ITEM 1. BUSINESS
THE COMPANY
Liberty Property Trust (the "Trust") is one of the largest owners and operators of suburban industrial and office real estate in the United States. The Trust is a self-administered and self-managed Maryland real estate investment trust (a "REIT"). The Trust and its subsidiary, Liberty Property Limited Partnership, a Pennsylvania limited partnership (the "Operating Partnership") and, together with the Trust, the "Company"), were formed to continue and expand the commercial real estate business of Rouse & Associates, a Pennsylvania general partnership, and certain affiliated entities (collectively, the "Predecessor"). Founded in 1972, the Predecessor developed and managed commercial real estate in the Southeastern and Mid-Atlantic United States. Substantially all of the Trust's assets are owned directly or indirectly by, and substantially all of the Trust's operations are conducted directly or indirectly by, the Operating Partnership.
The Company provides leasing, property management, acquisition, development, construction management, design management and other related services for a portfolio which, as of December 31, 1996, consisted of 259 industrial and office properties (the "Properties in Operation") totaling approximately 20.6 million leasable square feet. As of December 31, 1996, the Company also had 22 properties under development (the "Properties Under Development") and, together with the Properties in Operation, the "Properties"). The Properties Under Development are expected to generate approximately 3.0 million leasable square feet. The land, which is all zoned for commercial use, is believed to be capable of supporting, as and when developed, 9.3 million leaseable square feet. The Properties are located principally within the Southeastern and Mid-Atlantic United States. As of December 31, 1996, the Properties in Operation were approximately 92.8% leased to over 800 tenants.
During the year ended December 31, 1996, through Total Investments (as defined below) aggregating $232.2 million, the Company has increased its total leasable square footage of industrial and office space by approximately 23.5% by acquiring 33 properties totaling approximately 2.4 million leasable square feet and by developing 19 properties totaling approximately 1.5 million leasable square feet. The "Total Investment" for a property is defined as the property's purchase price plus closing costs and management's estimate, as determined at the time of acquisition, of the cost of necessary building improvements in the case of acquisitions, or land costs and land and building improvement costs in the case of development projects, and, where appropriate, other development costs and carrying costs required to reach rent commencement. During 1996, the Company has also increased its holdings of land for future development by 98 acres (net of acreage utilized in 1996 for development projects and sold), all zoned for commercial use.
As of December 31, 1996, the Properties in Operation consisted of 173 industrial and 86 office properties. The Company's industrial properties are located principally in suburban mixed-use developments or business parks and include warehouse/distribution facilities, as well as flex facilities which accommodate both industrial and office use. The industrial activities in the Company's flex facilities typically include service, assembly, light manufacturing and research and development. The Company's office properties are mid-rise and single story office buildings, located principally in suburban mixed-use developments or office parks.
The Trust is the sole general partner and also a limited partner of the Operating Partnership, with a combined equity interest in the Operating Partnership of 90.05% at December 31, 1996. The units of limited partnership interest (the "Units") in the Operating Partnership are exchangeable on a one for one basis (subject to antidilution protections) for Common Shares of Beneficial Interest $.001 par value per share (the "Common Shares"), of the Trust typically after the first anniversary of the issuance of any such Units. The only limited partners of the Operating Partnership other than the Trust are persons or entities that contributed assets to the Operating Partnership, principally senior executives of the Trust and their affiliates. The Units held by the limited partners other than the Trust (that is, the minority interest reflected in the Trust's financial statements) were exchangeable for approximately 3.5 million Common Shares on December 31, 1996.
The Company's executive offices are located at 65 Valley Stream Parkway, Malvern, Pennsylvania 19355. The telephone number is (610) 648-1700. The Company maintains offices in each of its primary markets.
MANAGEMENT AND EMPLOYEES
The Company's 199 employees (as of February 18, 1997) are under the direction of 17 senior executives, who have developed and managed over 35 million square feet of commercial real estate during the past 25 years and who, on average, have been affiliated with the Company and/or the Predecessor for 14 years. The Company's in-house leasing, marketing and property management staff operates in 8 full-service local offices in the United States. This structure enables the Company to better understand the particular characteristics of the local markets in which it operates, to respond quickly and directly to tenant needs and to better identify local acquisition and development opportunities. The Company considers its relations with its employees to be good.
BUSINESS OBJECTIVES AND STRATEGIES FOR GROWTH
The Company's primary objective is to increase funds from operations. See Item 6, "Selected Financial Data", for the definition of this term. The operating strategies for achieving this goal are to deliver outstanding tenant service, emphasize marketing to attract new tenants and enhance the Company's portfolio through the acquisition and development of high quality properties in markets affording opportunities for attractive investments. In pursuing these strategies,
the Company seeks to manage its capital structure to fund growth while maintaining financial liquidity and stability.
INTERNAL GROWTH STRATEGIES
Management believes that the Properties offer significant opportunities for the Company to increase its rental revenues and cash flow. The Company seeks to increase cash flow by continuing its practice of negotiating for contractual rental increases that take effect during the terms of its leases. In addition, the Company seeks to increase rental revenues through the renewal or replacement of expiring leases at higher rental rates and by improving the occupancy rates of its portfolio.
New Leases and Lease Renewals. In the early 1990s, rental rates in the markets in which the Properties are located were flat or decreased as a result of recessionary market conditions and an oversupply of commercial real estate in such markets. As these leases expire, the Company expects, although no assurance can be given, that replacement leases will reflect higher rental rates as economic conditions continue to improve and the oversupply of commercial real estate is mitigated by the decreased commercial construction starts in recent years.
Contractual Increases. The Company seeks to generate increased cash flow from the Properties in Operation through contractual increases in rental rates under its leases. The leases in effect with respect to the Properties in Operation as of December 31, 1996 provide for contractual rental increases that are expected to contribute an additional $1.2 million to the Company's cash flow for the year ending December 31, 1997. The Company intends to continue seeking to negotiate contractual rent increases that take effect during the terms of its leases.
Improving Occupancies. The Company believes that the quality and diversity of its tenant base has contributed, and will continue to contribute, to the success of its strategy for increasing rental and occupancy rates. The Company targets financially stable tenants in an effort to minimize uncertainty relating to the ability of its tenants to meet their lease obligations. The Company's success in maintaining its occupancy rates and attracting and retaining tenants is demonstrated in part by its renewal rate which was approximately 59.0% for the year ended December 31, 1996.
Cost Controls. The Company seeks to monitor and control its operating and administrative costs by performing many functions in-house rather than by engaging outside parties. For example, the Company relies primarily on its locally based leasing and marketing staff, thereby reducing commissions to third parties. Similarly, although construction and design services typically are provided by third parties (including, in certain instances, an entity affiliated with one or more of the Company's senior executives), the Company's in-house construction and design management staff closely supervises construction and design activities in an effort to control costs, minimize cost overruns, ensure timely delivery of tenant space and maximize productivity and efficiencies. The Company also employs an annual capital improvement
and preventive maintenance program designed to reduce the operating costs of the Properties and maintain their long-term value.
ACQUISITIONS
STRATEGY. The Company seeks to acquire properties consistent with its business objectives and strategies for growth. The Company has identified the following categories of acquisitions:
SINGLE-ASSET ACQUISITIONS:
STABILIZED ACQUISITIONS: Stabilized Acquisitions consist of individual properties generally located within the Company's existing markets, which are typically at high occupancy levels upon acquisition. During the year ended December 31, 1996, the Company acquired 27 properties which can be characterized as Stabilized Acquisitions containing approximately 1.6 million leasable square feet of industrial and office space for a Total Investment of approximately $96.3 million. These properties were 96.7% leased as of December 31, 1996.
ENTREPRENEURIAL ACQUISITIONS: Entrepreneurial Acquisitions consist of individual properties generally located within the Company's existing markets, which are typically either vacant or at low occupancy levels and can be purchased substantially below replacement cost, thereby offering the opportunity for above average return when fully leased. During the year ended December 31, 1996, the Company acquired 6 properties which can be characterized as Entrepreneurial Acquisitions containing approximately 783,000 leasable square feet of industrial and office space which was either vacant or partially leased at the time of acquisition, for a Total Investment of approximately $36.6 million. Approximately 45,000 square feet of space was acquired vacant for a Total Investment of approximately $1.5 million, and was 100.0% leased as of December 31, 1996. The remaining 738,000 square feet of this space was acquired partially leased for a Total Investment of approximately $35.1 million and was 68.1% leased as of December 31, 1996.
PORTFOLIO ACQUISITIONS:
Groups of properties or existing real estate companies that in either case offer an immediate return which can be enhanced by the Company's management expertise and financial strength.
DEVELOPMENT
STRATEGY. The Company pursues selective development opportunities focusing primarily on high quality suburban industrial and office properties within its existing markets. The Company's development activities fall into two categories: build-to-suit projects and projects built for inventory. The Company develops build-to-suit projects for existing and new tenants. The buildings in these projects are substantially pre-leased to one or more tenants prior to construction. The Company also builds properties for inventory in high-occupancy markets in which the Company has identified sufficient demand at market rental rates justifying such construction.
COMPLETED DEVELOPMENTS: During the year ended December 31, 1996, the Company completed 4 build-to-suit and 15 inventory projects, approximately 1.5 million square feet of leasable space representing a Total Investment of approximately $99.3 million. As of December 31, 1996, the completed development properties were 91.7% leased.
PROPERTIES UNDER DEVELOPMENT: As of December 31, 1996, the Company was developing 22 development properties which, upon completion, are expected to generate approximately 3.0 million square feet of leasable space representing a Total Investment of approximately $153.8 million. Approximately 68.8% of such leaseable space was pre-leased as of December 31, 1996. Five of these properties are 100% pre-leased under net leases as build-to-suit projects. There can be no assurance that any of these Properties Under Development will be completed, or that the Company's budgets or estimates of construction costs or time periods necessary to complete construction, will be realized. The Company expects to complete development of 12 properties (totalling 2.2 million square feet of leasable space) in the year ended December 31, 1997.
LAND: As of December 31, 1995, the Company owned 914 acres of land for development, all zoned for commercial use. During the year ended December 31, 1996 the Company purchased an additional 315 acres of land for development, and utilized 177 acres in development projects and sold 40 acres. Substantially all of the remaining 1,012 acres is located adjacent to or within existing industrial or business parks with site improvements, such as public sewers, water and utilities, available for service and the Company anticipates that the land would support 9.3 million leasable square feet. The Company believes that, because it is a fully integrated real estate firm, its base of commercially zoned land in existing industrial and business parks provides a competitive advantage for future development activities, particularly as the availability of land within the Company's geographic markets continues to diminish.
INTERNATIONAL OPERATION: The Company earns an annual fee of $600,000 (subject to adjustment for additional services undertaken by the Company) for its management services provided with respect to a joint venture between Rouse Kent Limited, which is owned by certain senior executives of the Company, and the County of Kent, England to develop a 650-acre, mixed-use park approximately 25 miles southeast of London. The Company has an option to purchase Rouse Kent for nominal consideration and an option to purchase future buildings and land within the park. The Company's international operations also include 4 Properties in Operation in the County of Kent.
SUBSEQUENT ACTIVITIES
Since December 31, 1996, the date as of which tabular data presented herein is reflected, the Company has purchased three office buildings containing approximately 267,134 leasable square feet for a Total Investment of $26.6 million. In addition, the Company has completed
development on three industrial distribution properties containing approximately 1.4 million leasable square feet for a Total Investment of $42.1 million.
The Company intends to pursue its acquisition and development strategies. The Company is currently in various stages of discussions and negotiations with respect to acquisition and build-to-suit projects totalling over $200.0 million. The consummation of these or any other future acquisitions or developments, if any, and the pace at which acquisitions may be made and developments completed, cannot be assured.
COMPETITION
The Company faces competition as a buyer, developer and lessor of properties and will likely face competition as an eventual seller of properties to the extent that properties are sold. The Company may be competing with other owners and developers with greater resources and whose management may have more experience than the Company's officers and trustees. There are numerous other entities, including but not limited to other REITs, that compete with the Company in seeking to acquire the limited number of properties available for sale that meet the Company's acquisition strategy. Like the Company, many of the potentially competing purchasers can use their own securities in making acquisitions. Additionally, the number of competitive properties in any particular market in which the Company's Properties are located could have a material adverse effect on both the Company's ability to lease space at the Properties or any newly-acquired property and on the rents charged at the Properties in Operation. However, the Company believes that its capital base, its existing sources of credit and its access as a public entity to the capital markets to raise funds during periods when conventional sources of financing may be unavailable or prohibitively expensive will provide the Company with competitive advantages. Further, the Company believes that the number of real estate developers has decreased as a result of the recessionary market conditions and tight credit markets during the early 1990s as well as the reluctance on the part of more conventional financing sources to fund development and acquisition projects. Moreover, the Company believes that its responsiveness to tenant needs will enable it to attract and maintain high quality tenants in the markets in which the Properties in Operation are located.
ENVIRONMENTAL REGULATIONS
Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment (collectively, "Environmental Laws"), a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of certain hazardous or toxic substances disposed, stored, released, generated, manufactured or discharged from, on, at, onto, under or in such property. Environmental Laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence or release of such hazardous or toxic substances. In addition, the presence of any such substances or the failure to properly remediate such substances when present, released or discharged may adversely
affect the owner's ability to sell or rent such property or to borrow using such property as collateral. The cost of any required remediation and the liability of the owner or operator therefor as to any property is generally not limited under such Environmental Laws and could exceed the value of the property and/or the aggregate assets of the owner or operator. Persons who arrange for disposal of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such persons. In addition to any action required by federal, state or local authorities, the presence of hazardous or toxic substances on any of the Properties, or on any properties acquired hereafter, could result in private plaintiffs bringing claims for personal injury or other causes of action. In connection with the ownership and operation of the Properties, and on any properties acquired hereafter, the Company may be potentially liable for remediation, release or injury. Further, various Environmental Laws impose on owners or operators the requirement of ongoing compliance with rules and regulations regarding business-related activities that may affect the environment. Failure to comply with such requirements could result in difficulty in the lease or sale of any affected Property or the imposition of monetary penalties and fines in addition to the costs required to attain compliance.
All of the Properties in Operation have been subject to Phase I Environmental Assessments ("Phase I Assessments"). The Phase I Assessments did not reveal, nor is the Company aware of, any non- compliance with Environmental Laws, environmental liability or other environmental claim that the Company believes would likely have a material adverse effect on the Company. Although certain environmental issues have been identified with respect to certain of the Properties, the Company does not believe that any of these issues is likely to materially adversely affect the results of the Company's operations. No assurance can be given that the Phase I Assessments revealed all potential environmental liabilities, that no prior owner or operator created any material adverse environmental condition not known to the Company, that no environmental liabilities have developed since such Phase I Assessments were prepared, that future laws, ordinances or regulations will not impose any material environmental requirement or liability, or that a material adverse environmental condition does not otherwise exist.
ITEM 2.

ITEM 2. PROPERTIES
The Properties in Operation, as of December 31, 1996, consisted of 173 industrial and 86 office properties.
Single tenants occupy 94 Properties in Operation. The Company provides a reduced level of service in connection with the operation or maintenance of these properties. The remaining 165 of the Company's Properties in Operation are occupied by multiple tenants for which the Company renders a range of building, operating and maintenance services.
The Company's industrial properties consist of a variety of warehouse, assembly, light manufacturing, distribution, and research and
development facilities. Substantially all of the Company's industrial properties are located in suburban, mixed-use developments or business parks and all are well-maintained facilities. They include both single- tenant and multi-tenant facilities, with most designed flexibly to accommodate various types of tenants, space requirements, and industrial uses to increase re-leasing opportunities and control re-leasing costs. They range in size from 11,600 square feet to 497,000 square feet, with an average building size of 90,652 square feet. As of December 31, 1996, the Company's industrial properties were 93.5% leased. Major tenants, based upon annual base rent, include the United States of America, SKF USA, Inc. and, Vistakon Division of Johnson & Johnson Vision Products, Inc., General Electric Company, and Biospherics, Inc.
The Company's office properties are mid-rise and single story office buildings principally located in suburban, mixed-use developments or office parks. All of the Company's office properties are well- maintained facilities. Substantially all are located in prime business locations within established business communities offering excellent access to interstate highway systems. As of December 31, 1996, the office properties were approximately 90.2% leased. The office properties range in size from 4,900 to 220,000 square feet, with an average building size of 57,379 square feet. Major tenants, based upon annual base rent, include AT&T Resource Management Corp., Sanofi Winthrop, Inc. (a division of Elf Aquitaine) and Prudential Insurance Company of America.
The table on the following pages gives information on the Company's Properties in Operation as of December 31, 1996.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Trust is not a party to any material legal proceedings. In the ordinary course of business, the Operating Partnership is party to ordinary routine litigation incidental to its business, including routine actions for negligence, personal injury or other claims, many of which are expected to be covered by liability insurance and in the aggregate are not expected to have a material effect on the business or financial condition of the Company.
On June 27, 1995, the Environmental Protection Agency ("EPA") notified Willard G. Rouse III, George F. Congdon and David C. Hammers, together with six other companies or individuals, that they may be potentially responsible for a portion of the response costs for remediation of ground water in part of the North Penn Service Area for certain properties located in Upper Gwynedd Township, Pennsylvania, (the "Church Road Properties"), as former owners. The Company acquired the Church Road Properties from the Predecessor upon formation. The Company has not been similarly notified by the EPA; however, as the present owner of the Church Road Properties, the potential exists for the Company to be named a potentially responsible party if there has been a release from the Church Road Properties of hazardous substances, including trichloroethylene, that requires remediation. In such circumstances, the Company believes it would have claims against other financially responsible parties (including previous owners of the Church Road Properties, such as Zenith and the other parties identified by EPA as potentially liable) and, consequently, the Company does not believe that its liability with respect to this matter, if any, is likely to be material. In addition, Mr. Rouse, Mr. Congdon, Mr. Hammers and Joseph P. Denny, have agreed to indemnify the Company for a period of ten years commencing in June 1994 with respect to material environmental liabilities associated with the Church Road Properties.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1996.
EXECUTIVE OFFICERS
The following persons are the executive officers of the Trust, which is the sole general partner of the Operating Partnership:
AGE AT NAME FEBRUARY POSITION 27, 1997 - ----------------------- -------- ----------------------------------
Willard G. Rouse III 54 Chairman of the Board of Trustees and Chief Executive Officer (1)
Joseph P. Denny 50 President, Chief Operating Officer and Trustee (1)
George J. Alburger, Jr. 49 Chief Financial Officer and Treasurer
George F. Congdon 54 Executive Vice President of Development and Trustee (1)
Robert E. Fenza 39 Executive Vice President
David C. Hammers 59 Executive Vice President
James J. Bowes 43 Corporate Secretary and General Counsel
- -------------- (1) Serving under a three-year employment agreement beginning June 23, 1994.
Each officer was elected as such in July 1994 with the exception of Mr. Alburger who was elected Chief Financial Officer and Treasurer in May 1995, and Mr. Bowes who was elected as Corporate Secretary in December 1996. Each officer will serve until the first meeting of the Board of Trustees after the next annual meeting of shareholders or until the officer resigns or is removed from office by the Board of Trustees.
Willard G. Rouse III has served as Chairman of the Board of Trustees and Chief Executive Officer of the Company since March 1994. Mr. Rouse had been a General Partner of the Predecessor since its founding in 1972. He serves as a Trustee of the Urban Land Institute. Mr. Rouse has served as Chairman of each of the Pennsylvania Convention Center Authority, Foundation for Architecture, We the People 200 and the Philadelphia Childrens Network and as President of the Fellowship Commission.
Joseph P. Denny has served as President, Chief Operating Officer and a trustee of the Company since March 1994. Mr. Denny joined the Predecessor in 1979 and served as a Regional Managing General Partner, and, later as President. In these capacities, he was responsible for developing approximately one billion dollars of projects, primarily large urban projects. Mr. Denny is a member of the Board of Directors of Lawrence Holdings Co. Mr. Denny is also a Vice Chairman of the Industrial and Office Park Council of the Urban Land Institute and serves on the Advisory Board of the Wharton Business School's Real Estate Center and the NAREIT Legislative Advisory Council.
George J. Alburger, Jr. became Chief Financial Officer and Treasurer of the Company in May 1995. For more than five years prior to joining the Company, Mr. Alburger served as Executive Vice President of EBL&S Property Management, Inc., an owner and manager of approximately 200 shopping centers aggregating 30 million square feet of retail space. Mr. Alburger is a certified public accountant and was formerly a Senior Manager with Price Waterhouse LLP.
George F. Congdon has served as a trustee of the Trust since March 1994, and as Executive Vice President of Development since April, 1995. Mr. Congdon previously served as Chief Financial Officer and Treasurer of the Company. Mr. Congdon had been a General Partner of the Predecessor
since its founding in 1972. He is a member of the Board of Directors of the People's Light and Theater Company and Historic Yellow Springs, Inc.
Robert E. Fenza has served as an Executive Vice President of the Company since March 1994, with principal responsibility for operations, property management and asset management. Mr. Fenza joined the Predecessor in 1984 and advanced to Regional Manager in 1987 and to Northern Division Manager in 1991.
David C. Hammers has served as an Executive Vice President since March 1994. Mr. Hammers had been a General Partner of the Predecessor since its founding in 1972.
James J. Bowes has served as General Counsel and Secretary of the Company since December, 1996. Prior to joining the Company, Mr. Bowes was a partner in the law firm of Blank Rome Comisky & McCauley.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANTS' SHARES AND RELATED SHAREHOLDERS MATTERS
The Common Shares have been traded on the New York Stock Exchange under the symbol "LRY" since June 16, 1994. There is no established public trading market for the Units. The following table sets forth, for the calendar quarters indicated, the high and low closing prices of the Common Shares as reported on the New York Stock Exchange Composite Tape and the dividends declared by the Company per Common Share for such calendar quarter.
DIVIDENDS PER HIGH LOW COMMON SHARE ---- --- ------------- First Quarter 22 1/8 20 1/4 0.40 Second Quarter 21 19 1/2 0.40 Third Quarter 21 3/4 19 3/8 0.41 Fourth Quarter 25 7/8 21 1/8 0.41
First Quarter 20 3/4 18 3/4 0.40 Second Quarter 20 1/8 18 3/8 0.40 Third Quarter 21 3/4 19 1/2 0.40 Fourth Quarter 21 3/8 19 0.40
Second Quarter (from 6/16/94) 20 3/8 19 5/8 0.03 Third Quarter 20 1/8 19 0.40 Fourth Quarter 20 1/8 17 3/8 0.40
As of February 24, 1997, the Common Shares were held by 406 holders of record. Since its initial public offering, the Company has paid regular and uninterrupted dividends.
Although the Company currently anticipates that comparable cash dividends will continue to be paid in the future, the payment of future dividends by the Company will be at the discretion of the Board of Trustees and will depend on numerous factors including the Company's cash flow, its financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, and such other factors as the Board of Trustees deems relevant.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth Selected Financial Data for Liberty Property Trust and Liberty Property Limited Partnership as of and for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, 1994, for Liberty Property Trust, Liberty Property Limited Partnership and the Predecessor combined as of and for the year ended December 31, 1994, and for the Predecessor for the period from January 1, 1994 to June 22, 1994, and for the years ended 1993 and 1992. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further description of the Predecessor. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto appearing elsewhere in this report. Certain amounts from prior periods have been restated to conform to current year presentation.
Minority interest reflects the portion of net income attributable to the equity interest in the Operating Partnership not owned by the Trust. Net income and amounts based on net income provided for the Trust are net of minority interest. Shareholder's equity of the Trust excludes minority interest.
Weighted average number of shares outstanding excludes shares issuable upon conversion of the 8% Exchangeable Subordinated Debentures due 2001 (the "Debentures") issued by the Operating Partnership and upon
conversion of the Units and includes the dilutive effect of outstanding options.
Industry analysts generally consider funds from operations to be an appropriate measure of the performance of an equity REIT. Funds from operations is defined as net income or loss (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization excluding the amortization of deferred financing costs and depreciation of non-real estate assets. Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principals and is not necessarily indicative of cash available to fund cash needs. The Company believes that to facilitate a clear understanding of the Company's operating results, funds from operations should be examined in conjunction with net income, although it should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. Funds from operations computed by the Company may not be comparable to other similarly titled measures of other REITs.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion is based on the consolidated financial statements of the Company and the combined financial statements of the Predecessor. The combined financial statements of the Predecessor reflect the combination of data from the balance sheets and the statements of operations of the partnerships that owned the properties, and the management, development and leasing operations of the Predecessor that were contributed to the Company in connection with its formation, which was consummated concurrently with its initial public offering. The combined financial statements of the Predecessor are presented for comparative purposes only.
The following discussion compares the results of operations of the Company for the year ended December 31, 1996 with the results of operations of the Company for the year ended December 31, 1995, and the results of operations of the Company for the year ended December 31, 1995 with the results of operations of the Company and Predecessor, on a combined basis, for the year ended December 31, 1994. As used herein, the term "Company" includes the Trust, the Operating Partnership and their subsidiaries (and, where the context indicates, the Predecessor).
RESULTS OF OPERATIONS
Comparison of year ended December 31, 1996 to year ended December 31, 1995. Total revenues (principally rental revenues and operating expense reimbursement) increased from $117.0 million for the year ended December 31, 1995 to $154.3 million for the year ended December 31, 1996. This increase was primarily due to the increase in the number of properties owned during the respective periods. As of January 1, 1995, the Company
owned 151 properties and, through December 31, 1995, acquired 52 additional properties (net of two properties exchanged in connection with such acquisitions) and completed development of five properties for a Total Investment of $223.1 million. As of January 1, 1996, the Company owned 208 properties, and, through December 31, 1996, acquired 33 additional properties and completed the development on 19 properties for a Total Investment of $232.2 million.
Rental property and real estate tax expenses increased from $29.3 million for the year ended December 31, 1995 to $40.9 million for the year ended December 31, 1996. This increase is due to the increase in the number of properties owned, and because of significant snow removal and other seasonal operating costs incurred as a result of the severe 1996 winter.
Property level operating income for the "Same Store" properties (properties owned since January 1, 1995) increased from $68.0 million for the year ended December 31, 1995 to $71.5 million for the year ended December 31, 1996. This increase of 5.1% is due to increases in rental rates and increases in occupancy.
Set forth below is a schedule comparing the operating results for the Same Store properties for the years ended December 31, 1996 and 1995.
1996 1995 -------- -------- (IN THOUSANDS) -----------------------
Rental revenue $ 75,823 $ 72,808 Operating expense reimbursement 24,553 21,463 -------- -------- 100,376 94,271
Rental property expenses 21,023 18,191 Real estate taxes 7,878 8,086 -------- -------- Property level operating income $ 71,475 $ 67,994 ======== ========
General and administrative expenses increased from $5.2 million for the year ended December 31, 1995 to $8.0 million for the year ended December 31, 1996. This $2.8 million increase is due to the increase in personnel and other related overhead costs necessitated by the increase in the number of properties owned during the respective periods. Included in the general and administrative expenses for the year ended December 31, 1996 is a $704,000 non-cash charge resulting from the amortization of a stock award over its vesting period. There is no corresponding charge for the year ended December 31, 1995.
Depreciation and amortization expenses increased from $22.5 million in 1995 to $28.2 million in 1996. This increase is due to the increase in the number of properties owned during the respective periods.
Interest expense increased from $37.7 million for the year ended December 31, 1995 to $38.5 million for the year ended December 31, 1996. This increase is due to an increase in the average debt outstanding for the respective periods which was $397.4 million in 1995 and $576.3 million in 1996. This increase is partly offset by the lower interest rate on the outstanding debt because of the 1% reduction in the interest rate on the Line of Credit borrowings which became effective on May 1, 1995, and because of a decrease in the outstanding Subordinated Debentures due to the conversion of $58.7 million Debentures in 1996.
As a result of the foregoing, the Company's operating income increased from $60.0 million for the year ended December 31, 1995 to $77.2 million for the year ended December 31, 1996. In addition, income before minority interest increased from $22.3 million for the year ended December 31, 1995 to $37.6 million for the year ended December 31, 1996.
Comparison of year ended December 31, 1995 to year ended December 31, 1994. Total revenues (principally rental revenues and operating expense reimbursement) increased from $83.0 million for the year ended December 31, 1994 to $117.0 million for the year ended December 31, 1995. This increase was primarily due to the increase in the number of properties owned during the respective periods. From January 1, 1994 through June 22, 1994, the Predecessor owned 113 properties. Concurrent with the initial public offering, the Company purchased 18 properties for a Total Investment of $57.0 million. From the consummation of its initial public offering through December 31, 1994, the Company purchased 20 additional properties for $79.5 million. As of January 1, 1995, the Company owned 151 properties and, through December 31, 1995, acquired 52 additional properties (net of two properties exchanged in connection with such acquisitions) and completed the development of five properties for a Total Investment of $223.1 million.
Rental property and real estate tax expenses increased from $21.8 million for the year ended December 31, 1994 to $29.3 million for the year ended December 31, 1995. This increase is due to the increase in the number of properties owned.
Property level operating income for the "Same Store" properties (properties owned since January 1, 1994) increased from $52.4 million for the year ended December 31, 1994 to $53.3 million for the year ended December 31, 1995. This increase of 1.7% was attributable primarily to an increase in the occupancy in the industrial distribution and office properties.
Set forth below is a schedule comparing the property level operating income for the Same Store properties for the years ended December 31, 1995 and 1994.
1995 1994 -------- -------- (IN THOUSANDS) ----------------------
Rental revenue $ 57,054 $ 57,323 Operating expense reimbursement 14,993 15,543 -------- -------- 72,047 72,866
Rental property expense 13,040 14,605 Real estate taxes 5,661 5,844 -------- -------- Property level operating income $ 53,346 $ 52,417 ======== ========
General and administrative expenses increased from $4.7 million for the year ended December 31, 1994 to $5.2 million for the year ended December 31, 1995. This $500,000 increase is due to an increase in the number of properties owned during the respective periods and as a result of costs incurred to operate as a publicly owned company during the entire period of 1995. The Predecessor did not incur similar costs from January 1, 1994 through June 22, 1994.
Depreciation and amortization expenses increased from $14.7 million for the year ended December 31, 1994 to $22.5 million for the year ended December 31, 1995. This increase is due to the increase in the number of properties owned during the respective periods.
Interest expense increased from $34.2 million for the year ended December 31, 1994 to $37.7 million for the year ended December 31, 1995. Interest expense for 1994 reflects, 1) interest on $525.0 million of mortgage loans for the Rouse Group, which loans were satisfied from the proceeds of the initial public offerings, and 2) interest on the Debentures for the period from issuance at June 23, 1994 through December 31, 1994. Interest expense for 1995 reflects, 1) interest on the Line of Credit borrowings and mortgage loans incurred to fund property acquisitions and development, and 2) interest on the Debentures for the full 1995 year.
During the year ended December 31, 1994, the Company recognized $55.8 million in extraordinary income from the extinguishment of debt. There was no similar item in 1995.
As a result of the foregoing, income before the effect of minority interest and extraordinary items increased from $7.6 million in 1994 to $22.3 million in 1995. In addition, the Company's operating income increased from $41.8 million in 1994 to $60.0 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash and cash equivalents of $19.6 million. Working capital at December 31, 1996 was $14.6 million.
Net cash flow provided by operating activities increased from $50.5 million for the year ended December 31, 1995 to $59.8 million for the year ended December 31, 1996. This $9.3 million increase was primarily due to the additional cash flow generated by the greater number of properties in service during the latter period.
Net cash used in investing activities decreased from $281.9 million for the year ended December 31, 1995 to $265.4 million for the year ended December 31, 1996. This decrease was a result of the $125.9 million investment made in March 1995 in connection with the acquisition of the Lingerfelt portfolio, while there was no similar portfolio acquisition made in 1996. This decrease was partly offset by the increase in acquisition, development and property investment from $156.9 for the year ended December 31, 1995 to $265.4 million for the year ended December 31, 1996.
Net cash provided by financing activities decreased from $216.9 million for the year ended December 31, 1995 to $214.6 million for the year ended December 31, 1996. This decrease is consistent with the decrease in investing activities.
The Company believes that its undistributed cash flow from operations are adequate to fund its short-term liquidity requirements.
The Company has funded its long-term liquidity requirements such as property acquisition and development activities primarily through its $250 million Line of Credit. This Line matures on June 15, 1998, subject to the Company's option to extend the maturity of the loan as described below. As of December 31, 1996, $241.7 million was outstanding under the Line of Credit. The Line of Credit is recourse to the Company only with respect to 50% of the outstanding principal amount thereof. Funds borrowed under the Line of Credit bear interest at an annual rate of 175 basis points over LIBOR. Subject to certain conditions and the payment of a fee equal to 0.5% of the then outstanding loan balance, the Company may exercise a one-time option to convert the loan balance into a two- year term loan upon the maturity of the Line of Credit. Following such conversion, the interest rate on the term loan would be LIBOR plus 4%.
In December 1996, the Company closed on an $80 million secured Line of Credit. The Line matures on December 13, 1998, however, at any time prior to December 13, 1998, maturity may be extended for one year subject to certain conditions and the payment of an extension fee equal to 1/4% of the total commitment (as defined). As of December 31, 1996 collateral had been approved to enable the Company to borrow up to $56.0 million, of which $25.0 million was outstanding. The interest rate on the Line of Credit is 1.60% over LIBOR.
Periodically, the Company pays down borrowings on its Line of Credit facilities with funds from long term capital sources. During 1996, the Company utilized the funds from $77.6 million of mortgage loans it placed in 1996 to paydown the line of credit. The Company has entered into a swap agreement, with a notional amount of $114.5 million, to hedge against possible fluctuations in interest rates in anticipation of a debt issuance in 1997 for a five to seven year term.
As of December 31, 1996, $240.8 million in mortgage loans were outstanding with maturities ranging from 1997 to 2013. The interest rates on $230.4 million of mortgage loans are fixed and range from 6% to 10%. Interest rates on $10.4 million of mortgage loans float with LIBOR or prime and are subject to certain caps. The weighted average interest
rate for the mortgage loans is 7.7% and the weighted average life is 8 years.
General
The Company expects to incur variable rate debt, including borrowings under the Lines of Credit, from time to time. The Company believes that its existing sources of capital will provide sufficient funds to finance its continued acquisition and development activities. In this regard, the Company continues to evaluate its long term capital sources which generally include the availability of debt financing and access to equity.
In July 1995, the Company filed a shelf registration with the Securities and Exchange Commission that enabled the Company to offer up to an aggregate of $350.0 million of securities, including common stock, preferred stock and debt. On November 27, 1995, the Company completed a follow-on public offering of 7,200,000 common shares resulting in proceeds of $140.4 million. The remaining $209.6 million shelf registration is available for future offerings.
On February 8, 1996, Moody's Investors Service assigned a prospective rating of Ba2 for senior unsecured debt issued by Liberty Property Limited Partnership under the shelf registration.
On October 15, 1996, the Company filed a Registration Statement of 1,000,000 shares to be issued through a Dividend Reinvestment and Stock Purchase Plan.
On February 21, 1997, the Company filed a shelf registration with the Securities and Exchange Commission that enable the Company to offer up to an aggregate of $850.0 million of securities, including common stock, preferred stock and debt.
CALCULATION OF FUNDS FROM OPERATIONS
Management considers funds from operations an appropriate measure of the performance of an equity REIT. Funds from operations is defined by NAREIT as net income or loss (computed in accordance with generally accepted accounting principles), excluding gains or losses from debt restructuring and sales of property plus depreciation and amortization excluding the amortization of deferred financing costs and depreciation of non-real estate assets. Funds from operations should not be considered as an alternative to net income or as an alternative to cash flow or as a measure of liquidity. Funds from operations for the years ended December 31, 1996 and 1995 are as follows:
1996 1995 ---------- ---------- (IN THOUSANDS)
Net income $ 33,740 $ 19,466 Addback: Minority interest 3,891 2,843 Depreciation and amortization 27,863 22,297 Premium on debenture conversion 1,027 - Gain on sale (577) - ---------- --------
Funds from operations $ 65,944 $ 44,606 ========== ========
INFLATION
Inflation has remained relatively low during the last three years, and as a result, has not had a significant impact on the Predecessor or the Company during this period. The Lines of Credit bear interest at a variable rate; therefore, the amount of interest payable under the Lines of Credit will be influenced by changes in short-term interest rates, which tend to be sensitive to inflation. To the extent an increase in inflation would result in increased operating costs, such as in insurance, real estate taxes or utilities, substantially all of the tenant's leases require the tenants to absorb these costs as part of their rental obligations. In addition, inflation also may have the effect of increasing market rental rates.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------- 		 FINANCIAL STATEMENTS AND REPORTS OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Report of Independent Auditors - Liberty Property Trust - -------------------------------------------------------
Financial Statements - Liberty Property Trust: - ---------------------------------------------- Balance Sheets: Liberty Property Trust Consolidated as of December 31, 1996 and
Statements of Operations: Liberty Property Trust Consolidated for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, Rouse Group Combined for the period from January 1, 1994 to June 22,
Statements of Shareholders' Equity and Owners' Deficit: Liberty Property Trust Consolidated for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, Rouse Group Combined for the period from January 1, 1994 to June 22,
Statements of Cash Flows: Liberty Property Trust Consolidated for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, Rouse Group Combined for the period from January 1, 1994 to June 22, -29-
Notes to Financial Statements - Liberty Property Trust
Financial Statement Schedule - Liberty Property Trust: Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996
Report of Independent Auditors - Liberty Property Limited Partnership - ---------------------------------------------------------------------
Financial Statements - Liberty Property Limited Partnership: - ------------------------------------------------------------ Balance Sheets: Liberty Property Limited Partnership Consolidated as of December 31, 1996 and 1995
Statements of Operations: Liberty Property Limited Partnership Consolidated for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, 1994 Rouse Group Combined for the period from January 1, 1994 to June 22,
Statements of Owners' Equity and Owners' Deficit: Liberty Property Limited Partnership Consolidated for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, 1994 Rouse Group Combined for the period from January 1, 1994 to June 22,
Statements of Cash Flows: Liberty Property Limited Partnership Consolidated for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, 1994 Rouse Group Combined for the period from January 1, 1994 to June 22,
Notes to Financial Statements - Liberty Property Limited Partnership
Financial Statement Schedule - Liberty Property Limited Partnership: Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996
REPORT OF INDEPENDENT AUDITORS
To The Board of Trustees and Shareholders Liberty Property Trust
We have audited the accompanying consolidated balance sheets of Liberty Property Trust (the "Trust") as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1996, and the period June 23, 1994 through December 31, 1994. We have also audited the combined statements of operations, owners' deficit and cash flows of the Rouse Group for the period January 1, 1994 through June 22, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Liberty Property Trust at December 31, 1996 and 1995, the consolidated results of Liberty Property Trust's operations and cash flows for each of the two years in the period ended December 31, 1996 and for the period June 23, 1994 through December 31, 1994, and the combined results of the Rouse Group's operations and cash flows for the period January 1, 1994 through June 22, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Philadelphia, Pennsylvania ERNST & YOUNG LLP February 17, 1997
CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY TRUST (IN THOUSANDS) DECEMBER 31, ------------------------- 1996 1995 ASSETS ---------- ---------- Real estate: Land and land improvements $ 140,196 $ 108,723 Buildings and improvements 908,835 715,908 Less accumulated depreciation (119,151) (94,183) ---------- --------- Operating real estate 929,880 730,448
Development in progress 85,628 67,021 Land held for development 44,054 28,578 ---------- --------- Net real estate 1,059,562 826,047
Cash and cash equivalents 19,612 10,629 Accounts receivable 8,707 5,608 Deferred financing and leasing costs, net of accumulated amortization (1996 $30,985; 1995 $24,007) 27,013 26,363 Prepaid expenses and other assets 37,718 29,455 ---------- --------- Total assets $1,152,612 $ 898,102 ========== ========= LIABILITIES Mortgage loans $ 240,803 $ 172,115 Subordinated debentures 171,214 229,900 Lines of credit 266,692 71,894 Accounts payable 6,294 4,577 Accrued interest 7,411 9,439 Dividend payable 14,248 12,668 Other liabilities 28,923 20,835 ---------- --------- Total liabilities 735,585 521,428
Minority interest 41,495 41,153
SHAREHOLDERS' EQUITY Common shares of beneficial interest, $.001 par value, 200,000,000 shares authorized, 31,400,361 and 28,348,048 shares issued and outstanding as of December 31, 1996 and 1995, respectively 31 28 Additional paid-in capital 370,813 314,407 Unearned compensation (1,408) - Retained earnings 6,096 21,086 ---------- --------- Total shareholders' equity 375,532 335,521 ---------- --------- Total liabilities and shareholders' equity $1,152,612 $ 898,102 ========== ========= See accompanying notes.
See accompanying notes.
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF LIBERTY PROPERTY TRUST AND COMBINED FINANCIAL STATEMENTS OF THE ROUSE GROUP
1. ORGANIZATION
Liberty Property Trust (the "Trust") a self-administered and self- managed real estate investment trust (a "REIT"), was formed in the State of Maryland on March 28, 1994 and commenced operations on June 23, 1994 upon completion of its initial public offering of 20,987,500 Common Shares of Beneficial Interest (the "Share Offering"). The Trust conducts all of its operations, including leasing, property management and other services through Liberty Property Limited Partnership (the "Operating Partnership" and together with the Trust referred to as the "Company"). Simultaneous with the closing of the Share Offering, the Company succeeded to substantially all of the interests of Rouse & Associates, a general partnership, and certain other entities affiliated with Rouse & Associates (collectively the "Rouse Group"). At December 31, 1996, the Trust owns an 90.02% interest in the Operating Partnership as the sole general partner and a .03% interest as a limited partner. Concurrent with the Share Offering, the Operating Partnership completed a public offering of $230 million of Exchangeable Subordinated Debentures (the "Debenture Offering", and, together with the Share Offering, the "Offerings") due 2001. The Debentures are guaranteed by the Trust. After June 23, 1995, the Debentures are exchangeable at any time prior to maturity into Common Shares of Beneficial Interest at a rate of one share for each $20 outstanding principal amount of Debentures, subject to certain adjustments. The Company completed a follow-on offering (the "Follow-on Offering") on November 27, 1995, which resulted in net proceeds of $131.5 million. The Company provides leasing, property management, acquisition, development, construction management, and design management for a portfolio of industrial and office properties which are located principally within the Southeastern and Mid-Atlantic United States.
The Rouse Group combined financial statements include accounts of the properties and entities acquired by the Operating Partnership which are considered to be entities under common ownership and management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation
The Consolidated Financial Statements of the Company include the accounts of the Trust, the Operating Partnership and the Operating Partnership's direct and indirect subsidiaries including Liberty Property Development Corporation. The acquisition of the Rouse Group
interest by the Operating Partnership was accounted for as a reorganization of entities under common control which is similar to the accounting for a pooling of interests. As a result, the operations of the Rouse Group are included in these Financial Statements. All significant intercompany transactions and accounts have been eliminated.
Certain amounts from prior periods have been restated to conform to current year presentation.
Real Estate and Depreciation
The Properties are recorded at the lower of cost or net realizable value and are depreciated using the straight-line method over their estimated useful lives. The estimated lives are as follows:
Building and improvements 40 years Equipment 10 years Tenant improvements Term of the related lease
Cash Equivalents
Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents. The carrying amount of these assets approximates their fair market value.
Revenues
The Company earns rental income under operating leases with tenants. Rental income is recognized on a straight-line basis over the applicable lease term.
Deferred Financing and Leasing Costs
Costs incurred in connection with financing or leasing are capitalized and amortized over the term of the related loan or lease. Amortization of deferred financing costs is reported as interest expense.
Earnings per Share
Earnings per share is computed using the weighted average common shares and common stock equivalents outstanding during the years ended December 31, 1996 and December 31, 1995 and for the period from June 23, 1994 through December 31, 1994. Fully diluted earnings per share is not disclosed because such information is not meaningful. Earnings per share is $1.16 calculated as if the debenture conversions which occurred in 1996 had occurred on January 1, 1996.
Income Taxes
The Trust has made an election to be taxed as a Real Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code. As a REIT, the Trust generally will not be subject to Federal income tax to the extent that it distributes at least 95% of its REIT
taxable income to its shareholders. If the Trust fails to qualify as a REIT in any taxable year, the Trust will be subject to Federal income tax (including any applicable Alternative Minimum Tax) at regular corporate rates on its taxable income. Even if the Trust qualifies for taxation as a REIT, the Trust may be subject to certain state and local taxes on its income and property and to Federal income and excise taxes on its undistributed income.
The Company paid dividends of $52.6 million, $38.7 million, and $10.2 million during the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, 1994. On a per share basis, the Company paid dividends of $1.61, $1.60 and $0.43 during the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, 1994. The portions of the 1996 dividend relating to return of capital and earnings and profits are 29.9% and 70.1%, respectively.
The Federal tax cost basis of the real estate at December 31, 1996 was approximately $1.1 billion.
3. REAL ESTATE
At December 31, 1996 and 1995, the Company owned and operated industrial and office properties within suburban mixed use developments or business parks. The carrying value of these properties by type is as follows (in thousands):
Depreciation expense was $24,968 in 1996, $19,675 in 1995, and $11,976 in 1994.
The Company has commenced development on 22 properties, which upon completion are expected to comprise approximately 3.0 million square feet of leasable space. As of December 31, 1996 approximately $85.6 million has been expended for the development of these projects and an additional $68.2 million is required for completion.
4. RELATED PARTY TRANSACTIONS
An affiliated company provides construction services to the Company. Amounts paid to this affiliate were $29,717,000 in 1996, $6,245,000 in 1995, and $2,583,000 in 1994.
During 1995, three properties were purchased from partnerships affiliated with Rouse & Associates not included in the Rouse Group. The Rouse principals received no financial consideration for the purchase.
Pursuant to agreements, the Company has been retained by an affiliate (Rouse Kent Limited) to provide development, management and other services. For the years ended December 31, 1996 and December 31, 1995 and the period from June 23, 1994 to December 31, 1994 the fees for these services were $600,000, $600,000 and $453,000 respectively. At December 31, 1995, the Company had a $250,000 receivable from Rouse Kent Limited for these management and other services. Additionally, the Company committed to loans in 1996 to two affiliates (Rouse Kent Development Limited and 1 Tower View Limited) for development projects. As of December 31, 1996, the balance of these notes receivable was $7.4 million.
5. MORTGAGE LOANS, SUBORDINATED DEBENTURES AND LINES OF CREDIT
Long term indebtedness consists generally of mortgage loans, subordinated debentures and Lines of Credit. The average annualized interest rates for the years ended December 31, 1996, 1995, and 1994, were approximately 7.6%, 7.8%, and 8.0% respectively. Interest expense for the years ended December 31, 1996, 1995, and 1994, aggregated $38,528,000, $37,688,000, and $34,243,000, respectively. Interest costs during these periods of $7,708,000, $3,475,000, and $190,000 were capitalized. Cash paid for interest for the years ended December 31, 1996, 1995, and 1994 was $35,995,000, $33,202,000, and $51,232,000, respectively.
Mortgage loans with maturities ranging from 1997 to 2013 are collateralized by and in some instances cross collateralized by properties with a book value of $314.0 million. The interest rates on $230.4 million of mortgage loans are fixed and range from 6% to 10%. Interest rates on $10.4 million of mortgage loans float with LIBOR or prime and are subject to certain caps. The weighted average interest rate on the mortgage loans is 7.7% and the weighted average life is 8 years.
The aggregate maturities of the mortgages loans outstanding are as follows (in thousands):
1997 $ 7,065 1998 10,936 1999 19,031 2000 29,717 2001 12,555 Thereafter 161,499 -------- TOTAL $240,803 ========
The Debentures are due on June 23, 2001 and are exchangeable for shares of the Trust at a rate of one share for each $20 outstanding principal amount of Debentures, subject to certain adjustments. The initial interest rate on the Debentures was 8% and increases with increases in the dividend payment on the Company's Common Shares of Beneficial Interest. At the current $.41 per share per quarter dividend payment rate, the effective interest rate on the Debentures is 8.2%. During the year ended December 31, 1996, the Company paid sums aggregating $1.0 million to facilitate the conversion of $58.7 million of Debentures into 2,934,300 common shares. During the year ended December 31, 1996, $2.9 million of related deferred financing costs were written off through additional paid-in capital.
The Lines of Credit are composed of two secured lines of credit (the "$250 million Line of Credit" and the "$80 million Line of Credit"). The $250 million Line of Credit is secured and is due on June 15, 1998 at which time it may be converted into a two year term loan with the payment of a conversion fee equal to 1/2% of the then outstanding balance. As of December 31, 1996, the $250.0 million Line of Credit was fully collateralized and $241.7 million was outstanding. The interest rate on the $250 million Line of Credit is 30-day LIBOR plus 1.75% (7.13% and 7.75% at December 31, 1996 and 1995, respectively). Other normal and customary fees apply including an unused line fee. The $250 million Line of Credit is recourse to the Company only with respect to 50% of the outstanding principal thereof and is otherwise non-recourse subject to certain conditions. At December 31, 1996, 109 properties with a book value of $387.6 million collateralized the $250 million Line of Credit. During 1996, the Company closed on an $80 million Line of Credit. The $80 million Line of Credit is secured and is due on December 13, 1998. At any time prior to December 13, 1998, maturity may be extended for one year subject to certain conditions and the payment of an extension fee equal to 1/4% of the total commitment. As of December 31, 1996, collateral had been approved to enable the company to borrow up to $56.0 million, of which $25.0 million was outstanding. The interest rate on the $80 million Line of Credit is 90-day LIBOR plus 1.60% (7.13% at December 31, 1996). At December 31, 1996, 23 properties with a book value of $64.5 million, and 2 development properties with a book value of $3.9 million collateralized the $80 million Line of Credit.
In 1994, the Company recognized a gain on extinguishment of debt which resulted primarily from the payment of mortgage notes and notes payable including penalties and accrued interest at a discount with $451.8 million in proceeds obtained from the issuance of shares and the Debentures.
The fair value of the Debentures at December 31, 1996 was $220.4 million based on the closing bid price of the security on the New York Stock Exchange. The fair values of the mortgages and Lines of Credit were estimated using discounted cash flow analysis, based on the Company's estimated incremental borrowing rate at December 31, 1996, for similar types of borrowing arrangements. The carrying values of the mortgages and the Lines of Credit approximate their fair values.
6.	LEASING ACTIVITY
Future minimum rental payments due from tenants under non-cancellable operating leases as of December 31, 1996 are as follows (in thousands):
1997 $119,777 1998 107,177 1999 91,805 2000 68,264 2001 40,441 Thereafter 126,211 -------- TOTAL $553,675 ========
In addition to minimum rental payments, tenants pay for their pro rata share of specified operating expenses. These amounts are included as operating expense reimbursement in the accompanying statements of operations.
7.	MINORITY INTEREST
In conjunction with the formation of the Company, persons contributing interest in properties to the Operating Partnership have received limited partnership interests in the Operating Partnership. The aggregate outstanding limited partnership interests have the same economic characteristics as would 3,470,961 common shares of the Trust, inasmuch as they share proportionately in the net income or loss and in any distributions of the Operating Partnership and such interests are exchangeable into the same number of shares of the Trust.
Minority interest in the accompanying consolidated financial statements relates to such limited partnership interests.
8.	SHARE OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The Company's 1995 Share Incentive Plan has authorized the grant of options to executive officers, other key employees, non-employee trustees and consultants for up to 2,100,000 shares of the Company's common shares of beneficial interest. All options granted have 10 year terms and vest over a 3 year period, with options to purchase up to 20% of the shares exercisable after the first anniversary, up to 50% after the second anniversary and 100% after the third anniversary of the date of grant.
Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 6.2%; dividend yield of 7.0%; volatility factor of the expected market price of the Company's common stock of .164; and a weighted-average expected life of the option of 3 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except for per share amounts): 1996 1995 ---------- ----------- (IN THOUSANDS) ----------------------------
Pro forma net income $ 33,359 $ 19,392
Pro forma earnings per share:
Primary $ 1.12 $ 0.89
Pro forma disclosures are not likely to be representative of the effects on reported net income for future years because of the staggered vesting periods of the options.
A summary of the Company's stock option activity, and related information for the years ended December 31, 1996, 1995 and the period from June 23, 1994 through December 31, 1994 follows:
Exercise prices for options outstanding as of December 31, 1996 ranged from $19.75 to $20.875. The weighted-average remaining contractual life of those options is 8.2 years.
An additional 511,887, 632,400 and 1,335,000 shares were reserved for issuance for future grants from the option plan at December 31, 1996, 1995 and 1994, respectively.
9. COMMITMENTS AND CONTINGENCIES
All of the Properties have been subject to Phase I Environmental Assessments ("Phase I Assessments") performed and obtained in contemplation of the formation or acquisitions. The Phase I Assessments consisted of, among other activities, a visual inspection of each Property and its neighborhood and a check of pertinent public records. The Phase I Assessments did not reveal, nor is the Company aware of, any non-compliance with environmental laws, environmental liability or other environmental claim that the Company believes would likely have a material adverse effect on the Company.
The Trust is not a party to any material legal proceedings. In the ordinary course of business, the Operating Partnership is party to ordinary routine litigation incidental to its business and in addition it is covered by insurance.
The Company has entered into an interest rate swap agreement to hedge against possible fluctuations in interest rates in anticipation of a $120 million debt issuance in 1997 for a five to seven year term. The securities underlying the interest rate swap agreement, with a notional amount of $114.5 million, are 5.875% US Treasury Securities maturing on February 15, 2004. Gain or loss on this hedging transaction is being deferred and will be amortized as adjustments to interest expense commencing on the date of issuance of the debt and over the term of the debt. At December 31, 1996, the Company had one swap transaction outstanding, and approximately $645,000 in unrealized gain has been deferred.
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the two years ended December 31, 1996 and 1995 (in thousands, except per share amounts):
11. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma information has been prepared assuming the Secondary Offering described in Note 1 and the acquisitions of 54 properties acquired in 1995 and 33 properties acquired in 1996 had occurred at January 1, 1995. The 1995 acquisitions were acquired for a total investment of $202.3 million and the 1996 acquisitions were acquired for a total investment of $132.9 million.
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------------------------
Total revenues $172,503 $155,537 Net income 34,229 28,619 Net income per share (1) 1.15 1.01
(1) Net income in the per share calculation has been computed after a deduction for minority interest.
This pro forma information is not necessarily indicative of what actual results of operations of the Company would have been, assuming the Company had completed the Secondary Offering as of January 1, 1995, nor do they purport to represent the results of operations of the Company for future periods.
SCHEDULE III
LIBERTY PROPERTY TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION (In thousands)
A summary of activity for real estate and accumulated depreciation is as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 --------- --------- ---------
REAL ESTATE: Balance at beginning of year $ 920,230 $ 586,789 $ 432,970 Additions 268,066 333,441 153,819 Disposition of property (9,583) -- -- ---------- --------- --------- Balance at end of year $1,178,713 $ 920,230 $ 586,789 ========== ========= =========
ACCUMULATED DEPRECIATION: Balance at beginning of year $ 94,183 $ 74,508 $ 62,532 Depreciation expense 24,968 19,675 11,976 ---------- --------- ---------
Balance at end of year $ 119,151 $ 94,183 $ 74,508 ========== ========= =========
Liberty Property Trust Liberty Property Trust and Rouse Group Combined
REPORT OF INDEPENDENT AUDITORS
To The Partners Liberty Property Limited Partnership
We have audited the accompanying consolidated balance sheets of Liberty Property Limited Partnership ("the Operating Partnership") as of December 31, 1996 and 1995, and the related consolidated statements of operations, owners' equity, and cash flows for each of the two years in the period ended December 31, 1996, and the period June 23, 1994 through December 31, 1994. We have also audited the combined statements of operations, owners' deficit and cash flows of the Rouse Group for the period January 1, 1994 through June 22, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Operating Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Liberty Property Limited Partnership at December 31, 1996 and 1995, the consolidated results of Liberty Property Limited Partnership's operations and cash flows for each of the two years in the period ended December 31, 1996 and for the period June 23, 1994 through December 31, 1994, and the combined results of the Rouse Group's operations and cash flows for the period January 1, 1994 through June 22, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Philadelphia, Pennsylvania ERNST & YOUNG LLP February 17, 1997
CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY LIMITED PARTNERSHIP (IN THOUSANDS) DECEMBER 31, ------------------------- 1996 1995 ---------- ---------- ASSETS Real estate: Land and land improvements $ 140,196 $ 108,723 Buildings and improvements 908,835 715,908 Less accumulated depreciation (119,151) (94,183) ---------- --------- Operating real estate 929,880 730,448
Development in progress 85,628 67,021 Land held for development 44,054 28,578 ---------- --------- Net real estate 1,059,562 826,047
Cash and cash equivalents 19,612 10,629 Accounts receivable 8,707 5,608 Deferred financing and leasing costs, net of accumulated amortization (1995, $30,985; 1994, $24,007) 27,013 26,363 Prepaid expenses and other assets 37,718 29,455 ---------- --------- Total assets $1,152,612 $ 898,102 ========== ========= LIABILITIES Mortgage loans $ 240,803 $ 172,115 Subordinated debentures 171,214 229,900 Line of credit 266,692 71,894 Accounts payable 6,294 4,577 Accrued interest 7,411 9,439 Dividend payable 14,248 12,668 Other liabilities 28,923 20,835 ---------- --------- Total liabilities 735,585 521,428
OWNERS' EQUITY General partner's equity 375,532 335,521 Limited partners' equity 41,495 41,153 ---------- --------- Total owners' equity 417,027 376,674 ---------- --------- Total liabilities and owners' equity $1,152,612 $ 898,102 ========== ========= See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF LIBERTY PROPERTY LIMITED PARTNERSHIP AND COMBINED FINANCIAL STATEMENTS OF THE ROUSE GROUP
1. ORGANIZATION
Liberty Property Trust (the "Trust") a self-administered and self- managed real estate investment trust (a "REIT"), was formed in the State of Maryland on March 28, 1994 and commenced operations on June 23, 1994 upon completion of its initial public offering of 20,987,500 Common Shares of Beneficial Interest (the "Share Offering"). The Trust conducts all of its operations, including leasing, property management and other services through Liberty Property Limited Partnership (the "Operating Partnership" and together with the Trust referred to as the "Company"). Simultaneous with the closing of the Share Offering, the Company succeeded to substantially all of the interests of Rouse & Associates, a general partnership, and certain other entities affiliated with Rouse & Associates (collectively the "Rouse Group"). At December 31, 1996, the Trust owns an 90.02% interest in the Operating Partnership as the sole general partner and a .03% interest as a limited partner. Concurrent with the Share Offering, the Operating Partnership completed a public offering of $230 million of Exchangeable Subordinated Debentures (the "Debenture Offering", and, together with the Share Offering, the "Offerings") due 2001. The Debentures are guaranteed by the Trust. After June 23, 1995, the Debentures are exchangeable at any time prior to maturity into Common Shares of Beneficial Interest at a rate of one share for each $20 outstanding principal amount of Debentures, subject to certain adjustments. The Company completed a follow-on offering (the "Follow-on Offering") on November 27, 1995, which resulted in net proceeds of $131.5 million. The Company provides leasing, property management, acquisition, development, construction management, and design management for a portfolio of industrial and office properties which are located principally within the Southeastern and Mid-Atlantic United States.
The Rouse Group combined financial statements include accounts of the properties and entities acquired by the Operating Partnership which are considered to be entities under common ownership and management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation
The Consolidated Financial Statements of the Company include the accounts of the Operating Partnership and the Operating Partnership's direct and indirect subsidiaries including Liberty Property Development Corporation. The acquisition of the Rouse Group interest by the
Operating Partnership was accounted for as a reorganization of entities under common control which is similar to the accounting for a pooling of interests. As a result, the operations of the Rouse Group are included in these Financial Statements. All significant intercompany transactions and accounts have been eliminated.
Certain amounts from prior periods have been restated to conform to current year presentation.
Real Estate and Depreciation
The Properties are recorded at the lower of cost or net realizable value and are depreciated using the straight-line method over their estimated useful lives. The estimated lives are as follows:
Building and improvements 40 years Equipment 10 years Tenant improvements Term of the related lease
Cash Equivalents
Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents. The carrying amount of these assets approximates their fair market value.
Revenues
The Company earns rental income under operating leases with tenants. Rental income is recognized on a straight-line basis over the applicable lease term.
Deferred Financing and Leasing Costs
Costs incurred in connection with financing or leasing are capitalized and amortized over the term of the related loan or lease. Amortization of deferred financing costs is reported as interest expense.
Income Taxes
In conformity with the Internal Revenue Code and applicable state and local tax statutes, taxable income or loss of the Operating Partnership is required to be reported in the tax returns of the partners in accordance with the terms of the Partnership Agreement and, accordingly, no provision has been made in the accompanying financial statements for any federal, state, or local income taxes.
3. REAL ESTATE
At December 31, 1996 and 1995, the Company owned and operated industrial and office properties within suburban mixed use developments or business parks. The carrying value of these properties by type is as follows (in thousands):
Depreciation expense was $24,968 in 1996, $19,675 in 1995, and $11,976 in 1994.
The Company has commenced development on 22 properties, which upon completion are expected to comprise approximately 3.0 million square feet of leasable space. As of December 31, 1996 approximately $85.6 million has been expended for the development of these projects and an additional $68.2 million is required for completion.
4. RELATED PARTY TRANSACTIONS
An affiliated company provides construction services to the Company. Amounts paid to this affiliate were $29,717,000 in 1996, $6,245,000 in 1995, and $2,583,000 in 1994.
During 1995, three properties were purchased from partnerships affiliated with Rouse & Associates not included in the Rouse Group. The Rouse principals received no financial consideration for the purchase.
Pursuant to agreements, the Company has been retained by an affiliate (Rouse Kent Limited) to provide development, management and other services. For the years ended December 31, 1996 and December 31, 1995, and the period from June 23, 1994 to December 31, 1994, the fees for these services were $600,000, $600,000 and $453,000, respectively. At December 31, 1995, the Company had a $250,000 receivable from Rouse Kent Limited for these management and other services. Additionally, the Company committed to loans in 1996 to two affiliates (Rouse Kent Development Limited and 1 Tower View Limited) for development projects. At December 31, 1996, the balance of these notes receivable was $7.4 million.
5. MORTGAGE LOANS, SUBORDINATED DEBENTURES AND LINES OF CREDIT
Long term indebtedness consists generally of mortgage loans, subordinated debentures and Lines of Credit. The average annualized interest rates for the years ended December 31, 1996, 1995, and 1994, were approximately 7.6%, 7.8%, and 8.0%, respectively. Interest expense
for the years ended December 31, 1996, 1995, and 1994, aggregated $38,528,000, $37,688,000, and $34,243,000, respectively. Interest costs during these periods of $7,708,000, $3,475,000, and $190,000 were capitalized. Cash paid for interest for the years ended December 31, 1996, 1995, and 1994 was $35,995,000, $33,202,000, and $51,232,000, respectively.
Mortgage loans with maturities ranging from 1997 to 2013 (weighted average life 8 years) are collateralized by and in some instances cross collateralized by properties with a book value of $314.0 million. The interest rates on $230.4 million of mortgage loans are fixed and range from 6% to 10%. Interest rates on $10.4 million of mortgage loans float with LIBOR or prime and are subject to certain caps. The weighted average interest rate on the mortgage loans is 7.7% and the weighted average life is 8 years.
The aggregate maturities of the mortgage loans outstanding are as follows (in thousands):
1997 $ 7,065 1998 10,936 1999 19,031 2000 29,717 2001 12,555 Thereafter 161,499 -------- TOTAL $240,803 ========
The Debentures are due on June 23, 2001 and are exchangeable for shares of the Trust at a rate of one share for each $20 outstanding principal amount of Debentures, subject to certain adjustments. The initial interest rate on the Debentures was 8% and increases with increases in the dividend payment on the Company's Common Shares of Beneficial Interest. At the current $.41 per share per quarter dividend payment rate, the effective interest rate on the Debentures is 8.2%. During the year ended December 31, 1996, the Company paid sums aggregating $1.0 million to facilitate the conversion of $58.7 million of Debentures into 2,934,300 common shares. During the year ended December 31, 1996, $2.9 million of related deferred financing costs were written off through additional paid-in capital.
The Lines of Credit are composed of two secured lines of credit (the "$250 million Line of Credit" and the "$80 million Line of Credit"). The $250 million Line of Credit is secured and is due on June 15, 1998 at which time it may be converted into a two year term loan with the payment of a conversion fee equal to 1/2% of the then outstanding balance. As of December 31, 1996, the $250 million Line of Credit was fully collateralized and $241.7 million was outstanding. The interest rate on the $250 million Line of Credit is 30-day LIBOR plus 1.75% (7.13% and 7.75% at December 31, 1996 and 1995, respectively). Other normal and customary fees apply including an unused line fee. The $250 million Line of Credit is recourse to the Company only with respect to 50% of the outstanding principal thereof and is otherwise non-recourse
subject to certain conditions. At December 31, 1996, 109 properties with a book value of $387.6 million collateralized the $250 million Line of Credit. During 1996, the Company closed on an $80 million Line of Credit. The $80 million Line of Credit is secured and is due on December 13, 1998. At any time prior to December 13, 1998, maturity may be extended for one year subject to certain conditions and the payment of an extension fee equal to 1/4% of the total commitment. As of December 31, 1996, collateral had been approved to enable the Company to borrow up to $56.0 million, of which $25.0 million was outstanding. The interest rate on the $80 million Line of Credit is 90-day LIBOR plus 1.60% (7.13% at December 31, 1996). At December 31, 1996, 23 properties with a book value of $64.5 million, and 2 development properties with a book value of $3.9 million collateralized the $80 million Line of Credit.
In 1994, the Company recognized a gain on extinguishment of debt which resulted primarily from the payment of mortgage notes and notes payable including penalties and accrued interest at a discount with $451.8 million in proceeds obtained from the issuance of shares and the close of the Debenture offering.
The fair value of the Debentures at December 31, 1996 was $220.4 million based on the closing bid price of the security on the New York Stock Exchange. The fair values of the mortgages and Lines of Credit were estimated using discounted cash flow analysis, based on the Company's estimated incremental borrowing rate at December 31, 1996, for similar types of borrowing arrangements. The carrying values of the mortgages and the Lines of Credit approximate their fair values.
6. LEASING ACTIVITY
Future minimum rental payments due from tenants under non-cancellable operating leases as of December 31, 1996 are as follows (in thousands):
1997 $119,777 1998 107,177 1999 91,805 2000 68,264 2001 40,441 Thereafter 126,211 -------- TOTAL $553,675 ========
In addition to minimum rental payments, tenants pay for their pro rata share of specified operating expenses. These amounts are included as operating expense reimbursement in the accompanying statements of operations.
7. COMMITMENTS AND CONTINGENCIES
All of the Properties have been subject to Phase I Environmental Assessments ("Phase I Assessments") performed and obtained in
contemplation of the formation or acquisitions. The Phase I Assessments consisted of, among other activities, a visual inspection of each Property and its neighborhood and a check of pertinent public records. The Phase I Assessments did not reveal, nor is the Company aware of, any non-compliance with environmental laws, environmental liability or other environmental claim that the Company believes would likely have a material adverse effect on the Company.
The Trust is not a party to any material legal proceedings. In the ordinary course of business, the Operating Partnership is party to ordinary routine litigation incidental to its business and in addition it is covered by insurance.
The Company has entered into an interest rate swap agreement to hedge against possible fluctuations in interest rates in anticipation of a $120 million debt issuance in 1997 for a five to seven year term. The securities underlying the interest rate swap agreement, with a notional amount of $114.5 million, are 5.875% US Treasury securities maturing on February 15, 2004. Gain or loss on this hedging transaction is being deferred and will be amortized as adjustments to interest expense commencing on the date of issuance of the debt and over the term of the debt. At December 31, 1996, the Company had one swap transaction outstanding, and approximately $645,000 in unrealized gain has been deferred.
8. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the two years ended December 31, 1996 and 1995 (in thousands):
9. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma information has been prepared assuming the Secondary Offering described in Note 1 and the acquisitions of 54 properties acquired in 1995 and 33 properties acquired in 1996 had occurred at January 1, 1995. The 1995 acquisitions were acquired for a total investment of $202.3 million and the 1996 acquisitions were acquired for a total investment of $132.9 million.
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 -------- -------- (IN THOUSANDS) ------------------------
Total revenues $172,503 $155,537 Net income 34,229 28,619
This pro forma information is not necessarily indicative of what actual results of operations of the Company would have been, assuming the Company had completed the Secondary Offering as of January 1, 1995, nor do they purport to represent the results of operations of the Company for future periods.
SCHEDULE III
LIBERTY PROPERTY LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION (In thousands)
A summary of activity for real estate and accumulated depreciation is as follows:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------
1996 1995 1994 ---------- --------- ---------
REAL ESTATE: Balance at beginning of year $ 920,230 $ 586,789 $ 432,970 Additions 268,066 333,441 153,819 Disposition of property (9,583) -- -- ---------- --------- ---------
Balance at end of year $1,178,713 $ 920,230 $ 586,789 ========== ========= =========
ACCUMULATED DEPRECIATION: Balance at beginning of year $ 94,183 $ 74,508 $ 62,532 Depreciation expense 24,968 19,675 11,976 ---------- --------- ---------
Balance at end of year $ 119,151 $ 94,183 $ 74,508 ========== ========= =========
Liberty Property Trust Liberty Property Trust and Rouse Group Combined
ITEM 9.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ---------------------------------------------------------
Except as set forth under the caption "Executive Officers" in Part I, the information required by Part III, Items 10, 11, 12 and 13, is hereby incorporated by reference to the Trust's definitive proxy statement for its Annual Meeting of Shareholders (other than the information called for by Item 402(i), (k) and (l) of Regulation S-K, which is not incorporated herein by reference) presently scheduled for May 21, 1997, which proxy statement will be filed pursuant to Regulation 14A not later than April 30, 1997, in accordance with General Instruction G(3) to Form 10-K.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM - ---------------------------------------------------------------------- 8-K - ---
The following consolidated Financial Statements of Liberty Property Trust, Liberty Property Limited Partnership and Rouse Group (The Predecessor) are included in Item 8.
(A) 1. FINANCIAL STATEMENTS AND REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Report of Independent Auditors - Liberty Property Trust - -------------------------------------------------------
Financial Statements - Liberty Property Trust - --------------------------------------------- Balance Sheet: Liberty Property Trust Consolidated as of December 31, 1996 and 1995
Statement of Operations: Liberty Property Trust Consolidated for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, 1994 Rouse Group Combined for the period from January 1, 1994 to June 22,
Statements of Shareholders' Equity and Owners' Deficit: Liberty Property Trust Consolidated for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, 1994 Rouse Group Combined for the period from January 1, 1994 to June 22,
Statements of Cash Flows: Liberty Property Trust Consolidated for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, 1994 Rouse Group Combined for the period from January 1, 1994 to June 22,
Notes to Financial Statements
Report of Independent Auditors - Liberty Property Limited Partnership - ---------------------------------------------------------------------
Financial Statements - Liberty Property Limited Partnership - ----------------------------------------------------------- Balance Sheet: Liberty Property Limited Partnership Consolidated as of December 31, 1996 and 1995
Statement of Operations: Liberty Property Limited Partnership Consolidated for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, 1994 Rouse Group Combined for the period from January 1, 1994 to June 22,
Statements of Owners' Equity and Owners' Deficit: Liberty Property Limited Partnership Consolidated for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, 1994 Rouse Group Combined for the period from January 1, 1994 to June 22,
Statements of Cash Flows: Liberty Property Limited Partnership Consolidated for the years ended December 31, 1996 and 1995 and for the period from June 23, 1994 to December 31, 1994 Rouse Group Combined for the period from January 1, 1994 to June 22,
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES: Schedule III -- Real Estate and Accumulated Depreciation as of December 31, 1996 for Liberty Property Trust All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
Schedule III -- Real Estate and Accumulated Depreciation as of December 31, 1996 for Liberty Property Limited Partnership All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
3. EXHIBITS
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed.
EXHIBIT NO. DESCRIPTION - ------------- --------------------------------------------------------
* 3.1 First Restated and Amended Agreement of Limited Partner- ship Limited Partnership, dated June 19, 1995, as amended.
** 3.1.1 Second Amendment to Agreement of Limited Partnership.
**** 3.2.1 Third Amendment to Agreement of Limited Partnership, dated December 30, 1996.
**** 3.2 Declaration of Trust, as amended of the Trust.
**** 3.3 By-laws of Trust.
**** 4.1 Indenture between the Operating Partnership and Bank of Boston, as Trustee, including Guaranty Provisions and Form of Debenture.
+ * 10.1 Liberty Property Trust Share Incentive Plan.
**** 10.2 Employment Agreement between the Company and Willard G. Rouse III.
**** 10.3 Employment Agreement between the Company and George F. Congdon.
**** 10.4 Employment Agreement between the Company and Joseph P. Denny.
**** 10.5 Contribution Agreement.
**** 10.6 Amended and Restated Limited Partnership Agreements of Pre-existing Pennsylvania Partnerships.
**** 10.7 Agreement of Sale for the Acquisition Properties.
**** 10.8 Option Agreement and Right of First Offer.
**** 10.9 Form of Indemnity Agreement.
***** 10.10 Contribution Agreement among the Trust, the Operating Partnership and the Contributing Owners described therein, related to the Lingerfelt Properties.
***** 10.11 Employment Agreement between the Company and Alan Lingerfelt.
****** 10.12 Amendment and Restated Revolving Loan Agreement and Note Modification, dated as of May 1, 1995, between General Electric Capital Corporation, as Dollar Lender, G.E. Capital Corporation (Funding) Limited, as Pound Lender, and Liberty Property Limited Partnership, as Borrower (including exhibits thereto).
** 10.13 Amended Exhibit A, dated as of February 29, 1996 of the Liberty Property Limited Partnership Agreement.
10.14 Loan Agreement between Liberty Property Limited Partnership and Liberty Property Trust and the The First National Bank of Boston, dated December 13, 1996.
* 21.1 Subsidiaries of the Registrants.
23.1 Consent of Ernst & Young, LLP on Liberty Property Trust.
23.2 Consent of Ernst & Young, LLP on Liberty Property Limited Partnership.
27.1 Financial Data Schedule. (EDGAR Version Only)
* 99.2 Waiver of Agreement.
- ----------------
* Incorporated by Reference to exhibit of the same number filed with the Registrants' Quarterly Report on Form 10-Q dated August 14, 1995.
** Incorporated by reference to exhibit of the same number filed with the Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
*** Incorporated by reference to exhibit of the same number filed with the Trusts' Registration Statement on Form S-11, Reg. No. 333-2221l.
**** Incorporated by reference to exhibit of the same number filed with the Trusts' Registration Statement on Form S-11, Reg. No. 33-77084.
***** Incorporated by reference to exhibit 10.1 filed with the Registrants' Current Report on Form 8-K, dated March 3, 1995.
***** Incorporated by reference to exhibit 10.2 filed with the Registrants' Current Report on Form 8-K, dated March 3, 1995.
****** Incorporated by reference to exhibit 10.1 to the Registrants' Registration Statement on Form S-3, Reg. No. 33-94782.
+ Indicates a management employment contract or compensa- tion agreement.
(B) REPORTS ON FORM 8-K
REPORTS ON FORM 8-K -------------------
Report on Form 8-K dated December 10, 1996 filed under Item 5 relating to the acquisition of eighteen properties during the period from January 1, 1996 to December 10, 1996. The report included a Combined Statement of Operating Revenue and Certain Operating Expenses for a majority of the properties, Pro Forma Condensed Consolidated Balance Sheets for Liberty Property Trust and Liberty Property Limited Partnership, and Pro Forma Consolidated Statements of Operations for Liberty Property Trust and Liberty Property Limited Partnership.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIBERTY PROPERTY TRUST
Date: Februrary 26, 1997 By: /s/ WILLARD G. ROUSE III -------------------------------------- WILLARD G. ROUSE III CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Chairman of the Board of Trustees and Chief Executive Officer (Principal Executive /s/ Willard G. Rouse III Officer) February 26, 1997 - --------------------------- Willard G. Rouse III
Chief Financial Officer and Treasurer (Principal Financial and Accounting /s/ George J. Alburger, Jr. Officer) February 26, 1997 - --------------------------- George J. Alburger, Jr.
/s/ Joseph P. Denny Trustee February 26, 1997 - --------------------------- Joseph P. Denny
/s/ George F. Congdon Trustee February 26, 1997 - --------------------------- George F. Congdon
/s/ M. Leanne Lachman Trustee February 26, 1997 - --------------------------- M. Leanne Lachman
/s/ Frederick F. Buchholz Trustee February 26, 1997 - --------------------------- Frederick F. Buchholz
/s/ J. Anthony Hayden Trustee February 26, 1997 - --------------------------- J. Anthony Hayden
/s/ David L. Lingerfelt Trustee February 26, 1997 - --------------------------- David L. Lingerfelt
/s/ John A. Miller Trustee February 26, 1997 - --------------------------- John A. Miller, CLU
/s/ Stephen B. Siegel Trustee February 26, 1997 - --------------------------- Stephen B. Siegel
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIBERTY PROPERTY LIMITED PARTNERSHIP BY: Liberty Property Trust General Partner
Date: February 26, 1997 By: /s/ WILLARD G. ROUSE III -------------------------------------- WILLARD G. ROUSE III CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Trustee of the /s/ Joseph P. Denny General Partner February 26, 1997 - --------------------------- Joseph P. Denny
Trustee of the /s/ George F. Congdon General Partner February 26, 1997 - --------------------------- George F. Congdon
Trustee of the /s/ M. Leanne Lachman General Partner February 26, 1997 - --------------------------- M. Leanne Lachman
Trustee of the /s/ Frederick F. Buchholz General Partner February 26, 1997 - --------------------------- Frederick F. Buchholz
Trustee of the /s/ J. Anthony Hayden General Partner February 26, 1997 - --------------------------- J. Anthony Hayden
Trustee of the /s/ David L. Lingerfelt General Partner February 26, 1997 - --------------------------- David L. Lingerfelt
Trustee of the /s/ John A. Miller General Partner February 26, 1997 - --------------------------- John A. Miller, CLU
Trustee of the /s/ Stephen B. Siegel General Partner February 26, 1997 - --------------------------- Stephen B. Siegel
EXHIBIT INDEX -------------
EXHIBIT NO. DESCRIPTION - ------------- --------------------------------------------------------
* 3.1 First Restated and Amended Agreement of Limited Partner- ship Limited Partnership, dated June 19, 1995, as amended.
** 3.1.1 Second Amendment to Agreement of Limited Partnership.
**** 3.2.1 Third Amendment to Agreement of Limited Partnership, dated December 30, 1996.
**** 3.2 Declaration of Trust, as amended of the Trust.
**** 3.3 By-laws of Trust.
**** 4.1 Indenture between the Operating Partnership and Bank of Boston, as Trustee, including Guaranty Provisions and Form of Debenture.
+ * 10.1 Liberty Property Trust Share Incentive Plan.
**** 10.2 Employment Agreement between the Company and Willard G. Rouse III.
**** 10.3 Employment Agreement between the Company and George F. Congdon.
**** 10.4 Employment Agreement between the Company and Joseph P. Denny.
**** 10.5 Contribution Agreement.
**** 10.6 Amended and Restated Limited Partnership Agreements of Pre-existing Pennsylvania Partnerships.
**** 10.7 Agreement of Sale for the Acquisition Properties.
**** 10.8 Option Agreement and Right of First Offer.
**** 10.9 Form of Indemnity Agreement.
***** 10.10 Contribution Agreement among the Trust, the Operating Partnership and the Contributing Owners described therein, related to the Lingerfelt Properties.
***** 10.11 Employment Agreement between the Company and Alan Lingerfelt.
****** 10.12 Amendment and Restated Revolving Loan Agreement and Note Modification, dated as of May 1, 1995, between General Electric Capital Corporation, as Dollar Lender, G.E. Capital Corporation (Funding) Limited, as Pound Lender, and Liberty Property Limited Partnership, as Borrower (including exhibits thereto).
** 10.13 Amended Exhibit A, dated as of February 29, 1996 of the Liberty Property Limited Partnership Agreement.
10.14 Loan Agreement between Liberty Property Limited Partnership and Liberty Property Trust and the The First National Bank of Boston, dated December 13, 1996.
* 21.1 Subsidiaries of the Registrants.
23.1 Consent of Ernst & Young, LLP on Liberty Property Trust.
23.2 Consent of Ernst & Young, LLP on Liberty Property Limited Partnership.
27.1 Financial Data Schedule. (EDGAR Version Only)
* 99.2 Waiver of Agreement.
- ----------------
* Incorporated by Reference to exhibit of the same number filed with the Registrants' Quarterly Report on Form 10-Q dated August 14, 1995.
** Incorporated by reference to exhibit of the same number filed with the Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
*** Incorporated by reference to exhibit of the same number filed with the Trusts' Registration Statement on Form S-11, Reg. No. 333-2221l.
**** Incorporated by reference to exhibit of the same number filed with the Trusts' Registration Statement on Form S-11, Reg. No. 33-77084.
***** Incorporated by reference to exhibit 10.1 filed with the Registrants' Current Report on Form 8-K, dated March 3, 1995.
***** Incorporated by reference to exhibit 10.2 filed with the Registrants' Current Report on Form 8-K, dated March 3, 1995.
****** Incorporated by reference to exhibit 10.1 to the Registrants' Registration Statement on Form S-3, Reg. No. 33-94782.
+ Indicates a management employment contract or compensa- tion agreement.