
the six months ended June 30, 1998. This $22.6 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 decreased to $128.4 million for the
six months ended June 30, 1999 from $526.2 million for the six months
ended June 30, 1998. This decrease primarily resulted from
decreased acquisition activity in 1999, and an increase in property
dispositions.
Net cash provided by financing activities decreased to $16.4 million for
the six months ended June 30, 1999 from $402.9 million for the six months
ended June 30, 1998. This decrease is due to a decrease in the Company's
financing requirements consistent with its decrease in investing
activities.
The Company believes that its undistributed cash flow from operations is
adequate to fund its short-term liquidity requirements.
The Company funds its acquisitions and completed development with long-
term capital sources. These activities may be funded on a temporary
basis through its $325.0 million unsecured line of credit (the "Credit
Facility"), which matures May 2000.
The interest rate on borrowings under the Credit Facility fluctuates
based upon the Company's leverage levels or ratings from Moody's Investor
Services, Inc. ("Moody's") and Standard & Poor's Rating's Group
- -22-
("Standard & Poor's"). Moody's and Standard & Poor's have assigned senior
debt ratings to the Company of Baa3 and BBB-, respectively. At these
ratings, the interest rate for borrowings under the Credit Facility is
110 basis points over LIBOR.
As of June 30, 1999, $386.2 million in mortgage loans, $895.0 million in
unsecured notes and $135.0 million in an unsecured term loan were
outstanding. The interest rates on $376.8 million of mortgage loans and
unsecured notes are fixed and range from 5.0% to 9.1%. Interest rates on
$9.4 million of mortgage loans and the unsecured term loan float with
LIBOR or a municipal bond index, $2.8 million of which is subject to a
cap. The weighted average remaining term for the mortgage loans,
unsecured notes and the unsecured term loan is 7.8 years. The scheduled
maturities of principal amortization of the Company's mortgage loans,
unsecured notes and the unsecured term loan outstanding and the related
weighted average interest rates are as follows (in thousands):
MORTGAGES UNSECURED WEIGHTED
-------------------------- NOTES AND AVERAGE
AMORTIZATION MATURITIES TERM LOAN TOTAL INTEREST RATE
------------ ---------- ---------- ---------- --------------
1999 $ 4,751 $ 3,818 $ - $ 8,569 6.9%
2000 9,053 26,377 - 35,430 8.4%
2001 8,724 20,122 135,000 163,846 6.5%
2002 7,584 - 100,000 107,584 6.7%
2003 7,521 26,606 50,000 84,127 7.3%
2004 7,553 15,910 100,000 123,463 7.0%
2005 6,728 99,018 - 105,746 7.6%
2006 5,414 30,078 100,000 135,492 7.2%
2007 4,992 - 100,000 104,992 7.3%
2008 4,714 28,835 - 33,549 7.2%
2009 2,419 42,096 270,000 314,515 7.8%
2010 1,426 - - 1,426 7.7%
2011 1,168 3,303 - 4,471 7.7%
2012 266 17,674 - 17,940 7.7%
2013 - - 75,000 (1) 75,000 6.4%
2018 - - 100,000 100,000 7.5%
--------- --------- ---------- ---------- -------
$ 72,313 $313,837 $1,030,000 $1,416,150 7.2%
========= ========= ========== ========== =======
(1) Callable 2003.
General
The Company believes that its existing sources of capital will provide
sufficient funds to finance its continued development and acquisition
activities. The Company's need for capital has been somewhat reduced by
a decline in acquisition activity throughout the year, resulting from a
general marketplace decline in initial returns on acquisitions. The
Company's existing sources of capital include the public debt and equity
markets, proceeds from property dispositions and net cash provided from
its operating activities. Additionally, the Company expects to incur
variable rate debt, including borrowings under the Credit Facility, from
time to time.
In 1998, the Company received $296.3 million in aggregate net proceeds
from the issuance of Common Shares and $292.1 million in aggregate net
proceeds from the issuance of unsecured notes. The Company used the
aggregate net proceeds from the sale of Common Shares and the unsecured
notes to fund the Company's activities, including paying down the Credit
Facility, which funds acquisition and development activity.
- -23-
On January 15, 1999, the Company closed a $135 million, two-year
unsecured term loan. The interest rate for the loan is 135 basis points
over LIBOR.
On April 20, 1999, the Company sold $250 million principal amount of
7.75% notes due 2009. The aggregate net proceeds from such issuance was
approximately $246.0 million.
On July 28, 1999, the Company completed a private placement of 3.8
million 9.25% Series B Cumulative Redeemable Preferred Units of the
Operating Partnership at a price of $25 per unit. The Company used the
aggregate net proceeds of approximately $93.0 million from the sale of
the preferred units to repay outstanding borrowings under the Company's
term loan and to fund the Company's activities including paying down the
Credit Facility which funds acquisitions and development activity.
The Company has an effective S-3 shelf registration statement on file
with the Securities and Exchange Commission. As of July 30, 1999, the
Company had the capacity pursuant to the Shelf Registration Statement to
issue $688.4 million in equity securities and the Operating Partnership
has the capacity to issue $108.0 million in debt securities.
Calculation of Funds from Operations
Management generally considers funds from operations (as defined below) a
useful financial performance measure of the operating performance of an
equity REIT, because, together with net income and cash flows, funds from
operations provides investors with an additional basis to evaluate the
ability of a REIT to incur and service debt and to fund acquisitions and
capital expenditures. Funds from operations is defined by NAREIT as net
income or loss after preferred distributions (computed in accordance with
generally accepted accounting principles ("GAAP")), excluding gains (or
losses) from debt restructuring and sales of property, plus real estate-
related depreciation and amortization and minority interest and excluding
significant nonrecurring events that materially distort the comparative
measurement of the Company's performance over time. Funds from
operations does not represent net income or cash flows from operations as
defined by GAAP and does not necessarily indicate that cash flows will be
sufficient to fund cash needs. It should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. Funds from
operations also does not represent cash flows generated from operating,
investing or financing activities as defined by GAAP. Funds from
operations for the three and six months ended June 30, 1999 and June 30,
1998 are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
(IN THOUSANDS) (IN THOUSANDS)
---------------------- ---------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
---------- ---------- ---------- ---------
Income available to common
shareholders $ 40,502 $ 23,286 $ 70,180 $ 45,276
Addback:
Minority interest 3,011 2,061 5,221 3,870
Depreciation and amortization 20,064 16,199 39,898 30,279
(Gain) loss on sale (11,942) 1,048 (13,211) 1,048
======== ======== ========= =========
Funds from operations $ 51,635 $ 42,594 $102,088 $ 80,473
======== ======== ========= =========
- -24-
YEAR 2000
Background
In the past, many computer software programs were written using two
digits rather than four to define the applicable year. As a result,
date-sensitive computer software may recognize a date using "00" as the
year 1900 rather than the year 2000. This is generally referred to as
the Year 2000 issue. If this situation occurs, the potential exists for
computer system failures or miscalculations by computer programs, which
could disrupt operations.
Approach
The Company has established a group to coordinate the Company's response
to the Year 2000 issue. This group, which reports to the President and
Chief Operating Officer, includes the Company's MIS Director, a Vice-
President-Property Management and its General Counsel, as well as
support staff. The Company is in the process of implementing a Year
2000 compliance program at the Company's offices and properties
consisting of the following phases:
PHASE 1 Compilation of an inventory of information technology
(IT) and non-IT systems that may be sensitive to the Year 2000 problem.
PHASE 2 Identification and prioritization of the critical systems
from the systems inventory compiled in Phase 1 and inquiries of third
parties with whom the Company does significant business (i.e., vendors,
service providers and certain tenants) as to the state of their Year
2000 readiness.
PHASE 3 Analysis of critical systems to determine which systems
are not Year 2000 compliant and evaluation of the costs to repair or
replace those systems.
PHASE 4 Repair or replace noncompliant systems and testing of
critical systems, where applicable.
Status
The Company's property management and accounting system uses four-digit
year fields and consequently is believed to be Year 2000 compliant.
Phases 1, 2, 3 and 4 are substantially complete but for the process of
making inquiries of significant third parties as to their Year 2000
readiness and testing of critical systems, which is ongoing.
Based upon the analysis conducted to date, the Company believes the
major critical systems at the Company's properties are currently
compliant.
Costs
The total cost to the Company of making its systems Year 2000 compliant
is currently estimated to be in the range of $200,000-$300,000. The
majority of this cost relates to repairing certain software, testing
systems and retrofitting or replacing energy management systems at
certain of the properties. The cost for the replacement of the
equipment and the software will be capitalized and depreciated over
their expected useful life. To the extent existing hardware or software
is replaced, the Company will expense the cost as incurred. This
- -25-
expense is included in the above cost estimate. Furthermore, all costs
related to software modification, as well as all costs associated with
the Company's administration of its Year 2000 project, are being
expensed as incurred and are likewise included in the cost estimate
above.
Risks Associated with the Year 2000 Problem
The Company utilizes computer systems in many aspects of its business.
As noted, the Company's property management and accounting systems use
four-digit year fields and are believed to be Year 2000 compliant.
Additionally, with respect to the hardware and software systems utilized
by the Company in its management information systems, the Company's
assessment to date indicates that these systems are Year 2000 compliant
or can readily be made Year 2000 compliant on a stand-alone basis.
Testing of the operation of these systems together is ongoing.
The Company's also utilizes microprocessors which are imbedded in
systems which are part of the building operations (e.g., microprocessors
contained within the buildings' energy management systems or fire and
life safety systems). In particular, Year 2000 problems in the HVAC,
elevator, security or other such systems at the properties could disrupt
operations at the affected properties. The properties generally consist
of suburban office and industrial properties. The properties are also
principally single-story and low-rise buildings. The Company has
reviewed its building operating systems on a building-by-building basis.
At this point, based on the status of its assessment, the Company does
not believe a material number of these systems will be non-compliant.
Additionally, many of these systems, which operate automatically, can be
operated manually and consequently in the event these systems experience
a failure as a result of the Year 2000 problem, the disruption caused by
such failure should not be material to the Company's operations.
The Company is also exposed to the risk that one or more of its vendors
or service providers could experience Year 2000 problems that impact the
ability of such vendor or service provider to provide goods and
services. Though this is not considered as significant a risk with
respect to the suppliers of goods, due to the availability of
alternative suppliers, the disruption of certain services, such as
utilities, could, depending upon the extent of the disruption, have a
material adverse impact on the Company's operations. To date, the
Company is not aware of any vendor or service provider Year 2000 issue
that management believes would have a material adverse impact on the
Company's operations. However, the Company has no means of ensuring
that its vendors or service providers will be Year 2000 ready. The
inability of vendors or service providers to complete their Year 2000
resolution process in a timely fashion could have a adverse impact on
the Company. The effect of non-compliance by vendors or service
providers is not determinable at this time.
In addition, the Company is exposed to the risk that one or more of its
tenants could experience Year 2000 problems that impact the ability of
such tenant to pay its rent to the Company in a timely fashion. The
Company does not believe that such a problem is likely to affect enough
tenants to pose a material problem for the Company. To date, the
Company is not aware of any tenant Year 2000 issue that would have a
material adverse impact on the Company's operations. However, the
Company has no means of ensuring that its tenants will be Year 2000
ready. The inability of tenants to complete their Year 2000 resolution
process in a timely fashion could have an adverse impact on the Company.
- -26-
The effect of non-compliance by tenants is not determinable at this
time.
Widespread disruptions in the national or international economy,
including disruptions affecting the financial markets, resulting from
Year 2000 issues, or in certain industries, such as commercial or
investment banks, could also have an adverse impact on the Company. The
likelihood and effect of such disruptions is not determinable at this
time.
Readers are cautioned that forward-looking statements contained in the
Year 2000 discussion should be read in conjunction with the Company's
disclosures regarding forward-looking statements previously disclosed.
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 Credit Facility bears interest at a variable rate; therefore,
the amount of interest payable under the Credit Facility will be
influenced by changes in short-term interest rates, which tend to be
sensitive to inflation. To the extent an increase in inflation would
result in increased operating costs, such as in insurance, real estate
taxes and utilities, substantially all of the tenants' leases require the
tenants to absorb these costs as part of their rental obligations. In
addition, inflation also may have the effect of increasing market rental
rates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
There have been no material changes to the Company's exposure to market
risk since its Annual Report on Form 10-K for 1998.
- -27-
PART II: OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
On July 28, 1999, the Operating Partnership issued 3.8 million
9.25% Series B Cumulative Redeemable Preferred Units of Limited
Partnership Interest (the "Units"). The aggregate sale price of the
Units was $95.0 million. The Units were sold to two institutional
investors in a private placement in reliance on the exemption from
registration under Section 4(2) of the Securities Act of 1933, as
amended. The Units are convertible after ten years (or, under limited
circumstances, a shorter period of time), on a one-for-one basis, into
the 9.25% Series B Cumulative Redeemable Preferred Shares of Beneficial
Interest of the Trust (the "Preferred Shares"), which were authorized
for issuance by the Trust in connection with this transaction. The
Units have identical rights, preferences and privileges as the Preferred
Shares. The Units do not include any mandatory redemption or sinking
fund provisions. The holders of the Units have certain rights to cause
the Trust to register the Preferred Shares pursuant to the terms of a
registration rights agreement entered into in connection with this
private placement.
The net proceeds of the sale of the units, approximately $93.0
million, was used to repay the Company's term loan and to fund other
Company activities, including paying down the outstanding balance under
the Credit Facility.
In connection with the sale of the Units, the Operating
Partnership amended its Second Restated and Amended Agreement of Limited
Partnership pursuant to the First Amendment thereto, filed as Exhibit
3.1.1 to this Report. The Articles Supplementary to the Amended and
Restated Declaration of Trust of the Trust creating the Preferred Shares
are filed as Exhibit 3.1.2 to this Report.
The Units are pari passu with the 8.80% Series A Cumulative
Redeemable Preferred Units of Limited Partnership of the Operating
Partnership, and senior to all other units of limited partnership
interest of the Operating Partnership. The Preferred Shares are pari
passu with the 8.80% Series A Cumulative Redeemable Preferred Shares of
Beneficial Interest of the Trust, and senior to the Common Shares of
Beneficial Interest of the Trust.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of Shareholders of the Trust was held on
May 19, 1999.
A. Election of Trustees.
At the meeting, management's nominees, Frederick F.
Buchholz, Stephen B. Siegel and Thomas C. DeLoach, Jr., were elected to
fill the three available positions as Class II trustees. Voting
- -28-
(expressed in number of shares) was as follows: Mr. Buchholz: 55,773,235
for, 245,855 against or withheld and no abstentions or broker non-votes;
Mr. Siegel: 48,506,298 for, 7,512,792 against or withheld and no
abstentions or broker non-votes; and Mr. DeLoach: 55,773,449 for, 245,641
against or withheld and no abstentions or broker non-votes.
B. Amendment to Share Incentive Plan.
At the meeting, the Trust's shareholders also approved an
amendment to the Trust's Amended and Restated Share Incentive Plan (the
"Plan") which increased the number of the Trust's shares of beneficial
interest available for awards pursuant to the Plan from 4,033,535 to
6,500,000. Voting (expressed in number of shares) was as follows:
38,544,228 for; 16,899,517 against; 575,345 abstained; and no broker non-
votes.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3.1.l First Amendment to Second Restated and Amended
Agreement of Limited Partnership of the Operating Partnership.
3.1.2 Articles Supplementary to the Amended and Restated
Declaration of Trust of the Trust relating to the 9.25% Series B
Cumulative Redeemable Preferred Shares of Beneficial Interest.
4.1 Third Supplemental Indenture, dated as of April 20,
1999, between the Operating Partnership, as Issuer, and First Chicago, as
Trustee, supplementing the Senior Indenture, dated as of October 24,
1997, between the Operating Partnership, as Obligor, and First Chicago,
as Trustee.
10.1 Liberty Property Trust Amended and Restated Share
Incentive Plan.
27 Financial Data Schedule (EDGAR VERSION ONLY)
b. Reports on Form 8-K
During the quarter ended June 30, 1999, the Registrants
filed one Current Report on Form 8-K:
(i) report dated April 19, 1999 reporting Items 5 and 7
and containing as an Exhibit the Underwriting Agreement dated April 15,
1999 among the Registrants and the Underwriters (as defined therein) and
the Statement Re: Computation of Earnings to Combined Fixed Charges and
Ratio of Earnings to Fixed Charges.
- -29-
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 August 6, 1999
- ------------------------------ --------------------------------
Joseph P. Denny Date
President
/s/ GEORGE J. ALBURGER, JR. August 6, 1999
- ------------------------------ --------------------------------
George J. Alburger, Jr. Date
Chief Financial Officer
LIBERTY PROPERTY LIMITED PARTNERSHIP
By: LIBERTY PROPERTY TRUST, GENERAL PARTNER
/s/ JOSEPH P. DENNY August 6, 1999
- ------------------------------ --------------------------------
Joseph P. Denny Date
President
/s/ GEORGE J. ALBURGER, JR. August 6, 1999
- ------------------------------ --------------------------------
George J. Alburger, Jr. Date
Chief Financial Officer
- -30-
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------
3.1.l First Amendment to Second Restated and Amended
Agreement of Limited Partnership of the Operating
Partnership.
3.1.2 Articles Supplementary to the Amended and Restated
Declaration of Trust of the Trust relating to the
9.25% Series B Cumulative Redeemable Preferred Shares
of Beneficial Interest.
4.1 Third Supplemental Indenture, dated as of April 20,
1999, between the Operating Partnership, as Issuer,
and First Chicago, as Trustee, supplementing the
Senior Indenture, dated as of October 24, 1997,
between the Operating Partnership, as Obligor, and
First Chicago, as Trustee.
10.1 Liberty Property Trust Amended and Restated Share
Incentive Plan.
27 Financial Data Schedule (EDGAR VERSION ONLY)
- -31-