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Liberty Property Trust 10-Q 2010
Form 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended June 30, 2010
     
OR
     
o   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)
PENNSYLVANIA (Liberty Property Limited Partnership)
  23-7768996
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 þ 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 þ 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 þ   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 þ
On August 3, 2010, 113,749,354 Common Shares of Beneficial Interest, par value $0.001 per share, of Liberty Property Trust were outstanding.
 
 

 

 


Table of Contents

Liberty Property Trust/Liberty Property Limited Partnership
Form 10-Q for the period ended June 30, 2010
         
Index   Page  
         
       
         
       
         
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Table of Contents

         
Index   Page  
         
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    49  
         
    50  
         
 Exhibit 10.18
 Exhibit 10.19
 Exhibit 12.1
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 31.3
 Exhibit 31.4
 Exhibit 32.1
 Exhibit 32.2
 Exhibit 32.3
 Exhibit 32.4
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY TRUST
(In thousands, except share and unit amounts)
                 
    June 30, 2010     December 31, 2009  
    (Unaudited)          
ASSETS
               
Real estate:
               
Land and land improvements
  $ 858,919     $ 850,559  
Building and improvements
    4,364,449       4,289,932  
Less accumulated depreciation
    (1,036,823 )     (973,624 )
 
           
 
               
Operating real estate
    4,186,545       4,166,867  
 
               
Development in progress
    7,951       66,714  
Land held for development
    210,748       218,633  
 
           
 
Net real estate
    4,405,244       4,452,214  
 
               
Cash and cash equivalents
    39,541       237,446  
Restricted cash
    36,351       42,232  
Accounts receivable
    6,657       6,057  
Deferred rent receivable
    102,544       95,527  
Deferred financing and leasing costs, net of accumulated amortization (2010, $118,545; 2009, $108,403)
    131,880       134,309  
Investments in and advances to unconsolidated joint ventures
    172,586       175,584  
Prepaid expenses and other assets
    58,289       85,574  
 
           
 
               
Total assets
  $ 4,953,092     $ 5,228,943  
 
           
 
               
LIABILITIES
               
Mortgage loans
  $ 352,019     $ 473,993  
Unsecured notes
    1,842,882       1,842,882  
Credit facility
    50,000       140,000  
Accounts payable
    36,772       31,195  
Accrued interest
    31,294       31,251  
Dividend and distributions payable
    55,718       55,402  
Other liabilities
    133,281       171,051  
 
           
 
               
Total liabilities
    2,501,966       2,745,774  
 
               
EQUITY
               
Liberty Property Trust shareholders’ equity
               
Common shares of beneficial interest, $.001 par value, 183,987,000 shares authorized; 114,642,717 (includes 1,249,909 in treasury) and 113,875,211 (includes 1,249,909 in treasury) shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively
    115       114  
Additional paid-in capital
    2,530,789       2,509,704  
Accumulated other comprehensive (loss) income
    (3,195 )     2,339  
Distributions in excess of net income
    (382,461 )     (337,911 )
Common shares in treasury, at cost, 1,249,909 shares as of June 30, 2010 and December 31, 2009
    (51,951 )     (51,951 )
 
           
Total Liberty Property Trust shareholders’ equity
    2,093,297       2,122,295  
 
               
Noncontrolling interest — operating partnership
               
3,943,224 and 4,011,354 common units outstanding as of June 30, 2010 and December 31, 2009, respectively 2009, respectively December 31, 2008, respectively
    69,113       72,294  
9,740,000 preferred units outstanding as of June 30, 2010 and December 31, 2009
    287,959       287,959  
Noncontrolling interest — consolidated joint ventures
    757       621  
 
           
 
               
Total equity
    2,451,126       2,483,169  
 
           
 
               
Total liabilities and equity
  $ 4,953,092     $ 5,228,943  
 
           
See accompanying notes.

 

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Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands, except per share amounts)
                 
    Three Months Ended  
    June 30, 2010     June 30, 2009  
OPERATING REVENUE
               
Rental
  $ 130,509     $ 129,352  
Operating expense reimbursement
    54,469       54,205  
 
           
Total operating revenue
    184,978       183,557  
 
           
 
               
OPERATING EXPENSE
               
Rental property
    34,659       34,770  
Real estate taxes
    22,402       21,773  
General and administrative
    12,567       11,655  
Depreciation and amortization
    43,873       42,005  
 
           
Total operating expenses
    113,501       110,203  
 
           
 
               
Operating income
    71,477       73,354  
 
               
OTHER INCOME (EXPENSE)
               
Interest and other income
    2,681       2,511  
Debt extinguishment gain
          563  
Interest expense
    (39,144 )     (36,755 )
 
           
 
               
Total other income (expense)
    (36,463 )     (33,681 )
 
           
 
               
Income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
    35,014       39,673  
 
               
Gain (loss) on property dispositions
    2,242       (2,050 )
Income taxes
    (503 )     (127 )
Equity in earnings of unconsolidated joint ventures
    783       1,192  
 
           
 
               
Income from continuing operations
    37,536       38,688  
 
               
Discontinued operations (including net gain on property dispositions of $2,408 and $3,670 for the three months ended June 30, 2010 and 2009, respectively)
    2,478       4,524  
 
           
 
               
Net income
    40,014       43,212  
Noncontrolling interest — operating partnership
    (6,421 )     (6,597 )
Noncontrolling interest — consolidated joint ventures
    (148 )     56  
 
           
 
               
Net income available to common shareholders
  $ 33,445     $ 36,671  
 
           
 
               
Earnings per common share
               
Basic:
               
Income from continuing operations
  $ 0.28     $ 0.31  
Income from discontinued operations
    0.02       0.04  
 
           
 
               
Income per common share — basic
  $ 0.30     $ 0.35  
 
           
 
               
Diluted:
               
Income from continuing operations
  $ 0.27     $ 0.31  
Income from discontinued operations
    0.02       0.04  
 
           
 
               
Income per common share — diluted
  $ 0.29     $ 0.35  
 
           
 
               
Distributions per common share
  $ 0.475     $ 0.475  
 
           
 
               
Weighted average number of common shares outstanding
               
Basic
    112,644       105,768  
Diluted
    113,380       106,245  
 
               
Amounts attributable to common shareholders
               
Income from continuing operations
  $ 31,050     $ 32,307  
Discontinued operations
    2,395       4,364  
 
           
Net income available to common shareholders
  $ 33,445     $ 36,671  
 
           
 
See accompanying notes.
               

 

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Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands, except per share amounts)
                 
    Six Months Ended  
    June 30, 2010     June 30, 2009  
OPERATING REVENUE
               
Rental
  $ 260,578     $ 257,064  
Operating expense reimbursement
    113,202       111,465  
 
           
Total operating revenue
    373,780       368,529  
 
           
 
               
OPERATING EXPENSE
               
Rental property
    75,073       73,151  
Real estate taxes
    44,910       43,546  
General and administrative
    27,441       27,212  
Depreciation and amortization
    86,804       84,575  
 
           
Total operating expenses
    234,228       228,484  
 
           
 
               
Operating income
    139,552       140,045  
 
               
OTHER INCOME (EXPENSE)
               
Interest and other income
    5,471       5,606  
Debt extinguishment gain
          1,092  
Interest expense
    (77,773 )     (73,946 )
 
           
Total other income (expense)
    (72,302 )     (67,248 )
 
           
 
               
Income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
    67,250       72,797  
 
               
Gain (loss) on property dispositions
    3,010       (2,344 )
Income taxes
    (955 )     (344 )
Equity in earnings of unconsolidated joint ventures
    1,177       1,609  
 
           
 
               
Income from continuing operations
    70,482       71,718  
 
               
Discontinued operations (including net gain on property dispositions of $5,270 and $3,869 for the six months ended June 30, 2010 and 2009, respectively)
    5,354       5,336  
 
           
 
               
Net income
    75,836       77,054  
Noncontrolling interest — operating partnership
    (12,704 )     (12,914 )
Noncontrolling interest — consolidated joint ventures
    (136 )     420  
 
           
 
               
Net income available to common shareholders
  $ 62,996     $ 64,560  
 
           
 
               
Earnings per common share
               
Basic:
               
Income from continuing operations
  $ 0.51     $ 0.58  
Income from discontinued operations
    0.05       0.05  
 
           
 
               
Income per common share — basic
  $ 0.56     $ 0.63  
 
           
 
               
Diluted:
               
Income from continuing operations
  $ 0.51     $ 0.57  
Income from discontinued operations
    0.05       0.05  
 
           
 
               
Income per common share — diluted
  $ 0.56     $ 0.62  
 
           
 
               
Distributions per common share
  $ 0.95     $ 0.95  
 
           
 
               
Weighted average number of common shares outstanding
               
Basic
    112,512       103,244  
Diluted
    113,182       103,625  
 
               
Amounts attributable to common shareholders
               
Income from continuing operations
  $ 57,822     $ 59,418  
Discontinued operations
    5,174       5,142  
 
           
Net income available to common shareholders
  $ 62,996     $ 64,560  
 
           
See accompanying notes.
               

 

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CONDENSED CONSOLIDATED STATEMENT OF EQUITY OF LIBERTY PROPERTY TRUST
(UNAUDITED AND IN THOUSANDS)
                                                                                 
                    Accumulated                     Total     Noncontroll-     Noncontroll-              
    Common             Other                     Liberty     ing interest-     ing interest-     Noncontroll-        
    Shares of     Additional     Comprehensive     Distributions     Common     Property Trust     operating     operating     ing Interest-        
    Beneficial     Paid-In     (loss)     in Excess of     Shares Held     Shareholders’     partnership-     partnership -     consolidated        
    Interest     Capital     Income     Net Income     in Treasury     Equity     Common     Preferred     joint ventures     Total Equity  
 
                                                                               
Balance at January 1, 2010
  $ 114     $ 2,509,704     $ 2,339     $ (337,911 )   $ (51,951 )   $ 2,122,295     $ 72,294     $ 287,959     $ 621     $ 2,483,169  
 
Net proceeds from the issuance of Common Shares
    1       11,657                         11,658                         11,658  
 
                                                                               
Net income
                      62,996             62,996       2,198       10,506       136       75,836  
Distributions
                      (107,546 )           (107,546 )     (3,959 )     (10,506 )           (122,011 )
Noncash compensation
          8,201                         8,201                         8,201  
Foreign currency translation adjustment
                (5,534 )                 (5,534 )     (193 )                 (5,727 )
Redemption of noncontrolling interests — common units
          1,227                         1,227       (1,227 )                  
 
                                                           
 
                                                                               
Balance at June 30, 2010
  $ 115     $ 2,530,789     $ (3,195 )   $ (382,461 )   $ (51,951 )   $ 2,093,297     $ 69,113     $ 287,959     $ 757     $ 2,451,126  
 
                                                           
See accompanying notes.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS OF LIBERTY PROPERTY TRUST
(Unaudited and in thousands)
                 
    Six Months Ended  
    June 30, 2010     June 30, 2009  
OPERATING ACTIVITIES
               
Net income
  $ 75,836     $ 77,054  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    86,853       86,306  
Amortization of deferred financing costs
    3,354       2,439  
Debt extinguishment gain
          (1,092 )
Equity in earnings of unconsolidated joint ventures
    (1,177 )     (1,609 )
Distributions from unconsolidated joint ventures
    517       663  
Gain on property dispositions
    (8,280 )     (1,526 )
Noncash compensation
    8,201       9,790  
Changes in operating assets and liabilities:
               
Restricted cash
    5,000       970  
Accounts receivable
    (609 )     6,208  
Deferred rent receivable
    (7,155 )     (5,677 )
Prepaid expenses and other assets
    1,966       18,806  
Accounts payable
    5,718       2,979  
Accrued interest
    43       (5,159 )
Other liabilities
    (22,059 )     (15,793 )
 
           
Net cash provided by operating activities
    148,208       174,359  
 
           
 
               
INVESTING ACTIVITIES
               
Investment in properties
    (49,316 )     (35,812 )
Investments in and advances to unconsolidated joint ventures
    (280 )     (4,017 )
Distributions from unconsolidated joint ventures
    3,177       18,379  
Net proceeds from disposition of properties/land
    27,752       80,333  
Net proceeds from (advances on) grant receivable/escrow
    22,969       (9,848 )
Investment in development in progress
    (7,919 )     (50,385 )
Investment in land held for development
    (2,683 )     (26,980 )
Investment in deferred leasing costs
    (14,467 )     (12,020 )
 
           
Net cash used in investing activities
    (20,767 )     (40,350 )
 
           
 
               
FINANCING ACTIVITIES
               
Net proceeds from issuance of Common Shares
    11,691       218,970  
Repayments of unsecured notes
          (285,268 )
Proceeds from mortgage loans
    635       317,213  
Repayments of mortgage loans
    (122,608 )     (43,029 )
Proceeds from credit facility
    90,000       199,150  
Repayments on credit facility
    (180,000 )     (319,150 )
Increase in deferred financing costs
    (8 )     (5,743 )
Distribution paid on Common Shares
    (107,197 )     (96,350 )
Distribution paid on units
    (14,531 )     (14,452 )
 
           
Net cash used in financing activities
    (322,018 )     (28,659 )
 
           
 
               
Net (decrease) increase in cash and cash equivalents
    (194,577 )     105,350  
(Decrease) increase in cash and cash equivalents related to foreign currency translation
    (3,328 )     3,392  
Cash and cash equivalents at beginning of period
    237,446       15,794  
 
           
Cash and cash equivalents at end of period
  $ 39,541     $ 124,536  
 
           
See accompanying notes.

 

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Liberty Property Trust
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2010
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 Liberty Property Limited Partnership (the “Operating Partnership” and, collectively 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 96.6% of the common equity of the Operating Partnership at June 30, 2010. The Company provides leasing, property management, development, acquisition and other tenant-related services for a portfolio of industrial and office properties which are located principally within the Mid-Atlantic, Southeastern, Midwestern and Southwestern United States and the United Kingdom. See a description of the Company’s markets in Note 2 to the Company’s financial statements.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Trust and its subsidiaries, including the Operating Partnership, 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 Trust and the Operating Partnership for the year ended December 31, 2009. 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 the current period presentation.

 

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Income per Common Share
The following table sets forth the computation of basic and diluted income per common share (in thousands except per share amounts):
                                                 
    For the Three Months Ended June 30, 2010     For the Three Months Ended June 30, 2009  
            Weighted                     Weighted        
            Average                     Average        
    Income     Shares             Income     Shares        
    (Numerator)     (Denominator)     Per Share     (Numerator)     (Denominator)     Per Share  
Basic income from continuing operations
                                               
Income from continuing operations net of noncontrolling interest
  $ 31,050       112,644     $ 0.28     $ 32,307       105,768     $ 0.31  
 
                                           
Dilutive shares for long-term compensation plans
          736                     477          
 
                                       
 
                                               
Diluted income from continuing operations
                                               
Income from continuing operations net of noncontrolling interest and assumed conversions
    31,050       113,380     $ 0.27       32,307       106,245     $ 0.31  
 
                                   
 
                                               
Basic income from discontinued operations
                                               
Discontinued operations net of noncontrolling interest
    2,395       112,644     $ 0.02       4,364       105,768     $ 0.04  
 
                                           
Dilutive shares for long-term compensation plans
          736                     477          
 
                                       
 
                                               
Diluted income from discontinued operations
                                               
Discontinued operations net of noncontrolling interest
    2,395       113,380     $ 0.02       4,364       106,245     $ 0.04  
 
                                   
 
                                               
Basic income per common share
                                               
Net income available to common shareholders
    33,445       112,644     $ 0.30       36,671       105,768     $ 0.35  
 
                                           
Dilutive shares for long-term compensation plans
          736                     477          
 
                                       
 
                                               
Diluted income per common share
                                               
Net income available to common shareholders and assumed conversions
  $ 33,445       113,380     $ 0.29     $ 36,671       106,245     $ 0.35  
 
                                   

 

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    For the Six Months Ended June 30, 2010     For the Six Months Ended June 30, 2009  
            Weighted                     Weighted        
            Average                     Average        
    Income     Shares             Income     Shares        
    (Numerator)     (Denominator)     Per Share     (Numerator)     (Denominator)     Per Share  
Basic income from continuing operations
                                               
Income from continuing operations net of noncontrolling interest
  $ 57,822       112,512     $ 0.51     $ 59,418       103,244     $ 0.58  
 
                                           
Dilutive shares for long-term compensation plans
          670                     381          
 
                                       
 
                                               
Diluted income from continuing operations
                                               
Income from continuing operations net of noncontrolling interest and assumed conversions
    57,822       113,182     $ 0.51       59,418       103,625     $ 0.57  
 
                                   
 
                                               
Basic income from discontinued operations
                                               
Discontinued operations net of noncontrolling interest
    5,174       112,512     $ 0.05       5,142       103,244     $ 0.05  
 
                                           
Dilutive shares for long-term compensation plans
          670                     381          
 
                                       
 
                                               
Diluted income from discontinued operations
                                               
Discontinued operations net of noncontrolling interest
    5,174       113,182     $ 0.05       5,142       103,625     $ 0.05  
 
                                   
 
                                               
Basic income per common share
                                               
Net income available to common shareholders
    62,996       112,512     $ 0.56       64,560       103,244     $ 0.63  
 
                                           
Dilutive shares for long-term compensation plans
          670                     381          
 
                                       
 
                                               
Diluted income per common share
                                               
Net income available to common shareholders and assumed conversions
  $ 62,996       113,182     $ 0.56     $ 64,560       103,625     $ 0.62  
 
                                   

 

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Dilutive shares for long-term compensation plans represent the unvested common shares outstanding during the year as well as the dilutive effect of outstanding options. The amounts of anti-dilutive options that were excluded from the computation of diluted income per common share for the three and six months ended June 30, 2010 were 1,513,000 and 1,473,000, respectively, as compared to 2,666,000 and 2,857,000, respectively, for the same periods in 2009.
During the three and six months ended June 30, 2010, 113,000 and 127,000 common shares, respectively, were issued upon the exercise of options.
Foreign Currency Translation
The functional currency of the Company’s United Kingdom operations is pounds sterling. The Company translates the financial statements for the United Kingdom operations into US dollars. Gains and losses resulting from this translation do not impact the results of operations and are included in accumulated other comprehensive (loss) income as a separate component of shareholders’ equity. A proportionate amount of gain or loss is allocated to noncontrolling interest-common units. Accumulated other comprehensive (loss) income consists solely of the foreign currency translation adjustments described above. Other comprehensive loss for the three and six months ended June 30, 2010 was $1.1 million and $5.7 million, respectively, as compared to other comprehensive income of $10.8 million and $9.5 million, respectively, for the same periods in 2009. Upon sale or upon complete or substantially complete liquidation of the Company’s foreign investment, the gain or loss on the sale will include the cumulative translation adjustments that have been previously recorded in accumulated other comprehensive (loss) income and noncontrolling interest-common units.
Note 2: Segment Information
The Company operates its portfolio of properties primarily throughout the Mid-Atlantic, Southeastern, Midwestern and Southwestern United States. Additionally, the Company owns certain assets in the United Kingdom. The Company reviews the performance of the portfolio on a geographical basis. As such, the following regions are considered the Company’s reportable segments:
     
Reportable Segments   Markets
 
Northeast
  Southeastern PA; Lehigh/Central PA; New Jersey
Midwest
  Minnesota; Milwaukee; Chicago
Mid-Atlantic
  Maryland; Carolinas; Richmond; Virginia Beach
South
  Jacksonville; Orlando; Boca Raton; Tampa; Texas; Arizona
Philadelphia/D.C.
  Philadelphia; Northern Virginia/Washington, D.C.
United Kingdom
  County of Kent; West Midlands
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 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.

 

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The operating information by segment is as follows (in thousands):
FOR THE THREE MONTHS ENDED JUNE 30, 2010
                                                                         
    Northeast                                            
            Lehigh/                                     Phila-              
    Southeastern     Central     New                             delphia/     United        
    PA     PA     Jersey     Midwest     Mid-Atlantic     South     D.C.     Kingdom     Total  
Operating revenue
  $ 44,161     $ 24,546     $ 7,833     $ 19,377     $ 33,733     $ 47,063     $ 7,255     $ 1,010     $ 184,978  
Rental property expenses and real estate taxes
    13,777       6,064       2,895       7,247       9,402       16,063       1,392       221       57,061  
 
                                                     
 
Property level operating income
  $ 30,384     $ 18,482     $ 4,938     $ 12,130     $ 24,331     $ 31,000     $ 5,863     $ 789       127,917  
 
                                                     
 
Interest and other income
                                                                    2,681  
Interest expense
                                                                    (39,144 )
General and administrative
                                                                    (12,567 )
Depreciation and amortization
                                                                    (43,873 )
 
                                                                     
Income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures         35,014  
Gain on property dispositions
                                                                    2,242  
Income taxes
                                                                    (503 )
Equity in earnings of unconsolidated joint ventures
                                                    783  
Discontinued operations
                                                                    2,478  
 
                                                                     
 
                                                                       
Net income
                                                                  $ 40,014  
 
                                                                     
FOR THE THREE MONTHS ENDED JUNE 30, 2009
                                                                         
    Northeast                                            
            Lehigh/                                     Phila-              
    Southeastern     Central     New                             delphia/     United        
    PA     PA     Jersey     Midwest     Mid-Atlantic     South     D.C.     Kingdom     Total  
Operating revenue
  $ 45,131     $ 24,583     $ 7,531     $ 20,725     $ 33,283     $ 46,121     $ 5,048     $ 1,135     $ 183,557  
Rental property expenses and real estate taxes
    13,965       6,409       2,760       7,681       9,253       15,022       1,193       260       56,543  
 
                                                     
 
                                                                       
Property level operating income
  $ 31,166     $ 18,174     $ 4,771     $ 13,044     $ 24,030     $ 31,099     $ 3,855     $ 875       127,014  
 
                                                     
 
                                                                       
Interest and other income
                                                                    2,511  
Debt extinguishment gain
                                                                    563  
Interest expense
                                                                    (36,755 )
General and administrative
                                                                    (11,655 )
Depreciation and amortization
                                                                    (42,005 )
 
                                                                     
Income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures         39,673  
Loss on property dispositions
                                                                    (2,050 )
Income taxes
                                                                    (127 )
Equity in earnings of unconsolidated joint ventures
                                                    1,192  
Discontinued operations
                                                                    4,524  
 
                                                                     
 
                                                                       
Net income
                                                                  $ 43,212  
 
                                                                     

 

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FOR THE SIX MONTHS ENDED JUNE 30, 2010
                                                                         
    Northeast                                            
            Lehigh/                                     Phila-              
    Southeastern     Central     New                             delphia/     United        
    PA     PA     Jersey     Midwest     Mid-Atlantic     South     D.C.     Kingdom     Total  
Operating revenue
  $ 90,414     $ 50,249     $ 15,837     $ 38,875     $ 69,160     $ 92,972     $ 14,228     $ 2,045     $ 373,780  
Rental property expenses and real estate taxes
    29,654       13,333       6,259       15,077       20,564       31,741       2,904       451       119,983  
 
                                                     
 
Property level operating income
  $ 60,760     $ 36,916     $ 9,578     $ 23,798     $ 48,596     $ 61,231     $ 11,324     $ 1,594       253,797  
 
                                                     
 
                                                                       
Interest and other income
                                                                    5,471  
Interest expense
                                                                    (77,773 )
General and administrative
                                                                    (27,441 )
Depreciation and amortization
                                                                    (86,804 )
 
                                                                     
Income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures         67,250  
Gain on property dispositions
                                                                    3,010  
Income taxes
                                                                    (955 )
Equity in earnings of unconsolidated joint ventures
                                                    1,177  
Discontinued operations
                                                                    5,354  
 
                                                                     
 
Net income
                                                                  $ 75,836  
 
                                                                     
FOR THE SIX MONTHS ENDED JUNE 30, 2009
                                                                         
    Northeast                                            
            Lehigh/                                     Phila-              
    Southeastern     Central     New                             delphia/     United        
    PA     PA     Jersey     Midwest     Mid-Atlantic     South     D.C.     Kingdom     Total  
Operating revenue
  $ 91,858     $ 49,626     $ 15,345     $ 41,389     $ 67,175     $ 91,117     $ 9,783     $ 2,236     $ 368,529  
Rental property expenses and real estate taxes
    29,519       13,978       5,928       15,258       19,977       29,174       2,373       490       116,697  
 
                                                     
 
Property level operating income
  $ 62,339     $ 35,648     $ 9,417     $ 26,131     $ 47,198     $ 61,943     $ 7,410     $ 1,746       251,832  
 
                                                     
 
                                                                       
Interest and other income
                                                                    5,606  
Debt extinguishment gain
                                                                    1,092  
Interest expense
                                                                    (73,946 )
General and administrative
                                                                    (27,212 )
Depreciation and amortization
                                                                    (84,575 )
 
                                                                     
 
                                                                       
Income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures         72,797  
Loss on property dispositions
                                                                    (2,344 )
Income taxes
                                                                    (344 )
Equity in earnings of unconsolidated joint ventures
                                                    1,609  
Discontinued operations
                                                                    5,336  
 
                                                                     
 
Net income
                                                                  $ 77,054  
 
                                                                     

 

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Note 3: Accounting for the Impairment or Disposal of Long-Lived Assets
The operating results and gain/(loss) on disposition of real estate for properties sold and held for sale are reflected in the condensed consolidated statements of operations as discontinued operations. Prior period financial statements have been adjusted for discontinued operations. The proceeds from dispositions of operating properties with no continuing involvement for the three and six months ended June 30, 2010 were $10.2 million and $16.5 million, respectively, as compared to $34.7 million and $69.5 million, respectively for the same periods in 2009.
Below is a summary of the results of operations for the properties held for sale and disposed of through the respective disposition dates (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30, 2010     June 30, 2009     June 30, 2010     June 30, 2009  
Revenues
  $ 309     $ 3,991     $ 822     $ 9,359  
Operating expenses
    (144 )     (1,281 )     (527 )     (3,421 )
Interest expense
    (22 )     (845 )     (43 )     (2,337 )
Depreciation and amortization
    (73 )     (1,011 )     (168 )     (2,134 )
 
                       
Income before property dispositions
  $ 70     $ 854     $ 84     $ 1,467  
 
                       
Interest expense is allocated to discontinued operations. The allocation of interest expense to discontinued operations was based on the ratio of net assets sold (without continuing involvement) to the sum of total net assets plus consolidated debt.
Asset Impairment
During the three and six months ended June 30, 2010, the Company recognized impairment charges of $400,000 related to a portfolio of properties in the Company’s Philadelphia/D.C. segment. During the three and six months ended June 30, 2009, the Company recognized impairments totaling $3.9 million and $4.5 million, respectively. For the three months ended June 30, 2009, $1.1 million in impairment related to a property in the Northeast segment, $331,000 related to a property in the Midwest segment, and $2.4 million related to a property in the Philadelphia/D.C. segment. For the six months ended June 30, 2009, $1.1 million in impairment related to a property in the Northeast segment, $113,000 related to a parcel of land in the Northeast segment, $89,000 related to a portfolio of properties in the Mid-Atlantic segment, $822,000 related to properties in the Midwest segment and $2.4 million related to a property in the Philadelphia/D.C. segment.
For the three and six months ended June 30, 2010, $400,000 in impairment was included in the caption gain (loss) on property dispositions in the Company’s statements of operations. For the three months ended June 30, 2009, $1.5 million in impairment related to properties sold was included in the caption discontinued operations in the Company’s statement of operations and $2.4 million in impairment was included in the caption gain (loss) on property dispositions in the Company’s statement of operations. For the six months ended June 30, 2009, $1.5 million in impairment related to properties sold was included in the caption discontinued operations in the Company’s statement of operations and $3.0 million in impairment was included in the caption gain (loss) on property dispositions in the Company’s statement of operations. The Company determined these impairments through a comparison of the aggregate future cash flows (including quoted offer prices) to be generated by the properties to the carrying value of the properties. The Company has evaluated each of the properties and land held for development and has determined that there are no additional valuation adjustments necessary at June 30, 2010.
Note 4: Noncontrolling interests
Noncontrolling interests in the accompanying financial statements represent the interests of the common and preferred units in Liberty Property Limited 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 outstanding as of June 30, 2010 have the same economic characteristics as common shares of the Trust. The 3,943,224 outstanding common units 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 3,943,224 outstanding common units based on the closing price of the shares of the Company at June 30, 2010 was $113.8 million.

 

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Preferred units

The Company has outstanding the following cumulative redeemable preferred units of the Operating Partnership (the “Preferred Units”):
                                             
                    Liquidation     Dividend     Redeemable      
Issue   Amount     Units     Preference     Rate     As of     Exchangeable after
    (in 000’s)                              
Series B
  $ 95,000       3,800     $ 25       7.45 %     8/31/09     8/31/13 into Series B Cumulative Redeemable Preferred Shares of the Trust
 
                                           
Series E
  $ 20,000       400     $ 50       7.00 %     6/16/10     6/16/15 into Series E Cumulative Redeemable Preferred Shares of the Trust
 
                                           
Series F
  $ 50,000       1,000     $ 50       6.65 %     6/30/10     12/12/15 into Series F Cumulative Redeemable Preferred Shares of the Trust
 
                                           
Series G
  $ 27,000       540     $ 50       6.70 %     12/15/11     12/15/16 into Series G Cumulative Redeemable Preferred Shares of the Trust
 
                                           
Series H
  $ 100,000       4,000     $ 25       7.40 %     8/21/12     8/21/17 into Series H Cumulative Redeemable Preferred Shares of the Trust
The Preferred Units are callable at the Operating Partnership’s option after a stated period of time. The Trust as the sole general partner of the Operating Partnership may at its option elect to settle the redemption for cash or through the exchange on a one-for-one basis with unregistered preferred shares of the Trust.
Note 5: Indebtedness
Mortgage Loans
In April 2010, the Company used available cash and proceeds from its $600 million Credit Facility to repay $119.3 million principal value of mortgage loans. The weighted average interest rate of these loans as of March 31, 2010 was 7.3%. The mortgages encumbered certain of the Company’s operating properties with a net book value of $216.8 million. The Company incurred a $1.2 million prepayment penalty and wrote off $936,000 in deferred financing costs in conjunction with the prepayment of these loans. These costs are included as interest expense in the accompanying statements of operations.
Note 6: Disclosure of Fair Value of Financial Instruments
The following disclosure of estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the following estimates are not necessarily indicative of the amounts the Company could have realized on disposition of the financial instruments at June 30, 2010 and December 31, 2009. 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, dividends and distributions payable and other liabilities are reasonable estimates of fair value because of the short-term nature of these instruments. The fair value of the Company’s long-term debt was greater than the aggregate carrying value by approximately $136.8 million and $33.5 million at June 30, 2010 and December 31, 2009, respectively. The fair value of the Company’s long-term debt is estimated using actual trading prices (where available) and using discounted cash flow analysis based on the borrowing rates currently available to the Company for loans with similar terms and maturities where actual trading prices are not available.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of June 30, 2010 and December 31, 2009. Although as of the date of this report, management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since June 30, 2010 and current estimates of fair value may differ significantly from the amounts presented herein.

 

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Note 7: Recently Issued Accounting Standards
Beginning with the first quarter of 2010, the Company is required to conduct an ongoing assessment to determine whether each entity in which it has an equity interest is a variable interest entity that should be consolidated if certain qualitative factors indicate that the Company has the controlling interest. This accounting change is required to be retroactively applied for all periods presented. The adoption of the requirement did not have a material impact on the Company’s financial statements.
Note 8: Supplemental Disclosure to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flows for the six months ended June 30, 2010 and 2009 (amounts in thousands):
                 
Non-cash activity   2010     2009  
 
               
Write-off of fully depreciated property and deferred costs
  $ 16,912     $ 17,476  

 

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CONDENSED CONSOLIDATED BALANCE SHEETS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(In thousands, except unit amounts)
                 
    June 30, 2010     December 31, 2009  
    (Unaudited)        
ASSETS
               
Real estate:
               
Land and land improvements
  $ 858,919     $ 850,559  
Building and improvements
    4,364,449       4,289,932  
Less accumulated depreciation
    (1,036,823 )     (973,624 )
 
           
 
               
Operating real estate
    4,186,545       4,166,867  
 
               
Development in progress
    7,951       66,714  
Land held for development
    210,748       218,633  
 
           
 
               
Net real estate
    4,405,244       4,452,214  
 
               
Cash and cash equivalents
    39,541       237,446  
Restricted cash
    36,351       42,232  
Accounts receivable
    6,657       6,057  
Deferred rent receivable
    102,544       95,527  
Deferred financing and leasing costs, net of accumulated amortization (2010, $118,545; 2009, $108,403)
    131,880       134,309  
Investments in and advances to unconsolidated joint ventures
    172,586       175,584  
Prepaid expenses and other assets
    58,289       85,574  
 
           
 
               
Total assets
  $ 4,953,092     $ 5,228,943  
 
           
 
               
LIABILITIES
               
Mortgage loans
  $ 352,019     $ 473,993  
Unsecured notes
    1,842,882       1,842,882  
Credit facility
    50,000       140,000  
Accounts payable
    36,772       31,195  
Accrued interest
    31,294       31,251  
Distributions payable
    55,718       55,402  
Other liabilities
    133,281       171,051  
 
           
 
               
Total liabilities
    2,501,966       2,745,774  
 
OWNERS’ EQUITY
               
General partner’s equity — common units, 114,642,717 and 113,875,211 units outstanding as of June 30, 2010 and December 31, 2009, respectively
    2,093,297       2,122,295  
 
               
Limited partners’ equity — 3,943,224 and 4,011,354 common units outstanding as of June 30, 2010 and December 31, 2009, respectively
    69,113       72,294  
— 9,740,000 preferred units outstanding as of June 30, 2010 and December 31, 2009
    287,959       287,959  
Noncontrolling interest — consolidated joint ventures
    757       621  
 
           
 
               
Total owners’ equity
    2,451,126       2,483,169  
 
           
 
               
Total liabilities and owners’ equity
  $ 4,953,092     $ 5,228,943  
 
           
See accompanying notes.

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands, except per unit amounts)
                 
    Three Months Ended  
    June 30, 2010     June 30, 2009  
OPERATING REVENUE
               
Rental
  $ 130,509     $ 129,352  
Operating expense reimbursement
    54,469       54,205  
 
           
Total operating revenue
    184,978       183,557  
 
           
 
               
OPERATING EXPENSE
               
Rental property
    34,659       34,770  
Real estate taxes
    22,402       21,773  
General and administrative
    12,567       11,655  
Depreciation and amortization
    43,873       42,005  
 
           
Total operating expenses
    113,501       110,203  
 
           
 
               
Operating income
    71,477       73,354  
 
               
OTHER INCOME (EXPENSE)
               
Interest and other income
    2,681       2,511  
Debt extinguishment gain
          563  
Interest expense
    (39,144 )     (36,755 )
 
           
Total other income (expense)
    (36,463 )     (33,681 )
 
           
Income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
    35,014       39,673  
Gain (loss) on property dispositions
    2,242       (2,050 )
Income taxes
    (503 )     (127 )
Equity in earnings of unconsolidated joint ventures
    783       1,192  
 
           
 
               
Income from continuing operations
    37,536       38,688  
 
               
Discontinued operations (including net gain on property dispositions of $2,408 and $3,670 for the three months ended June 30, 2010 and 2009, respectively)
    2,478       4,524  
 
           
 
               
Net income
    40,014       43,212  
 
               
Noncontrolling interest — consolidated joint ventures
    (148 )     56  
Preferred unit distributions
    (5,253 )     (5,253 )
 
           
 
               
Income available to common unitholders
  $ 34,613     $ 38,015  
 
           
 
               
Earnings per common unit
               
Basic:
               
Income from continuing operations
  $ 0.28     $ 0.31  
Income from discontinued operations
    0.02       0.04  
 
           
 
               
Income per common unit — basic
  $ 0.30     $ 0.35  
 
           
 
               
Diluted:
               
Income from continuing operations
  $ 0.27     $ 0.31  
Income from discontinued operations
    0.02       0.04  
 
           
 
               
Income per common unit — diluted
  $ 0.29     $ 0.35  
 
           
 
               
Distributions per common unit
  $ 0.475     $ 0.475  
 
           
 
               
Weighted average number of common units outstanding
               
Basic
    116,587       109,785  
Diluted
    117,323       110,262  
 
               
Net income allocated to general partners
  $ 33,445     $ 36,671  
Net income allocated to limited partners
    6,421       6,597  
See accompanying notes.

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands, except per unit amounts)
                 
    Six Months Ended  
    June 30, 2010     June 30, 2009  
OPERATING REVENUE
               
Rental
  $ 260,578     $ 257,064  
Operating expense reimbursement
    113,202       111,465  
 
           
Total operating revenue
    373,780       368,529  
 
           
 
               
OPERATING EXPENSE
               
Rental property
    75,073       73,151  
Real estate taxes
    44,910       43,546  
General and administrative
    27,441       27,212  
Depreciation and amortization
    86,804       84,575  
 
           
Total operating expenses
    234,228       228,484  
 
           
 
               
Operating income
    139,552       140,045  
 
               
OTHER INCOME (EXPENSE)
               
Interest and other income
    5,471       5,606  
Debt extinguishment gain
          1,092  
Interest expense
    (77,773 )     (73,946 )
 
           
Total other income (expense)
    (72,302 )     (67,248 )
 
           
Income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
    67,250       72,797  
Gain (loss) on property dispositions
    3,010       (2,344 )
Income taxes
    (955 )     (344 )
Equity in earnings of unconsolidated joint ventures
    1,177       1,609  
 
           
 
               
Income from continuing operations
    70,482       71,718  
 
               
Discontinued operations (including net gain on property dispositions of $5,270 and $3,869 for the six months ended June 30, 2010 and 2009, respectively)
    5,354       5,336  
 
           
 
               
Net income
    75,836       77,054  
 
               
Noncontrolling interest — consolidated joint ventures
    (136 )     420  
Preferred unit distributions
    (10,506 )     (10,506 )
 
           
 
               
Income available to common unitholders
  $ 65,194     $ 66,968  
 
           
 
               
Earnings per common unit
               
Basic:
               
Income from continuing operations
  $ 0.51     $ 0.58  
Income from discontinued operations
    0.05       0.05  
 
           
 
               
Income per common unit — basic
  $ 0.56     $ 0.63  
 
           
 
               
Diluted:
               
Income from continuing operations
  $ 0.51     $ 0.57  
Income from discontinued operations
    0.05       0.05  
 
           
 
               
Income per common unit — diluted
  $ 0.56     $ 0.62  
 
           
 
               
Distributions per common unit
  $ 0.95     $ 0.95  
 
           
 
               
Weighted average number of common units outstanding
               
Basic
    116,464       107,263  
Diluted
    117,134       107,644  
 
               
Net income allocated to general partners
  $ 62,996     $ 64,560  
Net income allocated to limited partners
    12,704       12,914  
See accompanying notes.

 

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CONDENSED CONSOLIDATED STATEMENT OF OWNERS’ EQUITY OF LIBERTY PROPERTY LIMITED PARTNERSHIP
(UNAUDITED AND IN THOUSANDS)
                                         
            Limited     Limited              
            Partners’     Partners’     Noncontrolling        
    General     Equity–     Equity–     Interest–     Total  
    Partner’s     Common     Preferred     Consolidated     Owners’  
    Equity     Units     Units     Joint Ventures     Equity  
 
                                       
Balance at January 1, 2010
  $ 2,122,295     $ 72,294     $ 287,959     $ 621     $ 2,483,169  
 
                                       
Contributions from partners
    19,859                         19,859  
Distributions to partners
    (107,546 )     (3,959 )     (10,506 )           (122,011 )
Foreign currency translation adjustment
    (5,534 )     (193 )                 (5,727 )
Net income
    62,996       2,198       10,506       136       75,836  
Redemption of limited partners common units for common shares
    1,227       (1,227 )                  
 
                             
 
Balance at June 30, 2010
  $ 2,093,297     $ 69,113     $ 287,959     $ 757     $ 2,451,126  
 
                             
See accompanying notes.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS OF
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Unaudited and in thousands)
                 
    Six Months Ended  
    June 30, 2010     June 30, 2009  
OPERATING ACTIVITIES
               
Net income
  $ 75,836     $ 77,054  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    86,853       86,306  
Amortization of deferred financing costs
    3,354       2,439  
Debt extinguishment gain
          (1,092 )
 
               
Equity in earnings of unconsolidated joint ventures
    (1,177 )     (1,609 )
 
               
Distributions from unconsolidated joint ventures
    517       663  
Gain on property dispositions
    (8,280 )     (1,526 )
Noncash compensation
    8,201       9,790  
Changes in operating assets and liabilities:
               
Restricted cash
    5,000       970  
Accounts receivable
    (609 )     6,208  
Deferred rent receivable
    (7,155 )     (5,677 )
Prepaid expenses and other assets
    1,966       18,806  
Accounts payable
    5,718       2,979  
Accrued interest
    43       (5,159 )
Other liabilities
    (22,059 )     (15,793 )
 
           
Net cash provided by operating activities
    148,208       174,359  
 
           
 
               
INVESTING ACTIVITIES
               
Investment in properties
    (49,316 )     (35,812 )
Investments in and advances to unconsolidated joint ventures
    (280 )     (4,017 )
Distributions from unconsolidated joint ventures
    3,177       18,379  
Net proceeds from disposition of properties/land
    27,752       80,333  
Net proceeds from (advances on) grant receivable/escrow
    22,969       (9,848 )
Investment in development in progress
    (7,919 )     (50,385 )
Investment in land held for development
    (2,683 )     (26,980 )
Investment in deferred leasing costs
    (14,467 )     (12,020 )
 
           
Net cash used in investing activities
    (20,767 )     (40,350 )
 
           
 
               
FINANCING ACTIVITIES
               
Repayments of unsecured notes
          (285,268 )
Proceeds from mortgage loans
    635       317,213  
Repayments of mortgage loans
    (122,608 )     (43,029 )
Proceeds from credit facility
    90,000       199,150  
Repayments on credit facility
    (180,000 )     (319,150 )
Increase in deferred financing costs
    (8 )     (5,743 )
Capital contributions
    11,691       218,970  
Distributions to partners
    (121,728 )     (110,802 )
 
           
Net cash used in financing activities
    (322,018 )     (28,659 )
 
           
 
               
Net (decrease) increase in cash and cash equivalents
    (194,577 )     105,350  
(Decrease) increase in cash and cash equivalents related to foreign currency translation
    (3,328 )     3,392  
Cash and cash equivalents at beginning of period
    237,446       15,794  
 
           
Cash and cash equivalents at end of period
  $ 39,541     $ 124,536  
 
           
See accompanying notes.

 

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Liberty Property Limited Partnership
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2010
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 Liberty Property Limited Partnership (the “Operating Partnership” and, collectively 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 96.6% of the common equity of the Operating Partnership at June 30, 2010. The Company provides leasing, property management, development, acquisition and other tenant-related services for a portfolio of industrial and office properties which are located principally within the Mid-Atlantic, Southeastern, Midwestern and Southwestern United States and the United Kingdom. See a description of the Company’s markets in Note 2 to the Company’s financial statements.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Operating Partnership and its subsidiaries 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 Trust and the Operating Partnership for the year ended December 31, 2009. 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 the current period presentation.

 

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Income per Common Unit
The following table sets forth the computation of basic and diluted income per common unit (in thousands, except per unit amounts):
                                                 
    For the Three Months Ended June 30, 2010     For the Three Months Ended June 30, 2009  
            Weighted                     Weighted        
    Income     Average Units             Income     Average Units        
    (Numerator)     (Denominator)     Per Unit     (Numerator)     (Denominator)     Per Unit  
Income from continuing operations net of noncontrolling interest
  $ 37,388                     $ 38,744                  
Less: Preferred unit distributions
    (5,253 )                     (5,253 )                
 
                                           
 
                                               
Basic income from continuing operations
                                               
Income from continuing operations available to common unitholders
    32,135       116,587     $ 0.28       33,491       109,785     $ 0.31  
 
                                           
Dilutive units for long-term compensation plans
          736                     477          
 
                                       
 
                                               
Diluted income from continuing operations
                                               
Income from continuing operations available to common unitholders and assumed conversions
    32,135       117,323     $ 0.27       _33,491       110,262     $ 0.31  
 
                                   
 
                                               
Basic income from discontinued operations
                                               
Discontinued operations
    2,478       116,587     $ 0.02       4,524       109,785     $ 0.04  
 
                                           
Dilutive units for long-term compensation plans
          736                     477          
 
                                       
 
                                               
Diluted income from discontinued operations
                                               
Discontinued operations
    2,478       117,323     $ 0.02       4,524       110,262     $ 0.04  
 
                                   
 
                                               
Basic income per common unit
                                               
Income available to common unitholders
    34,613       116,587     $ 0.30       38,015       109,785     $ 0.35  
 
                                           
 
                                               
Diluted units for long-term compensation plans
          736                     477          
 
                                       
 
                                               
Diluted income per common unit
                                               
Income available to common unitholders and assumed conversions
  $ 34,613       117,323     $ 0.29     $ 38,015       110,262     $ 0.35  
 
                                   

 

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    For the Six Months Ended June 30, 2010     For the Six Months Ended June 30, 2009  
            Weighted                     Weighted        
    Income     Average Units             Income     Average Units        
    (Numerator)     (Denominator)     Per Unit     (Numerator)     (Denominator)     Per Unit  
Income from continuing operations net of noncontrolling interest
  $ 70,346                     $ 72,138                  
Less: Preferred unit distributions
    (10,506 )                     (10,506 )                
 
                                           
 
                                               
Basic income from continuing operations
                                               
 
                                               
Income from continuing operations available to common unitholders
    59,840       116,464     $ 0.51       61,632       107,263     $ 0.58  
 
                                           
Dilutive units for long-term compensation plans
          670                     381          
 
                                       
 
                                               
Diluted income from continuing operations
                                               
Income from continuing operations available to common unitholders and assumed conversions
    59,840       117,134     $ 0.51       _61,632       107,644     $ 0.57  
 
                                   
 
                                               
Basic income from discontinued operations
                                               
Discontinued operations
    5,354       116,464     $ 0.05       5,336       107,263     $ 0.05  
 
                                           
Dilutive units for long-term compensation plans
          670                     381          
 
                                       
 
                                               
Diluted income from discontinued operations
                                               
Discontinued operations
    5,354       117,134     $ 0.05       5,336       107,644     $ 0.05  
 
                                   
 
                                               
Basic income per common unit
                                               
 
                                               
Income available to common unitholders
    65,194       116,464     $ 0.56       66,968       107,263     $ 0.63  
 
                                           
 
                                               
Diluted units for long-term compensation plans
          670                     381          
 
                                       
 
                                               
Diluted income per common unit
                                               
Income available to common unitholders and assumed conversions
  $ 65,194       117,134     $ 0.56     $ 66,968       107,644     $ 0.62  
 
                                   

 

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Dilutive units for long-term compensation plans represent the unvested common units outstanding during the year as well as the dilutive effect of outstanding options. The amounts of anti-dilutive options that were excluded from the computation of diluted income per common share for the three and six months ended June 30, 2010 were 1,513,000 and 1,473,000, respectively, as compared to 2,666,000 and 2,857,000, respectively, for the same periods in 2009.
During the three and six months ended June 30, 2010, 113,000 and 127,000 common shares, respectively, were issued upon the exercise of options.
Foreign Currency Translation
The functional currency of the Company’s United Kingdom operations is pounds sterling. The Company translates the financial statements for the United Kingdom operations into US dollars. Gains and losses resulting from this translation do not impact the results of operations and are included in general partner’s equity — common units and limited partners’ equity-common units. Other comprehensive loss for the three and six months ended June 30, 2010 was $1.1 million and $5.7 million, respectively, as compared to other comprehensive income of $10.8 million and $9.5 million, respectively, for the same periods in 2009. Upon sale or upon complete or substantially complete liquidation of a foreign investment, the gain or loss on the sale will include the cumulative translation adjustments that have been previously recorded in general partner’s equity-common units and limited partners’ equity — common units.
Note 2: Segment Information
The Company operates its portfolio of properties primarily throughout the Mid-Atlantic, Southeastern, Midwestern and Southwestern United States. Additionally, the Company owns certain assets in the United Kingdom. The Company reviews the performance of the portfolio on a geographical basis. As such, the following regions are considered the Company’s reportable segments:
     
Reportable Segments   Markets
 
   
Northeast
  Southeastern PA; Lehigh/Central PA; New Jersey
Midwest
  Minnesota; Milwaukee; Chicago
Mid-Atlantic
  Maryland; Carolinas; Richmond; Virginia Beach
South
  Jacksonville; Orlando; Boca Raton; Tampa; Texas; Arizona
Philadelphia/D.C.
  Philadelphia; Northern Virginia/Washington, D.C.
United Kingdom
  County of Kent; West Midlands
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 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.

 

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The operating information by segment is as follows (in thousands):
FOR THE THREE MONTHS ENDED JUNE 30, 2010
                                                                         
    Northeast                                            
            Lehigh/                                     Phila-              
    Southeastern     Central     New             Mid-             delphia/     United        
    PA     PA     Jersey     Midwest     Atlantic     South     D.C.     Kingdom     Total  
Operating revenue
  $ 44,161     $ 24,546     $ 7,833     $ 19,377     $ 33,733     $ 47,063     $ 7,255     $ 1,010     $ 184,978  
Rental property expenses and real estate taxes
    13,777       6,064       2,895       7,247       9,402       16,063       1,392       221       57,061  
 
                                                     
 
                                                                       
Property level operating income
  $ 30,384     $ 18,482     $ 4,938     $ 12,130     $ 24,331     $ 31,000     $ 5,863     $ 789       127,917  
 
                                                       
 
                                                                       
Interest and other income
                                                                    2,681  
Interest expense
                                                                    (39,144)  
General and administrative
                                                                    (12,567)  
Depreciation and amortization
                                                                    (43,873)  
 
                                                                       
Income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
        35,014  
Gain on property dispositions
                                                                    2,242  
Income taxes
                                                                    (503)  
Equity in earnings of unconsolidated joint ventures
                                                    783  
Discontinued operations
                                                                    2,478  
 
                                                                     
 
                                                                       
Net income
                                                                  $ 40,014  
 
                                                                     
FOR THE THREE MONTHS ENDED JUNE 30, 2009
                                                                         
    Northeast                                            
            Lehigh/                                     Phila-              
    Southeastern     Central     New             Mid-             delphia/     United        
    PA     PA     Jersey     Midwest     Atlantic     South     D.C.     Kingdom     Total  
Operating revenue
  $ 45,131     $ 24,583     $ 7,531     $ 20,725     $ 33,283     $ 46,121     $ 5,048     $ 1,135     $ 183,557  
Rental property expenses and real estate taxes
    13,965       6,409       2,760       7,681       9,253       15,022       1,193       260       56,543  
 
                                                     
 
                                                                       
Property level operating income
  $ 31,166     $ 18,174     $ 4,771     $ 13,044     $ 24,030     $ 31,099     $ 3,855     $ 875       127,014  
 
                                                       
 
                                                                       
Interest and other income
                                                                    2,511  
Debt extinguishment gain
                                                                    563  
Interest expense
                                                                    (36,755)  
General and administrative
                                                                    (11,655)  
Depreciation and amortization
                                                                    (42,005)  
 
                                                                     
Income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
        39,673  
Loss on property dispositions
                                                                    (2,050)  
Income taxes
                                                                    (127)  
Equity in earnings of unconsolidated joint ventures
                                                    1,192  
Discontinued operations
                                                                    4,524  
 
                                                                     
 
                                                                       
Net income
                                                                  $ 43,212  
 
                                                                     

 

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FOR THE SIX MONTHS ENDED JUNE 30, 2010
                                                                         
    Northeast                                            
            Lehigh/                                     Phila-              
    Southeastern     Central     New             Mid-             delphia/     United        
    PA     PA     Jersey     Midwest     Atlantic     South     D.C.     Kingdom     Total  
Operating revenue
  $ 90,414     $ 50,249     $ 15,837     $ 38,875     $ 69,160     $ 92,972     $ 14,228     $ 2,045     $ 373,780  
Rental property expenses and real estate taxes
    29,654       13,333       6,259       15,077       20,564       31,741       2,904       451       119,983  
 
                                                     
 
                                                                       
Property level operating income
  $ 60,760     $ 36,916     $ 9,578     $ 23,798     $ 48,596     $ 61,231     $ 11,324     $ 1,594       253,797  
 
                                                       
 
                                                                       
Interest and other income
                                                                    5,471  
Interest expense
                                                                    (77,773)  
General and administrative
                                                    (27,441)  
Depreciation and amortization
                                                    (86,804)  
 
                                                                     
Income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
        67,250  
Gain on property dispositions
                                                    3,010  
Income taxes
                                                                    (955)  
Equity in earnings of unconsolidated joint ventures
                                        1,177  
Discontinued operations
                                                                    5,354  
 
                                                                     
 
                                                                       
Net income
                                                                  $ 75,836  
 
                                                                     
FOR THE SIX MONTHS ENDED JUNE 30, 2009
                                                                         
    Northeast                                            
            Lehigh/                                     Phila-              
    Southeastern     Central     New             Mid-             delphia/     United        
    PA     PA     Jersey     Midwest     Atlantic     South     D.C.     Kingdom     Total  
Operating revenue
  $ 91,858     $ 49,626     $ 15,345     $ 41,389     $ 67,175     $ 91,117     $ 9,783     $ 2,236     $ 368,529  
Rental property expenses and real estate taxes
    29,519       13,978       5,928       15,258       19,977       29,174       2,373       490       116,697  
 
                                                     
 
                                                                       
Property level operating income
  $ 62,339     $ 35,648     $ 9,417     $ 26,131     $ 47,198     $ 61,943     $ 7,410     $ 1,746       251,832  
 
                                                       
 
                                                                       
Interest and other income
                                                                    5,606  
Debt extinguishment gain
                                                                    1,092  
Interest expense
                                                                    (73,946)  
General and administrative
                                                    (27,212)  
Depreciation and amortization
                                                    (84,575)  
 
                                                                     
Income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures
        72,797  
Loss on property dispositions
                                                    (2,344)  
Income taxes
                                                                    (344)  
Equity in earnings of unconsolidated joint ventures
                                                    1,609  
Discontinued operations
                                                                    5,336  
 
                                                                     
 
                                                                       
Net income
                                                                  $ 77,054  
 
                                                                     

 

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Note 3: Accounting for the Impairment or Disposal of Long-Lived Assets
The operating results and gain/(loss) on disposition of real estate for properties sold and held for sale are reflected in the condensed consolidated statements of operations as discontinued operations. Prior period financial statements have been adjusted for discontinued operations. The proceeds from dispositions of operating properties with no continuing involvement for the three and six months ended June 30, 2010 were $10.2 million and $16.5 million, respectively, as compared to $34.7 million and $69.5 million, respectively for the same periods in 2009.
Below is a summary of the results of operations for the properties held for sale and disposed of through the respective disposition dates (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30, 2010     June 30, 2009     June 30, 2010     June 30, 2009  
 
Revenues
  $ 309     $ 3,991     $ 822     $ 9,359  
Operating expenses
    (144 )     (1,281 )     (527 )     (3,421 )
Interest expense
    (22 )     (845 )     (43 )     (2,337 )
Depreciation and amortization
    (73 )     (1,011 )     (168 )     (2,134 )
 
                       
Income before property dispositions
  $ 70     $ 854     $ 84     $ 1,467  
 
                       
Interest expense is allocated to discontinued operations. The allocation of interest expense to discontinued operations was based on the ratio of net assets sold (without continuing involvement) to the sum of total net assets plus consolidated debt.
Asset Impairment
During the three and six months ended June 30, 2010, the Company recognized impairment charges of $400,000 related to a portfolio of properties in the Company’s Philadelphia/D.C. segment. During the three and six months ended June 30, 2009, the Company recognized impairments totaling $3.9 million and $4.5 million, respectively. For the three months ended June 30, 2009, $1.1 million in impairment related to a property in the Northeast segment, $331,000 related to a property in the Midwest segment, and $2.4 million related to a property in the Philadelphia/D.C. segment. For the six months ended June 30, 2009, $1.1 million in impairment related to a property in the Northeast segment, $113,000 related to a parcel of land in the Northeast segment, $89,000 related to a portfolio of properties in the Mid-Atlantic segment, $822,000 related to properties in the Midwest segment and $2.4 million related to a property in the Philadelphia/D.C. segment.
For the three and six months ended June 30, 2010, $400,000 in impairment was included in the caption gain (loss) on property dispositions in the Company’s statements of operations. For the three months ended June 30, 2009, $1.5 million in impairment related to properties sold was included in the caption discontinued operations in the Company’s statement of operations and $2.4 million in impairment was included in the caption gain (loss) on property dispositions in the Company’s statement of operations. For the six months ended June 30, 2009, $1.5 million in impairment related to properties sold was included in the caption discontinued operations in the Company’s statement of operations and $3.0 million in impairment was included in the caption gain (loss) on property dispositions in the Company’s statement of operations. The Company determined these impairments through a comparison of the aggregate future cash flows (including quoted offer prices) to be generated by the properties to the carrying value of the properties. The Company has evaluated each of the properties and land held for development and has determined that there are no additional valuation adjustments necessary at June 30, 2010.
Note 4: Limited partners’ equity
Common units
General and limited partners’ equity — common units relates to limited partnership interests of the Operating Partnership issued in connection with the formation of the Company and certain subsequent acquisitions. The common units outstanding as of June 30, 2010 have the same economic characteristics as common shares of the Trust. The 3,943,224 outstanding common units are the limited partners’ equity — common units held by persons and entities other than Liberty Property Trust, the general partner of Liberty Property Limited Partnership, which holds a number of common units equal to the number of outstanding common shares of beneficial interest. Both the common units held by Liberty Property Trust and the common units held by persons and entities other than Liberty Property Trust are counted in the weighted average number of common units outstanding during any given period. The 3,943,224 outstanding common units share proportionately in the net income or loss and in any distributions of the Operating Partnership and are exchangeable into the same number of common shares of the Trust. The market value of the 3,943,224 outstanding common units at June 30, 2010 based on the closing price of the shares of the Company at June 30, 2010 was $113.8 million.

 

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Preferred units
The Company has outstanding the following cumulative redeemable preferred units of the Operating Partnership (the “Preferred Units”):
                                             
                    Liquidation     Dividend     Redeemable      
Issue   Amount     Units     Preference     Rate     As of     Exchangeable after
    (in 000’s)                              
Series B
  $ 95,000       3,800     $ 25       7.45 %     8/31/09     8/31/13 into Series B Cumulative Redeemable Preferred Shares of the Trust
 
                                           
Series E
  $ 20,000       400     $ 50       7.00 %     6/16/10     6/16/15 into Series E Cumulative Redeemable Preferred Shares of the Trust
 
                                           
Series F
  $ 50,000       1,000     $ 50       6.65 %     6/30/10     12/12/15 into Series F Cumulative Redeemable Preferred Shares of the Trust
 
                                           
Series G
  $ 27,000       540     $ 50       6.70 %     12/15/11     12/15/16 into Series G Cumulative Redeemable Preferred Shares of the Trust
 
                                           
Series H
  $ 100,000       4,000     $ 25       7.40 %     8/21/12     8/21/17 into Series H Cumulative Redeemable Preferred Shares of the Trust
The Preferred Units are callable at the Operating Partnership’s option after a stated period of time. The Trust as the sole general partner of the Operating Partnership may at its option elect to settle the redemption for cash or through the exchange on a one-on-one basis with unregistered preferred shares of the Trust.
Note 5: Indebtedness
Mortgage Loans
In April 2010, the Company used available cash and proceeds from its $600 million Credit Facility to repay $119.3 million principal value of mortgage loans. The weighted average interest rate of these loans as of March 31, 2010 was 7.3%. The mortgages encumbered certain of the Company’s operating properties with a net book value of $216.8 million. The Company incurred a $1.2 million prepayment penalty and wrote off $936,000 in deferred financing costs in conjunction with the prepayment of these loans. These costs are included as interest expense in the accompanying statements of operations.
Note 6: Disclosure of Fair Value of Financial Instruments
The following disclosure of estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the following estimates are not necessarily indicative of the amounts the Company could have realized on disposition of the financial instruments at June 30, 2010 and December 31, 2009. 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, dividends and distributions payable and other liabilities are reasonable estimates of fair value because of the short-term nature of these instruments. The fair value of the Company’s long-term debt was greater than the aggregate carrying value by approximately $136.8 million and $33.5 million at June 30, 2010 and December 31, 2009, respectively. The fair value of the Company’s long-term debt is estimated using actual trading prices (where available) and using discounted cash flow analysis based on the borrowing rates currently available to the Company for loans with similar terms and maturities where actual trading prices are not available.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of June 30, 2010 and December 31, 2009. Although as of the date of this report, management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since June 30, 2010 and current estimates of fair value may differ significantly from the amounts presented herein.

 

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Note 7: Recently Issued Accounting Standards
Beginning with the first quarter of 2010, the Company is required to conduct an ongoing assessment to determine whether each entity in which it has an equity interest is a variable interest entity that should be consolidated if certain qualitative factors indicate that the Company has the controlling interest. This accounting change is required to be retroactively applied for all periods presented. The adoption of the requirement did not have a material impact on the Company’s financial statements.
Note 8: Supplemental Disclosure to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flows for the six months ended June 30, 2010 and 2009 (amounts in thousands):
                 
Non-cash activity   2010     2009  
Write-off of fully depreciated property and deferred costs
  $ 16,912     $ 17,476  

 

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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 operates primarily in the Mid-Atlantic, Southeastern, Midwestern and Southwestern United States. Additionally, the Company owns certain assets in the United Kingdom.
As of June 30, 2010, the Company owned and operated 346 industrial and 291 office properties (the “Wholly Owned Properties in Operation”) totaling 64.5 million square feet. In addition, as of June 30, 2010, the Company owned one property under development, which when completed is expected to comprise 75,000 square feet (the “Wholly Owned Property under Development”), and 1,343 acres of developable land, substantially all of which is zoned for commercial use. Additionally, as of June 30, 2010, the Company had an ownership interest, through unconsolidated joint ventures, in 48 industrial and 49 office properties totaling 14.2 million square feet (the “JV Properties in Operation” and, together with the Wholly Owned Properties in Operation, the “Properties in Operation”), and one property under development, which when completed is expected to comprise 176,000 square feet (the “JV Property under Development” and, together with the Wholly Owned Property under Development, the “Properties under Development”). The Company also has an ownership interest through unconsolidated joint ventures in 627 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 increasing 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’s operating results depend primarily upon income from rental operations and are substantially influenced by rental demand for the Properties in Operation. Continued weakness in the economy has had a negative impact on the Company’s business. Although credit market conditions have somewhat improved for the Company, continued general credit constraints in the economy, as well as persistent high levels of unemployment, present challenges relating to the pricing of commercial real estate and demand for the Company’s products.
Consistent with the current reduced level of economic growth in the United States, rental demand for the Properties in Operation remained weak for the three months ended June 30, 2010 even though improved when compared to the three months ended June 30, 2009. The Company leased 4.1 million square feet in its Properties in Operation during the three months ended June 30, 2010 and attained occupancy of 90.2% for the Wholly Owned Properties in Operation and 81.5% for the JV Properties in Operation for a combined occupancy of 88.7% for the Properties in Operation, all as of that date. At December 31, 2009, occupancy for the Wholly Owned Properties in Operation was 89.5% and for the JV Properties in Operation was 87.7% for a combined occupancy for the Properties in Operation of 89.2%. The Company believes that straight line rents on renewal and replacement leases for 2010 will on average be 10% to 15% lower than rents on expiring leases. Furthermore, the Company believes that average occupancy for its Properties in Operation will not increase or decrease by more than 1% for 2010 compared to 2009.
WHOLLY OWNED CAPITAL ACTIVITY
Acquisitions
The Company did not acquire any operating properties during the six months ended June 30, 2010. For 2010, the Company anticipates that wholly owned property acquisitions will range from no acquisitions to acquisitions of up to $100 million.

 

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Dispositions
Disposition activity allows the Company to, among other things, (1) reduce its holdings in certain markets and product types within a market; (2) lower the average age of the portfolio; (3) optimize the cash proceeds from the sale of certain assets; and (4) obtain funds for investment activities. During the three months ended June 30, 2010, the Company realized proceeds of $10.2 million from the sale of two operating properties representing 72,000 square feet and 12 acres of land. During the six months ended June 30, 2010, the Company realized proceeds of $16.5 million from the sale of four operating properties representing 150,000 square feet and 12 acres of land. The Company’s original guidance for 2010 suggested that it would realize proceeds of approximately $75 million to $125 million from the sale of operating properties. The Company currently believes that it will not reach the low end of this range.
Development
During the three months ended June 30, 2010, the Company brought into service one Wholly Owned Property under Development representing 211,000 square feet and a Total Investment, as defined below, of $45.7 million, and did not initiate any development. During the six months ended June 30, 2010, the Company brought into service two Wholly Owned Properties under Development representing 306,000 square feet and a Total Investment of $70.5 million, and did not initiate any development. As of June 30, 2010, the projected Total Investment of the Wholly Owned Property under Development was $12.4 million. For 2010, the Company expects to bring into service operating properties representing between $75 million and $100 million of Total Investment. Although the Company continues to pursue development opportunities, current market conditions are not generally favorable for speculative development. Any development starts for 2010 likely will be substantially pre-leased.
The “Total Investment” for a Property is defined as the Property’s purchase price plus closing costs (for development properties and land) 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.
JOINT VENTURE CAPITAL ACTIVITY
The Company periodically enters into joint venture relationships in connection with the execution of its real estate operating strategy.
Acquisitions
During the three and six months ended June 30, 2010, none of the unconsolidated joint ventures in which the Company held an interest acquired any properties. For 2010, the Company believes that none of the unconsolidated joint ventures in which the Company holds an interest will acquire any properties.
Dispositions
During the three and six months ended June 30, 2010, none of the unconsolidated joint venture in which the Company held an interest disposed of any properties. For 2010, the Company does not anticipate that any unconsolidated joint ventures in which it holds an interest will dispose of any operating properties.
Development
During the three and six months ended June 30, 2010, an unconsolidated joint ventures in which the Company held an interest brought one JV Property under Development into service representing 464,000 square feet and a Total Investment of $25.1 million. As of June 30, 2010, the projected Total Investment of the JV Property under Development was $134.0 million. For 2010, the Company expects unconsolidated joint ventures in which it holds an interest to bring into service between $125 million and $175 million of Total Investment in operating properties.

 

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PROPERTIES IN OPERATION
The composition of the Company’s Properties in Operation as of June 30, 2010 and 2009 was as follows (in thousands, except dollars and percentages):
                                                 
    Net Rent              
    Per Square Foot     Total Square Feet     Percent Occupied  
    June 30,     June 30,     June 30,  
    2010     2009     2010     2009     2010     2009  
 
Wholly Owned Properties in Operation:
                                               
Industrial-Distribution
  $ 4.37     $ 4.34       31,572       31,502       90.8 %     88.5 %
Industrial-Flex
  $ 9.00     $ 9.18       11,233       11,497       88.5 %     87.9 %
Office
  $ 14.35     $ 14.35       21,734       21,272       90.3 %     92.1 %
 
                                   
 
  $ 8.52     $ 8.60       64,539       64,271       90.2 %     89.6 %
 
                                   
 
                                               
Joint Venture Properties in Operation:
                                               
Industrial-Distribution
  $ 3.86     $ 4.23       9,505       8,316       77.3 %     87.7 %
Industrial-Flex
  $ 22.03     $ 27.86       171       171       81.9 %     81.3 %
Office
  $ 23.54     $ 25.00       4,574       4,575       90.1 %     89.9 %
 
                                   
 
  $ 11.06     $ 11.91       14,250       13,062       81.5 %     88.4 %
 
                                   
 
                                               
Properties in Operation:
                                               
Industrial-Distribution
  $ 4.27     $ 4.32       41,077       39,818       87.7 %     88.3 %
Industrial-Flex
  $ 9.18     $ 9.43       11,404       11,668       88.4 %     87.8 %
Office
  $ 15.94     $ 16.20       26,308       25,847       90.2 %     91.7 %
 
                                   
 
  $ 8.94     $ 9.15       78,789       77,333       88.7 %     89.4 %
 
                                   
Geographic segment data for the three months ended June 30, 2010 and 2009 are included in Note 2 to the Company’s financial statements.
Forward-Looking Statements
When used throughout this report, the words “believes,” “anticipates,” “estimates” and “expects” and similar expressions are intended to identify forward-looking statements. Such statements indicate that assumptions have been used that are subject to a number of risks and uncertainties that could cause actual financial results or management plans and objectives to differ materially from those projected or expressed herein, including: the effect of global, national and regional economic conditions; rental demand; the Company’s ability to identify, and enter into agreements with suitable joint venture partners in situations where it believes such arrangements are advantageous; the Company’s ability to identify and secure additional properties and sites, both for itself and the joint ventures to which it is a party, that meet its criteria for acquisition or development; the effect of prevailing market interest rates; risks related to the integration of the operations of entities that we have acquired or may acquire; risks related to litigation; and other risks described from time to time in the Company’s filings with the SEC. Given these uncertainties, readers are cautioned not to place undue reliance on such statements.
Critical Accounting Policies and Estimates
Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for a discussion of critical accounting policies which include capitalized costs, revenue recognition, allowance for doubtful accounts, impairment of real estate, intangibles and investments in unconsolidated joint ventures. During the three months ended June 30, 2010, there were no material changes to these policies.

 

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Results of Operations
The following discussion is based on the consolidated financial statements of the Company. It compares the results of operations of the Company for the three and six months ended June 30, 2010 with the results of operations of the Company for the three and six months ended June 30, 2009. As a result of the varying levels of development, acquisition and disposition activities by the Company in 2010 and 2009, 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.
This information should be read in conjunction with the accompanying condensed consolidated financial statements and notes included elsewhere in this report.
Comparison of Three and Six Months Ended June 30, 2010 to Three and Six Months Ended June 30, 2009
Overview
The Company’s average gross investment in operating real estate owned for the three months ended June 30, 2010 increased to $5,191.6 million from $4,971.1 million for the three months ended June 30, 2009. This increase in operating real estate resulted in increases in rental revenue, operating expense reimbursement, real estate taxes and depreciation and amortization expense. For the six months ended June 30, 2010, the Company’s average gross investment in operating real estate owned increased to $5,146.0 million from $4,945.6 million for the six months ended June 30, 2009. This increase in operating real estate resulted in increases in rental revenue, operating expense reimbursement, rental property expenses, real estate taxes and depreciation and amortization expense.
Total operating revenue increased to $185.0 million for the three months ended June 30, 2010 from $183.6 million for the three months ended June 30, 2009. The $1.4 million increase was primarily due to the increase in investment in operating real estate and an increase in “Termination Fees,” which totaled $1.5 million for the three months ended June 30, 2010 as compared to $0.8 million for the same period in 2009. Total operating revenue increased to $373.8 million for the six months ended June 30, 2010 from $368.5 million for the six months ended June 30, 2009. The $5.3 million increase was primarily due to the increase in investment in operating real estate and an increase in “Termination Fees,” which totaled $3.2 million for the six months ended June 30, 2010 as compared to $1.1 million for the same period in 2009. Termination Fees are fees that the Company agrees to accept in consideration for permitting certain tenants to terminate their leases prior to the contractual expiration date. Termination Fees are included in rental revenue and if a property is sold, related termination fees are included in discontinued operations.
Segments
The Company evaluates the performance of the Wholly Owned Properties in Operation in terms of property level operating income by reportable segment (see Note 2 to the Company’s financial statements for a reconciliation of this measure to net income). The following table identifies changes in reportable segments (dollars in thousands):
Property Level Operating Income:
                                                 
    Three Months Ended     Percentage     Six Months Ended     Percentage  
    June 30,     Increase     June 30,     Increase  
    2010     2009     (Decrease)     2010     2009     (Decrease)  
Northeast
                                               
- Southeastern PA
  $ 30,384     $ 31,166       (2.5 %)   $ 60,760     $ 62,339       (2.5 %)
- Lehigh/Central PA
    18,482       18,174       1.7 %     36,916       35,648       3.6 %
- New Jersey
    4,938       4,771       3.5 %     9,578       9,417       1.7 %
Midwest
    12,130       13,044       (7.0% ) (1)     23,798       26,131       (8.9% ) (1)
Mid-Atlantic
    24,331       24,030       1.3 %     48,596       47,198       3.0 %
South
    31,000       31,099       (0.3 %)     61,231       61,943       (1.1 %)
 
                                               
Philadelphia
    5,863       3,855       52.1% (2)     11,324       7,410       52.8% (2)
United Kingdom
    789       875       (9.8 %)     1,594       1,746       (8.7 %)
 
                                   
Total property level operating income
  $ 127,917     $ 127,014       0.7 %   $ 253,797     $ 251,832       0.8 %
 
                                   
     
(1)  
The change was primarily due to a decrease in occupancy. This decrease was partially offset by an increase in average gross investment in operating real estate and an increase in rental rates in 2010.
 
(2)  
The change was primarily due to an increase in average gross investment in operating real estate and rental rates.

 

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Same Store
Property level operating income, exclusive of Termination Fees, for the Same Store properties decreased to $120.1 million for the three months ended June 30, 2010 from $124.1 million for the three months ended June 30, 2009, on a straight line basis (which recognizes rental revenue evenly over the life of the lease), and decreased to $118.2 million for the three months ended June 30, 2010 from $120.3 million for the three months ended June 30, 2009 on a cash basis. These decreases of 3.2% and 1.8%, respectively, are primarily due to a decrease in occupancy in the Company’s office portfolio.
Property level operating income, exclusive of Termination Fees, for the Same Store properties decreased to $238.8 million for the six months ended June 30, 2010 from $247.3 million for the six months ended June 30, 2009, on a straight line basis (which recognizes rental revenue evenly over the life of the lease), and decreased to $235.0 million for the six months ended June 30, 2010 from $239.8 million for the six months ended June 30, 2009 on a cash basis. These decreases of 3.4% and 2.0%, respectively, are primarily due to a decrease in occupancy in the Company’s office portfolio.
Management generally considers the performance of the Same Store properties to be a useful financial performance measure because the results are directly comparable from period to period. Management further believes that the performance comparison should exclude Termination Fees since they are more event specific and are not representative of ordinary performance results. In addition, Same Store property level operating income and Same Store cash basis property level operating income exclusive of Termination Fees is considered by management to be a more reliable indicator of the portfolio’s baseline performance. The Same Store properties consist of the 621 properties totaling approximately 61.4 million square feet owned on January 1, 2009, excluding properties sold through June 30, 2010.
Set forth below is a schedule comparing the property level operating income, on a straight line basis and on a cash basis, for the Same Store properties for the three and six months ended June 30, 2010 and 2009. Same Store property level operating income and cash basis property level operating income are non-GAAP measures and do not represent income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures because they do not reflect the consolidated operations of the Company. Investors should review Same Store results, along with Funds from operations (see “Liquidity and Capital Resources” section), GAAP net income and cash flow from operating activities, investing activities and financing activities when considering the Company’s operating performance. Also, set forth below is a reconciliation of Same Store property level operating income and cash basis property level operating income to net income (in thousands).

 

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    Three Months Ended     Six Months Ended  
    June 30, 2010     June 30, 2009     June 30, 2010     June 30, 2009  
Same Store:
                               
Rental revenue
  $ 122,698     $ 126,478     $ 245,150     $ 252,757  
Operating expenses:
                               
Rental property expense
    34,155       35,107       73,720       74,137  
Real estate taxes
    21,095       20,847       42,331       41,770  
Operating expense recovery
    (52,605 )     (53,546 )     (109,703 )     (110,404 )
 
                       
Unrecovered operating expenses
    2,645       2,408       6,348       5,503  
 
                       
 
                               
Property level operating income
    120,053       124,070       238,802       247,254  
Less straight line rent
    1,841       3,752       3,778       7,462  
 
                       
 
                               
Cash basis property level operating income
  $ 118,212     $ 120,318     $ 235,024     $ 239,792  
 
                       
 
                               
Reconciliation of non-GAAP financial measure — Same Store:
                               
Cash basis property level operating income
  $ 118,212     $ 120,318     $ 235,024     $ 239,792  
Straight line rent
    1,841       3,752       3,778       7,462  
 
                       
Property level operating income
    120,053       124,070       238,802       247,254  
Property level operating income — properties purchased or developed subsequent to January 1, 2009
    6,395       2,119       11,768       3,453  
Termination fees
    1,469       825       3,227       1,125  
General and administrative expense
    (12,567 )     (11,655 )     (27,441 )     (27,212 )
Depreciation and amortization expense
    (43,873 )     (42,005 )     (86,804 )     (84,575 )
Other income (expense)
    (36,463 )     (33,681 )     (72,302 )     (67,248 )
Gain (loss) on property dispositions
    2,242       (2,050 )     3,010       (2,344 )
Income taxes
    (503 )     (127 )     (955 )     (344 )
Equity in earnings of unconsolidated joint ventures
    783       1,192       1,177       1,609  
Discontinued operations (1)
    2,478       4,524       5,354       5,336  
 
                       
 
                               
Net income
  $ 40,014     $ 43,212     $ 75,836     $ 77,054  
 
                       
     
(1)  
Includes Termination Fees of $227,000 for the three and six months ended June 30, 2009.
General and Administrative
General and administrative expenses increased to $12.6 million for the three months ended June 30, 2010 compared to $11.7 million for the three months ended June 30, 2009 and increased to $27.4 million for the six months ended June 30, 2010 compared to $27.2 million for the six months ended June 30, 2009. These increases were primarily due to a decrease in costs capitalized related to development activity. These increases for the six-month periods were offset by a decrease in expenses associated with the Company’s Long Term Incentive Compensation Plan.
Depreciation and Amortization
Depreciation and amortization increased to $43.9 million for the three months ended June 30, 2010 from $42.0 million for the three months ended June 30, 2009 and $86.8 million for the six months ended June 30, 2010 from $84.6 million for the six months ended June 30, 2009. These increases were primarily due to the increased investment in operating real estate.
Interest Expense
Interest expense increased to $39.1 million for the three months ended June 30, 2010 from $36.8 million for the three months ended June 30, 2009. This increase was primarily related to the prepayment of $119.3 million of mortgage loans during the three months ended June 30, 2010. The Company incurred a $1.2 million prepayment penalty and wrote off $936,000 in deferred financing costs in conjunction with the prepayment of these loans. The increase was also related to a decrease in interest capitalized due to a decrease in development activity. The effect of the loan prepayment and the decrease in interest capitalized was partially offset by a decrease in interest expense associated with the decrease in the average debt outstanding to $2,297.7 million for the three months ended June 30, 2010 from $2,513.2 million for the three months ended June 30, 2009. The weighted average interest rate remained relatively unchanged at 6.3% for the three months ended June 30, 2010 compared to 6.4% for the three months ended June 30, 2009. Interest expense increased to $77.8 million for the six months ended June 30, 2010 from $73.9 million for the six months ended June 30, 2009. This increase was primarily related to the loan prepayment noted above and a decrease in interest capitalized due to a decrease in development activity. The effect of the loan prepayment and the decrease in interest capitalized was partially offset by a decrease in interest expense associated with the decrease in the average debt outstanding to $2,350.8 million for the six months ended June 30, 2010 from $2,538.8 million for the six months ended June 30, 2009. The weighted average interest rate remained unchanged at 6.3% for both periods.

 

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Interest expense allocated to discontinued operations for the three months ended June 30, 2010 and 2009 was $22,000 and $845,000, respectively, and for the six months ended June 30, 2010 and 2009 was $43,000 and $2.3 million, respectively. These decreases were due to the decrease in the level of dispositions in 2010 compared to 2009.
Other
Gain (loss) on property dispositions increased to a gain of $2.2 million for the three months ended June 30, 2010 from a loss of $2.1 million for the three months ended June 30, 2009 and to a gain of $3.0 million for the six months ended June 30, 2010 from a loss of $2.3 million for the six months ended June 30, 2009. These increases were primarily due to impairments recognized on certain of the Company’s properties in 2009 in connection with sales activities.
During the three months ended June 30, 2009, the Company purchased $3.5 million principal amount of its 7.25% March 2011 senior unsecured notes and $4.9 million principal amount of its 6.375% August 2012 senior unsecured notes. These notes were purchased at an aggregate $0.6 million discount. During the six months ended June 30, 2009, the Company purchased $6.9 million principal amount of its 8.50% August 2010 senior unsecured notes, $3.5 million principal amount of its 7.25% March 2011 senior unsecured notes and $4.9 million principal amount of its 6.375% August 2012 senior unsecured notes. These notes were purchased at an aggregate $1.1 million discount. These discounts are included as a debt extinguishment gain in the Company’s statements of operations. There were no similar transactions during the three and six months ended June 30, 2010.
Income from discontinued operations decreased to $2.5 million for the three months ended June 30, 2010 from $4.5 million for the three months ended June 30, 2009 and increased to $5.4 million for the six months ended June 30, 2010 from $5.3 million for the six months ended June 30, 2009. The decrease for the three month periods was due to a decrease in gains recognized on sales which were $2.4 million for the three months ended June 30, 2010 and $3.7 million for the three months ended June 30, 2009. This increase for the six month periods was due to an increase in gains recognized on sales which were $5.3 million for the six months ended June 30, 2010 compared to $3.9 million for the six months ended June 30, 2009.
As a result of the foregoing, the Company’s net income decreased to $40.0 million for the three months ended June 30, 2010 from $43.2 million for the three months ended June 30, 2009 and decreased to $75.8 million for the six months ended June 30, 2010 from $77.1 million for the six months ended June 30, 2009.
Liquidity and Capital Resources
Overview
The Company has historically accessed capital primarily from the public unsecured debt markets and the equity markets. The uncertainty in the global credit markets that existed in early 2009 has eased considerably for issuers such as the Company. The Company believes that its traditional access to capital through the unsecured debt market is currently available. Additionally, the Company’s sources of capital include proceeds from the disposition of properties, equity contributions from joint venture partners and net cash provided by operating activities. The Company also expects to incur variable rate debt, including borrowings under the Company’s credit facility, from time to time.
Activity
As of June 30, 2010, the Company had cash and cash equivalents of $75.9 million, including $36.4 million in restricted cash.

 

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Net cash flow provided by operating activities decreased to $148.2 million for the six months ended June 30, 2010 from $174.4 million for the six months ended June 30, 2009. This $26.2 million decrease was primarily due to a decrease in operating results and fluctuations in operating assets and liabilities during the respective periods. The decrease in operating results is due to a decrease in same store performance which is primarily attributable to the decrease in occupancy, primarily in the office portfolio. Net cash flow provided by operating activities is the primary source of liquidity to fund distributions to shareholders and for recurring capital expenditures and leasing transaction costs for the Company’s Wholly Owned Properties in Operation. To date during 2010 the performance of the Company’s business is generally consistent with its expectations. The Company anticipates moderate increases in occupancy during the second half of 2010 and further increases in occupancy in 2011. Currently the amount the Company distributes as dividends to its shareholders exceeds the net cash provided by its operating activities less costs associated with lease transactions. The Company believes that the anticipated increases in occupancy in the remainder of 2010 and 2011 should provide for sufficient net cash to cover the cost of the dividend at some point in 2011. However, should this increased occupancy not occur or our operating results are otherwise adversely affected, the Company might need to re-evaluate the amount of the quarterly dividend.
Net cash used in investing activities was $20.8 million for the six months ended June 30, 2010 compared to $40.4 million for the six months ended June 30, 2009. This $19.6 million decrease primarily resulted from the reduction of expenditures on the Company’s development pipeline and land held for development. Net cash used in investing activities also decreased due to the change in net proceeds received from (advances on) a grant receivable and an escrow in 2010. Offsetting these decreases was a decrease in net proceeds from the disposition of properties and land.
Net cash used in financing activities was $322.0 million for the six months ended June 30, 2010 compared to $28.7 million for the six months ended June 30, 2009. This $293.3 million increase was primarily due to the net proceeds received in 2009 from the issuance of shares pursuant to the Company’s continuous equity offering program. Additionally during 2010 the Company prepaid $119.3 million of mortgage loans and repaid its credit facility in the net amount of $90 million with cash on hand. Net cash used in financing activities includes proceeds from the issuance of equity and debt, net of debt repayments, equity repurchases and shareholder distributions.
The Company funds its development and acquisitions with long-term capital sources and proceeds from the disposition of properties. For the three months ended June 30, 2010, a portion of these activities were funded through a $600 million Credit Facility (the “Credit Facility”). The interest rate on borrowings under the Credit Facility fluctuates based upon ratings from Moody’s Investors Service, Inc. (“Moody’s”), Standard and Poor’s Ratings Group (“S&P”) and Fitch, Inc. (“Fitch”). The current ratings for the Company’s senior unsecured debt are Baa2, BBB and BBB+ from Moody’s, S&P and Fitch, respectively. At these ratings, the interest rate for borrowings under the Credit Facility is 65 basis points over LIBOR. The Company has exercised its one year renewal option and the Credit Facility now expires in January 2011. The Company is currently in negotiations for a credit facility to replace the expiring Credit Facility. In light of the anticipated demands of the Company’s capital plan, the Company expects to reduce the amount of credit facility to approximately $500 million. A closing on the replacement credit facility is expected to take place in the third quarter of 2010. Although still in negotiation, the Company anticipates that the interest rate on borrowings under the replacement credit facility will be higher than the interest rate on the expiring Credit Facility. Similar facilities that other borrowers have recently obtained have required rates equal to 200-300 basis points over LIBOR.
Additionally, the Company has entered into an agreement to fund its planned improvements for the Kings Hill Phase 2 land development project. At June 30, 2010, the Company hadn’t drawn any of a £7 million revolving credit facility. The facility expires on November 22, 2011.
The Company uses debt financing to lower its overall cost of capital in an attempt to increase the return to shareholders. The Company staggers its debt maturities and maintains debt levels it considers to be prudent. In determining its debt levels, the Company considers various financial measures including the debt to gross assets ratio and the fixed charge coverage ratio. As of June 30, 2010 the Company’s debt to gross assets ratio was 37.5% and for the six months ended June 30, 2010 the fixed charge coverage ratio was 2.6x. Debt to gross assets equals total long-term debt, borrowings under the Credit Facility divided by total assets plus accumulated depreciation. The fixed charge coverage ratio equals income from continuing operations before property dispositions, including operating activity from discontinued operations, plus interest expense and depreciation and amortization, divided by interest expense, including capitalized interest, plus distributions on preferred units.
As of June 30, 2010, $352.0 million in mortgage loans and $1,842.9 million in unsecured notes were outstanding with a weighted average interest rate of 6.41%. The interest rates on $2,151.3 million of mortgage loans and unsecured notes are fixed and range from 5.00% to 8.75%. For $43.6 million of mortgage loans, the interest rate floats at a spread to LIBOR. The interest rate on these loans at June 30, 2010 was 5.15%. The weighted average remaining term for the mortgage loans and unsecured notes is 4.3 years.

 

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The scheduled principal amortization and maturities of the Company’s mortgage loans, unsecured notes and the Credit Facility and the related weighted average interest rates as of June 30, 2010 are as follows (in thousands, except percentages):
                                                 
    MORTGAGES                             WEIGHTED  
    PRINCIPAL     PRINCIPAL     UNSECURED     CREDIT             AVERAGE  
    AMORTIZATION     MATURITIES     NOTES     FACILITY     TOTAL     INTEREST RATE  
2010 (6 months)
  $ 3,217     $ 4,736     $ 169,739     $     $ 177,692       8.37 %
2011
    5,948       10,511       246,500       50,000       312,959       6.09 %
2012
    4,605       72,433 (1)     230,100             307,138       6.29 %
2013
    4,027       4,510                   8,537       5.79 %
2014
    4,398       2,684       200,000             207,082       5.67 %
2015
    3,932       44,469       300,000             348,401       5.25 %
2016
    2,461       182,318       300,000             484,779       6.11 %
2017
    1,770             296,543             298,313       6.62 %
2018 & thereafter
                100,000             100,000       7.50 %
 
                                   
 
  $ 30,358     $ 321,661     $ 1,842,882     $ 50,000     $ 2,244,901       6.29 %
 
                                   
     
(1)  
There are two one — year extensions for $42,310 of mortgages.
General
The Company has continued to focus on the performance of the Same Store portfolio. In addition, the Company has continued to pursue development and acquisition opportunities and the strategic disposition of certain properties. The Company endeavors to maintain high occupancy levels while increasing rental rates and controlling costs, though the current economic environment and weak real estate fundamentals have pressured occupancy and created a declining rental rate environment.

 

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The expiring square feet and annual net rent by year for the Properties in Operation as of June 30, 2010 are as follows (in thousands except number of tenants and % of Annual Rent):
                                                                                                                                 
    Industrial-Distribution     Industrial-Flex     Office     Total  
    Number                     % of     Number                     % of     Number                     % of     Number                     % of  
    of     Square     Annual     Annual     of     Square     Annual     Annual     of     Square     Annual     Annual     of     Square     Annual     Annual  
    Tenants     Feet     Rent     Rent     Tenants     Feet     Rent     Rent     Tenants     Feet     Rent     Rent     Tenants     Feet     Rent     Rent  
Wholly Owned Properties in Operation:
                                                                                                                               
2010
    21       806     $ 3,419       2.3 %     61       710     $ 6,265       6.3 %     159       1,216     $ 15,270       4.8 %     241       2,732     $ 24,954       4.4 %
2011
    61       3,026       13,563       9.1 %     131       1,412       12,424       12.4 %     252       1,918       26,827       8.3 %     444       6,356       52,814       9.2 %
2012
    54       5,032       22,920       15.5 %     125       1,715       15,907       15.9 %     253       2,332       38,754       12.0 %     432       9,079       77,581       13.6 %
2013
    47       2,808       13,389       9.0 %     102       1,621       15,674       15.6 %     201       2,323       37,494       11.7 %     350       6,752       66,557       11.7 %
2014
    34       2,741       13,817       9.3 %     69       964       9,954       9.9 %     147       2,798       43,464       13.5 %     250       6,503       67,235       11.8 %
2015
    33       4,070       18,847       12.7 %     63       1,045       10,746       10.7 %     135       2,536       36,490       11.3 %     231       7,651       66,083       11.6 %
2016
    17       2,062       10,345       7.0 %     25       709       7,673       7.7 %     57       1,656       29,368       9.1 %     99       4,427       47,386       8.3 %
2017
    12       1,761       8,981       6.0 %     26       701       7,707       7.7 %     30       647       11,097       3.4 %     68       3,109       27,785       4.9 %
2018
    13       1,731       10,983       7.4 %     11       344       2,926       2.9 %     26       930       17,778       5.5 %     50       3,005       31,687       5.5 %
2019
    10       1,323       7,745       5.2 %     4       247       3,248       3.2 %     29       1,500       30,433       9.5 %     43       3,070       41,426       7.2 %
Thereafter
    16       3,318       24,446       16.5 %     12       476       7,707       7.7 %     44       1,767       35,136       10.9 %     72       5,561       67,289       11.8 %
 
                                                                                               
 
                                                                                                                               
Total
    318       28,678     $ 148,455       100.0 %     629       9,944     $ 100,231       100.0 %     1,333       19,623     $ 322,111       100.0 %     2,280       58,245     $ 570,797       100.0 %
 
                                                                                               
 
                                                                                                                               
Joint Venture Properties in Operation:
                                                                                                                               
2010
    3       263     $ 1,216       3.5 %               $       0.0 %     38       207     $ 4,047       3.4 %     41       470     $ 5,263       3.3 %
2011
    10       1,027       3,874       11.3 %     1       11       281       7.7 %     36       479       12,236       10.3 %     47       1,517       16,391       10.5 %
2012
    8       356       1,614       4.7 %     5       68       1,717       47.4 %     20       219       5,106       4.3 %     33       643       8,437       5.4 %
2013
    7       936       3,616       10.6 %                       0.0 %     13       146       3,570       3.0 %     20       1,082       7,186       4.6 %
2014
    7       1,125       5,194       15.2 %     2       25       674       18.6 %     20       394       10,534       8.9 %     29       1,544       16,402       10.5 %
2015
    5       741       3,326       9.7 %                       0.0 %     22       198       4,609       3.9 %     27       939       7,935       5.1 %
2016
    7       552       3,114       9.1 %     1       36       953       26.3 %     17       506       12,500       10.5 %     25       1,094       16,567       10.6 %
2017
    4       720       3,350       9.8 %                       0.0 %     5       200       4,695       4.0 %     9       920       8,045       5.1 %
2018
    5       726       3,964       11.6 %                       0.0 %     12       48       1,665       1.4 %     17       774       5,629       3.6 %
2019
    1       500       3,151       9.2 %                       0.0 %     15       203       5,853       4.9 %     16       703       9,004       5.7 %
Thereafter
    3       401       1,818       5.3 %                       0.0 %     16       1,522       53,918       45.4 %     19       1,923       55,736       35.6 %
 
                                                                                               
 
                                                                                                                               
Total
    60       7,347     $ 34,237       100.0 %     9       140     $ 3,625       100.0 %     214       4,122     $ 118,733       100.0 %     283       11,609     $ 156,595       100.0 %
 
                                                                                               

 

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The scheduled deliveries of the 251,000 square feet of Properties under Development as of June 30, 2010 are as follows (dollars in thousands):
                                                         
            Square Feet              
    Scheduled     Industrial-     Industrial                     Percent     Total  
    In-Service Date     Distribution     - Flex     Office     Total     Leased     Investment  
Wholly Owned Property under Development
  3rd Quarter 2010                 75,000       75,000       100.0 %   $ 12,384  
 
                                           
 
  TOTAL                 75,000       75,000       100.0 %   $ 12,384  
 
                                           
 
                                                       
Joint Venture Property under Development
  3rd Quarter 2010                 176,058       176,058       53.2 %   $ 133,984  
 
                                           
 
  TOTAL                 176,058       176,058       53.2 %   $ 133,984  
 
                                           
 
                                                       
Total Properties under Development
  TOTAL                 251,058       251,058       67.2 %   $ 146,368  
 
                                           
The Company has an effective S-3 shelf registration statement on file with the SEC pursuant to which the Trust and the Operating Partnership may issue an unlimited amount of equity securities and debt securities.
Calculation of Funds from Operations
The National Association of Real Estate Investment Trusts (“NAREIT”) has issued