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EX-31.2 - EXHIBIT 31.2 - LIBERTY PROPERTY TRUSTlptex312-33116.htm
EX-31.1 - EXHIBIT 31.1 - LIBERTY PROPERTY TRUSTlptex311-33116.htm
EX-32.3 - EXHIBIT 32.3 - LIBERTY PROPERTY TRUSTlptex323-33116.htm
EX-31.4 - EXHIBIT 31.4 - LIBERTY PROPERTY TRUSTlptex314-33116.htm
EX-32.4 - EXHIBIT 32.4 - LIBERTY PROPERTY TRUSTlptex324-33116.htm
EX-12.1 - EXHIBIT 12.1 - LIBERTY PROPERTY TRUSTlptex121-33116.htm
EX-32.1 - EXHIBIT 32.1 - LIBERTY PROPERTY TRUSTlptex321-33116.htm
EX-32.2 - EXHIBIT 32.2 - LIBERTY PROPERTY TRUSTlptex322-33116.htm
EX-31.3 - EXHIBIT 31.3 - LIBERTY PROPERTY TRUSTlptex313-33116.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, 2016
  
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 May 3, 2016, 146,625,092 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, 2016 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 97.6% of the common equity of the Operating Partnership at March 31, 2016. 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, 2016
 
Index
 
Page
 
 
 
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.

3


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

4


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands, except share and unit amounts)
 
 
March 31, 2016
 
December 31, 2015
ASSETS
 
 
 
Real estate:
 
 
 
Land and land improvements
$
1,186,960

 
$
1,183,411

Building and improvements
5,127,287

 
5,124,521

Less accumulated depreciation
(1,159,991
)
 
(1,148,228
)
Operating real estate
5,154,256

 
5,159,704

Development in progress
335,927

 
360,948

Land held for development
341,356

 
336,967

Net real estate
5,831,539

 
5,857,619

Cash and cash equivalents
43,663

 
35,353

Restricted cash
6,606

 
9,018

Accounts receivable, net
18,319

 
14,343

Deferred rent receivable, net
121,278

 
118,787

Deferred financing and leasing costs, net of accumulated amortization (March 31, 2016, $170,558; December 31, 2015, $175,243)
183,813

 
192,038

Investments in and advances to unconsolidated joint ventures
210,341

 
218,454

Assets held for sale
7,918

 
12,968

Prepaid expenses and other assets
94,821

 
99,049

Total assets
$
6,518,298

 
$
6,557,629

LIABILITIES
 
 
 
Mortgage loans, net
$
304,360

 
$
307,908

Unsecured notes, net
2,580,910

 
2,580,108

Credit facility
260,000

 
259,000

Accounts payable
60,328

 
51,382

Accrued interest
43,130

 
26,154

Dividend and distributions payable
71,317

 
71,787

Other liabilities
228,868

 
243,806

Total liabilities
3,548,913

 
3,540,145

Noncontrolling interest - operating partnership - 301,483 preferred units outstanding as of March 31, 2016 and December 31, 2015
7,537

 
7,537

EQUITY
 
 
 
Liberty Property Trust shareholders’ equity
 
 
 
Common shares of beneficial interest, $.001 par value, 283,987,000 shares authorized; 146,603,946 and 147,577,984 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
147

 
148

Additional paid-in capital
3,640,341

 
3,669,627

Accumulated other comprehensive loss
(24,188
)
 
(17,893
)
Distributions in excess of net income
(711,034
)
 
(698,954
)
Total Liberty Property Trust shareholders’ equity
2,905,266

 
2,952,928

Noncontrolling interest – operating partnership
 
 
 
3,539,075 common units outstanding as of March 31, 2016 and December 31, 2015
52,663

 
53,100

Noncontrolling interest – consolidated joint ventures
3,919

 
3,919

Total equity
2,961,848

 
3,009,947

Total liabilities, noncontrolling interest - operating partnership and equity
$
6,518,298

 
$
6,557,629


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, 2016
 
March 31, 2015
OPERATING REVENUE
 
 
 
Rental
$
139,054

 
$
148,585

Operating expense reimbursement
51,086

 
58,316

Total operating revenue
190,140

 
206,901

OPERATING EXPENSE
 
 
 
Rental property
28,509

 
35,571

Real estate taxes
25,320

 
26,164

General and administrative
20,990

 
18,802

Depreciation and amortization
54,078

 
58,796

Impairment - real estate assets

 
15,739

Total operating expense
128,897

 
155,072

Operating income
61,243

 
51,829

OTHER INCOME (EXPENSE)
 
 
 
Interest and other income
4,598

 
6,371

Interest expense
(31,412
)
 
(34,670
)
Total other income (expense)
(26,814
)
 
(28,299
)
Income before gain on property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
34,429

 
23,530

Gain on property dispositions
20,521

 
2,271

Income taxes
(801
)
 
(845
)
Equity in earnings of unconsolidated joint ventures
4,914

 
6,906

Net income
59,063

 
31,862

Noncontrolling interest – operating partnership
(1,509
)
 
(853
)
Noncontrolling interest – consolidated joint ventures

 
(58
)
Net income available to common shareholders
$
57,554

 
$
30,951

 
 
 
 
Net income
$
59,063

 
$
31,862

Other comprehensive loss - foreign currency translation
(5,087
)
 
(10,410
)
Other comprehensive loss - derivative instruments
(1,360
)
 
(947
)
Other comprehensive loss
(6,447
)
 
(11,357
)
Total comprehensive income
52,616

 
20,505

Less: comprehensive income attributable to noncontrolling interest
(1,357
)
 
(648
)
Comprehensive income attributable to common shareholders
$
51,259

 
$
19,857

Earnings per common share
 
 
 
Income per common share – basic
$
0.39

 
$
0.21

Income per common share – diluted
$
0.39

 
$
0.21

Distributions per common share
$
0.475

 
$
0.475

Weighted average number of common shares outstanding
 
 
 
Basic
146,071

 
148,315

Diluted
146,531

 
149,031

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
 
TOTAL LIBERTY PROPERTY TRUST SHAREHOLDERS’
EQUITY
 
NONCONTROLLING INTEREST - OPERATING PARTNERSHIP-COMMON
 
NONCONTROLLING INTEREST -
CONSOLIDATED
JOINT
VENTURES
 
TOTAL EQUITY
 
NONCONTROLLING INTEREST - OPERATING PARTNERSHIP (MEZZANINE)
Balance at January 1, 2016
 
$
148

 
$
3,669,627

 
$
(17,893
)
 
$
(698,954
)
 
$
2,952,928

 
$
53,100

 
$
3,919

 
$
3,009,947

 
$
7,537

Net proceeds from the issuance of common shares
 

 
504

 

 

 
504

 

 

 
504

 

Net income
 

 

 

 
57,554

 
57,554

 
1,391

 

 
58,945

 
118

Distributions
 

 

 

 
(69,634
)
 
(69,634
)
 
(1,676
)
 

 
(71,310
)
 
(118
)
Share repurchase
 
(1
)
 
(40,895
)
 

 

 
(40,896
)
 

 

 
(40,896
)
 

Share-based compensation
 

 
11,105

 

 

 
11,105

 

 

 
11,105

 

Other comprehensive loss - foreign currency translation
 

 

 
(4,967
)
 

 
(4,967
)
 
(120
)
 

 
(5,087
)
 

Other comprehensive loss - derivative instruments
 

 

 
(1,328
)
 

 
(1,328
)
 
(32
)
 

 
(1,360
)
 

Balance at March 31, 2016
 
$
147

 
$
3,640,341

 
$
(24,188
)
 
$
(711,034
)
 
$
2,905,266

 
$
52,663

 
$
3,919

 
$
2,961,848

 
$
7,537


See accompanying notes.

7


CONSOLIDATED STATEMENTS OF CASH FLOWS OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands)
 
 
Three Months Ended
 
March 31, 2016
 
March 31, 2015
OPERATING ACTIVITIES
 
 
 
Net income
$
59,063

 
$
31,862

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
54,837

 
59,431

Amortization of deferred financing costs
1,002

 
1,073

Impairment - real estate assets

 
15,739

Equity in earnings of unconsolidated joint ventures
(4,914
)
 
(6,906
)
Distributions from unconsolidated joint ventures
314

 

Gain on property dispositions
(20,521
)
 
(2,271
)
Share-based compensation
10,536

 
7,437

Other
(1,652
)
 
(2,990
)
Changes in operating assets and liabilities:
 
 
 
Restricted cash
2,216

 
489

Accounts receivable
(4,030
)
 
(3,670
)
Deferred rent receivable
(5,225
)
 
(5,504
)
Prepaid expenses and other assets
(2,926
)
 
(13,058
)
Accounts payable
3,762

 
(116
)
Accrued interest
16,976

 
12,178

Other liabilities
(12,627
)
 
(3,718
)
Net cash provided by operating activities
96,811

 
89,976

INVESTING ACTIVITIES
 
 
 
Investment in properties – acquisitions
(8,000
)
 

Investment in properties – other
(13,314
)
 
(12,805
)
Investments in and advances to unconsolidated joint ventures
(14,635
)
 
(5,822
)
Distributions from unconsolidated joint ventures
26,684

 
6,098

Net proceeds from disposition of properties/land
127,727

 
40,998

Investment in development in progress
(76,522
)
 
(48,001
)
Investment in land held for development
(15,392
)
 
(4,045
)
Payment of deferred leasing costs
(8,200
)
 
(9,684
)
Other
8,095

 
(1,601
)
Net cash provided by (used in) investing activities
26,443

 
(34,862
)
FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of common shares
504

 
12,579

Share repurchase
(40,896
)
 

Proceeds from unsecured notes

 
398,576

Repayments of unsecured notes

 
(300,000
)
Repayments of mortgage loans
(3,101
)
 
(2,160
)
Proceeds from credit facility
187,000

 
390,000

Repayments on credit facility
(186,000
)
 
(507,000
)
Payment of deferred financing costs

 
(3,551
)
Distribution paid on common shares
(70,104
)
 
(70,562
)
Distribution paid on units
(1,794
)
 
(1,863
)
Net cash used in financing activities
(114,391
)
 
(83,981
)
Net increase (decrease) in cash and cash equivalents
8,863

 
(28,867
)
Decrease in cash and cash equivalents related to foreign currency translation
(553
)
 
(1,724
)
Cash and cash equivalents at beginning of period
35,353

 
69,346

Cash and cash equivalents at end of period
$
43,663

 
$
38,755


See accompanying notes.

8


CONSOLIDATED BALANCE SHEETS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands, except unit amounts)
 
 
March 31, 2016
 
December 31, 2015
ASSETS
 
 
 
Real estate:
 
 
 
Land and land improvements
$
1,186,960

 
$
1,183,411

Building and improvements
5,127,287

 
5,124,521

Less accumulated depreciation
(1,159,991
)
 
(1,148,228
)
Operating real estate
5,154,256

 
5,159,704

Development in progress
335,927

 
360,948

Land held for development
341,356

 
336,967

Net real estate
5,831,539

 
5,857,619

Cash and cash equivalents
43,663

 
35,353

Restricted cash
6,606

 
9,018

Accounts receivable, net
18,319

 
14,343

Deferred rent receivable, net
121,278

 
118,787

Deferred financing and leasing costs, net of accumulated amortization (March 31, 2016, $170,558; December 31, 2015, $175,243)
183,813

 
192,038

Investments in and advances to unconsolidated joint ventures
210,341

 
218,454

Assets held for sale
7,918

 
12,968

Prepaid expenses and other assets
94,821

 
99,049

Total assets
$
6,518,298

 
$
6,557,629

LIABILITIES
 
 
 
Mortgage loans, net
$
304,360

 
$
307,908

Unsecured notes, net
2,580,910

 
2,580,108

Credit facility
260,000

 
259,000

Accounts payable
60,328

 
51,382

Accrued interest
43,130

 
26,154

Distributions payable
71,317

 
71,787

Other liabilities
228,868

 
243,806

Total liabilities
3,548,913

 
3,540,145

Limited partners' equity - 301,483 preferred units outstanding as of March 31, 2016, and December 31, 2015
7,537

 
7,537

OWNERS’ EQUITY
 
 
 
General partner’s equity - 146,603,946 and 147,577,984 common units outstanding as of March 31, 2016 and December 31, 2015, respectively
2,905,266

 
2,952,928

Limited partners’ equity – 3,539,075 common units outstanding as of March 31, 2016 and December 31, 2015
52,663

 
53,100

Noncontrolling interest – consolidated joint ventures
3,919

 
3,919

Total owners’ equity
2,961,848

 
3,009,947

Total liabilities, limited partners' equity and owners’ equity
$
6,518,298

 
$
6,557,629


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, 2016
 
March 31, 2015
OPERATING REVENUE
 
 
 
Rental
$
139,054

 
$
148,585

Operating expense reimbursement
51,086

 
58,316

Total operating revenue
190,140

 
206,901

OPERATING EXPENSE
 
 
 
Rental property
28,509

 
35,571

Real estate taxes
25,320

 
26,164

General and administrative
20,990

 
18,802

Depreciation and amortization
54,078

 
58,796

Impairment - real estate assets

 
15,739

Total operating expense
128,897

 
155,072

Operating income
61,243

 
51,829

OTHER INCOME (EXPENSE)
 
 
 
Interest and other income
4,598

 
6,371

Interest expense
(31,412
)
 
(34,670
)
Total other income (expense)
(26,814
)
 
(28,299
)
Income before gain on property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
34,429

 
23,530

Gain on property dispositions
20,521

 
2,271

Income taxes
(801
)
 
(845
)
Equity in earnings of unconsolidated joint ventures
4,914

 
6,906

Net income
59,063

 
31,862

Noncontrolling interest – consolidated joint ventures

 
(58
)
Preferred unit distributions
(118
)
 
(118
)
Net income available to common unitholders
$
58,945

 
$
31,686

Net income
$
59,063

 
$
31,862

Other comprehensive loss - foreign currency translation
(5,087
)
 
(10,410
)
Other comprehensive loss - derivative instruments
(1,360
)
 
(947
)
Other comprehensive loss
(6,447
)
 
(11,357
)
Total comprehensive income
$
52,616

 
$
20,505

Earnings per common unit
 
 
 
Income per common unit - basic
$
0.39

 
$
0.21

Income per common unit - diluted
$
0.39

 
$
0.21

Distributions per common unit
$
0.475

 
$
0.475

Weighted average number of common units outstanding
 
 
 
        Basic
149,610

 
151,856

        Diluted
150,070

 
152,572

Net income allocated to general partners
$
57,554

 
$
30,951

Net income allocated to limited partners
$
1,509

 
$
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, 2016
$
2,952,928

 
$
53,100

 
$
3,919

 
$
3,009,947

 
$
7,537

Contributions from partners
11,609

 

 

 
11,609

 

Unit repurchase
(40,896
)
 

 

 
(40,896
)
 

Distributions to partners
(69,634
)
 
(1,676
)
 

 
(71,310
)
 
(118
)
Other comprehensive loss - foreign currency translation
(4,967
)
 
(120
)
 

 
(5,087
)
 

Other comprehensive loss - derivative instruments
(1,328
)
 
(32
)
 

 
(1,360
)
 

Net income
57,554

 
1,391

 

 
58,945

 
118

Balance at March 31, 2016
$
2,905,266

 
$
52,663

 
$
3,919

 
$
2,961,848

 
$
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, 2016
 
March 31, 2015
OPERATING ACTIVITIES
 
 
 
Net income
$
59,063

 
$
31,862

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
54,837

 
59,431

Amortization of deferred financing costs
1,002

 
1,073

Impairment - real estate assets

 
15,739

Equity in earnings of unconsolidated joint ventures
(4,914
)
 
(6,906
)
Distributions from unconsolidated joint ventures
314

 

Gain on property dispositions
(20,521
)
 
(2,271
)
Noncash compensation
10,536

 
7,437

Other
(1,652
)
 
(2,990
)
Changes in operating assets and liabilities:
 
 
 
Restricted cash
2,216

 
489

Accounts receivable
(4,030
)
 
(3,670
)
Deferred rent receivable
(5,225
)
 
(5,504
)
Prepaid expenses and other assets
(2,926
)
 
(13,058
)
Accounts payable
3,762

 
(116
)
Accrued interest
16,976

 
12,178

Other liabilities
(12,627
)
 
(3,718
)
Net cash provided by operating activities
96,811

 
89,976

INVESTING ACTIVITIES
 
 
 
Investment in properties – acquisitions
(8,000
)
 

Investment in properties – other
(13,314
)
 
(12,805
)
Investments in and advances to unconsolidated joint ventures
(14,635
)
 
(5,822
)
Distributions from unconsolidated joint ventures
26,684

 
6,098

Net proceeds from disposition of properties/land
127,727

 
40,998

Investment in development in progress
(76,522
)
 
(48,001
)
Investment in land held for development
(15,392
)
 
(4,045
)
Payment of deferred leasing costs
(8,200
)
 
(9,684
)
Other
8,095

 
(1,601
)
Net cash provided by (used in) investing activities
26,443

 
(34,862
)
FINANCING ACTIVITIES
 
 
 
Proceeds from unsecured notes

 
398,576

Repayments of unsecured notes

 
(300,000
)
Repayments of mortgage loans
(3,101
)
 
(2,160
)
Proceeds from credit facility
187,000

 
390,000

Repayments on credit facility
(186,000
)
 
(507,000
)
Payment of deferred financing costs

 
(3,551
)
Capital contributions
504

 
12,579

Distributions to partners
(112,794
)
 
(72,425
)
Net cash used in financing activities
(114,391
)
 
(83,981
)
Net increase (decrease) in cash and cash equivalents
8,863

 
(28,867
)
Decrease in cash and cash equivalents related to foreign currency translation
(553
)
 
(1,724
)
Cash and cash equivalents at beginning of period
35,353

 
69,346

Cash and cash equivalents at end of period
$
43,663

 
$
38,755


See accompanying notes.

12


Liberty Property Trust and Liberty Property Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2016
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 97.6% of the common equity of the Operating Partnership at March 31, 2016. 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.
As of January 1, 2016 under the revised accounting standard Topic 810 (see Recently Issued Accounting Standards below), the Operating Partnership is a variable interest entity ("VIE") of the Trust as the limited partners do not have substantive kick-out or participating rights. The Trust is the primary beneficiary of the Operating Partnership as it has the power to direct the activities of the Operating Partnership and the rights to absorb 97.6% of the net income of the Operating Partnership. The Trust has no significant assets or liabilities other than its investment in the Operating Partnership. As the Operating Partnership is already consolidated in the balance sheets of the Trust, the identification of this entity as a VIE has no impact on the consolidated financial statements of the Trust. In addition, the Company holds a 20% interest in Liberty/Comcast 1701 JFK Boulevard, LP which was determined to be a VIE. The Company determined that it is not the primary beneficiary as the Company and its third party partner share control of the joint venture. The Company's maximum exposure to loss is equal to its equity investment in the joint venture which was $20.1 million and $20.5 million as of March 31, 2016 and December 31, 2015, respectively.
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, 2015. 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, 2018. The Company is evaluating the impact ASU 2014-09 will have on its financial position and results of operations.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (Topic 810) ("ASU 2015-02"). The standard requires that all entities re-evaluate and revise consolidation documentation for limited partnerships and similar legal entities. It makes changes to both the variable interest model and voting model. The Company adopted ASU 2015-02 beginning January 1, 2016. The adoption of ASU 2015-02 did not have a material impact on the Company's financial position and results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for the Company beginning January 1, 2019. Early adoption of ASU 2016-02 is permitted. The standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is evaluating the impact ASU 2016-02 will have on its financial position and results of operations.

13


In March 2016, the FASB issued ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships ("ASU 2016-05"). ASU 2016-05 states that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under FASB Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 is effective for the Company beginning January 1, 2017. Early adoption of ASU 2016-05 is permitted. The standard allows application on a prospective or modified retrospective basis. The Company does not believe that ASU 2016-05 will have a material impact on its financial position and results of operations.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 is designed to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for the Company beginning January 1, 2017. Early adoption of ASU 2016-09 is permitted. Certain amendments in the standard are to be applied retrospectively and certain amendments are to be applied prospectively. The Company is evaluating the impact ASU 2016-09 will have on its financial position and results of operations.
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, 2016
 
March 31, 2015
 
Income
(Numerator)
 
Weighted
Average
Shares
(Denominator)
 
Per Share
 
Income
(Numerator)
 
Weighted
Average
Shares
(Denominator)
 
Per Share
Net income available to common shareholders - basic
$
57,554

 
146,071

 
$
0.39

 
$
30,951

 
148,315

 
$
0.21

Dilutive shares for long-term compensation plans

 
460

 
 
 

 
716

 
 
Net income available to common shareholders - diluted
$
57,554

 
146,531

 
$
0.39

 
$
30,951

 
149,031

 
$
0.21

 
 
 
 
 
 
 
 
 
 
 
 

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, 2016 was 2.4 million as compared to 596,000 for the same period in 2015.
During the three months ended March 31, 2016, 15,000 common shares were issued upon the exercise of options. During the year ended December 31, 2015, 65,000 common shares were issued upon the exercise of options.
Share Repurchase
In August 2015, the Company’s Board of Trustees authorized a share repurchase plan under which the Company may purchase up to $250 million of the Company’s outstanding common shares. Purchases made pursuant to the program will be made in either the open market or in privately negotiated transactions from time to time as permitted by securities laws and other legal requirements.
During the three months ended March 31, 2016, the Company purchased an aggregate of 1.4 million common shares for $40.9 million at an average price of $29.28 per share as part of the share repurchase plan.


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, 2016
 
March 31, 2015
 
Income (Numerator)
 
Weighted
Average Units
(Denominator)
 
Per Unit
 
Income
(Numerator)
 
Weighted
Average Units
(Denominator)
 
Per Unit
Income - net of noncontrolling interest - consolidated joint ventures
$
59,063

 
 
 
 
 
$
31,804

 
 
 
 
Less: Preferred unit distributions
(118
)
 
 
 
 
 
(118
)
 
 
 
 
Income available to common unitholders - basic
$
58,945

 
149,610

 
$
0.39

 
$
31,686

 
151,856

 
$
0.21

Dilutive units for long-term compensation plans

 
460

 
 
 

 
716

 
 
Income available to common unitholders - diluted
$
58,945

 
150,070

 
$
0.39

 
$
31,686

 
152,572

 
$
0.21

 
 
 
 
 
 
 
 
 
 
 
 

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, 2016 was 2.4 million as compared to 596,000 for the same period in 2015.
During the three months ended March 31, 2016, 15,000 common units were issued upon exercise of options. During the year ended December 31, 2015, 65,000 common units were issued upon the exercise of options.
Share Repurchase
In August 2015, the Company’s Board of Trustees authorized a share repurchase plan under which the Company may purchase up to $250 million of the Company’s outstanding common units. Purchases made pursuant to the program will be made in either the open market or in privately negotiated transactions from time to time as permitted by securities laws and other legal requirements.
During the three months ended March 31, 2016, the Company purchased an aggregate of 1.4 million common shares for $40.9 million at an average price of $29.28 per share as part of the share repurchase plan. In connection with these repurchases, an equal number of common units were repurchased by the Operating Partnership from the Trust.

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,
 
 
2016
 
2015
Foreign Currency Translation:
 
 
 
 
     Beginning balance
 
$
(17,256
)
 
$
(5,823
)
     Translation adjustment
 
(5,087
)
 
(10,410
)
     Ending balance
 
(22,343
)
 
(16,233
)
 
 
 
 
 
Derivative Instruments:
 
 
 
 
     Beginning balance
 
(865
)
 
(377
)
     Unrealized loss
 
(1,643
)
 
(1,299
)
     Reclassification adjustment (1)
 
283

 
352

     Ending balance
 
(2,225
)
 
(1,324
)
Total accumulated other comprehensive loss
 
(24,568
)
 
(17,557
)
Less: portion included in noncontrolling interest – operating partnership
 
380

 
211

Total accumulated other comprehensive loss included in shareholders' equity/owners' equity
 
$
(24,188
)
 
$
(17,346
)

(1)
Amounts reclassified out of Accumulated Other Comprehensive Loss/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. During the three months ended March 31, 2016, the Company realigned its reportable segments as follows:
Carolinas/Richmond;
Chicago/Milwaukee;
Florida;
Houston;
Lehigh/Central PA;
Minnesota;
Philadelphia;
Southeastern PA; and
United Kingdom.
Certain other segments are aggregated into an "Other" category which includes the reportable segments: Arizona; Atlanta; Cincinnati/Columbus/Indianapolis; Dallas; DC Metro; New Jersey; Northern Virginia; Southern California; and other.
Comparative prior periods have been restated to reflect current segment disclosures.
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,
 
 
 
 
2016
 
2015
 
Operating revenue
 
 
 
 
 
 
Carolinas/Richmond
 
$
15,760

 
$
20,334

 
 
Chicago/Milwaukee
 
10,193

 
9,793

 
 
Florida
 
29,318

 
30,932

 
 
Houston
 
14,766

 
12,324

 
 
Lehigh/Central PA
 
34,243

 
33,554

 
 
Minnesota
 
11,346

 
12,672

 
 
Philadelphia
 
10,355

 
9,982

 
 
Southeastern PA
 
25,883

 
39,238

 
 
United Kingdom
 
3,552

 
3,725

 
 
Other
 
34,998

 
34,398

 
Segment-level operating revenue
 
190,414

 
206,952

 
 
 
 
 
 
 
 
 Reconciliation to total operating revenues
 
 
 
 
 
 
 Other
 
(274
)
 
(51
)
 
 Total operating revenue
 
$
190,140

 
$
206,901

 
 
 
 
 
 
 
 
 Net operating income
 
 
 
 
 
 
 
Carolinas/Richmond
 
$
10,840

 
$
12,846

 
 
Chicago/Milwaukee
 
6,793

 
6,743

 
 
Florida
 
18,047

 
19,102

 
 
Houston
 
8,833

 
7,221

 
 
Lehigh/Central PA
 
24,202

 
22,971

 
 
Minnesota
 
4,578

 
5,985

 
 
Philadelphia
 
7,097

 
7,022

 
 
Southeastern PA
 
13,751

 
20,988

 
 
United Kingdom
 
2,405

 
2,516

 
 
Other
 
22,825

 
22,176

 
Segment-level net operating income
 
119,371

 
127,570

 
 
 
 
 
 
 
 
 Reconciliation to net income
 
 
 
 
 
 
 Interest expense
 
(31,412
)
 
(34,670
)
 
 
 Depreciation/amortization expense (1)
 
(39,798
)
 
(43,514
)
 
 
 Impairment - real estate assets
 

 
(15,739
)
 
 
 Gain on property dispositions
 
20,521

 
2,271

 
 
 Equity in earnings of unconsolidated joint ventures
 
4,914

 
6,906

 
 
 General and administrative expense (1)
 
(14,539
)
 
(12,574
)
 
 
 Income taxes (1)
 
(570
)
 
(707
)
 
 
 Other
 
576

 
2,319

 
Net income
 
$
59,063

 
$
31,862

 

(1)
Excludes costs which are included in determining segment-level net operating income.

17



During the three months ended March 31, 2016, the Company acquired one operating property for a purchase price of $8.0 million. This property, comprising 73,000 square feet of leaseable space, is located in the Company's Chicago/Milwaukee reportable segment.

The Company's sales by reportable segment for the three months ended March 31, 2016 are as follows:

 
Three months ended March 31, 2016
 
 
Properties Sold
 
Square Feet (000s)
 
Gross Proceeds (000s)
 
Minnesota
1

 
92

 
$
9,200

 
Florida
6

 
574

 
111,828

(1)
Other
1

 
183

 
10,100

 
Total
8

 
849

 
$
131,128

 

(1)
Includes gross proceeds from the sale of 3.5 acres of land.

One property totaling 198,000 square feet in the Company's Dallas reportable segment was considered held for sale as of March 31, 2016.

The Company's total assets by reportable segment as of March 31, 2016 and December 31, 2015 is as follows (in thousands):

 
March 31, 2016
 
December 31, 2015
Carolinas/Richmond
$
477,932

 
$
467,098

Chicago/Milwaukee
438,204

 
429,390

Florida
781,322

 
874,352

Houston
520,639

 
522,285

Lehigh/Central PA
1,188,450

 
1,157,468

Minnesota
345,590

 
346,840

Philadelphia
475,495

 
444,889

Southeastern PA
448,560

 
448,523

United Kingdom
208,221

 
215,850

Other
1,570,906

 
1,586,481

Segment-level total assets
6,455,319

 
6,493,176

Corporate Other
62,979

 
64,453

Total assets
$
6,518,298

 
$
6,557,629


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

Asset Impairment

The Company disposes of and anticipates the potential disposition of certain properties prior to the end of their remaining useful lives. There were no impairments recognized during the three months ended March 31, 2016. 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 Carolinas/Richmond 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 in ASC 820. These measurements have occurred throughout the respective periods as circumstances arise, and the resulting estimates of fair value are not necessarily reflective of measurements at the period’s end. 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, 2016

18


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.
Common units
The common units of the Operating Partnership not held by the Trust outstanding as of March 31, 2016 have the same economic characteristics as common shares of the Trust. The 3.5 million outstanding common units of the Operating Partnership not held by the Trust share proportionately in the net income or loss and in any distributions of the Operating Partnership. The common units of the Operating Partnership not held by the Trust are redeemable at any time at the option of the holder. The Trust, as the sole general partner of the Operating Partnership, may at its option elect to settle the redemption in cash or through the exchange on a one-for-one basis with unregistered common shares of the Trust. The market value of the 3.5 million outstanding common units based on the closing price of the common shares of the Trust at March 31, 2016 was $118.4 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 have the same economic characteristics as common shares of the Trust. The 3.5 million outstanding common units as of March 31, 2016 not held by the Trust are the limited partners' equity - common units held by persons and entities other than the Trust. The common units of the Operating Partnership not held by the Trust are redeemable at any time at the option of the holder. The Trust, as the sole general partner of the Operating Partnership, may at its option elect to settle the redemption in cash or through the exchange on a one-for-one basis with unregistered common shares of the Trust. The market value of the 3.5 million outstanding common units at March 31, 2016 based on the closing price of the common shares of the Trust at March 31, 2016 was $118.4 million.
Note 9: Noncontrolling Interest - Operating Partnership/Limited Partners' Equity - Preferred Units
As of March 31, 2016, 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: 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, 2016 and December 31, 2015. 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.

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.

19


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, 2016 and December 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, 2015 and March 31, 2016 (in thousands):
 
 
Mortgage Loans
 
Unsecured Notes
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
As of December 31, 2015
 
$
307,908

 
$
306,334

 
$
2,580,108

 
$
2,616,395

As of March 31, 2016
 
$
304,360

 
$
302,783

 
$
2,580,910


$
2,719,746

Note 11: Unconsolidated Joint Ventures
Liberty Washington, LP
During the three months ended March 31, 2016, Liberty Washington LP (a joint venture in which the Company holds a 25% interest) sold three properties located in the Company's Northern Virginia reportable segment containing 601,000 square feet for $80.5 million.
In addition, during the three months ended March 31, 2016, four properties in the Company's Northern Virginia reportable segment containing 449,000 square feet were transferred to the mortgage lender in full satisfaction of a $66.1 million nonrecourse mortgage loan that was secured by the properties. The Company's share of gain from property dispositions and extinguishment of debt is included in equity in earnings of unconsolidated joint ventures in the accompanying consolidated statements of comprehensive income.
The Company's share of gain from extinguishment of debt was $912,000 and its share of gain on property dispositions was $1.8 million.
As of March 31, 2016 the joint venture was in default of a $46.4 million non-recourse mortgage loan related to certain properties within the joint venture located in the Company's Northern Virginia reportable segment.


20


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 an 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 $100.8 million and $101.4 million at March 31, 2016 and December 31, 2015, respectively, and expire at various dates between 2018 and 2020.
The Company accounts for the effective portion of changes in the fair value of a derivative in accumulated other comprehensive loss and subsequently reclassifies the effective portion to earnings over the term that the hedged transaction affects earnings. The Company accounts for the ineffective portion of changes in the fair value of a derivative directly in earnings.
The following table presents the location in the financial statements of the gains or losses recognized related to the Company’s cash flow hedges for the three months ended March 31, 2016 and 2015:
 
Three Months Ended
 
 
 
March 31, 2016
 
March 31, 2015
 
 
 
(in thousands)
 
 
Amount of loss related to the effective portion recognized in other comprehensive loss
$
(1,643
)
 
$
(1,299
)
 
 
Amount of loss related to the effective portion subsequently reclassified to interest expense
$
(283
)
 
$
(352
)
 
 
Amount of loss related to the ineffective portion recognized in interest expense
$
(56
)
 
$
(59
)
 
 
 
 
 
 
 
 
The fair value of the Swaps in the amounts of $8.1 million and $7.1 million as of March 31, 2016 and December 31, 2015, respectively, is included in other liabilities in the accompanying consolidated balance sheets. The Company estimates that $1.0 million will be reclassified from accumulated other comprehensive loss 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, which totaled approximately $8.3 million as of March 31, 2016.

21


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, 2016, were as follows (in thousands):
 
Year
 
Amount
2016
 
$
778

2017
 
1,038

2018
 
1,038

2019
 
1,038

2020
 
1,038

2021 and thereafter
 
6,754

Total
 
$
11,684


Operating ground lease expense for the three months ended March 31, 2016 was $256,000 as compared to $64,000 for the same period in 2015.
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, 2016 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.
Other
As of March 31, 2016, the Company had letter of credit obligations of $4.9 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, 2016, the Company had 24 buildings under development. These buildings are expected to contain, when completed, a total of 6.3 million square feet of leasable space and represent an anticipated aggregate investment of $603.8 million. At March 31, 2016, development in progress totaled $335.9 million. In addition, as of March 31, 2016, the Company had invested $12.3 million in deferred leasing costs related to these development buildings.
As of March 31, 2016, the Company was committed to $80.5 million in improvements on certain buildings and land parcels.
As of March 31, 2016, the Company was committed to $28.7 million in future land purchases.
As of March 31, 2016, the Company was obligated to pay for tenant improvements not yet completed for a maximum of $35.9 million.

As of March 31, 2016, the Company was committed to fund up to $4 million for tenant improvements and leasing commissions under a loan to the buyer of properties in the Company's Southeastern PA reportable segment.

Unconsolidated joint ventures in which the Company holds an interest have engaged the Company as the developer of its development properties pursuant to development agreements. The Company agrees, in consideration for a development fee, to be responsible for all aspects of the development of the properties and to guarantee the timely lien-free completion of construction of the properties and the payment, subject to certain exceptions, of any cost overruns incurred in the development of the properties. The Company is currently developing five buildings for its unconsolidated joint ventures which represent an anticipated aggregate investment by the joint ventures of $1.0 billion.

22



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 Consolidated Statements of Cash Flows
The following are supplemental disclosures to the consolidated statements of cash flows for the three months ended March 31, 2016 and 2015 (amounts in thousands):
 
 
2016
 
2015
 Write-off of fully depreciated/amortized property and deferred costs
$
12,685

 
$
14,436

 Write-off of depreciated/amortized property and deferred costs due to sale
$
32,323

 
$
10,295

 Unrealized loss on cash flow hedge
$
(1,360
)
 
$
(947
)
 Changes in accrued development capital expenditures
$
394

 
$
(8,343
)

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.
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, 2016, the Company owned and operated 485 industrial and 123 office properties (the “Wholly Owned Properties in Operation”) totaling 89.7 million square feet. In addition, as of March 31, 2016, the Company owned 24 properties under development, which when completed are expected to comprise 6.3 million square feet (the “Wholly Owned Properties under Development”) and 1,733 acres of developable land, substantially all of which is zoned for commercial use. Additionally, as of March 31, 2016, the Company had an ownership interest, through unconsolidated joint ventures, in 49 industrial and 26 office properties totaling 13.4 million square feet (the “JV Properties in Operation” and, together with the Wholly Owned Properties in Operation, the “Properties in Operation”), five properties under development, which when completed are expected to comprise 2.5 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 392 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. The Company also believes that long-term trends indicate potential erosion in the value of certain suburban office properties in certain markets. Accordingly, the Company has increased its investment in industrial and metro-office properties and markets with strong demographic and economic fundamentals, and has decreased its investment in suburban office properties. Furthermore, the Company expects to accelerate this strategy during 2016. The Company anticipates that this strategy will yield significant benefits over time, 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 also anticipates that this strategy will result in a gradual improvement in the average quality and geographic location of the Company’s properties. The Company believes

23


that these benefits of the strategy will greatly outweigh the short-term reduction in net cash from operating activities that results from the disposition of the suburban office assets.
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, 2016 straight line rents on renewal and replacement leases were on average 10.2% higher than rents on expiring leases. The Company's guidance for 2016 contemplated an increase of straight line rent on average of 1% to 4%. During the three months ended March 31, 2016, the Company successfully leased 5.4 million square feet and, as of that date, attained occupancy of 93.7% for the Wholly Owned Properties in Operation and 94.1% for the JV Properties in Operation for a combined occupancy of 93.8% for the Properties in Operation. At December 31, 2015, occupancy for the Wholly Owned Properties in Operation was 93.9% and for the JV Properties in Operation was 92.8% for a combined occupancy for the Properties in Operation of 93.7%. The Company's guidance for 2016 contemplated an increase in average occupancy of 1% to 2%.
Wholly Owned Capital Activity
Acquisitions
During the three months ended March 31, 2016, the Company acquired one operating property for a purchase price of $8.0 million. This property, which contain 73,000 square feet of leaseable space, was 52.8% occupied as of March 31, 2016. The Company also acquired one parcel of land containing 8.3 acres for a purchase price of $3.3 million.
Dispositions
During the three months ended March 31, 2016, the Company realized proceeds of $131.1 million from the sale of eight properties totaling 849,000 square feet and 3.5 acres of land.
Development
During the three months ended March 31, 2016, the Company brought into service five Wholly Owned Properties under Development representing 716,000 square feet and a Total Investment of $94.5 million. During the three months ended March 31, 2016, the Company initiated two Wholly Owned Properties under Development with a projected Total Investment of $24.3 million. As of March 31, 2016, the Company had 24 Wholly Owned Properties under Development with a projected Total Investment of $603.8 million. These Wholly Owned Properties under Development were 48.7% pre-leased as of March 31, 2016.
“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, 2016, an unconsolidated joint venture in which the Company holds a 25% interest realized gross proceeds of $80.5 million for the sale of three properties totaling 601,000 square feet. In addition, four properties containing 449,000 square feet were transferred to the mortgage lender for release of a $66.1 million nonrecourse mortgage loan. None of the unconsolidated joint ventures in which the Company holds an interest acquired 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, 2016 a joint venture in which the Company holds a 25% interest brought into service one property totaling 430,000 square feet and a Total Investment of $24.3 million. As of March 31, 2016, joint ventures in which the Company holds an interest had five JV Properties under Development which are expected to comprise, upon completion, 2.5 million square feet and a 222-room Four Seasons Hotel and are expected to represent a Total Investment by the joint ventures of $1.0 billion. These JV Properties under Development were 82.5% pre-leased as of March 31, 2016.
Included in these totals are joint ventures in which the Company holds a 20% interest that are developing the Comcast Innovation & Technology Center, which is expected to comprise, upon completion, 1.3 million square feet and the aforementioned hotel and is expected to represent a Total Investment by the joint ventures of $934 million.


24


Properties in Operation
The composition of the Company’s Properties in Operation as of March 31, 2016 and 2015 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,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Wholly Owned Properties in Operation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrial-Distribution
$
4.60

 
$
4.45

 
$
6.09

 
$
5.94

 
71,362

 
68,434

 
95.7
%
 
94.6
%
Industrial-Flex
$
8.98

 
$
8.68

 
$
12.73

 
$
12.57

 
8,066

 
8,738

 
93.1
%
 
92.5
%
Office
$
17.91

 
$
15.74

 
$
26.73

 
$
24.55

 
10,230

 
13,929

 
80.3
%
 
87.0
%
 
$
6.30

 
$
6.46

 
$
8.70

 
$
9.23

 
89,658

 
91,101

 
93.7
%
 
93.2
%
JV Properties in Operation: (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrial-Distribution
$
4.08

 
$
4.08

 
$
5.88

 
$
5.79

 
10,307

 
10,075

 
95.5
%
 
95.6
%
Industrial-Flex
$
26.12

 
$
25.93

 
$
27.15

 
$
24.76

 
108

 
108

 
95.7
%
 
93.5
%
Office
$
29.05

 
$
26.24

 
$
40.60

 
$
37.65

 
2,983

 
4,114

 
89.2
%
 
86.5
%
 
$
9.53

 
$
10.18

 
$
13.38

 
$
14.47

 
13,398

 
14,297

 
94.1
%
 
93.0
%
Properties in Operation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrial-Distribution
$
4.54

 
$
4.40

 
$
6.06

 
$
5.92

 
81,669

 
78,509

 
95.7
%
 
94.7
%
Industrial-Flex
$
9.21

 
$
8.89

 
$
12.92

 
$
12.72

 
8,174

 
8,846

 
93.1
%
 
92.5
%
Office
$
20.63

 
$
18.12

 
$
30.12

 
$
27.53

 
13,213

 
18,043

 
82.3
%
 
86.9
%
 
$
6.72

 
$
6.96

 
$
9.31

 
$
9.94

 
103,056

 
105,398

 
93.8
%
 
93.2
%

(1) Net rent represents the contractual rent per square foot at March 31, 2016 or 2015 for tenants in occupancy. Net rent does not include the tenant's obligation to pay property operating expenses and real estate taxes. If a tenant was within a free rent period at March 31, 2016 or 2015 its rent would equal zero for the purposes of this metric.
(2) Straight line rent and operating expense reimbursement represents the straight line rent including operating expense recoveries per square foot at March 31, 2016 or 2015 for tenants in occupancy.
(3) JV Properties in Operation represents the properties owned by unconsolidated joint ventures in which the Company had an interest during the respective periods. Unconsolidated joint ventures in which the Company holds an interest owned 75 and 83 properties as of March 31, 2016 and 2015, respectively.

The table below details the vacancy activity during the three months ended March 31, 2016:
 
 Total Square Feet
 
Wholly Owned Properties in Operation
 
JV Properties in Operation
 
Properties in Operation
Vacancy Activity
 
 
 
 
 
Vacancy at January 1, 2016
5,472,746

 
1,013,039

 
6,485,785

Acquisition vacant space
34,537

 

 
34,537

Completed development vacant space
287,123

 
228,447

 
515,570

Disposition vacant space
(116,337
)
 
(429,206
)
 
(545,543
)
Expirations
4,254,401

 
454,205

 
4,708,606

Property structural changes/other

 
(254
)
 
(254
)
Leasing activity
(4,289,361
)
 
(475,163
)
 
(4,764,524
)
Vacancy at March 31, 2016
5,643,109

 
791,068

 
6,434,177

 


 
 
 
 
Lease transaction costs per square foot (1)
$
2.73

 
$
2.64

 
$
2.72