10-Q 1 q093001.txt SEPTEMBER 30, 2001 FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 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 number: 1-13130 (Liberty Property Trust) 1-13132 (Liberty Property Limited Partnership) LIBERTY PROPERTY TRUST LIBERTY PROPERTY LIMITED PARTNERSHIP (Exact name of registrants as specified in their governing documents) MARYLAND (Liberty Property Trust) 23-7768996 PENNSYLVANIA (Liberty Property Limited Partnership) 23-2766549 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 65 Valley Stream Parkway, Suite 100, Malvern, Pennsylvania 19355 (Address of Principal Executive Offices) (Zip Code) Registrants' Telephone Number, Including Area Code (610)648-1700 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past ninety (90) days. YES X NO On November 2, 2001, 73,391,503 Common Shares of Beneficial Interest, par value $.001 per share, of Liberty Property Trust were outstanding. 2 LIBERTY PROPERTY TRUST/LIBERTY PROPERTY LIMITED PARTNERSHIP FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2001 INDEX ----- Part I. Financial Information ------------------------------- Item 1. Financial Statements (unaudited) Page ---- Consolidated balance sheets of Liberty Property Trust at September 30, 2001 and December 31, 2000. 3 Consolidated statements of operations of Liberty Property Trust for the three months ended September 30, 2001 and September 30, 2000. 4 Consolidated statements of operations of Liberty Property Trust for the nine months ended September 30, 2001 and September 30, 2000. 5 Consolidated statements of cash flows of Liberty Property Trust for the nine months ended September 30, 2001 and September 30, 2000. 6 Notes to consolidated financial statements for Liberty Property Trust. 7 Consolidated balance sheets of Liberty Property Limited Partnership at September 30, 2001 and December 31, 2000. 11 Consolidated statements of operations of Liberty Property Limited Partnership for the three months ended September 30, 2001 and September 30, 2000. 12 Consolidated statements of operations of Liberty Property Limited Partnership for the nine months ended September 30, 2001 and September 30, 2000. 13 Consolidated statements of cash flows of Liberty Property Limited Partnership for the nine months ended September 30, 2001 and September 30, 2000. 14 Notes to consolidated financial statements for Liberty Property Limited Partnership. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 25 Part II. Other Information --------------------------- Signatures 27 -2- 3 CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY TRUST (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, 2001 DECEMBER 31, 2000 ------------------ ----------------- (UNAUDITED) ASSETS Real estate: Land and land improvements $ 472,627 $ 443,057 Buildings and improvements 2,898,836 2,759,420 Less accumulated depreciation (388,979) (334,415) ---------- ---------- Operating real estate 2,982,484 2,868,062 Development in progress 218,280 208,486 Land held for development 163,755 137,402 ---------- ---------- Net real estate 3,364,519 3,213,950 Cash and cash equivalents 6,820 4,638 Accounts receivable 20,985 12,624 Deferred financing and leasing costs, net of accumulated amortization (2001, $59,340; 2000, $59,071) 63,497 57,807 Prepaid expenses and other assets 117,860 107,336 ---------- ---------- Total assets $3,573,681 $3,396,355 ========== ========== LIABILITIES Mortgage loans $ 348,450 $ 362,025 Unsecured notes 1,345,000 1,095,000 Credit facility 90,000 176,000 Convertible debentures - 70,871 Accounts payable 40,819 15,672 Accrued interest 18,869 29,478 Dividend payable 47,242 43,220 Other liabilities 79,617 84,515 ---------- ---------- Total liabilities 1,969,997 1,876,781 Minority interest 188,415 198,769 SHAREHOLDERS' EQUITY Series A preferred shares, $.001 par value, 5,000,000 shares authorized, issued and outstanding as of September 30, 2001 and December 31, 2000 120,814 120,814 Common shares of beneficial interest, $.001 par value, 191,200,000 shares authorized, 73,154,588 (includes 59,100 in treasury) and 68,272,079 (includes 59,100 in treasury) shares issued and outstanding as of September 30, 2001 and December 31, 2000, respectively 73 68 Additional paid-in capital 1,322,892 1,223,191 Unearned compensation (1,229) (1,690) Distributions in excess of net income (25,954) (20,251) Common shares in treasury, at cost, 59,100 shares as of September 30, 2001 and December 31, 2000 (1,327) (1,327) ---------- ---------- Total shareholders' equity 1,415,269 1,320,805 ---------- ---------- Total liabilities and shareholders' equity $3,573,681 $3,396,355 ========== ==========
See accompanying notes. -3- 4
CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY TRUST (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE THREE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ------------------ ------------------ REVENUE Rental $ 105,775 $ 97,152 Operating expense reimbursement 40,721 36,219 Interest and other 1,916 1,523 --------- --------- Total revenue 148,412 134,894 --------- --------- EXPENSES Rental property 27,809 24,541 Real estate taxes 15,270 12,946 Interest 27,697 27,518 General and administrative 4,953 4,736 Depreciation and amortization 25,734 22,934 --------- --------- Total expenses 101,463 92,675 --------- --------- Income before property dispositions and minority interest 46,949 42,219 Gain on property dispositions 140 2,964 --------- --------- Income before minority interest 47,089 45,183 Minority interest 4,775 5,092 --------- --------- Net income 42,314 40,091 Preferred distributions 2,750 2,750 --------- --------- Income available to common shareholders $ 39,564 $ 37,341 ========= ========= Earnings per share: Income per common share - basic $ 0.54 $ 0.55 ========= ========= Income per common share - diluted $ 0.53 $ 0.54 ========= ========= Distributions declared per common share $ 0.59 $ 0.57 ========= ========= Weighted average number of common shares outstanding Basic 72,773 67,683 Diluted 73,977 68,699 ========= =========
See accompanying notes. -4- 5
CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY TRUST (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NINE NINE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ------------------ ------------------ REVENUE Rental $ 313,120 $ 283,949 Operating expense reimbursement 119,934 106,827 Interest and other 4,618 4,123 --------- --------- Total revenue 437,672 394,899 --------- --------- EXPENSES Rental property 82,530 72,380 Real estate taxes 41,901 37,922 Interest 83,592 79,535 General and administrative 16,167 13,998 Depreciation and amortization 75,482 68,388 --------- --------- Total expenses 299,672 272,223 --------- --------- Income before property dispositions extraordinary item and minority interest 138,000 122,676 Gain on property dispositions 2,334 11,712 --------- --------- Income before extraordinary item and minority interest 140,334 134,388 Extraordinary item-loss on extinquishment of debt - 2,103 --------- --------- Income before minority interest 140,334 132,285 Minority interest 14,499 14,994 --------- --------- Net income 125,835 117,291 Preferred distributions 8,250 8,250 --------- --------- Income available to common shareholders $ 117,585 $ 109,041 ========= ========= Earnings per share Basic: Income before extraordinary item $ 1.67 $ 1.65 Extraordinary item - (0.03) --------- --------- Income available to common shareholders $ 1.67 $ 1.62 ========= ========= Diluted: Income before extraordinary item $ 1.64 $ 1.63 Extraordinary item - (0.03) --------- --------- Income available to common shareholders $ 1.64 $ 1.60 ========= ========= Distributions declared per common share $ 1.73 $ 1.61 ========= ========= Weighted average number of common shares Outstanding Basic 70,487 67,253 Diluted 73,360 67,935 ========= =========
See accompanying notes. -5- 6
CONSOLIDATED STATEMENTS OF CASH FLOWS OF LIBERTY PROPERTY TRUST (UNAUDITED AND IN THOUSANDS) NINE NINE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ------------------ ------------------ OPERATING ACTIVITIES Net income $ 125,835 $ 117,291 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 75,482 68,388 Amortization of deferred financing costs 3,086 2,818 Minority interest in net income 14,499 14,994 Gain on sale (2,334) (11,712) Noncash compensation 1,749 1,807 Changes in operating assets and liabilities: Accounts receivable (8,361) 6,529 Prepaid expenses and other assets (11,971) (23,147) Accounts payable 25,147 12,317 Accrued interest (10,609) (2,090) Other liabilities (4,898) (190) ---------- --------- Net cash provided by operating activities 207,625 187,005 ---------- --------- INVESTING ACTIVITIES Investment in properties (59,264) (82,968) Proceeds from disposition of properties 77,298 63,604 Investment in development in progress (187,116) (120,110) Investment in land held for development (44,488) (71,013) Increase in deferred leasing costs (17,495) (12,518) ---------- --------- Net cash used in investing activities (231,065) (223,005) ---------- --------- FINANCING ACTIVITIES Net proceeds from issuance of common shares 18,178 10,855 Proceeds from issuance of preferred units - 19,470 Retirement of convertible debentures (597) (10,914) Proceeds from issuance of unsecured notes 250,000 200,000 Repayments of unsecured notes - (90,000) Repayments of mortgage loans (13,903) (7,520) Proceeds from credit facility 253,200 450,000 Repayments on credit facility (339,200) (405,000) Decrease (increase) in deferred financing costs 279 (6,593) Distributions paid on common shares (119,022) (104,755) Distributions paid on preferred shares (8,250) (8,250) Distributions paid on units (15,063) (14,969) ---------- --------- Net cash provided by financing activities 25,622 32,324 ---------- --------- Increase (decrease) in cash and cash equivalents 2,182 (3,676) Cash and cash equivalents at beginning of period 4,638 9,064 ---------- --------- Cash and cash equivalents at end of period $ 6,820 $ 5,388 ========== ========= SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS Write-off of fully depreciated property and deferred costs $ 22,693 $ 21,518 Acquisition of properties (328) - Assumption of mortgage loans 328 - Conversion of convertible debentures 70,274 2,583 ========== =========
See accompanying notes. -6- 7 LIBERTY PROPERTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2001 NOTE 1 - BASIS OF PRESENTATION ------------------------------ The accompanying unaudited consolidated financial statements of Liberty Property Trust (the "Trust") and its subsidiaries, including Liberty Property Limited Partnership (the "Operating Partnership") (the Trust, Operating Partnership and their respective subsidiaries referred to collectively as the "Company"), have been prepared in accordance with accounting principles generally accepted in the United States ("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 Trust and the Operating Partnership for the year ended December 31, 2000. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial statements for these interim periods have been included. The results of interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. Certain amounts from prior periods have been reclassified to conform to current period presentation. The following table sets forth the computation of basic and diluted income per common share for the three and nine months ended September 30, 2001 and 2000:
FOR THE THREE MONTHS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 ENDED SEPTEMBER 30, 2000 ------------------------------------- ------------------------------------- INCOME SHARES PER SHARE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- ----------- ------------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income $ 42,314 $ 40,091 Less: Preferred distributions 2,750 2,750 -------- -------- Basic income per common share Income available to common share- holders 39,564 72,773 $ 0.54 37,341 67,683 $ 0.55 ====== ====== Dilutive shares Long-term compen- sation plans - 1,181 - 1,016 Convertible debentures - 23 - - -------- ------- -------- ------- Diluted income per common share Income available to common share- holders and assumed conversions $ 39,564 73,977 $ 0.53 $ 37,341 68,699 $ 0.54 ======== ======= ====== ======== ======= ======
-7- 8
FOR THE NINE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 ENDED SEPTEMBER 30, 2000 ------------------------------------- ------------------------------------- INCOME SHARES PER SHARE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- ----------- ------------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income $125,835 $117,291 Less: preferred distributions 8,250 8,250 -------- -------- Basic income per common share Income available to common share- holders 117,585 70,487 $ 1.67 109,041 67,253 $ 1.62 ====== ====== Dilutive shares Long-term compen- sation plans - 1,083 - 682 Convertible debentures 2,587 1,790 - - -------- ------- -------- ------- Diluted income per common share Income available to common share- holders and assumed conversions $120,172 73,360 $ 1.64 $109,041 67,935 $ 1.60 ======== ======= ====== ======== ======= ======
For the three and nine months ended September 30, 2000, diluted income per common share includes the weighted average common shares and the dilutive effect of long-term compensation plans, and excludes the effects of the conversion of the Exchangeable Subordinated Debentures due 2001 of the Operating Partnership (the "Convertible Debentures"), into common shares, as to do so would have been antidilutive. Diluted income per common share for the three and nine months ended September 30, 2001 includes the average weighted common shares, the dilutive effect of long- term compensation plans and the dilutive effect of the conversion of the Convertible Debentures into common shares. NOTE 2 - ORGANIZATION --------------------- 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 the Operating Partnership. The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 94.9% of the common equity of the Operating Partnership at September 30, 2001. The Company provides leasing, property management, development, acquisition, construction management and design management for a portfolio of industrial and office properties which are located principally within the Southeastern, Mid- Atlantic and Midwestern United States. NOTE 3 - SEGMENT INFORMATION ---------------------------- The Company reviews the performance of the portfolio on a geographic basis, as such, the following regions are considered the Company's reportable segments: Southeastern Pennsylvania; New Jersey; Lehigh Valley, Pennsylvania; Virginia; the Carolinas; Jacksonville, Florida; -8- 9 Detroit, Michigan; and all others combined (including Maryland, Tampa, Florida; South Florida; Minneapolis, Minnesota; and the United Kingdom). The Company's reportable segments are distinct business units, which are each managed separately in order to concentrate market knowledge within a geographic area. Within these reportable segments, the Company derives its revenues from its two product types: industrial properties and office properties. The Company evaluates performance of the reportable segments based on property-level net operating income, which is calculated as rental revenue and operating expense reimbursement less rental property expenses and real estate taxes. The accounting policies of the reportable segments are the same as those for the Company on a consolidated basis. The operating information by segment is as follows (in thousands):
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 ----------------------------------------------------------------------------------------------------------------------- SE New Lehigh The Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total -------- -------- -------- -------- --------- ------------ -------- ---------- -------- Real estate related revenues $ 43,771 $ 10,882 $ 14,725 $ 11,595 $ 11,687 $ 11,216 $ 15,693 $ 26,927 $146,496 Rental property expenses and real estate taxes 12,877 3,474 3,598 2,816 3,525 3,014 5,289 8,486 43,079 -------- -------- -------- -------- -------- -------- -------- -------- -------- Property-level net operating income 30,894 7,408 11,127 8,779 8,162 8,202 10,404 18,441 103,417 Other income/expenses, net 56,468 -------- Income before property dispositions and minority interest 46,949 Gain on property dispositions 140 Minority interest 4,775 Preferred distributions 2,750 -------- Income available to common shareholders $ 39,564 ========
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 ----------------------------------------------------------------------------------------------------------------------- SE New Lehigh The Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total -------- -------- -------- -------- --------- ------------ -------- ---------- -------- Real estate related revenues $ 37,563 $ 10,628 $ 12,918 $ 10,662 $ 10,780 $ 10,496 $ 14,477 $ 25,847 $133,371 Rental property expenses and real estate taxes 10,331 3,355 2,666 2,325 2,888 2,562 4,909 8,451 37,487 -------- -------- -------- -------- -------- -------- -------- -------- -------- Property-level net operating income 27,232 7,273 10,252 8,337 7,892 7,934 9,568 17,396 95,884 Other income/expenses, net 53,665 -------- Income before property dispositions and minority interest 42,219 Gain on property dispositions 2,964 Minority interest 5,092 Preferred distributions 2,750 -------- Income available to common shareholders $ 37,341 ========
-9- 10
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 ----------------------------------------------------------------------------------------------------------------------- SE New Lehigh The Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total -------- -------- -------- -------- --------- ------------ -------- ---------- -------- Real estate related revenues $128,788 $ 33,567 $ 43,133 $ 33,541 $ 33,798 $ 34,100 $ 44,667 $ 81,460 $433,054 Rental property expenses and real estate taxes 37,606 10,265 10,793 7,992 9,429 8,963 13,976 25,407 124,431 -------- -------- -------- -------- -------- -------- -------- --------- -------- Property-level net operating income 91,182 23,302 32,340 25,549 24,369 25,137 30,691 56,053 308,623 Other income/expenses, net 170,623 -------- Income before property dispositions, extraordinary item and minority interest 138,000 Gain on property dispositions 2,334 Extraordinary item-loss on extinguishment of debt - Minority interest 14,499 Preferred distributions 8,250 -------- Income available to common shareholders $117,585 ========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 ----------------------------------------------------------------------------------------------------------------------- SE New Lehigh The Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total -------- -------- -------- -------- --------- ------------ -------- ---------- -------- Real estate related revenues $108,623 $ 31,510 $ 37,560 $ 32,457 $ 30,504 $ 31,332 $ 42,511 $ 76,279 $390,776 Rental property expenses and real estate taxes 30,539 9,841 8,386 7,172 8,430 7,474 14,532 23,928 110,302 -------- -------- -------- -------- -------- -------- -------- -------- -------- Property-level net operating income 78,084 21,669 29,174 25,285 22,074 23,858 27,979 52,351 280,474 Other income/expenses, net 157,798 -------- Income before property dispositions, extraordinary item and minority interest 122,676 Gain on property dispositions 11,712 Extraordinary item-loss on extinguishment of debt 2,103 Minority interest 14,994 Preferred distributions 8,250 -------- Income available to common shareholders $109,041 ========
-10- 11
CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY LIMITED PARTNERSHIP (IN THOUSANDS) SEPTEMBER 30, 2001 DECEMBER 31, 2000 ------------------ ----------------- (UNAUDITED) ASSETS Real estate: Land and land improvements $ 472,627 $ 443,057 Buildings and improvements 2,898,836 2,759,420 Less accumulated depreciation (388,979) (334,415) ---------- ---------- Operating real estate 2,982,484 2,868,062 Development in progress 218,280 208,486 Land held for development 163,755 137,402 ---------- ---------- Net real estate 3,364,519 3,213,950 Cash and cash equivalents 6,820 4,638 Accounts receivable 20,985 12,624 Deferred financing and leasing costs, net of accumulated amortization (2001, $59,340; 2000, $59,071) 63,497 57,807 Prepaid expenses and other assets 117,860 107,336 ---------- ---------- Total assets $3,573,681 $3,396,355 ========== ========== LIABILITIES Mortgage loans $ 348,450 $ 362,025 Unsecured notes 1,345,000 1,095,000 Credit facility 90,000 176,000 Convertible debentures - 70,871 Accounts payable 40,819 15,672 Accrued interest 18,869 29,478 Distributions payable 47,242 43,220 Other liabilities 79,617 84,515 ---------- ---------- Total liabilities 1,969,997 1,876,781 OWNERS' EQUITY General partner's equity - preferred units 120,814 120,814 - common units 1,294,455 1,199,991 Limited partners' equity - preferred units 112,516 112,516 - common units 75,899 86,253 ---------- ---------- Total owners' equity 1,603,684 1,519,574 ---------- ---------- Total liabilities and owners' equity $3,573,681 $3,396,355 ========== ==========
See accompanying notes. -11- 12
CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY LIMITED PARTNERSHIP (UNAUDITED AND IN THOUSANDS) THREE THREE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ------------------ ------------------ REVENUE Rental $ 105,775 $ 97,152 Operating expense reimbursement 40,721 36,219 Interest and other 1,916 1,523 --------- --------- Total revenue 148,412 134,894 --------- --------- EXPENSES Rental property 27,809 24,541 Real estate taxes 15,270 12,946 Interest 27,697 27,518 General and administrative 4,953 4,736 Depreciation and amortization 25,734 22,934 --------- --------- Total expenses 101,463 92,675 --------- --------- Income before property dispositions 46,949 42,219 Gain on property dispositions 140 2,964 --------- --------- Net income $ 47,089 $ 45,183 ========= ========= Net income allocated to general partner $ 42,314 $ 40,091 ========= ========= Net income allocated to limited partners $ 4,775 $ 5,092 ========= =========
See accompanying notes. -12- 13
CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY LIMITED PARTNERSHIP (UNAUDITED AND IN THOUSANDS) NINE NINE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ------------------ ------------------ REVENUE Rental $ 313,120 $ 283,949 Operating expense reimbursement 119,934 106,827 Interest and other 4,618 4,123 --------- --------- Total revenue 437,672 394,899 --------- --------- EXPENSES Rental property 82,530 72,380 Real estate taxes 41,901 37,922 Interest 83,592 79,535 General and administrative 16,167 13,998 Depreciation and amortization 75,482 68,388 --------- --------- Total expenses 299,672 272,223 --------- --------- Income before property dispositions and extraordinary item 138,000 122,676 Gain on property dispositions 2,334 11,712 --------- --------- Income before extraordinary item 140,334 134,388 Extraordinary item-loss on extinguishment of debt - 2,103 --------- --------- Net income $ 140,334 $ 132,285 ========= ========= Net income allocated to general partner $ 125,835 $ 117,291 ========= ========= Net income allocated to limited partners $ 14,499 $ 14,994 ========= =========
See accompanying notes. -13- 14
CONSOLIDATED STATEMENTS OF CASH FLOWS OF LIBERTY PROPERTY LIMITED PARTNERSHIP (UNAUDITED AND IN THOUSANDS) NINE NINE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ------------------ ------------------ OPERATING ACTIVITIES Net income $ 140,334 $ 132,285 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 75,482 68,388 Amortization of deferred financing costs 3,086 2,818 Gain on sale (2,334) (11,712) Noncash compensation 1,749 1,807 Changes in operating assets and liabilities: Accounts receivable (8,361) 6,529 Prepaid expenses and other assets (11,971) (23,147) Accounts payable 25,147 12,317 Accrued interest (10,609) (2,090) Other liabilities (4,898) (190) ---------- --------- Net cash provided by operating activities 207,625 187,005 ---------- --------- INVESTING ACTIVITIES Investment in properties (59,264) (82,968) Proceeds from disposition of properties 77,298 63,604 Investment in development in progress (187,116) (120,110) Investment in land held for development (44,488) (71,013) Increase in deferred leasing costs (17,495) (12,518) ---------- --------- Net cash used in investing activities (231,065) (223,005) ---------- --------- FINANCING ACTIVITIES Retirement of convertible debentures (597) (10,914) Proceeds from issuance of unsecured notes 250,000 200,000 Repayments of unsecured notes - (90,000) Repayments of mortgage loans (13,903) (7,520) Proceeds from credit facility 253,200 450,000 Repayments on credit facility (339,200) (405,000) Decrease (increase) in deferred financing costs 279 (6,593) Capital contributions 18,178 30,325 Distributions to partners (142,335) (127,974) ---------- --------- Net cash provided by financing activities 25,622 32,324 ---------- --------- Increase (decrease) in cash and cash equivalent 2,182 (3,676) Cash and cash equivalents at beginning of period 4,638 9,064 ---------- --------- Cash and cash equivalents at end of period $ 6,820 $ 5,388 ========== ========= SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS Write-off of fully depreciated property and deferred costs $ 22,693 $ 21,518 Acquisition of properties (328) - Assumption of mortgage loans 328 - Conversion of convertible debentures 70,274 2,583 ========== =========
See accompanying notes. -14- 15 LIBERTY PROPERTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2001 NOTE 1 - BASIS OF PRESENTATION ------------------------------ The accompanying unaudited consolidated financial statements of Liberty Property Limited Partnership (the "Operating Partnership") and its direct and indirect subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States ("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 Trust and the Operating Partnership for the year ended December 31, 2000. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial statements for these interim periods have been included. The results of interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. Certain amounts from prior periods have been reclassified to conform to current period presentation. NOTE 2 - ORGANIZATION --------------------- Liberty Property Trust (the "Trust") is a self-administered and self- managed Maryland real estate investment trust (a "REIT"). Substantially all of the Trust's assets are owned directly or indirectly, and substantially all of the Trust's operations are conducted directly or indirectly, by the Operating Partnership (the Trust, Operating Partnership and their respective subsidiaries referred to collectively as the "Company"). The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 94.9% of the common equity of the Operating Partnership at September 30, 2001. The Company provides leasing, property management, acquisition, development, construction management and design management for a portfolio of industrial and office properties which are located principally within the Southeastern, Mid- Atlantic and Midwestern United States. NOTE 3 - SEGMENT INFORMATION ---------------------------- The Company reviews the performance of the portfolio on a geographic basis, as such, the following regions are considered the Company's reportable segments: Southeastern Pennsylvania; New Jersey; Lehigh Valley, Pennsylvania; Virginia; the Carolinas; Jacksonville, Florida; Detroit, Michigan; and all others combined (including Maryland, Tampa, Florida; South Florida; Minneapolis, Minnesota; and the United Kingdom). The Company's reportable segments are distinct business units, which are each managed separately in order to concentrate market knowledge within a geographic area. Within these reportable segments, the Company derives its revenues from its two product types: industrial properties and office properties. -15- 16 The Company evaluates performance of the reportable segments based on property-level net operating income, which is calculated as rental revenue and operating expense reimbursement less rental property expenses and real estate taxes. The accounting policies of the reportable segments are the same as those for the Company on a consolidated basis. The operating information by segment is as follows (in thousands):
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 ----------------------------------------------------------------------------------------------------------------------- SE New Lehigh The Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total -------- -------- -------- -------- --------- ------------ -------- ---------- -------- Real estate related revenues $ 43,771 $ 10,882 $ 14,725 $ 11,595 $ 11,687 $ 11,216 $ 15,693 $ 26,927 $146,496 Rental property expenses and real estate taxes 12,877 3,474 3,598 2,816 3,525 3,014 5,289 8,486 43,079 -------- -------- -------- -------- -------- -------- -------- --------- -------- Property-level net operating income 30,894 7,408 11,127 8,779 8,162 8,202 10,404 18,441 103,417 Other income/expenses, net 56,468 -------- Income before property dispositions 46,949 Gain on property dispositions 140 -------- Net income $ 47,089 ======== Net income allocated to general partner $ 42,314 ======== Net income allocated to limited partners $ 4,775 ========
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 ----------------------------------------------------------------------------------------------------------------------- SE New Lehigh The Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total -------- -------- -------- -------- --------- ------------ -------- ---------- -------- Real estate related revenues $ 37,563 $ 10,628 $ 12,918 $ 10,662 $ 10,780 $ 10,496 $ 14,477 $ 25,847 $133,371 Rental property expenses and real estate taxes 10,331 3,355 2,666 2,325 2,888 2,562 4,909 8,451 37,487 -------- -------- -------- -------- -------- -------- -------- -------- -------- Property-level net operating income 27,232 7,273 10,252 8,337 7,892 7,934 9,568 17,396 95,884 Other income/expenses, net 53,665 -------- Income before property dispositions 42,219 Gain on property dispositions 2,964 -------- Net income $ 45,183 ======== Net income allocated to general partner $ 40,091 ======== Net income allocated to limited partners $ 5,092 ========
-16- 17
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 ----------------------------------------------------------------------------------------------------------------------- SE New Lehigh The Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total -------- -------- -------- -------- --------- ------------ -------- ---------- -------- Real estate related revenues $128,788 $ 33,567 $ 43,133 $ 33,541 $ 33,798 $ 34,100 $ 44,667 $ 81,460 $433,054 Rental property expenses and real estate taxes 37,606 10,265 10,793 7,992 9,429 8,963 13,976 25,407 124,431 -------- -------- -------- -------- -------- -------- -------- -------- -------- Property-level net operating income 91,182 23,302 32,340 25,549 24,369 25,137 30,691 56,053 308,623 Other income/expenses, net 170,623 -------- Income before property dispositions and extraordinary item 138,000 Gain on property dispositions 2,334 Extraordinary item-loss on extinguishment of debt - -------- Net income $140,334 ======== Net income allocated to general partner $125,835 ======== Net income allocated to limited partners $ 14,499 ========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 ----------------------------------------------------------------------------------------------------------------------- SE New Lehigh The Pennsyl. Jersey Valley Virginia Carolinas Jacksonville Michigan All Others Total -------- -------- -------- -------- --------- ------------ -------- ---------- -------- Real estate related revenues $108,623 $ 31,510 $ 37,560 $ 32,457 $ 30,504 $ 31,332 $ 42,511 $ 76,279 $390,776 Rental property expenses and real estate taxes 30,539 9,841 8,386 7,172 8,430 7,474 14,532 23,928 110,302 -------- -------- -------- -------- -------- -------- -------- -------- -------- Property-level net operating income 78,084 21,669 29,174 25,285 22,074 23,858 27,979 52,351 280,474 Other income/expenses, net 157,798 -------- Income before property dispositions and extraordinary item 122,676 Gain on property dispositions 11,712 Extraordinary item-loss on extinguishment of debt 2,103 -------- Net income $132,285 ======== Net income allocated to general partner $117,291 ======== Net income allocated to limited partners $ 14,994 ========
-17- 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------------------------------------------- OVERVIEW The following discussion and analysis of the consolidated financial condition and consolidated results of operations should be read together with the consolidated financial statements of the Company and notes thereto contained in this Form 10-Q. Statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are not historical fact may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). The Company intends such forward- looking statements to be covered by the safe harbor provision for forward-looking statements contained in Section 21E of the Exchange Act. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. As forward- looking statements, these statements involve important risks, uncertainties and other factors that could cause actual results to differ materially from the expected results and, accordingly, such results may differ from those expressed in any forward-looking statements. These risks, uncertainties and other factors include, without limitation, uncertainties affecting future economic conditions and the real estate businesses generally (such as entry into new leases, renewals of leases, tenant defaults, dependence on tenants' business operations and the cost to complete and lease-up pending developments), risks relating to our ability to maintain and increase property occupancy and rental rates, risks relating to construction and development activities, acquisition, disposition, possible environmental liabilities and risks relating to leverage and debt service. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company's operating results depend primarily upon income from rental operations. This income is substantially influenced by rental demand for the properties in operation and properties under development. In addition, the Company's continued growth is dependent upon its ability to maintain property occupancy rates and increase rental rates on the properties in operation. The general slowdown in the economy may have a negative effect on occupancy and rental rates. To the extent the slowdown negatively affects office occupancy disproportionately to the industrial occupancy, the negative effect on growth will be greater due to the higher rental rates for office properties. The composition of the Company's properties in operation as of September 30, 2001 and 2000 is as follows (in thousands):
TOTAL PERCENT OF TOTAL SQUARE FEET SQUARE FEET PERCENT OCCUPIED ---------------- ---------------- ---------------- SEPT. 30, SEPT. 30, SEPT. 30, TYPE 2001 2000 2001 2000 2001 2000 ------------------------- ------- ------- ------- ------- ------- ------- Industrial - Distribution 21,409 20,164 42.8% 41.7% 97.4% 96.3% Industrial - Flex 12,433 12,886 24.9% 26.7% 94.1% 94.3% Office 16,134 15,289 32.3% 31.6% 92.1% 95.1% ------- ------- ------- ------- ------- ------- Total 49,976 48,339 100.0% 100.0% 94.8% 95.4% ======= ======= ======= ======= ======= =======
-18- 19 Geographic segment data for the three and nine months ended September 30, 2001 and 2000 is included in Note 3 of the Notes to the Liberty Property Trust and Liberty Property Limited Partnership Financial Statements. RESULTS OF OPERATIONS The following discussion is based on the consolidated financial statements of the Company. It compares the results of operations of the Company for the three and nine months ended September 30, 2001 (unaudited) with the results of operations of the Company for the three and nine months ended September 30, 2000 (unaudited). As a result of the development, acquisition and disposition activities by the Company in 2001 and 2000, the overall operating results of the Company during such periods are not directly comparable. However, certain data, including the "Same Store" comparison, do lend themselves to direct comparison. As used herein, the term "Company" includes the Trust, the Operating Partnership and their subsidiaries. This information should be read in conjunction with the accompanying consolidated financial statements and notes included elsewhere in this report. For the three and nine months ended September 30, 2001 compared to the three and nine months ended September 30, 2000. ----------------------------------------------------------------------- Total revenue (principally rental revenue and operating expense reimbursement) increased to $148.4 million from $134.9 million for the three months ended September 30, 2001 compared to the same period in 2000, and increased to $437.7 million from $394.9 million for the nine months ended September 30, 2001 compared to the same period in 2000. These increases are primarily due to the increased net investment in properties developed, acquired, or disposed of during the respective periods. The following is a summary of the Company's acquisition, development and disposition activity for the three and nine months ended September 30, 2001 and 2000:
2001 2000 ----------------------------- ----------------------------- NO. OF TOTAL INVESTMENT (1) NO. OF TOTAL INVESTMENT (1) BLDGS. OR PROCEEDS BLDGS. OR PROCEEDS ------ -------------------- ------ -------------------- (in millions) (in millions) Properties owned as of: Beginning January 1, 652 634 Acquisitions 3 $ 23.8 9 $ 55.4 Completed developments 13 147.2 12 108.6 Dispositions (28) (65.8) (6) (40.7) ---- ---- June 30, 640 649 Acquisitions 1 $ 13.1 3 $ 21.2 Completed developments 7 48.7 6 40.5 Dispositions (1) (3.3) (7) (13.3) ---- ---- Ending September 30, 647 651 ==== ==== (1) The "Total Investment" for a property is defined as the property's purchase price plus closing costs and management's estimate, as determined at the time of acquisition, of the cost of necessary building improvements in the case of acquisitions, or land costs and land and building improvement costs in the case of development projects, and where appropriate, other development costs and carrying costs required to reach rent commencement.
-19- 20 Rental property and real estate tax expenses increased to $43.1 million from $37.5 million for the three months ended September 30, 2001 compared to the same period in 2000, and to $124.4 million from $110.3 million for the nine months ended September 30, 2001 compared to the same period in 2000. These increases are due to the increase in the total investment in properties owned during the respective periods. Property-level net operating income for the "Same Store" properties (properties owned as of January 1, 2000) increased to $86.6 million for the three months ended September 30, 2001 from $86.4 million for the three months ended September 30, 2000, on a straight line basis, (which recognizes rental revenue evenly over the life of the lease), and increased to $85.2 million for the three months ended September 30, 2001 from $84.3 million for the three months ended September 30, 2000, on a cash basis. These increases of 0.3% and 1.0%, respectively, are due to increases in rental rates for the properties, partially offset by a decrease in occupancy, primarily in the office portion of the portfolio. Property-level net operating income for the Same Store properties increased to $263.7 million for the nine months ended September 30, 2001 from $256.1 million for the nine months ended September 30, 2000, on a straight line basis and increased to $258.6 million for the nine months ended September 30, 2001 from $249.8 million for the nine months ended September 30, 2000, on a cash basis. These increases of 2.9% and 3.5%, respectively, are due to increases in rental rates for the properties, partially offset by a decrease in occupancy, primarily in the office portion of the portfolio. Set forth below is a schedule comparing the property-level net operating income for the Same Store properties for the three and nine months ended September 30, 2001 and 2000 (in thousands).
STRAIGHT LINE BASIS CASH BASIS --------------------- --------------------- QUARTER ENDED QUARTER ENDED --------------------- --------------------- SEPT.30, SEPT.30, SEPT.30, SEPT.30, 2001 2000 2001 2000 --------- --------- --------- --------- Rental Revenue $ 88,560 $ 87,285 $ 87,121 $ 85,246 -------- -------- -------- -------- Operating expenses: Rental property expense 24,064 22,645 24,064 22,645 Real estate taxes 13,254 11,682 13,254 11,682 Operating expense recovery (35,364) (33,420) (35,364) (33,420) -------- -------- -------- -------- Unrecovered operating expenses 1,954 907 1,954 907 -------- -------- -------- -------- Property-level net operating income $ 86,606 $ 86,378 $ 85,167 $ 84,339 ======== ======== ======== ========
-20- 21
STRAIGHT LINE BASIS CASH BASIS --------------------- --------------------- NINE MONTHS ENDED NINE MONTHS ENDED --------------------- --------------------- SEPT.30, SEPT.30, SEPT.30, SEPT.30, 2001 2000 2001 2000 --------- --------- --------- --------- Rental Revenue $ 267,041 $ 258,858 $ 261,988 $ 252,542 --------- --------- --------- --------- Operating expenses: Rental property expense 72,730 67,872 72,730 67,872 Real estate taxes 36,391 34,371 36,391 34,371 Operating expense recovery (105,777) (99,534) (105,777) (99,534) --------- --------- --------- --------- Unrecovered operating expenses 3,344 2,709 3,344 2,709 --------- --------- --------- --------- Property-level net operating income $ 263,697 $ 256,149 $ 258,644 $ 249,833 ========= ========= ========= =========
General and administrative expenses increased to $5.0 million for the three months ended September 30, 2001 from $4.7 million compared to the same period in 2000 and to $16.2 million from $14.0 million for the nine months ended September 30, 2001 compared to the same period in 2000. These increases are primarily due to the funding of initiatives which the Company undertook relating to training, internal assurance, property management, and marketing. Depreciation and amortization expense increased to $25.7 million from $22.9 million for the three months ended September 30, 2001 compared to the same period in 2000 and to $75.5 million from $68.4 million for the nine months ended September 30, 2001 compared to the same period in 2000. These increases are primarily due to an increase in the investment in properties owned during the respective periods. Interest expense increased to $27.7 million from $27.5 million for the three months ended September 30, 2001 compared to the same period in 2000, and to $83.6 million from $79.5 million for the nine months ended September 30, 2001 compared to the same period in 2000. These increases are due to an increase in the average debt outstanding for the respective periods, which was $1,768.6 million for the three months ended September 30, 2001 compared to $1,594.4 million for the same period in 2000 and $1,746.6 million for the nine months ended September 30, 2001 compared to $1,561.3 million for the same period in 2000. The affect of the increase in the average debt outstanding was partially offset by a decrease in interest rates. The weighted average interest rates for the respective periods have decreased from 7.63% for the three months ended September 30, 2000 to 7.41% for the three months ended September 30, 2001, and from 7.55% for the nine months ended September 30, 2000 to 7.51% for the nine months ended September 30, 2001. In the third quarter of 2001, the Company realized a gain on sale of $140,000, due to the sale of one property and two parcels of land for $3.7 million. During the nine months ended September 30, 2001, the Company realized a gain on sale of $2.3 million, due to the sale of 29 operating properties, one development property and six parcels of land for $80.5 million. In the third quarter of 2000, the Company realized a gain on sale of $3.0 million, due to the sale of seven properties and three parcels of land for $16.4 million, and during the nine months ended September 30, 2000, the Company realized a gain on sale of $11.7 million, due to the sale of 13 properties and six parcels of land for $68.7 million. -21- 22 During the nine months ended September 30, 2000, the Company repurchased $10.9 million principal amount of the Convertible Debentures, resulting in the recognition of an extraordinary loss totaling $2.1 million. These losses represent the redemption premiums and the write-off of related deferred financing costs. There were no extraordinary items in the nine months ended September 30, 2001. As a result of the foregoing, the Company's income before minority interest increased to $47.1 million for the three months ended September 30, 2001 from $45.2 million for the three months ended September 30, 2000, and to $140.3 million for the nine months ended September 30, 2001 from $132.3 million for the nine months ended September 30, 2000. In addition, net income increased to $42.3 million for the three months ended September 30, 2001 from $40.1 million for the three months ended September 30, 2000 and to $125.8 million for the nine months ended September 30, 2001 from $117.3 million for the nine months ended September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2001, the Company had cash and cash equivalents of $6.8 million. Net cash flow provided by operating activities increased to $207.6 million for the nine months ended September 30, 2001 from $187.0 million for the nine months ended September 30, 2000. This $20.6 million increase was primarily due the increase in net income and to the fluctuations in prepaid expenses and accounts payable during the respective periods. Net cash used in investing activities increased to $231.1 million for the nine months ended September 30, 2001 from $223.0 million for the nine months ended September 30, 2000. This increase primarily resulted from an increase in development in progress in 2001. Cash flows from financing activities decreased by $6.7 million for the nine months ended September 30, 2001 versus the nine months ended September 30, 2000. This decrease is primarily due to the funding of investing activities with the increased funds provided by operations. The Company believes that its undistributed cash flow from operations is adequate to fund its short-term liquidity requirements. The Company funds its acquisitions and completed developments with long- term capital sources. During the nine months ended September 30, 2001, these activities were funded through a $450 million unsecured line of credit (the "Credit Facility"). The interest rate on borrowings under the Credit Facility fluctuates based upon the Company's leverage levels or ratings from Moody's Investors Services, Inc. ("Moody's") and Standard & Poor's Ratings Group ("Standard & Poor's") and Fitch, Inc. ("Fitch"). Moody's and Standard & Poor's currently assign senior debt ratings to the Company of Baa2 and BBB, respectively. On July 18, 2001, Fitch initiated coverage on the Company with a BBB senior debt rating. At these ratings the interest rate for borrowings under the Credit Facility on September 30, 2001 is 4.5%. -22- 23 As of September 30, 2001, $348.5 million in mortgage loans and $1,345.0 million in unsecured notes were outstanding. The interest rates on $1,687.5 million of mortgage loans and unsecured notes are fixed and range from 6.0% to 8.8%. The interest rate on a $6.0 million mortgage loan floats with a municipal bond index. The weighted average remaining term for the mortgage loans and the unsecured notes is 7.1 years. The scheduled maturities of principal amortization of the Company's mortgage loans and the unsecured notes outstanding and the related weighted average interest rates as of September 30, 2001 are as follows (in thousands):
MORTGAGES WEIGHTED -------------------------- UNSECURED AVERAGE AMORTIZATION MATURITIES NOTES TOTAL INTEREST RATE ------------ ---------- ---------- ---------- -------------- 2001 $ 2,425 $ 15,406 $ - $ 17,831 6.9% 2002 8,115 - 100,000 108,115 6.7% 2003 8,092 26,606 50,000 84,698 7.3% 2004 8,167 16,340 100,000 124,507 6.9% 2005 7,090 115,039 - 122,129 7.6% 2006 5,001 30,078 100,000 135,079 7.2% 2007 4,543 - 100,000 104,543 7.3% 2008 4,238 29,268 - 33,506 7.2% 2009 2,146 42,051 270,000 314,197 7.8% 2010 1,348 - 200,000 201,348 8.5% 2011 1,098 3,533 250,000 254,631 7.3% 2012 192 17,674 - 17,866 7.7% 2013 - - 75,000 (1) 75,000 6.4% 2018 - - 100,000 100,000 7.5% -------- --------- ---------- ---------- ------ $ 52,455 $ 295,995 $1,345,000 $1,693,450 7.4% ======== ========= ========== ========== ======
(1) Callable in 2003. GENERAL The Company has continued to pursue development and acquisition opportunities and the strategic disposition of certain properties. In addition, the Company has continued to focus on improving the performance of the Same Store portfolio by achieving and maintaining high occupancy levels and maximizing rental rates. The expiring square feet and annual base rent by year for the properties in operation as of September 30, 2001 are as follows (in thousands):
INDUSTRIAL- DISTRIBUTION INDUSTRIAL-FLEX OFFICE TOTAL ------------------ ------------------ ------------------ ------------------ SQUARE ANNUAL SQUARE ANNUAL SQUARE ANNUAL SQUARE ANNUAL YEAR FEET BASE RENT FEET BASE RENT FEET BASE RENT FEET BASE RENT ---------- ------ --------- ------ --------- ------ --------- ------ --------- 2001 647 $ 2,830 597 $ 4,350 583 $ 7,233 1,827 $ 14,413 2002 3,604 15,116 1,935 15,594 1,748 22,261 7,287 52,971 2003 1,866 8,686 2,423 21,456 1,625 22,326 5,914 52,468 2004 2,072 10,607 1,877 17,127 1,591 24,892 5,540 52,626 2005 2,708 13,979 1,366 12,616 3,017 44,577 7,091 71,172 2006 2,576 11,857 1,439 16,005 1,176 17,996 5,191 45,858 Thereafter 7,377 42,127 2,061 22,060 5,111 87,240 14,549 151,427 ------ -------- ------ -------- ------ -------- ------ -------- Total 20,850 $105,202 11,698 $109,208 14,851 $226,525 47,399 $440,935 ====== ======== ====== ======== ====== ======== ====== ========
-23- 24 The Company believes that its existing sources of capital will provide sufficient funds to finance its continued development and acquisition activities. The scheduled deliveries of the 3.7 million square feet of properties under development as of September 30, 2001 are as follows (in thousands):
SQUARE FEET ----------------------------- SCHEDULED IND- IND- PERCENT PRE-LEASED IN-SERVICE DATE DIST. FLEX OFFICE TOTAL SEPTEMBER 30, 2001 TOTAL INVESTMENT ---------------- ------ ------ ------- ------ ------------------ ---------------- 4th Quarter 2001 304 93 144 541 87.8% $ 41,228 1st Quarter 2002 - 394 166 560 44.9% 57,480 2nd Quarter 2002 - 170 233 403 45.2% 41,971 3rd Quarter 2002 300 339 216 855 7.8% 64,010 Thereafter 823 42 515 1,380 11.8% 119,730 ----- ----- ----- ----- ------ -------- Total 1,427 1,038 1,274 3,739 30.4% $324,419 ===== ===== ===== ===== ====== ========
The Company's sources of capital include the public debt and equity markets, proceeds from property dispositions and net cash provided from its operating activities. Additionally, the Company expects to incur variable rate debt, including borrowings under the Credit Facility, from time to time. In 2000, the Company received approximately $19.5 million in aggregate net proceeds from the issuance of 9.125% Series C Cumulative Redeemable Preferred Units, and approximately $197.1 million in aggregate net proceeds from the issuance of unsecured notes. In 2001, the Company received approximately $246.2 million in aggregate net proceeds from the issuance of unsecured notes. The Company used the aggregate net proceeds from the issuance of the preferred units, and unsecured notes to fund the Company's activities, including paying down the Credit Facility, which funds development and acquisition activity. In October 1999, the Board of Trustees authorized a share repurchase program. Pursuant to the plan, as amended, the Company may purchase up to $100 million of the Company's common shares, Convertible Debentures or preferred shares. Through November 2, 2001, the Company purchased 59,100 common shares and purchased Convertible Debentures exchangeable into 877,950 common shares. The total cost for the purchase of the common shares and Convertible Debentures was approximately $21.9 million. The Company has an effective S-3 shelf registration statement on file with the Securities and Exchange Commission. As of November 2, 2001, the Company had the capacity pursuant to this shelf registration statement to issue $688.4 million in equity securities and the Operating Partnership had the capacity to issue $261.1 million in debt securities. In October 2001, the Financial Accounting Standards Board issued Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144). FAS 144 supercedes FAS 121 and certain provisions of APB Opinion 30 with regards to reporting the effects of a disposal of a segment. The Company will adopt FAS 144 effective January 1, 2002 and does not expect the adoption of this new pronouncement to have a material affect on the financial position or results of operations of the Company. -24- 25 CALCULATION OF FUNDS FROM OPERATIONS Management generally considers Funds from operations (as defined below) a useful financial performance measure of the operating performance of an equity REIT, because, together with net income and cash flows, Funds from operations provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund development, acquisitions and capital expenditures. Funds from operations is defined by NAREIT as net income (computed in accordance with generally accepted accounting principles ("GAAP")), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations does not represent net income or cash flows from operations as defined by GAAP and does not necessarily indicate that cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. Funds from operations also does not represent cash flows generated from operating, investing or financing activities as defined by GAAP. Funds from operations for the three and nine months ended September 30, 2001 and September 30, 2000 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED (IN THOUSANDS) (IN THOUSANDS) -------------------- --------------------- SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, 2001 2000 2001 2000 --------- --------- --------- --------- Income available to common shareholders $ 39,564 $ 37,341 $117,585 $109,041 Adjustments: Minority interest less preferred unit distributions 2,122 2,439 6,540 7,577 Depreciation and amortization 25,264 22,598 74,125 67,310 Extraordinary item-loss on extinguishment of debt - - - 2,103 Gain on sale of property (140) (2,964) (2,334) (11,712) ======== ======== ======== ======== Funds from operations $ 66,810 $ 59,414 $195,916 $174,319 ======== ======== ======== ========
INFLATION --------- Inflation has remained relatively low during the last three years, and as a result, it has not had a significant impact on the Company during this period. The Credit Facility bears interest at a variable rate; therefore, the amount of interest payable under the Credit Facility will be influenced by changes in short-term interest rates, which tend to be sensitive to inflation. To the extent an increase in inflation would result in increased operating costs, such as in insurance, real estate taxes and utilities, substantially all of the tenants' leases require the tenants to absorb these costs as part of their rental obligations. In addition, inflation also may have the effect of increasing market rental rates. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------- There have been no material changes to the Company's exposure to market risk since its Annual Report on Form 10-K for the year ended December 31, 2000. -25- 26 PART II: OTHER INFORMATION -------------------------- Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a. Exhibits None b. Reports on Form 8-K None -26- 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LIBERTY PROPERTY TRUST /s/ WILLARD G. ROUSE III November 9, 2001 ------------------------------------- -------------------------- Willard G. Rouse III Date Chairman of the Board of Trustees, President and Chief Executive Officer /s/ GEORGE J. ALBURGER, JR. November 9, 2001 ------------------------------------- -------------------------- George J. Alburger, Jr. Date Chief Financial Officer and Executive Vice President LIBERTY PROPERTY LIMITED PARTNERSHIP By: LIBERTY PROPERTY TRUST, GENERAL PARTNER /s/ WILLARD G. ROUSE III November 9, 2001 ------------------------------------- -------------------------- Willard G. Rouse III Date Chairman of the Board of Trustees, President and Chief Executive Officer /s/ GEORGE J. ALBURGER, JR. November 9, 2001 ------------------------------------- -------------------------- George J. Alburger, Jr. Date Chief Financial Officer and Executive Vice President -27-