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EX-31.2 - EXHIBIT 31.2 - LIBERTY PROPERTY TRUSTlryex312-33115.htm
EX-12.1 - EXHIBIT 12.1 - LIBERTY PROPERTY TRUSTlryex121-33115.htm
EX-31.3 - EXHIBIT 31.3 - LIBERTY PROPERTY TRUSTlryex313-33115.htm
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EX-31.1 - EXHIBIT 31.1 - LIBERTY PROPERTY TRUSTlryex311-33115.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________
FORM 10-Q
__________________________________________________________
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the quarterly period ended March 31, 2015
  
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
Commission file numbers: 1-13130 (Liberty Property Trust)
1-13132 (Liberty Property Limited Partnership) 
__________________________________________________________
LIBERTY PROPERTY TRUST
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Exact name of registrants as specified in their governing documents)
__________________________________________________________
 
MARYLAND (Liberty Property Trust)
23-7768996
PENNSYLVANIA (Liberty Property Limited Partnership)
23-2766549
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
500 Chesterfield Parkway
Malvern, Pennsylvania
19355
(Address of Principal Executive Offices)
(Zip Code)
 
Registrants’ Telephone Number, Including Area Code (610) 648-1700
__________________________________________________________
 
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past ninety (90) days.    Yes  x    No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):
  
Large Accelerated Filer
x
Accelerated Filer
o
Non-Accelerated Filer
o (Do not check if a smaller reporting company)
Smaller Reporting Company
o
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
On April 28, 2015, 149,471,760 Common Shares of Beneficial Interest, par value $0.001 per share, of Liberty Property Trust were outstanding.



EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2015 of Liberty Property Trust and Liberty Property Limited Partnership. Unless stated otherwise or the context otherwise requires, references to the “Trust” mean Liberty Property Trust and its consolidated subsidiaries, and references to the “Operating Partnership” mean Liberty Property Limited Partnership and its consolidated subsidiaries. The terms the “Company,” “we,” “our” and “us” mean the Trust and the Operating Partnership, collectively.

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

The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 97.7% of the common equity of the Operating Partnership at March 31, 2015. The common units of limited partnership interest in the Operating Partnership (the “Common Units”), other than those owned by the Trust, are exchangeable on a one-for-one basis (subject to anti-dilution protections) for the Trust's common shares of beneficial interest, $0.001 par value per share (the “Common Shares”).

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

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

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

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

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





2


Liberty Property Trust/Liberty Property Limited Partnership
Form 10-Q for the period ended March 31, 2015
 
Index
 
Page
 
 
 
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.

3


Index
 
Page
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
FIFTH SUPPLEMENTAL INDENTURE, DATED AS OF MARCH 24, 2015, BETWEEN LIBERTY PROPERTY LIMITED PARTNERSHIP, AS ISSUER, AND U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE
 
 
 
 
 
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
 
 
 
 
 
CERTIFICATION OF CEO OF LIBERTY PROPERTY TRUST REQUIRED BY RULE 13A-14(A)
 
 
 
 
 
CERTIFICATION OF CFO OF LIBERTY PROPERTY TRUST REQUIRED BY RULE 13A-14(A)
 
 
 
 
 
CERTIFICATION OF CEO OF LIBERTY PROPERTY TRUST, IN ITS CAPACITY AS THE GENERAL PARTNER OF LIBERTY PROPERTY LIMITED PARTNERSHIP, REQUIRED BY RULE 13A-14(A)
 
 
 
 
 
CERTIFICATION OF CFO OF LIBERTY PROPERTY TRUST, IN ITS CAPACITY AS THE GENERAL PARTNER OF LIBERTY PROPERTY LIMITED PARTNERSHIP, REQUIRED BY RULE 13A-14(A)
 
 
 
 
 
CERTIFICATION OF CEO OF LIBERTY PROPERTY TRUST REQUIRED BY RULE 13A-14(B)
 
 
 
 
 
CERTIFICATION OF CFO OF LIBERTY PROPERTY TRUST REQUIRED BY RULE 13A-14(B)
 
 
 
 
 
CERTIFICATION OF CEO OF LIBERTY PROPERTY TRUST, IN ITS CAPACITY AS THE GENERAL PARTNER OF LIBERTY PROPERTY LIMITED PARTNERSHIP, REQUIRED BY RULE 13A-14(B)
 
 
 
 
 
CERTIFICATION OF CFO OF LIBERTY PROPERTY TRUST, IN ITS CAPACITY AS THE GENERAL PARTNER OF LIBERTY PROPERTY LIMITED PARTNERSHIP, REQUIRED BY RULE 13A-14(B)
 
 
 
 
 
XBRL Instance Document
 
 
 
 
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
XBRL Extension Labels Linkbase
 
 
 
 
 
XBRL Taxonomy Extension Presentation Linkbase Document
 

4


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands, except share and unit amounts)
 
 
March 31, 2015
 
December 31, 2014
ASSETS
 
 
 
Real estate:
 
 
 
Land and land improvements
$
1,187,786

 
$
1,189,760

Building and improvements
5,347,120

 
5,343,908

Less accumulated depreciation
(1,221,059
)
 
(1,182,569
)
Operating real estate
5,313,847

 
5,351,099

Development in progress
269,518

 
277,411

Land held for development
272,349

 
269,059

Net real estate
5,855,714

 
5,897,569

Cash and cash equivalents
38,755

 
69,346

Restricted cash
18,911

 
20,325

Accounts receivable
19,039

 
15,481

Deferred rent receivable
113,129

 
107,909

Deferred financing and leasing costs, net of accumulated amortization (2015, $173,076; 2014, $169,468)
202,231

 
206,286

Investments in and advances to unconsolidated joint ventures
215,403

 
208,832

Assets held for sale

 
8,389

Prepaid expenses and other assets
101,322

 
91,399

Total assets
$
6,564,504

 
$
6,625,536

LIABILITIES
 
 
 
Mortgage loans
$
484,584

 
$
487,301

Unsecured notes
2,607,874

 
2,509,094

Credit facility
50,000

 
167,000

Accounts payable
51,783

 
52,043

Accrued interest
36,691

 
24,513

Dividend and distributions payable
72,512

 
72,253

Other liabilities
199,311

 
219,418

Total liabilities
3,502,755

 
3,531,622

Noncontrolling interest - operating partnership - 301,483 preferred units outstanding as of March 31, 2015 and December 31, 2014
7,537

 
7,537

EQUITY
 
 
 
Liberty Property Trust shareholders’ equity
 
 
 
Common shares of beneficial interest, $.001 par value, 283,987,000 shares authorized; 150,367,813 (includes 1,249,909 in treasury) and 149,807,179 (includes 1,249,909 in treasury) shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
150

 
150

Additional paid-in capital
3,760,834

 
3,740,594

Accumulated other comprehensive loss
(17,346
)
 
(6,252
)
Distributions in excess of net income
(694,748
)
 
(654,869
)
Common shares in treasury, at cost, 1,249,909 shares as of March 31, 2015 and December 31, 2014
(51,951
)
 
(51,951
)
Total Liberty Property Trust shareholders’ equity
2,996,939

 
3,027,672

Noncontrolling interest – operating partnership
 
 
 
3,539,075 and 3,553,566 common units outstanding as of March 31, 2015 and December 31, 2014, respectively
53,354

 
54,786

Noncontrolling interest – consolidated joint ventures
3,919

 
3,919

Total equity
3,054,212

 
3,086,377

Total liabilities, noncontrolling interest - operating partnership and equity
$
6,564,504

 
$
6,625,536


See accompanying notes.

5


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands, except per share amounts)
 
Three Months Ended
 
March 31, 2015
 
March 31, 2014
OPERATING REVENUE
 
 
 
Rental
$
148,585

 
$
138,949

Operating expense reimbursement
58,316

 
58,681

Total operating revenue
206,901

 
197,630

OPERATING EXPENSE
 
 
 
Rental property
35,571

 
38,641

Real estate taxes
26,164

 
24,501

General and administrative
18,802

 
18,356

Depreciation and amortization
58,796

 
56,734

Impairment - real estate assets
15,739

 

Total operating expense
155,072

 
138,232

Operating income
51,829

 
59,398

OTHER INCOME (EXPENSE)
 
 
 
Interest and other income
6,371

 
2,439

Interest expense
(34,670
)
 
(39,207
)
Total other income (expense)
(28,299
)
 
(36,768
)
Income before gain on property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
23,530

 
22,630

Gain on property dispositions
2,271

 

Income taxes
(845
)
 
(531
)
Equity in earnings of unconsolidated joint ventures
6,906

 
4,159

Income from continuing operations
31,862

 
26,258

Discontinued operations (including net gain on property dispositions of $46,115 for the three months ended March 31, 2014)

 
47,848

Net income
31,862

 
74,106

Noncontrolling interest – operating partnership
(853
)
 
(1,853
)
Noncontrolling interest – consolidated joint ventures
(58
)
 
(353
)
Net income available to common shareholders
$
30,951

 
$
71,900

 
 
 
 
Net income
$
31,862

 
$
74,106

Other comprehensive (loss) income - foreign currency translation
(10,410
)
 
1,346

Other comprehensive loss - derivative instruments
(947
)
 
(511
)
Other comprehensive (loss) income
(11,357
)
 
835

Total comprehensive income
20,505

 
74,941

Less: comprehensive income attributable to noncontrolling interest
(648
)
 
(2,226
)
Comprehensive income attributable to common shareholders
$
19,857

 
$
72,715

Earnings per common share
 
 
 
Basic:
 
 
 
Income from continuing operations
$
0.21

 
$
0.17

Income from discontinued operations

 
0.32

Income per common share – basic
$
0.21

 
$
0.49

Diluted:
 
 
 
Income from continuing operations
$
0.21

 
$
0.17

Income from discontinued operations

 
0.32

Income per common share – diluted
$
0.21

 
$
0.49

Distributions per common share
$
0.475

 
$
0.475

Weighted average number of common shares outstanding
 
 
 
Basic
148,315

 
146,425

Diluted
149,031

 
147,095

Amounts attributable to common shareholders
 
 
 
Income from continuing operations
$
30,951

 
$
25,179

Discontinued operations

 
46,721

Net income available to common shareholders
$
30,951

 
$
71,900

See accompanying notes.

6


CONSOLIDATED STATEMENT OF EQUITY OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands)
 
 
 
COMMON
SHARES OF
BENEFICIAL
INTEREST
 
ADDITIONAL
PAID-IN
CAPITAL
 
ACCUMULATED
OTHER
COMPREHENSIVE LOSS
 
DISTRIBUTIONS
IN EXCESS OF
NET INCOME
 
COMMON
SHARES
HELD
IN
TREASURY
 
TOTAL
LIBERTY
PROPERTY
TRUST
SHAREHOLDERS’
EQUITY
 
NONCONTROLL-
ING INTEREST -
OPERATING
PARTNERSHIP-
COMMON
 
NONCONTROLL-
ING INTEREST -
CONSOLIDATED
JOINT
VENTURES
 
TOTAL
EQUITY
 
NONCONTROLLING INTEREST - OPERATING PARTNERSHIP (MEZZANINE)
Balance at January 1, 2015
 
$
150

 
$
3,740,594

 
$
(6,252
)
 
$
(654,869
)
 
$
(51,951
)
 
$
3,027,672

 
$
54,786

 
$
3,919

 
$
3,086,377

 
$
7,537

Net proceeds from the issuance of common shares
 

 
12,579

 

 

 

 
12,579

 

 

 
12,579

 

Net income
 

 

 

 
30,951

 

 
30,951

 
735

 
58

 
31,744

 
118

Distributions
 

 

 

 
(70,830
)
 

 
(70,830
)
 
(1,680
)
 
(58
)
 
(72,568
)
 
(118
)
Share-based compensation
 

 
7,437

 

 

 

 
7,437

 

 

 
7,437

 

Other comprehensive loss - foreign currency translation
 

 

 
(10,169
)
 

 

 
(10,169
)
 
(241
)
 

 
(10,410
)
 

Other comprehensive loss - derivative instruments
 

 

 
(925
)
 

 

 
(925
)
 
(22
)
 

 
(947
)
 

Redemption of noncontrolling interests – common units
 

 
224

 

 

 

 
224

 
(224
)
 

 

 

Balance at March 31, 2015
 
$
150

 
$
3,760,834

 
$
(17,346
)
 
$
(694,748
)
 
$
(51,951
)
 
$
2,996,939

 
$
53,354

 
$
3,919

 
$
3,054,212

 
$
7,537


See accompanying notes.

7


CONSOLIDATED STATEMENTS OF CASH FLOWS OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands)
 
 
Three Months Ended
 
March 31, 2015
 
March 31, 2014
OPERATING ACTIVITIES
 
 
 
Net income
$
31,862

 
$
74,106

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
59,431

 
57,589

Amortization of deferred financing costs
1,073

 
1,510

Impairment - real estate assets
15,739

 

Equity in earnings of unconsolidated joint ventures
(6,906
)
 
(4,159
)
Gain on property dispositions
(2,271
)
 
(46,117
)
Share-based compensation
7,437

 
6,580

Other
(2,990
)
 
(635
)
  Changes in operating assets and liabilities:
 
 
 
Restricted cash
489

 
31,726

Accounts receivable
(3,670
)
 
(4,052
)
Deferred rent receivable
(5,504
)
 
(2,765
)
Prepaid expenses and other assets
(13,058
)
 
(26,557
)
Accounts payable
(116
)
 
6,562

Accrued interest
12,178

 
16,441

Other liabilities
(3,718
)
 
(36,537
)
Net cash provided by operating activities
89,976

 
73,692

INVESTING ACTIVITIES
 
 
 
Investment in operating properties - acquisitions

 
(37,635
)
Investment in operating properties - other
(12,805
)
 
(16,522
)
Investments in and advances to unconsolidated joint ventures
(5,822
)
 
(429
)
Distributions from unconsolidated joint ventures
6,098

 
2,978

Net proceeds from disposition of properties/land
40,998

 
327,160

Net (advances on) proceeds from public reimbursement receivable/escrow
(1,601
)
 
5,001

Investment in development in progress
(48,001
)
 
(74,478
)
Investment in land held for development
(4,045
)
 
(1,967
)
Investment in deferred leasing costs
(9,684
)
 
(9,158
)
Net cash (used in) provided by investing activities
(34,862
)
 
194,950

FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of common shares
12,579

 
15,472

Proceeds from unsecured notes
398,576

 

Repayments of unsecured notes
(300,000
)
 

Repayments of mortgage loans
(2,160
)
 
(2,019
)
Proceeds from credit facility
390,000

 

Repayments on credit facility
(507,000
)
 

Payment of deferred financing costs
(3,551
)
 
(3,619
)
Distribution paid on common shares
(70,562
)
 
(69,634
)
Distribution paid on units
(1,863
)
 
(1,914
)
Net cash used in financing activities
(83,981
)
 
(61,714
)
Net (decrease) increase in cash and cash equivalents
(28,867
)
 
206,928

(Decrease) increase in cash and cash equivalents related to foreign currency translation
(1,724
)
 
211

Cash and cash equivalents at beginning of period
69,346

 
163,414

Cash and cash equivalents at end of period
$
38,755

 
$
370,553


See accompanying notes.

8


CONSOLIDATED BALANCE SHEETS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands, except unit amounts)
 
 
March 31, 2015
 
December 31, 2014
ASSETS
 
 
 
Real estate:
 
 
 
Land and land improvements
$
1,187,786

 
$
1,189,760

Building and improvements
5,347,120

 
5,343,908

Less accumulated depreciation
(1,221,059
)
 
(1,182,569
)
Operating real estate
5,313,847

 
5,351,099

Development in progress
269,518

 
277,411

Land held for development
272,349

 
269,059

Net real estate
5,855,714

 
5,897,569

Cash and cash equivalents
38,755

 
69,346

Restricted cash
18,911

 
20,325

Accounts receivable
19,039

 
15,481

Deferred rent receivable
113,129

 
107,909

Deferred financing and leasing costs, net of accumulated amortization (2015, $173,076; 2014, $169,468)
202,231

 
206,286

Investments in and advances to unconsolidated joint ventures
215,403

 
208,832

Assets held for sale

 
8,389

Prepaid expenses and other assets
101,322

 
91,399

Total assets
$
6,564,504

 
$
6,625,536

LIABILITIES
 
 
 
Mortgage loans
$
484,584

 
$
487,301

Unsecured notes
2,607,874

 
2,509,094

Credit facility
50,000

 
167,000

Accounts payable
51,783

 
52,043

Accrued interest
36,691

 
24,513

Distributions payable
72,512

 
72,253

Other liabilities
199,311

 
219,418

Total liabilities
3,502,755

 
3,531,622

Limited partners' equity - 301,483 preferred units outstanding as of March 31, 2015 and December 31, 2014
7,537

 
7,537

OWNERS’ EQUITY
 
 
 
General partner’s equity - 149,117,904 (net of 1,249,909 treasury units) and 148,557,270 (net of 1,249,909 treasury units) common units outstanding as of March 31, 2015 and December 31, 2014, respectively
2,996,939

 
3,027,672

Limited partners’ equity – 3,539,075 and 3,553,566 common units outstanding as of March 31, 2015 and December 31, 2014, respectively
53,354

 
54,786

Noncontrolling interest – consolidated joint ventures
3,919

 
3,919

Total owners’ equity
3,054,212

 
3,086,377

Total liabilities, limited partners' equity and owners’ equity
$
6,564,504

 
$
6,625,536


See accompanying notes.

9


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands, except per unit amounts)
 
 
Three Months Ended
 
March 31, 2015
 
March 31, 2014
OPERATING REVENUE
 
 
 
Rental
$
148,585

 
$
138,949

Operating expense reimbursement
58,316

 
58,681

Total operating revenue
206,901

 
197,630

OPERATING EXPENSE
 
 
 
Rental property
35,571

 
38,641

Real estate taxes
26,164

 
24,501

General and administrative
18,802

 
18,356

Depreciation and amortization
58,796

 
56,734

Impairment - real estate assets
15,739

 

Total operating expense
155,072

 
138,232

Operating income
51,829

 
59,398

OTHER INCOME (EXPENSE)
 
 
 
Interest and other income
6,371

 
2,439

Interest expense
(34,670
)
 
(39,207
)
Total other income (expense)
(28,299
)
 
(36,768
)
Income before loss on property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
23,530

 
22,630

Gain on property dispositions
2,271

 

Income taxes
(845
)
 
(531
)
Equity in earnings of unconsolidated joint ventures
6,906

 
4,159

Income from continuing operations
31,862

 
26,258

Discontinued operations (including net gain on property dispositions of $46,115 for the three months ended March 31, 2014)

 
47,848

Net income
31,862

 
74,106

Noncontrolling interest – consolidated joint ventures
(58
)
 
(353
)
Preferred unit distributions
(118
)
 
(118
)
Income available to common unitholders
$
31,686

 
$
73,635

Net income
$
31,862

 
$
74,106

Other comprehensive (loss) income - foreign currency translation
(10,410
)
 
1,346

Other comprehensive loss - derivative instruments
(947
)
 
(511
)
Other comprehensive (loss) income
(11,357
)
 
835

Total comprehensive income
$
20,505

 
$
74,941

Earnings per common unit
 
 
 
Basic:
 
 
 
Income from continuing operations
$
0.21

 
$
0.17

Income from discontinued operations

 
0.32

Income per common unit - basic
$
0.21

 
$
0.49

Diluted:
 
 
 
Income from continuing operations
$
0.21

 
$
0.17

Income from discontinued operations

 
0.32

Income per common unit - diluted
$
0.21

 
$
0.49

Distributions per common unit
$
0.475

 
$
0.475

Weighted average number of common units outstanding
 
 
 
        Basic
151,856

 
149,981

        Diluted
152,572

 
150,651

Net income allocated to general partners
$
30,951

 
$
71,900

Net income allocated to limited partners
$
853

 
$
1,853


See accompanying notes.

10


CONSOLIDATED STATEMENT OF OWNERS’ EQUITY OF LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands)
 
 
GENERAL
PARTNER’S
EQUITY
 
LIMITED
PARTNERS’
EQUITY  –
COMMON
UNITS
 
NONCONTROLLING
INTEREST –
CONSOLIDATED
JOINT VENTURES
 
TOTAL
OWNERS’
EQUITY
 
LIMITED PARTNERS' EQUITY - PREFERRED
Balance at January 1, 2015
$
3,027,672

 
$
54,786

 
$
3,919

 
$
3,086,377

 
$
7,537

Contributions from partners
20,016

 

 

 
20,016

 

Distributions to partners
(70,830
)
 
(1,680
)
 
(58
)
 
(72,568
)
 
(118
)
Other comprehensive loss - foreign currency translation
(10,169
)
 
(241
)
 

 
(10,410
)
 

Other comprehensive loss - derivative instruments
(925
)
 
(22
)
 

 
(947
)
 

Net income
30,951

 
735

 
58

 
31,744

 
118

Redemption of limited partners common units for common shares
224

 
(224
)
 

 

 

Balance at March 31, 2015
$
2,996,939

 
$
53,354

 
$
3,919

 
$
3,054,212

 
$
7,537


See accompanying notes.

11


CONSOLIDATED STATEMENTS OF CASH FLOWS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands)
 
 
Three Months Ended
 
March 31, 2015
 
March 31, 2014
OPERATING ACTIVITIES
 
 
 
Net income
$
31,862

 
$
74,106

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
59,431

 
57,589

Amortization of deferred financing costs
1,073

 
1,510

Impairment - real estate assets
15,739

 

Equity in earnings of unconsolidated joint ventures
(6,906
)
 
(4,159
)
Gain on property dispositions
(2,271
)
 
(46,117
)
Noncash compensation
7,437

 
6,580

Other
(2,990
)
 
(635
)
  Changes in operating assets and liabilities:
 
 
 
Restricted cash
489

 
31,726

Accounts receivable
(3,670
)
 
(4,052
)
Deferred rent receivable
(5,504
)
 
(2,765
)
Prepaid expenses and other assets
(13,058
)
 
(26,557
)
Accounts payable
(116
)
 
6,562

Accrued interest
12,178

 
16,441

Other liabilities
(3,718
)
 
(36,537
)
Net cash provided by operating activities
89,976

 
73,692

INVESTING ACTIVITIES
 
 
 
Investment in operating properties - acquisitions

 
(37,635
)
Investment in operating properties - other
(12,805
)
 
(16,522
)
Investments in and advances to unconsolidated joint ventures
(5,822
)
 
(429
)
Distributions from unconsolidated joint ventures
6,098

 
2,978

Net proceeds from disposition of properties/land
40,998

 
327,160

Net (advances on) proceeds from public reimbursement receivable/escrow
(1,601
)
 
5,001

Investment in development in progress
(48,001
)
 
(74,478
)
Investment in land held for development
(4,045
)
 
(1,967
)
Investment in deferred leasing costs
(9,684
)
 
(9,158
)
Net cash (used in) provided by investing activities
(34,862
)
 
194,950

FINANCING ACTIVITIES
 
 
 
Proceeds from unsecured notes
398,576

 

Repayment of unsecured notes
(300,000
)
 

Repayments of mortgage loans
(2,160
)
 
(2,019
)
Proceeds from credit facility
390,000

 

Repayments on credit facility
(507,000
)
 

Payment of deferred financing costs
(3,551
)
 
(3,619
)
Capital contributions
12,579

 
15,472

Distributions to partners
(72,425
)
 
(71,548
)
Net cash used in financing activities
(83,981
)
 
(61,714
)
Net (decrease) increase in cash and cash equivalents
(28,867
)
 
206,928

(Decrease) increase in cash and cash equivalents related to foreign currency translation
(1,724
)
 
211

Cash and cash equivalents at beginning of period
69,346

 
163,414

Cash and cash equivalents at end of period
$
38,755

 
$
370,553


See accompanying notes.

12


Liberty Property Trust and Liberty Property Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2015
Note 1: Organization and Basis of Presentation
Organization
Liberty Property Trust (the “Trust”) is a self-administered and self-managed Maryland real estate investment trust (a “REIT”). Substantially all of the Trust’s assets are owned directly or indirectly, and substantially all of the Trust’s operations are conducted directly or indirectly, by its subsidiary, Liberty Property Limited Partnership, a Pennsylvania limited partnership (the “Operating Partnership” and, together with the Trust and their consolidated subsidiaries, the “Company”). The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 97.7% of the common equity of the Operating Partnership at March 31, 2015. The Company owns and operates industrial properties nationally and owns and operates office properties in a focused group of office markets. Additionally, the Company owns certain assets in the United Kingdom. Unless otherwise indicated, the notes to the Consolidated Financial Statements apply to both the Trust and the Operating Partnership. The terms the “Company,” “we,” “our” and “us” mean the Trust and Operating Partnership collectively.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of the Company for the year ended December 31, 2014. 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.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance. The standard clarifies the required factors that an entity must consider when recognizing revenue. The standard also requires additional disclosures concerning contracts with customers, judgments concerning revenue recognition, and assets recognized for the costs to obtain or fulfill a contract. ASU 2014-09 is effective for the Company beginning January 1, 2017. The Company is evaluating the impact ASU 2014-09 will have on its financial position and results of operations.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The standard requires the costs for issuing debt to appear on a balance sheet as a direct deduction from the debt's value. ASU 2015-03 is effective for the Company beginning January 1, 2016. The standard would be applied retrospectively. The Company does not anticipate that the adoption of ASU 2015-03 will have a material impact on its financial position or results of operations.


13


Note 2: Income per Common Share of the Trust

The following table sets forth the computation of basic and diluted income per common share of the Trust (in thousands except per share amounts):
 
 
For the Three Months Ended
 
For the Three Months Ended
 
March 31, 2015
 
March 31, 2014
 
Income
(Numerator)
 
Weighted
Average
Shares
(Denominator)
 
Per Share
 
Income
(Numerator)
 
Weighted
Average
Shares
(Denominator)
 
Per Share
Basic income from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations net of noncontrolling interest
$
30,951

 
148,315

 
$
0.21

 
$
25,179

 
146,425

 
$
0.17

Dilutive shares for long-term compensation plans

 
716

 
 
 

 
670

 
 
Diluted income from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations net of noncontrolling interest
$
30,951

 
149,031

 
$
0.21

 
$
25,179

 
147,095

 
$
0.17

Basic income from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations net of noncontrolling interest
$

 
148,315

 
$

 
$
46,721

 
146,425

 
$
0.32

Dilutive shares for long-term compensation plans

 
716

 
 
 

 
670

 
 
Diluted income from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations net of noncontrolling interest
$

 
149,031

 
$

 
$
46,721

 
147,095

 
$
0.32

Basic income per common share
 
 
 
 
 
 
 
 
 
 
 
Net income available to common shareholders
$
30,951

 
148,315

 
$
0.21

 
$
71,900

 
146,425

 
$
0.49

Dilutive shares for long-term compensation plans

 
716

 
 
 

 
670

 
 
Diluted income per common share
 
 
 
 
 
 
 
 
 
 
 
Net income available to common shareholders
$
30,951

 
149,031

 
$
0.21

 
$
71,900

 
147,095

 
$
0.49

 
 
 
 
 
 
 
 
 
 
 
 

Dilutive shares for long-term compensation plans represent the unvested common shares outstanding during the periods as well as the dilutive effect of outstanding options. The amount of anti-dilutive options excluded from the computation of diluted income per common share for the three months ended March 31, 2015 was 596,000 as compared to 1,247,000 for the same period in 2014.
During the three months ended March 31, 2015, 44,000 common shares were issued upon the exercise of options. During the year ended December 31, 2014, 44,000 common shares were issued upon the exercise of options.



14


Note 3: Income per Common Unit of the Operating Partnership

The following table sets forth the computation of basic and diluted income per common unit of the Operating Partnership (in thousands, except per unit amounts):
 
 
For the Three Months Ended
 
For the Three Months Ended
 
March 31, 2015
 
March 31, 2014
 
Income (Numerator)
 
Weighted
Average Units
(Denominator)
 
Per Unit
 
Income
(Numerator)
 
Weighted
Average Units
(Denominator)
 
Per Unit
Income from continuing operations - net of noncontrolling interest - consolidated joint ventures
$
31,804

 
 
 
 
 
$
25,905

 
 
 
 
Less: Preferred unit distributions
(118
)
 
 
 
 
 
(118
)
 
 
 
 
Basic income from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations available to common unitholders
$
31,686

 
151,856

 
$
0.21

 
$
25,787

 
149,981

 
$
0.17

Dilutive units for long-term compensation plans

 
716

 
 
 

 
670

 
 
Diluted income from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations available to common unitholders
$
31,686

 
152,572

 
$
0.21

 
$
25,787

 
150,651

 
$
0.17

Basic income from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations
$

 
151,856

 
$

 
$
47,848

 
149,981

 
$
0.32

Dilutive units for long-term compensation plans

 
716

 
 
 

 
670

 
 
Diluted income from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations
$

 
152,572

 
$

 
$
47,848

 
150,651

 
$
0.32

Basic income per common unit
 
 
 
 
 
 
 
 
 
 
 
Income available to common unitholders
$
31,686

 
151,856

 
$
0.21

 
$
73,635

 
149,981

 
$
0.49

Dilutive units for long-term compensation plans

 
716

 
 
 

 
670

 
 
Diluted income per common unit
 
 
 
 
 
 
 
 
 
 
 
Income available to common unitholders
$
31,686

 
152,572

 
$
0.21

 
$
73,635

 
150,651

 
$
0.49

 
 
 
 
 
 
 
 
 
 
 
 

Dilutive units for long-term compensation plans represent the unvested common units outstanding during the periods as well as the dilutive effect of outstanding options. The amount of anti-dilutive options excluded from the computation of diluted income per common unit for the three months ended March 31, 2015 was 596,000 as compared to 1,247,000 for the same period in 2014.
During the three months ended March 31, 2015, 44,000 common units were issued upon exercise of options. During the year ended December 31, 2014, 44,000 common units were issued upon the exercise of options.

15


Note 4: Accumulated Other Comprehensive Loss

The following table sets forth the components of Accumulated Other Comprehensive Loss (in thousands):

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Foreign Currency Translation:
 
 
 
 
     Beginning balance
 
$
(5,823
)
 
$
8,592

     Translation adjustment
 
(10,410
)
 
1,346

     Ending balance
 
(16,233
)
 
9,938

 
 
 
 
 
Derivative Instruments:
 
 
 
 
     Beginning balance
 
(377
)
 
1,584

     Unrealized loss
 
(1,299
)
 
(871
)
     Reclassification adjustment (1)
 
352

 
360

     Ending balance
 
(1,324
)
 
1,073

Total accumulated other comprehensive (loss) income
 
(17,557
)
 
11,011

Less: portion included in noncontrolling interest – operating partnership
 
211

 
(454
)
Total accumulated other comprehensive (loss) income included in shareholders' equity/owners' equity
 
$
(17,346
)
 
$
10,557


(1)
Amounts reclassified out of Accumulated Other Comprehensive (Loss) Income/General & Limited Partner's Equity into contractual interest expense.

Note 5: Segment Information
The Company owns and operates industrial properties nationally and owns and operates office properties in a focused group of office markets. Additionally, the Company owns certain assets in the United Kingdom. The Company's reportable segments are as follows.
Carolinas;
Chicago/Milwaukee;
Houston;
Lehigh/Central PA;
Minnesota;
Orlando;
Philadelphia;
Richmond/Hampton Roads;
Southeastern PA;
South Florida;
Tampa;
United Kingdom.
Certain other segments are aggregated into an "Other" category which includes the reportable segments: Arizona; Atlanta; Cincinnati/Columbus/Indianapolis; Dallas; Maryland; New Jersey; Northern Virginia; Southern California; Washington D.C. and other.
The Company evaluates the performance of its reportable segments based on net operating income. Net operating income includes operating revenue from external customers, real estate taxes, amortization of lease transaction costs and other operating expenses which relate directly to the management and operation of the assets within each reportable segment.
The Company's accounting policies for the segments are the same as those used in the Company's consolidated financial statements. There are no material inter-segment transactions.

16


The operating information by reportable segment is as follows (in thousands):
 
 
 
For the Three Months
 
 
 
Ended March 31,
 
 
 
2015
 
2014
Operating revenue
 
 
 
 
 
Carolinas
 
$
9,844

 
$
8,316

 
Chicago/Milwaukee
 
9,793

 
8,570

 
Houston
 
12,324

 
11,867

 
Lehigh/Central PA
 
33,554

 
29,623

 
Minnesota
 
12,672

 
13,750

 
Orlando
 
5,264

 
7,995

 
Philadelphia
 
9,982

 
9,408

 
Richmond/Hampton Roads
 
10,490

 
10,068

 
South Florida
 
12,206

 
12,309

 
Southeastern PA
 
39,238

 
38,437

 
Tampa
 
13,462

 
13,173

 
United Kingdom
 
3,725

 
4,102

 
Other
 
34,398

 
35,039

Segment-level operating revenue
 
206,952

 
202,657

 
 
 
 
 
 
 Reconciliation to total operating revenues
 
 
 
 
 
 Discontinued operations
 

 
(4,748
)
 
 Other
 
(51
)
 
(279
)
 Total operating revenue
 
$
206,901

 
$
197,630

 
 
 
 
 
 
 Net operating income
 
 
 
 
 
 
Carolinas
 
$
6,617

 
$
5,742

 
Chicago/Milwaukee
 
6,743

 
5,163

 
Houston
 
7,221

 
7,053

 
Lehigh/Central PA
 
22,971

 
19,240

 
Minnesota
 
5,985

 
6,619

 
Orlando
 
3,571

 
5,492

 
Philadelphia
 
7,022

 
6,721

 
Richmond/Hampton Roads
 
6,229

 
5,920

 
South Florida
 
6,829

 
7,527

 
Southeastern PA
 
20,988

 
19,600

 
Tampa
 
8,702

 
8,441

 
United Kingdom
 
2,516

 
2,850

 
Other
 
22,176

 
21,731

Segment-level net operating income
 
127,570

 
122,099

 
 
 
 
 
 
 Reconciliation to income from continuing operations
 
 
 
 
 
 Interest expense (1)
 
(34,670
)
 
(39,764
)
 
 Depreciation/amortization expense (1) (2)
 
(43,514
)
 
(44,536
)
 
 Impairment - real estate assets
 
(15,739
)
 

 
 Gain on property dispositions
 
2,271

 

 
 Equity in earnings of unconsolidated joint ventures
 
6,906

 
4,159

 
 General and administrative expense (1) (2)
 
(12,574
)
 
(12,401
)
 
 Discontinued operations excluding interest and gain on property dispositions
 

 
(2,290
)
 
 Income taxes (2)
 
(707
)
 
(483
)
 
 Other
 
2,319

 
(526
)
 Income from continuing operations
 
$
31,862

 
$
26,258

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

17



During the three months ended March 31, 2015, the Company did not acquire any operating properties.
During the three months ended March 31, 2015, the Company realized proceeds of $42.2 million from the sale of seven properties in the Company's Southeastern PA segment and segments grouped into the Company's "Other" category.

Note 6: Accounting for the Impairment or Disposal of Long-Lived Assets

Prior to the adoption of Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08") on January 1, 2014, the results of operations for all operating properties sold or held for sale during the reported periods were shown under discontinued operations on the consolidated statements of comprehensive income. Under ASU 2014-08, operating properties that were sold or classified as held for sale before the adoption of ASU 2014-08 continue to be classified as discontinued operations. Accordingly, operating properties previously reported as discontinued operations will continue to be presented as discontinued operations on the consolidated statements of comprehensive income for all periods presented.
A summary of the results of operations for the properties classified as discontinued operations through the respective disposition dates is as follows (in thousands):
 
 
Three Months Ended March 31,
 
2015
 
2014
Revenues
$

 
$
4,748

Operating expenses

 
(2,495
)
Interest and other income

 
37

Interest expense

 
(557
)
Depreciation and amortization

 

Income before gain on property dispositions

 
1,733

Gain on property dispositions

 
46,115

Net income
$

 
$
47,848

Interest expense has been allocated to discontinued operations. The allocation of interest expense to discontinued operations was based on the ratio of net assets sold and held for sale (without continuing involvement) to the sum of total net assets plus consolidated debt.

Asset Impairment

The Company anticipates the potential disposition of certain properties prior to the end of their remaining useful lives. During the three months ended March 31, 2015, the Company recognized $15.7 million in impairments, $13.4 million of which related to the Company's Richmond/Hampton Roads reportable segment and $2.3 million of which related to the Company's Southeastern Pennsylvania reportable segment. The Company determined these impairments based on third party offer prices and quoted offer prices for comparable transactions which are Level 2 and Level 3 inputs, respectively, according to the fair value hierarchy established by the FASB in Topic 820, "Fair Value Measurements and Disclosures." However, these properties are not classified as held for sale as all of the criteria for such classification have not been met as of March 31, 2015. The Company has evaluated each of its properties and land held for development and has determined that there were no additional valuation adjustments necessary at March 31, 2015.  There were no impairments recognized during the three months ended March 31, 2014.
Note 7: Noncontrolling Interests of the Trust
Noncontrolling interests in the accompanying financial statements represent the interests of the common and preferred units in the Operating Partnership not held by the Trust. In addition, noncontrolling interests include third-party ownership interests in consolidated joint venture investments.

18


Common units
The common units outstanding of the Operating Partnership not held by the Trust as of March 31, 2015 have the same economic characteristics as common shares of the Trust. The 3,539,075 outstanding common units of the Operating Partnership at such date not held by the Trust share proportionately in the net income or loss and in any distributions of the Operating Partnership. The common units of the Operating Partnership not held by the Trust are redeemable at any time at the option of the holder. The Trust, as the sole general partner of the Operating Partnership, may at its option elect to settle the redemption in cash or through the exchange on a one-for-one basis of unregistered common shares of the Trust. The market value of the 3,539,075 outstanding common units based on the closing price of the common shares of the Trust at March 31, 2015 was $126.3 million.
Note 8: Limited Partners' Equity and Noncontrolling Interest of the Operating Partnership
Limited partners' equity in the accompanying financial statements represents the interests of the common and preferred units in the Operating Partnership not held by the Trust. The Operating Partnership's noncontrolling interest includes third-party ownership interests in consolidated joint venture investments.
Common units
The common units outstanding as of March 31, 2015 have the same economic characteristics as common shares of the Trust. The 3,539,075 outstanding common units at such date are the limited partners' equity - common units held by persons and entities other than the Trust, the general partner of the Operating Partnership, which holds a number of common units equal to the number of outstanding common shares of beneficial interest. The Trust, as the sole general partner of the Operating Partnership, may at its option elect to settle the redemption in cash or through the exchange on a one-for-one basis of unregistered common shares of the Trust. The market value of the 3,539,075 outstanding common units at March 31, 2015 based on the closing price of the common shares of the Trust at March 31, 2015 was $126.3 million.
Note 9: Noncontrolling Interest - Operating Partnership/Limited Partners' Equity - Preferred Units
As of March 31, 2015, the Company had outstanding the following cumulative preferred units of the Operating Partnership:

ISSUE
 
AMOUNT
 
UNITS
 
LIQUIDATION
PREFERENCE
 
DIVIDEND
RATE
 
 
(in 000’s)
 
 
 
 
Series I-2
 
$
7,537

 
301

 
$25
 
6.25
%
The preferred units are putable at the holder's option at any time and are callable at the Operating Partnership's option after a stated period of time for cash.
Note 10: Indebtedness

In March 2015, the Company used proceeds from its unsecured credit facility together with available cash on hand to repay all $300 million of its 5.125% senior unsecured notes due March 2015.

In March 2015, the Company issued $400 million of 3.75% senior unsecured notes due 2025. The net proceeds from this issuance were used to repay borrowings under the Company's unsecured credit facility and for general corporate purposes.

Note 11: Disclosure of Fair Value of Financial Instruments
The following disclosure of estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the following estimates are not necessarily indicative of the amounts the Company could have realized on disposition of the financial instruments at March 31, 2015 and December 31, 2014. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued interest, dividend and distributions payable and other liabilities are reasonable estimates of fair value because of the short-term nature of these instruments. The carrying value of the outstanding amounts under the Company's credit facility is a reasonable estimate of fair value because interest rates float at a rate based on LIBOR.


19


The Company determines the fair value of its interest rate swaps by using the standard methodology of netting discounted future fixed cash payments with the discounted expected variable cash receipts. These variable cash receipts of interest rate swaps are based on expectations of future LIBOR interest rates (forward curves) estimated by observing market LIBOR interest rate curves. This is a Level 2 fair value calculation. Also, credit valuation adjustments are factored into the fair value calculations to account for potential nonperformance risk. These credit valuation adjustments were concluded to be not significant inputs for the fair value calculations for the periods presented. See Note 12 - Derivative Instruments.

The Company used a discounted cash flow model to determine the estimated fair value of its debt as of March 31, 2015.  This is a Level 3 fair value calculation. The inputs used in preparing the discounted cash flow model include actual maturity dates and scheduled cash flows as well as estimates for market value discount rates.  The Company updates the discounted cash flow model on a quarterly basis to reflect any changes in the Company's debt holdings and changes to discount rate assumptions.  
The following summarizes the fair value of the Company's mortgage loans and unsecured notes as of December 31, 2014 and March 31, 2015 (in thousands):
 
 
Mortgage Loans
 
Unsecured Notes
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
As of December 31, 2014
 
$
487,301

 
$
501,231

 
$
2,509,094

 
$
2,704,069

As of March 31, 2015
 
$
484,584

 
$
496,873

 
$
2,607,874


$
2,769,146

Note 12: Derivative Instruments
The Company borrows funds at a combination of fixed and variable rates. Borrowings under the Company's revolving credit facility and certain bank mortgage loans bear interest at variable rates. Our long-term debt typically bears interest at fixed rates. Our interest rate risk management objectives are to limit generally the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We generally do not hold or issue these derivative contracts for trading or speculative purposes. The interest rate on all of our variable rate debt is generally adjusted at one or three month intervals, subject to settlements under interest rate hedge contracts.
Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss (for the Trust) and general partner's equity and limited partners' equity - common units (for the Operating Partnership) and is subsequently reclassified into interest expense in the period that the hedged forecasted transaction affects earnings.
The Company determines the fair value of its interest rate swaps by using the standard methodology of netting discounted future fixed cash payments with the discounted expected variable cash receipts. These variable cash receipts of interest rate swaps are based on expectations of future LIBOR interest rates (forward curves) estimated by observing market LIBOR interest rate curves. This is a Level 2 fair value calculation. Also, credit valuation adjustments are factored into the fair value calculations to account for potential nonperformance risk. These credit valuation adjustments were concluded to be not significant inputs for the fair value calculations for the periods presented.
The Company holds interest in three interest rate swap contracts (“Swaps”) that eliminate the impact of changes in interest rates on the payments required under variable rate mortgages. The Swaps had aggregate notional amounts of $103.2 million and $103.6 million at March 31, 2015 and December 31, 2014, respectively, and expire at various dates between 2018 and 2020.
For the three months ended March 31, 2015 and March 31, 2014, the effective portion of the change in the fair value of the swaps were decreases in the amount of $1.3 million and $871,000, respectively, which were recorded as decreases in other comprehensive income. These amounts reported in accumulated other comprehensive income will be reclassified to interest expense as interest payments are made on the variable rate mortgages. The amount of loss reclassified from accumulated other comprehensive income was $352,000 and $360,000 for the three months ended March 31, 2015 and March 31, 2014, respectively. The ineffective portion of the change in the fair value of the Swaps for the three months ended March 31, 2015 and March 31, 2014 in the amounts of $59,000 and $18,000, respectively, were recorded as increases to interest expense in the accompanying consolidated statements of comprehensive income.
The fair value of the Swaps in the amounts of $9.0 million and $8.5 million as of March 31, 2015 and December 31, 2014, respectively, is included in other liabilities in the accompanying consolidated balance sheets. The Company estimates that $1.2

20


million will be reclassified from accumulated other comprehensive income as an increase to interest expense over the next 12 months.
The Company has agreements with its derivative counterparties that contain a provision whereby if the Company defaults on any of its indebtedness, including defaults where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. If the Company were to breach any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the agreements at their termination value including accrued interest for approximately $9.1 million.
Note 13: Commitments and Contingencies
Environmental Matters
Substantially all of the Company's properties and land were subject to Phase I Environmental Assessments and when appropriate Phase II Environmental Assessments (collectively, the “Environmental Assessments”) obtained in contemplation of their acquisition by the Company or obtained by predecessor owners prior to the sale of the property or land to the Company. The Environmental Assessments did not reveal, nor is the Company aware of, any non-compliance with environmental laws, environmental liability or other environmental claim that the Company believes would likely have a material adverse effect on the Company.
Operating Ground Lease Agreements
Future minimum rental payments under the terms of all non-cancelable operating ground leases under which the Company is the lessee, as of March 31, 2015, were as follows (in thousands):
 
Year
 
Amount
2015
 
$
507

2016
 
686

2017
 
686

2018
 
686

2019
 
686

2020 through 2034
 
6,604

Total
 
$
9,855


Operating ground lease expense for the three months ended March 31, 2015 was $64,000 as compared to $47,000 for the same period in 2014.
Legal Matters
From time to time, the Company is a party to a variety of legal proceedings, claims and assessments arising in the normal course of business. As of March 31, 2015 there were no legal proceedings, claims or assessments that the Company expects to have a material adverse effect on the Company’s business or financial statements.
Comcast Innovation and Technology Center
The Company has entered into two joint ventures for the purpose of developing and owning the Comcast Innovation & Technology Center (the "Project") located on the 1800 block of Arch Street in Philadelphia, Pennsylvania. The 59-story building will include 1.3 million square feet of rentable office space and a 222-room Four Seasons Hotel.  Completion of the first phase of the Project is anticipated to be in the third quarter of 2017. Project costs for the development of the Project, exclusive of tenant-funded interior improvements, are anticipated to be approximately $932 million.  The Company's investment in the Project is expected to be approximately $185 million with 20% ownership interests in both joint ventures.
The two joint ventures have engaged the Company as the developer of the Project pursuant to a Development Agreement by which the Company agrees, in consideration for a development fee, to be responsible for all aspects of the development of the Project and to guarantee the timely lien-free completion of construction of the Project and the payment, subject to certain exceptions, of any cost overruns incurred in the development of the Project.


21


Other
As of March 31, 2015, the Company had letter of credit obligations of $4.2 million. The Company believes that the likelihood is remote that there will be a draw upon these letter of credit obligations.
As of March 31, 2015, the Company had 21 buildings under development. These buildings are expected to contain, when completed, a total of 3.8 million square feet of leasable space and represent an anticipated aggregate investment of $412.9 million. At March 31, 2015, development in progress totaled $269.5 million. In addition, as of March 31, 2015, the Company had invested $8.0 million in deferred leasing costs related to these development buildings. In addition, the Company had signed commitments for build-to-suit developments not yet commenced for an anticipated aggregate investment of $167.0 million.
As of March 31, 2015, the Company was committed to $14.8 million in improvements on certain buildings and land parcels.
As of March 31, 2015, the Company was committed to $51.0 million in future land purchases.
As of March 31, 2015, the Company was obligated to pay for tenant improvements not yet completed for a maximum of $41.5 million.
The Company maintains cash and cash equivalents at financial institutions. The combined account balances at each institution typically exceed FDIC insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes the risk is not significant.
Note 14: Supplemental Disclosure to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flows for the three months ended March 31, 2015 and 2014 (amounts in thousands):
 
 
2015
 
2014
 Write-off of fully depreciated/amortized property and deferred costs
$
14,436

 
$
11,279

 Write-off of depreciated/amortized property and deferred costs due to sale
$
10,295

 
$
131,026

 Unrealized loss on cash flow hedge
$
(947
)
 
$
(511
)
 Changes in accrued development capital expenditures
$
(8,343
)
 
$
2,280


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

22


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Liberty Property Trust (the “Trust”) is a self-administered and self-managed Maryland real estate investment trust (“REIT”). Substantially all of the Trust’s assets are owned directly or indirectly, and substantially all of the Trust’s operations are conducted directly or indirectly, by its subsidiary, Liberty Property Limited Partnership, a Pennsylvania limited partnership (the “Operating Partnership” and, collectively with the Trust and their consolidated subsidiaries, the “Company”).
The Company owns and operates industrial properties nationally and owns and operates office properties in a focused group of office markets. Additionally, the Company owns certain assets in the United Kingdom.
As of March 31, 2015, the Company owned and operated 486 industrial and 180 office properties (the “Wholly Owned Properties in Operation”) totaling 91.1 million square feet. In addition, as of March 31, 2015, the Company owned 21 properties under development, which when completed are expected to comprise 3.8 million square feet (the “Wholly Owned Properties under Development”) and 1,491 acres of developable land, substantially all of which is zoned for commercial use. Additionally, as of March 31, 2015, the Company had an ownership interest, through unconsolidated joint ventures, in 49 industrial and 34 office properties totaling 14.3 million square feet (the “JV Properties in Operation” and, together with the Wholly Owned Properties in Operation, the “Properties in Operation”), four properties under development, which when completed are expected to comprise 2.1 million square feet and a 222-room hotel (the "JV Properties under Development" and, collectively with the Wholly Owned Properties under Development, the "Properties under Development" and, collectively with the Properties in Operation, the "Properties") and 460 acres of developable land, substantially all of which is zoned for commercial use.
The Company focuses on creating value for shareholders and increasing profitability and cash flow. With respect to its Properties in Operation, the Company endeavors to maintain high occupancy levels while maximizing rental rates and controlling costs. The Company pursues development opportunities that it believes will create value and yield acceptable returns. The Company also acquires properties that it believes will create long-term value, and disposes of properties that no longer fit within the Company’s strategic objectives or in situations where it can optimize cash proceeds. The Company expects its strategy with respect to product and market selection to continue to favor industrial and metro-office properties and markets with strong demographic and economic fundamentals.

Due to long-term trends that the Company believes favor industrial properties and indicate potential erosion in value of suburban office properties, the Company has increased its investment in industrial and metro-office properties and decreased its investment in suburban office properties. The short-term effect of these activities is a reduction in net cash from operating activities, as rental income related to the Company's industrial properties is less than that from the Company's suburban office properties, assuming similar amounts invested. The Company anticipates that over time it will realize the benefits of these activities, including a higher rate of rental growth and a lower level of lease transaction costs and other capital costs for industrial properties as opposed to suburban office properties.
The Company’s operating results depend primarily upon income from rental operations and are substantially influenced by rental demand for the Properties in Operation. During the three months ended March 31, 2015, straight line rents on renewal and replacement leases were on average 2.4% higher than rents on expiring leases. The Company's guidance for 2015 contemplated an increase of straight line rent on average of 2% to 3%. During the three months ended March 31, 2015, the Company successfully leased 6.7 million square feet and, as of that date, attained occupancy of 93.2% for the Wholly Owned Properties in Operation and 93.0% for the JV Properties in Operation for a combined occupancy of 93.2% for the Properties in Operation. At December 31, 2014, occupancy for the Wholly Owned Properties in Operation was 93.1% and for the JV Properties in Operation was 92.2% for a combined occupancy for the Properties in Operation of 93.0%. The Company's guidance for 2015 contemplated an increase in average occupancy of 1% to 2%.
Wholly Owned Capital Activity
Acquisitions
During the three months ended March 31, 2015, the Company did not acquire any operating properties or land parcels.
Dispositions
During the three months ended March 31, 2015, the Company realized proceeds of $42.2 million from the sale of seven properties totaling 622,000 square feet.
Development
During the three months ended March 31, 2015, the Company brought into service four Wholly Owned Properties under Development representing 466,000 square feet and a Total Investment of $47.0 million. During the three months ended March 31,

23


2015, the Company did not initiate any Wholly Owned Properties under Development. As of March 31, 2015, the Company had 21 Wholly Owned Properties under Development with a projected Total Investment of $412.9 million.
“Total Investment” for a Property Under Development is defined as the sum of the land costs and the costs of land improvements, building and building improvements, lease transaction costs, and where appropriate, other development costs and carrying costs.
Unconsolidated Joint Venture Capital Activity
The Company periodically enters into unconsolidated joint venture relationships in connection with the execution of its real estate operating strategy.
Acquisitions/Dispositions
During the three months ended March 31, 2015, none of the unconsolidated joint ventures in which the Company held an interest acquired or sold any operating properties or land parcels. Consistent with the Company's strategy, from time to time the Company may consider transferring assets to or purchasing assets from an unconsolidated joint venture in which the Company holds an interest.
Development
During the three months ended March 31, 2015, none of the unconsolidated joint ventures in which the Company held an interest brought any properties into service or began development on any properties. As of March 31, 2015, joint ventures in which the Company held an interest had four properties under development which are expected to comprise, upon completion, 2.1 million square feet and are expected to represent a Total Investment of $977 million.
The most significant of these properties under development is the Comcast Innovation & Technology Center, which is expected to comprise, upon completion, 1.3 million square feet and a 222-room hotel and is expected to represent a Total Investment of $932 million.

24


Properties in Operation
The composition of the Company’s Properties in Operation as of March 31, 2015 and 2014 was as follows (square feet in thousands):

 
Net Rent
Per Square Foot(1)
 
Straight Line Rent and Operating Expense Reimbursement Per Square Foot(2)
 
Total Square Feet
 
Percent Occupied
 
March 31,
 
March 31,
 
March 31,
 
March 31,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Wholly Owned Properties in Operation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrial-Distribution
$
4.45

 
$
4.53

 
$
5.94

 
$
5.93

 
68,434

 
64,368

 
94.6
%
 
91.6
%
Industrial-Flex
$
8.68

 
$
8.55

 
$
12.57

 
$
12.35

 
8,738

 
9,041

 
92.5
%
 
89.8
%
Office
$
15.74

 
$
15.91

 
$
24.55

 
$
24.19

 
13,929

 
14,587

 
87.0
%
 
87.6