10-K 1 lpt1231201710k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
 
 
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
 
 
 
 
 
 
Commission file numbers:
 
1-13130 (Liberty Property Trust)
 
 
1-13132 (Liberty Property Limited Partnership)
 
LIBERTY PROPERTY TRUST
 
LIBERTY PROPERTY LIMITED PARTNERSHIP
(Exact Names of Registrants as Specified in Their Governing Documents)
 
 
 
 
 
 
MARYLAND (Liberty Property Trust)
 
23-7768996
PENNSYLVANIA (Liberty Property Limited Partnership)
 
23-2766549
 
 
 
(State or Other Jurisdiction
 
(I.R.S. Employer
of Incorporation or Organization)
 
Identification Number)
 
 
 
500 Chesterfield Parkway
 
 
Malvern, Pennsylvania
 
19355
 
 
 
(Address of Principal Executive Offices)
 
(Zip Code)
Registrants' Telephone Number, including Area Code (610) 648-1700
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
 
 
 
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS
 
ON WHICH REGISTERED
 
 
 
Common Shares of Beneficial Interest,
 
 
$0.001 par value
 
 
(Liberty Property Trust)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES þ NO o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
YES o NO þ
Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports) and (2) have been subject to such filing requirements for the past ninety (90) days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.) þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of the Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. (See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act). (Check one):
Large Accelerated Filer
x
Accelerated Filer
o
Non-Accelerated Filer
o(Do not check if a smaller reporting company)
Smaller Reporting Company
o
 
 
Emerging Growth Company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes  o    No  x
Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
The aggregate market value of the Common Shares of Beneficial Interest, $0.001 par value (the "Common Shares"), of Liberty Property Trust held by non-affiliates of Liberty Property Trust was $5.9 billion, based upon the closing price of $40.71 on the New York Stock Exchange composite tape on June 30, 2017. Non-affiliate ownership is calculated by excluding all Common Shares that may be deemed to be beneficially owned by executive officers and trustees, without conceding that any such person is an "affiliate" for purposes of the federal securities laws.
Number of Common Shares outstanding as of February 26, 2018: 147,460,813
Documents Incorporated by Reference
Portions of the proxy statement for the annual meeting of shareholders of Liberty Property Trust to be held in May 2018 are incorporated by reference into Part III of this Form 10-K.




EXPLANATORY NOTE


This report combines the annual reports on Form 10-K for the period ended December 31, 2017 of Liberty Property Trust and Liberty Property Limited Partnership. Unless stated otherwise or the context otherwise requires, references to the “Trust” mean Liberty Property Trust and its consolidated subsidiaries, and references to the “Operating Partnership” mean Liberty Property Limited Partnership and its consolidated subsidiaries. The terms the “Company,” “we,” “our” and “us” mean the Trust and the Operating Partnership, collectively.

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

The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 97.7% of the common equity of the Operating Partnership at December 31, 2017. The common units of limited partnership interest in the Operating Partnership (the “Common Units”), other than those owned by the Trust, are exchangeable on a one-for-one basis (subject to anti-dilution protections) for the Trust's common shares of beneficial interest, $0.001 par value per share (the “Common Shares”).

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

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

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

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

This report also includes separate Item 9A. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of the Trust and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Trust and Operating Partnership are compliant with Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended.


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INDEX
 
Index
 
Page
 
 
 
PART I.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
PART III
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
PART IV
 
 
 
 
 
Item 15.
 
 
 
Item 16.
 
 
 
 
 
 
 
 
 
 
 
 



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----------
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information included in this Annual Report on Form 10-K and other materials filed or to be filed by the Company (as defined herein) with the Securities and Exchange Commission (“SEC”) (as well as information included in oral statements or other written statements made or to be made by the Company) contain statements that are or will be forward-looking, such as statements relating to rental operations, business and property development activities, joint venture relationships, acquisitions and dispositions (including related pro forma financial information), future capital expenditures, financing sources and availability, litigation and the effects of regulation (including environmental regulation) and competition. These forward-looking statements generally are accompanied by words such as “believes,” “anticipates,” “expects,” “estimates,” “should,” “seeks,” “intends,” “planned,” “outlook” and “goal” or similar expressions. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, the Company can give no assurance that its expectations will be achieved. As forward-looking statements, these statements involve important risks, uncertainties and other factors that could cause actual results to differ materially from the expected results and, accordingly, such results may differ from those expressed in any forward-looking statements made by, or on behalf of the Company. The Company assumes no obligation to update or supplement forward looking statements that become untrue because of subsequent events. These risks, uncertainties and other factors include, without limitation, uncertainties affecting real estate businesses generally (such as entry into new leases, renewals of leases and dependence on tenants' business operations), risks relating to our ability to maintain and increase property occupancy and rental rates, risks relating to the continued repositioning of the Company's portfolio, risks relating to construction and development activities, risks relating to acquisition and disposition activities, risks relating to the integration of the operations of entities that we have acquired or may acquire, risks relating to joint venture relationships and any possible need to perform under certain guarantees that we have issued or may issue in connection with such relationships, risks related to properties developed by the Company on a fee basis, risks associated with tax abatement, tax credit programs, or other government incentives, possible environmental liabilities, risks relating to leverage and debt service (including availability of financing terms acceptable to the Company and sensitivity of the Company's operations and financing arrangements to fluctuations in interest rates), dependence on the primary markets in which the Company's properties are located, the existence of complex regulations relating to status as a real estate investment trust (“REIT”) and the adverse consequences of the failure to qualify as a REIT, risks relating to litigation and the potential adverse impact of market interest rates on the market price for the Company's securities. See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements.”



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PART I
ITEM 1. BUSINESS
The Company
Liberty Property Trust (the "Trust") is a self-administered and self-managed Maryland real estate investment trust (a "REIT"). Substantially all of the Trust's assets are owned directly or indirectly, and substantially all of the Trust's operations are conducted directly or indirectly, by its subsidiary, Liberty Property Limited Partnership, a Pennsylvania limited partnership (the "Operating Partnership" and, together with the Trust and their consolidated subsidiaries, the "Company").
The Company completed its initial public offering in 1994 to continue and expand the commercial real estate business of Rouse & Associates, a Pennsylvania general partnership, and certain affiliated entities (collectively, the "Predecessor"), which was founded in 1972. As of December 31, 2017, the Company owned and operated 461 industrial and 48 office properties (the "Wholly Owned Properties in Operation") totaling 87.3 million square feet. In addition, as of December 31, 2017, the Company owned 20 properties under development, which when completed are expected to comprise 5.6 million square feet (the "Wholly Owned Properties under Development"). The Company owned 10 properties held for redevelopment (the "Wholly Owned Properties held for Redevelopment") totaling 1.0 million square feet and 1,563 acres of developable land, substantially all of which is zoned for commercial use. Additionally, as of December 31, 2017, the Company had an ownership interest, through unconsolidated joint ventures, in 47 industrial and 18 office properties totaling 14.3 million square feet (the "JV Properties in Operation" and, together with the Wholly Owned Properties in Operation, the "Properties in Operation"), three properties under development, which when completed are expected to comprise 552,000 square feet and a 217-room Four Seasons Hotel (the "JV Properties under Development" and, collectively with the Wholly Owned Properties under Development, the "Properties under Development", one property held for redevelopment, totaling 48,000 square feet (the "JV Property Held for Redevelopment" and, collectively with the Wholly Owned Properties held for Redevelopment, the "Properties Held for Redevelopment" and, collectively with the Properties in Operation and the Properties under Development, the "Properties"), and 347 acres of developable land, substantially all of which is zoned for commercial use.
The Company provides leasing, property management, development and other tenant-related services for the Properties. The industrial Properties consist of a variety of warehouse, distribution, service, assembly, light manufacturing and research and development 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. The Company's office Properties consist of metro-office buildings and multi-story and single-story office buildings located principally in suburban mixed-use developments or office parks. Substantially all of the Properties are located in prime business locations within established business communities. The Company’s strategy with respect to product and market selection favors industrial properties and markets with strong demographic and economic fundamentals, and to a lesser extent, metro-office properties. The Company also believes that long-term trends generally indicate potential erosion in the value of certain suburban office properties. Accordingly, the Company announced a strategic shift whereby it plans to divest of its remaining suburban office properties, and to reinvest those proceeds in acquisitions in targeted industrial markets and new development. Additionally, from time to time, the Company develops properties on a fee basis for unrelated third parties or joint ventures in which the Company holds an interest. In these cases the Company typically agrees to be responsible for all aspects of the development of the project and to guarantee the timely lien-free completion of construction of the project and the payment of certain cost overruns incurred in the development of the project.
The Trust is the sole general partner and also a limited partner of the Operating Partnership, owning 97.7% of the common equity of the Operating Partnership at December 31, 2017. The common units of limited partnership interest in the Operating Partnership (the "Common Units"), other than those owned by the Trust, are exchangeable on a one-for-one basis (subject to anti-dilution protections) for the Trust's common shares of beneficial interest, $0.001 par value per share (the "Common Shares"). As of December 31, 2017, the Common Units held by the limited partners were exchangeable for 3.5 million Common Shares. The ownership of the holders of Common Units is reflected on the Trust's financial statements as “noncontrolling interest- operating partnership” as a component of total equity. The ownership of the holders of Common Units not owned by the Trust is reflected on the Operating Partnership's financial statements as “limited partners' equity” as a component of total owners' equity.
In addition to this Annual Report on Form 10-K, the Company files with or furnishes to the SEC periodic and current reports, proxy statements and other information. The Company makes these documents available on its website, www.libertyproperty.com, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Any document the Company files with or furnishes to the SEC is available to read and copy at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Further information about the public reference facilities is available by calling the SEC at (800) SEC-0330. These documents also may be accessed on the SEC's website, http://www.sec.gov.
Also posted on the Company's website is the Company's Code of Conduct, which applies to all of its employees and also serves as a code of ethics for its chief executive officer, chief financial officer and persons performing similar functions. The Company will send the Code of Conduct, free of charge, to anyone who requests a copy in writing from its Investor Relations Department

5


at the address set forth on the cover of this filing. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendments to or waivers of the Code of Conduct by posting the required information in the Corporate Governance page in the Investors section of its website.
Management and Employees
As of February 23, 2018, the Company's 295 employees operated under the direction of 16 senior executives, who have been affiliated with the Company and the Predecessor for an average of 20 years. The Company and the Predecessor have developed and managed commercial real estate for the past 45 years. The Company maintains an in-house leasing and property management staff which the Company believes enables it to better understand the characteristics of the local markets in which it operates, to respond quickly and directly to tenant needs and to better identify local real estate opportunities. In certain circumstances the Company also engages and directs the activities of third party property managers and leasing agents.
Segments and Markets
At December 31, 2017, the Company's reportable segments were based on the Company's method of internal reporting and were as follows:
Carolinas/Richmond;
Chicago/Minneapolis;
Florida;
Houston;
Lehigh/Central PA;
Philadelphia;
Southeastern PA; and
United Kingdom.
Certain other segments are aggregated into an "Other" category which includes the reportable segments: Arizona; Atlanta; Cincinnati/Columbus/Indianapolis; Dallas; DC Metro; New Jersey; Southern California.
Business Objective and Strategies for Growth
The Company's business objective is to maximize long-term profitability for its shareholders by operating as a leader in commercial real estate through the ownership, management, development and acquisition of superior industrial and, to a lesser extent, office properties. The Company intends to achieve this objective by owning and operating industrial properties nationally and owning and operating office properties in focused metro-office markets (primarily, metropolitan Philadelphia). The Company believes that pursuing this objective will provide the benefits of enhanced investment opportunities, economies of scale, risk diversification, access to capital and the ability to attract and retain personnel. The Company also strives to provide an exceptional and positive tenant experience. The Company is committed to developing and owning high-performing sustainable buildings and operating an energy-efficient portfolio. In pursuing its business objective, the Company seeks to achieve a combination of internal and external growth, maintain a conservative balance sheet and pursue a strategy of financial flexibility.
Products
The Company strives to be a high quality provider of two products: industrial and office. The Company's strategy with respect to product and market selection generally favors industrial properties and markets with strong demographic and economic fundamentals, and to a lesser extent, metro-office properties. However, consistent with the Company's strategy and market opportunities, the Company may pursue industrial and office products other than those noted above. In addition, the Company also develops properties on a fee basis for unrelated third parties or unconsolidated joint ventures in which the Company has an interest.
Markets
The Company owns and operates industrial properties nationally and owns and operates office properties in focused metro-office markets. Additionally, the Company owns certain assets in the United Kingdom. Generally, the Company seeks to have a presence in each market sufficient for the Company to compete effectively in that market. The Company gathers information from internal sources and independent third parties and analyzes this information to support its evaluation of current and new markets and market conditions.

6


Organizational Plan
The Company seeks to maintain a management organization that facilitates efficient execution of the Company's strategy. As part of this effort, the Company pursues a human resources plan designed to create and maintain a highly effective real estate company through recruiting, training and retaining capable people. The structure is designed to support a local entrepreneurial platform operating within a value-added corporate structure. The Company seeks to provide management and all employees with technology tools to enhance competitive advantage and more effectively execute on strategic and operational goals.
Internal Growth Strategies
The Company seeks to maximize the profitability of its Properties by endeavoring to maintain high occupancy levels while obtaining competitive rental rates, controlling costs and focusing on customer service efforts.
Maintain High Occupancies
The Company believes that the quality and diversity of its tenant base and its strategy of operating in multiple markets is integral to achieving its goal of attaining high occupancy levels for its portfolio. The Company targets financially stable tenants in an effort to minimize uncertainty relating to the ability of the tenants to meet their lease obligations.
Cost Controls
The Company seeks to identify best practices to apply throughout the Company in order to enhance cost savings and other efficiencies. The Company also employs an annual capital improvement and preventative maintenance program designed to reduce operating costs and maintain the long-term value of the Properties in Operation.
Customer Service
The Company seeks to achieve high tenant retention through a comprehensive customer service program, which is designed to provide an exceptional and positive tenant experience. The customer service program establishes best practices and provides an appropriate customer feedback process. The Company believes that the program has been helpful in increasing tenant satisfaction.
High Performance Buildings
The Company is committed to the sustainable design, development and operation of its portfolio. The Company strives to create work environments that limit resource consumption, improve building performance and promote human health and productivity. The Company believes that sustainable, high performance buildings and environmentally responsible business practices are not only good for the environment, but that they also create value for the Company's tenants and shareholders.
The Company's efforts have included research, development, and deployment of sustainable building strategies and technologies, tenant education and outreach and education, and LEED accreditation for its development, property management and leasing staff.
The Company has utilized the U.S. Green Building Council's LEED rating system and the U.S. Department of Energy's ENERGY STAR system to drive energy efficiency and sustainable construction across its buildings and operations. As of December 31, 2017, either directly or through equity interests in unconsolidated joint ventures, the Company owns or has under construction 90 LEED buildings and has one building in the United Kingdom constructed under the international BREEAM standards. The Company has 44 ENERGY STAR-certified buildings and pursues energy and water efficient performance in the Properties in Operation. It is the Company's intention to obtain LEED or UK equivalent accreditation for all of its development properties.
External Growth Strategies
The Company seeks to enhance its long-term profitability through the development, acquisition and disposition of properties either directly or through joint ventures. The Company also considers acquisitions of real estate operating companies.
Wholly Owned Properties
Development
The Company's development investment strategy focuses primarily on the development of high-quality industrial properties within its existing markets and, to a lesser extent, office properties in metropolitan Philadelphia. When the Company's marketing efforts identify opportunities, the Company will consider pursuing such opportunities outside of the Company's established markets. The Company and its Predecessor have developed over 85 million square feet of commercial real estate during the past 45 years. The Company's development activities generally fall into two categories: build-to-suit projects and projects built for inventory (projects that are less than 75% pre-leased prior to commencement of construction). The Company develops build-to-suit projects for

7


existing and new tenants. The Company also builds properties for inventory where the Company has identified sufficient demand at market rental rates to justify such construction.
During the year ended December 31, 2017, the Company brought into service 17 wholly owned inventory projects totaling 2.9 million square feet and representing an aggregate Total Investment of $259.0 million. As of December 31, 2017, these completed development properties were 83.7% leased.
As of December 31, 2017, the Company had 20 Wholly Owned Properties under Development, which are expected to comprise, upon completion, 5.6 million square feet and are expected to represent a Total Investment of $526.7 million. These Wholly Owned Properties under Development were 50.2% pre-leased as of December 31, 2017. The scheduled deliveries of the 5.6 million square feet of Wholly Owned Properties under Development are as follows (in thousands, except percentages):
 
 
SQUARE FEET
 
PERCENT PRE-LEASED
 
TOTAL
SCHEDULED IN-SERVICE DATE
 
INDUSTRIAL
 
OFFICE
 
TOTAL
 
DECEMBER 31, 2017
 
INVESTMENT
 1st Quarter, 2018
 
101

 
236

 
337

 
100.0
%
 
$
71,386

 2nd Quarter, 2018
 
1,790

 
175

 
1,965

 
95.6
%
 
195,706

 3rd Quarter, 2018
 
881

 

 
881

 
56.6
%
 
65,934

 4th Quarter, 2018
 
1,100

 

 
1,100

 
%
 
84,085

 1st Quarter, 2019
 
546

 

 
546

 
21.1
%
 
51,722

 2nd Quarter, 2019
 
201

 

 
201

 
%
 
24,132

 3rd Quarter, 2019
 
600

 

 
600

 
%
 
33,746

TOTAL
 
5,219

 
411

 
5,630

 
50.2
%
 
$
526,711

 
 
 
 
 
 
 
 
 
 
 
“Total Investment” for a Property Under Development is defined as the sum of the land costs and the costs of land improvements, building and building improvements, lease transaction costs, and where appropriate, other development costs and carrying costs. 
The Company believes that, because it is a fully integrated real estate firm, its base of commercially zoned land provides a competitive advantage for future development activities. As of December 31, 2017, the Company owned 1,563 acres of land held for development, substantially all of which is zoned for commercial use. Substantially all of the land is located adjacent to or within existing industrial or business parks with site improvements, such as public sewers, water and utilities, available for service. The Company estimates that its land holdings would support, as and when developed, approximately 18.1 million square feet. The Company's investment in land held for development as of December 31, 2017 was $330.7 million.
Through a development agreement with Philadelphia Industrial Development Corporation, the Company has development rights for 135 acres of land located at the Navy Yard in Philadelphia. The Company estimates that these 135 acres would support, as and when developed, approximately 2.4 million square feet.
Through a development agreement with Kent County Council, the Company develops commercial buildings at Kings Hill, a 650-acre mixed use development site in the County of Kent, England. The Company also is the project manager for the installation of infrastructure on the site and receives a portion of the proceeds from the sale of land parcels to home builders. The site has planning consent and available land for approximately 1.35 million square feet of commercial space of which approximately 1.0 million square feet had been built as of December 31, 2017. During 2015, the Company obtained planning consent for a further 635 homes at Kings Hill, taking the total consent to 3,486 homes of which 2,836 had been sold as of December 31, 2017.
Acquisitions/Dispositions
The Company seeks to acquire properties consistent with its business objectives and strategy. The Company executes its acquisition strategy by purchasing properties that the Company believes will create shareholder value over the long-term.
During the year ended December 31, 2017, the Company acquired eight operating properties for a purchase price of $256.4 million. These properties contain 1.9 million square feet and were 94.6% leased as of December 31, 2017. The Company also acquired nine parcels of land totaling 253 acres for an aggregate purchase price of $40.0 million.
The Company disposes of properties and land held for development that no longer fit within the Company's strategic plan, or with respect to which the Company believes it can optimize cash proceeds. The Company may also, from time to time, sell properties to its tenants pursuant to purchase options contained in their leases. During the year ended December 31, 2017, the Company sold 10 Wholly Owned Properties containing an aggregate of 2.3 million square feet as well as 113 acres of land for aggregate proceeds of $367.3 million.

8


Joint Venture Properties
The Company, from time to time, considers joint venture opportunities with institutional investors or other real estate companies. Joint venture partnerships provide the Company with additional sources of capital to share investment risk and fund capital requirements. In some instances, joint venture partnerships provide the Company with additional local market or product type expertise.
As of December 31, 2017, the Company had investments in and advances to unconsolidated joint ventures totaling $288.5 million (see Note 7 to the Company's Consolidated Financial Statements).
Development
During the year ended December 31, 2017, an unconsolidated joint venture in which the Company held an interest brought into service a build to suit project totaling 154,000 square feet and representing a Total Investment of $11.6 million. As of December 31, 2017, this completed development property was 100.0% leased. As of December 31, 2017, the Company had one JV Property under Development, which is expected to comprise, upon completion, 302,000 square feet and is expected to represent a Total Investment of $21.1 million. This JV Property under Development was not pre-leased as of December 31, 2017.
In addition, joint ventures in which the Company held an interest continued the development of the Comcast Technology Center. During the year ended December 31, 2017, 1.1 million square feet of office space representing a Total Investment by the joint ventures of $599.6 million was brought into service. The remaining 250,000 square feet of office space and the 217-room Four Seasons hotel representing a Total Investment by the joint ventures of $354.1 million was included as JV Properties under Development as of December 31, 2017.
As of December 31, 2017, unconsolidated joint ventures in which the Company held an interest owned 347 acres of land held for development. Substantially all of the land held for development and the land related to the leasehold interest is zoned for commercial use and is located adjacent to or within existing industrial or business parks with site improvements, such as public sewers, water and utilities, available for service. The Company estimates that its joint venture land holdings and leasehold interest would support, as and when developed, approximately 6.3 million square feet.
Acquisitions/Dispositions
During the year ended December 31, 2017, an unconsolidated joint venture in which the Company held a 20% interest acquired one redevelopment property that contained 48,000 square feet for a purchase price of $15.0 million and was 100% leased.
During the year ended December 31, 2017, none of the unconsolidated joint ventures in which the Company holds an interest sold any operating properties or land parcels.

ITEM 1A. RISK FACTORS
The Company's results of operations and the ability to make distributions to our shareholders and service our indebtedness may be affected by the risk factors set forth below. (The Company refers to itself as "we," "us" or "our" in the following risk factors.) This section contains some forward looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
Risks Related to Our Business
The Company's business is subject to the risks in this section.
Unfavorable events affecting our existing tenants and potential tenants, or negative market conditions that may affect our existing tenants and potential tenants, could have an adverse impact on our ability to attract new tenants, relet space, collect rent or renew leases, and thus could have a negative effect on our cash flow from operations.
Our cash flow from operations depends on our ability to lease space to tenants on economically favorable terms. Therefore, we could be adversely affected by various factors and events over which we have limited control, such as:
lack of demand for space in the areas where our Properties are located
inability to retain existing tenants and attract new tenants
oversupply of or reduced demand for space and changes in market rental rates

9


defaults by our tenants or their failure to pay rent on a timely basis
the need to periodically renovate and repair our space
physical damage to our Properties
economic or physical decline of the areas where our Properties are located
potential risk of functional obsolescence of our Properties over time
If a tenant is unable to pay rent due to us, we may be forced to evict the tenant, or engage in other remedies, which may be expensive and time consuming and may adversely affect our net income, shareholders' equity and cash distributions to shareholders.
If our tenants do not renew their leases as they expire, we may not be able to rent the space. Furthermore, leases that are renewed, and some new leases for space that is relet, may have terms that are less economically favorable to us than current lease terms, or may require us to incur significant costs, such as for renovations, tenant improvements or lease transaction costs.
Any of these events could adversely affect our cash flow from operations and our ability to make expected distributions to our shareholders and service our indebtedness.
A significant portion of our costs, such as real estate taxes, insurance costs, and debt service payments, generally are not reduced when circumstances cause a decrease in cash flow from our Properties.
We may face risks associated with our current business strategy.
As previously reported, and as further summarized below in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” we undertook several significant transactions in recent years, consistent with our strategy to favor industrial properties and markets with strong demographic and economic fundamentals and, to a lesser extent, metro-office properties. We also believe that long-term trends indicate potential erosion in certain suburban office properties. Accordingly, we announced a strategic shift whereby we expect to substantially divest of our remaining suburban office properties, and reinvest those proceeds in acquisitions in targeted industrial markets and new development.
While management believes that this strategy will be in the best long-term interests of the Company and its shareholders,  in the near term, this strategy will be dilutive to operating cash flow and we cannot assure you that this strategy will produce the intended benefit, or when, if ever, those intended benefits will be achieved.   This strategy poses certain risks, including without limitation the following:
for similar investment dollars, rental income from industrial properties is generally less in the short term than rental income generated from suburban office properties
our expectation of increasing demand and increasing stability of value in the industrial sector and metro-office sector may not materialize
the relative advantages in the ownership of industrial properties and metro-office properties as opposed to suburban office properties will be affected by variable and unpredictable macro-economic and global conditions that are outside of our control
our identification of markets with strong demographic and economic fundamentals may prove erroneous, due to macro-economic and global conditions that are outside of our control
Failure of our strategy to achieve the intended benefits could have a material adverse effect on our results of operations, financial condition and liquidity.
We may not be able to compete successfully with other entities that operate in our industry.
We experience a great deal of competition in attracting tenants for our Properties and in locating land to develop and properties to acquire.
In our effort to lease our Properties, we compete for tenants with a broad spectrum of other landlords in each of our markets. These competitors include, among others, publicly-held REITs, privately-held entities, individual property owners and tenants who wish to sublease their space. Some of these competitors may be able to offer prospective tenants more attractive financial or other terms than we are able to offer.

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We may experience increased operating costs, which could adversely affect our operations.
Our Properties are subject to increases in operating expenses such as real estate taxes, insurance, cleaning, electricity, heating, ventilation and air conditioning, general and administrative costs and other costs associated with security, landscaping, repairs and maintenance. While our current tenants generally are obligated to pay a significant portion of these costs, there is no assurance that these tenants will make such payments or agree to pay these costs upon renewal or that new tenants will agree to pay these costs. If operating expenses increase in our markets, we may not be able to increase rents or reimbursements in all of these markets so as to meet increased expenses without simultaneously decreasing occupancy rates. If this occurs, our ability to make distributions to shareholders and service our indebtedness could be adversely affected.
Our ability to achieve growth in operating income depends in part on our ability to develop properties, which may suffer under certain circumstances.
We intend to continue to develop properties when warranted by market conditions. Our general construction and development activities include the risks that:
construction and leasing of a property may not be completed on schedule, which could result in increased expenses and construction costs, and would result in reduced profitability
construction costs may exceed our original estimates due to increases in interest rates and increased materials, labor or other costs, possibly making the property unprofitable or less profitable than projected because we may not be able to increase rents to compensate for the increase in construction costs
we may be unable to obtain, or may face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to a project
we may abandon development opportunities after we begin to explore them and as a result, we may fail to recover costs already incurred. If we alter or discontinue our development efforts, costs of the investment may need to be expensed rather than capitalized and we may determine the investment is impaired, resulting in a loss
we may expend funds on and devote management's time to projects that we do not complete
occupancy rates and rents at newly completed properties may not meet our expectations. This may result in lower than projected occupancy and rental rates with the result that our investment is not profitable or less profitable than projected
we may incur losses under construction warranties, guaranties and delay damages under our contracts with tenants and other customers.

We face risks when we develop properties on a fee basis for joint ventures in which we hold an interest or for unrelated third parties.

We develop properties, from time to time, on a fee basis for joint ventures in which we hold an interest or for unrelated third parties, in addition to developing properties to be wholly owned in our own portfolio. In these cases we typically agree to be responsible for all aspects of the development of the project and to guarantee the timely lien-free completion of construction of the project and the payment, subject to certain exceptions, of cost overruns incurred in the development of the project. For example, in addition to the Comcast Technology Center project discussed below, in 2016 we entered into an agreement to develop a corporate headquarters office building for American Water Works, Inc. in Camden, New Jersey for an estimated total building cost of $145.1 million, plus overall project infrastructure in the amount of $28.0 million. If we encounter construction delays or unexpected costs in the development of these projects or other similar projects, the resulting additional costs incurred and potential payments to the customer would adversely affect our cash flow and net income.
Our development of Comcast Technology Center exposes us to certain risks.
In 2014, the Company entered into two joint ventures with Comcast Corporation for the purpose of developing and owning the Comcast Technology Center located in Philadelphia, Pennsylvania as part of a mixed-use development. The 60-story building will include 1.3 million square feet of leasable office space and a 217-room Four Seasons Hotel.   Projected costs for this development, exclusive of tenant-funded interior improvements, are anticipated to be approximately $953.7 million. The Company's investment in the project is expected to be approximately $190.7 million with 20% ownership interests in both joint ventures. The two joint ventures have engaged the Company as the developer of the project pursuant to a Development Agreement by which the Company agrees, in consideration for a development fee, to be responsible for all aspects of the development of the project and to guarantee the timely lien-free completion of construction of the project and the payment, subject to certain exceptions, of any cost overruns incurred in the development of the project. To mitigate this risk, the Company entered into guaranteed maximum price contracts with a third party contractor to construct the project. Comcast Corporation has entered into a lease for 100% of the office space in the building.

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Development of a project such as the Comcast Technology Center is subject to the general development and construction risks noted above.  Those risks are magnified by the size of the project, and include construction risks and cost overrun risks associated with a construction project with the engineering and design complexities of a high rise mixed-use building.  If we fail to complete the development of the project in compliance with the deadlines set forth in the lease with Comcast Corporation, or if the costs of development exceed the budgets agreed upon by the joint ventures, the Company could be liable for substantial damages and costs. We have recently been notified that there are additional construction costs in connection with the project. Until such time as we receive appropriate information concerning the amount and nature of these additional costs and we have an opportunity to investigate them, it is not possible to estimate the amount of possible additional costs, if any, that the Company may incur in connection with its guarantee beyond the obligations of the contractor under its guaranteed maximum price contracts. There is also additional risk associated with ownership of a hotel, with which our employees have limited experience.
We face risks associated with property acquisitions.
We acquire individual properties and portfolios of properties, in some cases through the acquisition of operating entities, and intend to continue to do so when circumstances warrant.
Our acquisition activities and their success are generally subject to the following risks:
when we are able to locate a desirable property, competition from other real estate investors may significantly increase the purchase price
acquired properties may fail to perform as expected
the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates
acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties and operating entities, into our existing operations, and as a result, our results of operations and financial condition could be adversely affected
We may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flow.
Many of our Properties are concentrated in our primary markets, and we therefore may suffer economic harm as a result of adverse conditions in those markets.
Our Properties are located principally in specific geographic areas. Due to the concentration of our Properties in these areas, performance is dependent on economic conditions in these areas.

The value and the marketability of some of our Properties may be reduced as the result of the expiration or loss of local tax abatements, tax credit programs, or other governmental incentives.

Certain of our Properties have the benefit of governmental tax incentives aimed at inducing office or industrial users to relocate to incentivize development in areas and neighborhoods which have not historically seen robust commercial development. These incentives typically have specific sunset provisions and may be subject to governmental discretion in the eligibility or award of the applicable incentives. For example, the Pennsylvania Keystone Opportunity Zones applicable to our Properties in the Philadelphia Navy Yard Corporate Center expire on December 31, 2018 or December 31, 2025 (as applicable) and the Grow NJ tax credit program applicable to our properties in the Camden Waterfront project expires on July 31, 2019 and is subject to the approval of each project by certain agencies and officers of the State of New Jersey. The expiration of these incentive programs or the inability of potential tenants or users to be eligible for or to obtain governmental approval of the incentives may have an adverse effect on the value of our Properties and on our cash flow and net income, and may result in impairment charges.


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Our Properties may be subject to impairment charges.

We continually evaluate the recoverability of the carrying value of our Properties, whether Development Properties (including land held for development), Properties Held for Redevelopment or Properties in Operation, as well as land and infrastructure being developed on a fee basis (including our Camden, NJ waterfront project), under generally accepted accounting principles. Factors considered in evaluating impairment of our Properties include significant declines in operating revenues, recurring operating losses and other significant adverse changes in general market conditions, and, in the case of Development Properties (including land held for development as well as land and infrastructure being developed on a fee basis), the abandonment of a project or the determination by management that future development is unlikely to occur or is unlikely to produce adequate cash flows to recover the carrying value of the Property. Generally, a Property held for investment is not considered impaired if the undiscounted estimated future cash flows of the Property over its estimated holding period are in excess of the Property’s net book value at the balance sheet date. If held for sale, a Property is not considered impaired unless its estimated fair value (less costs to sell) is less than the Property's book value at the balance sheet date. Assumptions used to estimate market values, annual and residual cash flows and estimated holding period of such assets require the judgment of management.

There can be no assurance that we will not take additional charges in the future related to the impairment of our Properties. We believe we have applied reasonable estimates and judgments in determining the proper classification of our Properties. However, these estimates require the use of estimated market values, which are difficult to assess. Should external or internal circumstances change, requiring the need to shorten holding periods or adjust the estimated future cash flows of certain Properties, we could be required to record additional impairment charges. Any future impairment could have a material adverse effect on our results of operations and funds from operations.
We may not be able to access financial markets to obtain capital on a timely basis, or on acceptable terms.
Our ability to access the public debt and equity markets depends on a variety of factors, including:
general economic conditions affecting these markets
our own financial structure and performance
the market's opinion of REITs in general
the market's opinion of REITs that own properties similar to ours
We may suffer adverse effects as a result of the terms of and covenants relating to our indebtedness.
Required payments on our indebtedness generally are not reduced if the economic performance of our portfolio of Properties declines. If the economic performance of our Properties declines, net income, cash flow from operations and cash available for distribution to shareholders will be reduced. If payments on debt cannot be made, we could sustain a loss, or in the case of mortgages, suffer foreclosures by mortgagees or suffer judgments. Further, some obligations, including our $930 million of aggregate credit facilities and $2.3 billion in unsecured notes issued in past public offerings, contain cross-default and/or cross-acceleration provisions, which means that a default on one obligation may constitute a default on other obligations.
Our credit facilities and unsecured debt securities contain customary restrictions, requirements and limitations on our ability to incur indebtedness, including total debt to total asset ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt which we must maintain. Our continued ability to borrow under our $930 million of aggregate credit facilities is subject to compliance with our financial and other covenants. In addition, our failure to comply with such covenants could cause a default under these credit facilities, and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us, or be available only on unattractive terms.
Our degree of leverage could limit our ability to obtain additional financing.
Our degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes. Our senior unsecured debt is currently rated investment grade by the three major rating agencies. However, there can be no assurance we will be able to maintain this rating, and in the event our senior debt is downgraded from its current rating, we would likely incur higher borrowing costs. Our degree of leverage could also make us more vulnerable to a downturn in business or the economy generally.
Further issuances of equity securities may be dilutive to our existing shareholders.
The interests of our existing shareholders could be diluted if we issue additional equity securities to finance future developments, acquisitions, or repay indebtedness. Our Board of Trustees can authorize the issuance of additional securities without shareholder

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approval. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including issuances of common and preferred equity.
An increase in interest rates would increase our interest costs on variable rate debt and could adversely impact our ability to refinance existing debt or dispose of properties in accordance with our strategy.
We currently have, and may incur more, indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will our interest costs, which would adversely affect our cash flow and our ability to pay principal and interest on our debt and our ability to make distributions to our shareholders. Further, rising interest rates could limit our ability to refinance existing debt when it matures.
From time to time, we enter into interest rate swap agreements and other interest rate hedging contracts, including swaps, caps and floors. While these agreements are intended to lessen the impact of rising interest rates on us, they also expose us to the risks that the other parties to the agreements might not perform, or that we could incur significant costs associated with the settlement of the agreements, or that the agreements might be unenforceable and the underlying transactions would fail to qualify as highly-effective cash flow hedges under guidance included in ASC 815 “Derivatives and Hedging.”
In addition, an increase in interest rates could decrease the amounts third parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions.
Property ownership through joint ventures will limit our ability to act exclusively in our interests and may require us to depend on the financial performance of our co-venturers.
From time to time we invest in joint ventures in which we do not hold a controlling interest. These investments involve risks that do not exist with properties in which we own a controlling interest, including the possibility that our partners may, at any time, have business, economic or other objectives that are inconsistent with our objectives. In instances where we lack a controlling interest, our partners may be in a position to require action that is contrary to our objectives. While we seek to negotiate the terms of these joint ventures in a way that secures our ability to act in our best interests, there can be no assurance that those terms will be sufficient to fully protect us against actions contrary to our interests. If the objectives of our partners are inconsistent with ours, we may not in every case be able to act exclusively in our interests.
Additionally, our joint venture partners may experience financial difficulties or change their investment philosophies. This may impair their ability to meet their obligations to the joint venture, such as with respect to providing additional capital, if required. If such a circumstance presented itself we may be required to perform on their behalf, if possible, or suffer a loss of all or a portion of our investment in the joint venture.
We could suffer adverse effects if were to experience security breaches through cyber attacks.
We are subject to risks from security breaches and other significant disruptions of our information technology networks and related systems, which are essential to our business operations. Such breaches and disruptions may occur through cyber attacks or cyber intrusions over the Internet, persons inside our organization or persons with access to systems inside our organization. Certain of our tenants are in the financial and retail industries, which have been particular targets of cyber attacks, and as a result, we may be especially likely to be targeted by cyber attacks. We cannot provide assurance that our activities to maintain the security and integrity of our networks and related systems will be effective. A security breach involving our networks and related systems could disrupt our operations in numerous ways, including by creating difficulties for our tenants that may reflect poorly on us.

We may be adversely affected by trends in the office real estate industry

Telecommuting, flexible work schedules, open workspaces and teleconferencing are becoming more common.  These practice enable businesses to reduce their space requirements.  There is also an increasing trend among some businesses to utilize shared office space and co-working spaces.  A continuation of the movement towards these practices could over time erode the overall demand for office space and, in turn, place downward pressure on occupancy, rental rates and property valuations. 
Risks Related to the Real Estate Industry
Real estate investments are illiquid, and we may not be able to sell our Properties if and when we determine it is appropriate to do so.
Real estate generally cannot be sold quickly. We may not be able to dispose of our Properties promptly in response to economic or other conditions. In addition, provisions of the Internal Revenue Code of 1986, as amended (the "Code"), limit a REIT's ability

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to sell properties in some situations when it may be economically advantageous to do so, thereby adversely affecting returns to shareholders and adversely impacting our ability to meet our obligations to the holders of other securities.
We may experience economic harm if any damage to our Properties is not covered by insurance.
We believe all of our Properties are adequately insured with carriers that are adequately capitalized. However, we cannot guarantee that the limits of our current policies will be sufficient in the event of a catastrophe to our Properties or that carriers will be able to honor their obligations. Our existing property and liability policies expire during 2018. We cannot guarantee that we will be able to renew or duplicate our current coverages in adequate amounts or at reasonable prices.
We may suffer losses that are not covered under our comprehensive liability, fire, extended coverage and rental loss insurance policies. For example, we may not be insured for losses resulting from acts of war, certain acts of terrorism, or from certain liabilities. If an uninsured loss or a loss in excess of insured limits should occur, we would nevertheless remain liable for the loss, which could adversely affect cash flow from operations.
Potential liability for environmental contamination could result in substantial costs.
Under federal, state and local environmental laws, ordinances and regulations, we may be required to investigate and clean up the effects of releases of hazardous or toxic substances or petroleum products at our Properties simply because of our current or past ownership or operation of the real estate. If unidentified environmental problems arise, we may have to make substantial payments which could adversely affect our cash flow and our ability to make distributions to our shareholders because:
as owner or operator, we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination
the law typically imposes clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination
even if more than one person may be responsible for the contamination, each person who shares legal liability under the environmental laws may be held responsible for all of the clean-up costs
governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs
These costs could be substantial. The presence of hazardous or toxic substances or petroleum products or the failure to properly remediate contamination may materially and adversely affect our ability to borrow against, sell or rent an affected property. In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination. Changes in laws increasing the potential liability for environmental conditions existing at our Properties may result in significant unanticipated expenditures.
Substantially all of the Company's properties and land were subject to environmental assessments obtained in contemplation of their acquisition by the Company or obtained by predecessor owners prior to the sale of the property or land to the Company. These assessments generally include a visual inspection of the properties and the surrounding areas, an examination of current and historical uses of the properties and the surrounding areas and a review of relevant state, federal and historical documents, but do not involve invasive techniques such as soil and ground water sampling. Where appropriate, on a property-by-property basis, our practice is to have these consultants conduct additional testing, including sampling for asbestos, for lead in drinking water, for soil contamination where underground storage tanks are or were located or where other past site usages create a potential environmental problem, and for contamination in groundwater. Even though these environmental assessments are conducted, there is still the risk that:
the environmental assessments and updates will not identify all potential environmental liabilities
a prior owner created a material environmental condition that is not known to us or the independent consultants preparing the assessments
new environmental liabilities have developed since the environmental assessments were conducted
future uses or conditions such as changes in applicable environmental laws and regulations could result in environmental liability for us
While we test indoor air quality on a regular basis and have an ongoing maintenance program in place to address this aspect of property operations, inquiries about indoor air quality may necessitate special investigation and, depending on the results, remediation. Indoor air quality issues can stem from inadequate ventilation, chemical contaminants from indoor or outdoor sources, pollen, viruses and bacteria. Indoor exposure to chemical or biological contaminants above certain levels can be alleged to be connected to allergic reactions or other health effects and symptoms in susceptible individuals. If these conditions were to occur at one of our Properties, we may need to undertake a targeted remediation program, including without limitation, steps to increase

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indoor ventilation rates and eliminate sources of contaminants. Such remediation programs could be costly, necessitate the temporary relocation of some or all of the Property's tenants or require rehabilitation of the affected Property.
Our Properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our Properties could require us to undertake a costly remediation program to contain or remove the mold from the affected Property. In addition, the presence of significant mold could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.
Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make expenditures that adversely impact our operating results.
All of our Properties are required to comply with the Americans with Disabilities Act ("ADA"). The ADA generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers, and non-compliance could result in imposition of fines by the United States government or an award of damages to private litigants, or both. Expenditures related to complying with the provisions of the ADA could adversely affect our results of operations and financial condition and our ability to make distributions to shareholders. In addition, we are required to operate our Properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our Properties. We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to shareholders.
Terrorist attacks and other acts of violence or war may adversely impact our operating results and may affect markets on which our securities are traded.
Terrorist attacks against our Properties, or against the United States or United Kingdom or the interests of the United States or United Kingdom generally, may negatively affect our operations and investments in our securities. Attacks or armed conflicts could have a direct adverse impact on our Properties or operations through damage, destruction, loss or increased security costs. Any terrorism insurance that we obtain may be insufficient to cover the loss for damages to our Properties as a result of terrorist attacks.
Furthermore, any terrorist attacks or armed conflicts could result in increased volatility in or damage to financial markets in the United States or the United Kingdom or the worldwide economy. Adverse economic conditions could affect the ability of our tenants to pay rent, which could have an adverse impact on our operating results.
Risks Related to Our Organization and Structure
We have elected REIT status under the federal tax laws and could suffer adverse consequences if we fail to qualify as a REIT.
We have elected REIT status under federal tax laws and have taken the steps known to us to perfect that status, but we cannot be certain that we qualify or that we will remain qualified. Qualification as a REIT involves the application of highly technical and complex provisions of the Code, as to which there are only limited judicial or administrative interpretations. The complexity of these provisions and of the related regulations is greater in the case of a REIT that holds its assets in partnership form, as we do. Moreover, no assurance can be given that new tax laws will not significantly affect our qualification as a REIT or the federal income tax consequences of such qualification. New laws could be applied retroactively, which means that past operations could be found to be in violation, which would have a negative effect on the business.
If we fail to qualify as a REIT in any taxable year, the distributions to shareholders would not be deductible when computing taxable income. If this happened, we would be subject to federal income tax on our taxable income at regular corporate rates. Also, we could be prevented from qualifying as a REIT for the four years following the year in which we were disqualified. Further, if we requalified as a REIT after failing to qualify, we might have to pay the full corporate-level tax on any unrealized gain in our assets during the period we were not qualified as a REIT. We would then have to distribute to our shareholders the earnings we accumulated while we were not qualified as a REIT. These additional taxes would reduce our funds available for distribution to our shareholders. In addition, while we were disqualified as a REIT, we would not be required by the Code to make distributions to our shareholders. A failure by the Company to qualify as a REIT and the resulting requirement to pay taxes and interest (and

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perhaps penalties) would cause us to default under various agreements to which we are a party, including under our credit facility, and would have a material adverse effect on our business, prospects, results of operations, earnings, financial condition and our ability to make distributions to shareholders.
Future economic, market, legal, tax or other considerations may lead our Board of Trustees to authorize the revocation of our election to qualify as a REIT. A revocation of our REIT status would require the consent of the holders of a majority of the voting interests of all of our outstanding Common Shares.
Certain trustees and officers of the Trust may not have the same interests as shareholders as to certain tax laws.
Certain trustees and officers of the Trust own Common Units. These units may be exchanged for our Common Shares. The trustees and officers who own those units and have not yet exchanged them for our Common Shares may suffer different and more adverse tax consequences than holders of our Common Shares suffer in certain situations:
when certain of our Properties are sold
when debt on those Properties is refinanced
if we are involved in a tender offer or merger
Because these officers own units and face different consequences than shareholders do, the Trust and those trustees and officers may have different objectives as to these transactions than shareholders do.
Certain aspects of our organization could have the effect of restricting or preventing a change of control of our Company, which could have an adverse effect on the price of our shares.
Our charter contains an ownership limit on shares. To qualify as a REIT, five or fewer individuals cannot own, directly or indirectly, more than 50% in value of the outstanding shares of beneficial interest. To this end, our Declaration of Trust, among other things, generally prohibits any holder of the Trust's shares from owning more than 5% of the Trust's outstanding shares of beneficial interest, unless that holder gets the consent from our Board of Trustees. This limitation could prevent the acquisition of control of the Company by a third party without the consent from our Board of Trustees.
We can issue preferred shares. Our Declaration of Trust authorizes our Board of Trustees to establish the preferences and rights of any shares issued. The issuance of preferred shares could have the effect of delaying, making more difficult or preventing a change of control of the Company, even if a change in control were in the shareholder's interest.
There are limitations on acquisition of and changes in control pursuant to, and fiduciary protections of the Board under Maryland law. The Maryland General Corporation Law ("MGCL") contains provisions which are applicable to the Trust as if the Trust were a corporation. Among these provisions is a section, referred to as the "control share acquisition statute," which eliminates the voting rights of shares acquired in quantities so as to constitute "control shares," as defined under the MGCL. The MGCL also contains provisions applicable to us that are referred to as the "business combination statute," which would generally limit business combinations between the Company and any 10% owners of the Trust's shares or any affiliate thereof. Further, Maryland law provides broad discretion to the Board with respect to its fiduciary duties in considering a change in control of our Company, including that the Board is subject to no greater level of scrutiny in considering a change in control transaction than with respect to any other act by the Board. Finally, the "unsolicited takeovers" provisions of the MGCL permit the Board, without shareholder approval and regardless of what is currently provided in our Declaration of Trust or By-Laws, to implement takeover defenses that our Company does not yet have, including permitting only the Board to fix the size of the Board and permitting only the Board to fill a vacancy on the Board. All of these provisions may have the effect of inhibiting a third party from making an acquisition proposal for our Company or of delaying, deferring or preventing a change in control of the Company under circumstances that otherwise could provide the holders of Common Shares with the opportunity to realize a premium over the then current market price.
Various factors out of our control could hurt the market value of our publicly traded securities.
The value of our publicly traded securities depends on various market conditions, which may change from time to time. In addition to general economic and market conditions and our particular financial condition and performance, the value of our publicly traded securities could be affected by, among other things, the extent of institutional investor interest in us and the market's opinion of REITs in general and, in particular, REITs that own and operate properties similar to ours.
The market value of the equity securities of a REIT may be based primarily upon the market's perception of the REIT's growth potential and its current and future cash distributions, and may be secondarily based upon factors such as the real estate market value of the underlying assets. The failure to meet the market's expectations with regard to future earnings and cash distributions likely would adversely affect the market price of publicly traded securities. Our payment of future dividends will be at the discretion

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of our Board of Trustees and will depend on numerous factors including our cash flow, financial condition and capital requirements, annual distribution requirements under the REIT provisions of the Code, the general economic environment and such other factors as our Board of Trustees deems relevant.
Rising market interest rates could make an investment in publicly traded securities less attractive. If market interest rates increase, purchasers of publicly traded securities may demand a higher annual yield on the price they pay for their securities. This could adversely affect the market price of publicly traded securities.

On December 22, 2017, H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (the “Act”), was signed into law by President Donald J. Trump, making significant changes to the Internal Revenue Code of 1986, as amended (the "Code").

Relevant changes include, but are not limited to, the following:

Reduces the federal corporate income tax rate from 35% to 21% (including with respect to our taxable REIT subsidiaries (“TRSs”)) for tax years beginning after December 31, 2017;
Restricts the deductibility of interest expense by businesses (generally, to 30% of the business’ adjusted taxable income) except, among others, “real property businesses” electing out of such restriction; and while generally, we expect our business to qualify as a “real property business”, we have not yet determined whether the Company and/or our TRSs can and/or will make such an election going forward;
Reduces the rate of U.S. federal withholding tax on distributions made to non-U.S. shareholders by a REIT that are attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;
Generally, reduces the highest marginal income tax rate for individuals to 37% from 39.6%;
Generally, allows a deduction for individuals equal to 20% of ordinary dividends distributed by a REIT (excluding capital gain dividends and qualified dividend income), generally resulting in a maximum effective federal income tax rate applicable to such dividends of 29.6% as compared to 37% prior to the enactment of this provision of the Act; and
Limits certain deductions for individuals, including deductions for state and local income taxes, and eliminates deductions for miscellaneous itemized deductions (including certain investment expenses).

Under the Act, many of the provisions, in particular those affecting individual taxpayers, expire at the end of 2025.  While many of the provisions contained in the Act generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Code may have unanticipated effects on the Company and/or our shareholders.  Moreover, Congressional leaders have recognized that the process of adopting extensive tax legislation in a short amount of time may have led to a need to amend or supplement the legislation which can only be accomplished through additional tax legislation.  At this point, it is unclear whether Congress will address these issues or when the Treasury Department (“Treasury”) and/or the Internal Revenue Service (“IRS”) will issue administrative guidance.

As a result, the Company’s taxable income and/or the amount of distributions to our shareholders required in order to maintain our REIT status, and our relative tax advantage as a REIT, may significantly change and/or be adversely impacted over time.  Further, the Act is a complex set of revisions to the current U.S. federal income tax laws which have the potential to impact certain classes of taxpayers and/or industries differently, and will require subsequent and substantial rulemaking, guidance and interpretation in a number of areas by both the Treasury and the IRS.  The long-term impact of the Act on the overall economy, government revenues, our tenants, the Company and the overall real estate industry cannot be reasonably predicted at this early stage of the new law’s implementation.  As a result, we cannot reasonably provide any assurance at this time that the Act will not adversely impact the Company, our shareholders and/or the price of our securities moving forward.
We do not have a shareholder rights plan but are not precluded from adopting one.
Although we do not have a shareholder rights plan, we are not prohibited from adopting, without shareholder approval, a shareholder rights plan that may discourage any potential acquirer from acquiring more than a specific percentage of our outstanding Common Shares since, upon this type of acquisition without approval of our Board of Trustees, all other common shareholders would have the right to purchase a specified amount of Common Shares at a substantial discount from market price.
Transactions by the Trust or the Operating Partnership could adversely affect debt holders.
Except with respect to several covenants limiting the incurrence of indebtedness and a covenant requiring the Operating Partnership to maintain a certain unencumbered total asset value, our indentures do not contain any additional provisions that would protect holders of the Operating Partnership's debt securities in the event of (i) a highly leveraged transaction involving the Operating Partnership, (ii) a change of control or (iii) certain reorganizations, restructurings, mergers or similar transactions involving the Operating Partnership or the Trust.

18


ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Wholly Owned Properties in Operation, as of December 31, 2017, consisted of 461 industrial and 48 office properties. Single tenants occupy 197 Wholly Owned Properties in Operation. These tenants generally require a reduced level of service in connection with the operation or maintenance of these properties. The remaining 312 Wholly Owned Properties in Operation are multi-tenant properties for which the Company renders a range of building, operating and maintenance services.
As of December 31, 2017, the industrial Wholly Owned Properties in Operation were 97.1% leased. The average building size for the industrial Wholly Owned Properties in Operation was approximately 181,000 square feet. As of December 31, 2017, the office Wholly Owned Properties in Operation were 94.4% leased. The average building size for the office Wholly Owned Properties in Operation was approximately 85,000 square feet.
The JV Properties in Operation, as of December 31, 2017, consisted of 47 industrial and 18 office properties. Single tenants occupy 27 JV Properties in Operation. These tenants generally require a reduced level of service in connection with the operation or maintenance of these properties. The remaining 38 JV Properties in Operation are multi-tenant properties for which the Company renders a range of building, operating and maintenance services.
As of December 31, 2017, the industrial JV Properties in Operation were 96.3% leased. The average building size for the industrial JV Properties in Operation was approximately 234,000 square feet. As of December 31, 2017, the office JV Properties in Operation were 97.1% leased. The average building size for the office JV Properties in Operation was approximately 182,000 square feet.
As of December 31, 2017, the industrial Properties in Operation were 97.0% leased. The average building size for the industrial Properties in Operation was approximately 186,000 square feet. As of December 31, 2017, the office Properties in Operation were 95.6% leased. The average building size for the office Properties in Operation was approximately 112,000 square feet.
A complete listing of the Wholly Owned Properties in Operation appears as Schedule III to the financial statements of the Company included in this Annual Report on Form 10-K. The table below sets forth certain information on the Company's Properties in Operation as of December 31, 2017 (in thousands, except percentages).

19


 
 
Type
 
Net Rent(1)
 
Straight Line Rent and Operating Expense Reimbursement (2)
 
Square Feet
 
% Leased
Wholly Owned Properties in Operation
 
 
 
 
 
 
Carolinas/Richmond
 
Industrial
 
$
58,306

 
$
74,988

 
13,052

 
95.8
%
 
 
Office
 

 

 

 

 
 
Total
 
58,306

 
74,988

 
13,052

 
95.8
%
 
 
 
 
 
 
 
 
 
 
 
Chicago/Minneapolis
 
Industrial
 
43,611

 
61,247

 
9,757

 
97.6
%
 
 
Office
 
1,463

 
3,855

 
345

 
100.0
%
 
 
Total
 
45,074

 
65,102

 
10,102

 
97.7
%
 
 
 
 
 
 
 
 
 
 
 
Florida
 
Industrial
 
43,286

 
59,407

 
6,818

 
97.0
%
 
 
Office
 
2,090

 
2,548

 
151

 
100.0
%
 
 
Total
 
45,376

 
61,955

 
6,969

 
97.0
%
 
 
 
 
 
 
 
 
 
 
 
Houston
 
Industrial
 
39,608

 
60,085

 
7,648

 
92.7
%
 
 
Office
 

 

 

 
%
 
 
Total
 
39,608

 
60,085

 
7,648

 
92.7
%
 
 
 
 
 
 
 
 
 
 
 
Lehigh/Central PA
 
Industrial
 
116,764

 
147,413

 
24,236

 
100.0
%
 
 
Office
 

 

 

 

 
 
Total
 
116,764

 
147,413

 
24,236

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
Philadelphia
 
Industrial
 
8,768

 
11,923

 
626

 
100.0
%
 
 
Office
 
25,184

 
34,902

 
884

 
96.4
%
 
 
Total
 
33,952

 
46,825

 
1,510

 
97.9
%
 
 
 
 
 
 
 
 
 
 
 
SE Pennsylvania
 
Industrial
 
6,756

 
8,716

 
553

 
97.4
%
 
 
Office
 
31,471

 
42,573

 
1,848

 
93.4
%
 
 
Total
 
38,227

 
51,289

 
2,401

 
94.3
%
 
 
 
 
 
 


 
 
 
 
United Kingdom
 
Industrial
 
10,586

 
11,571

 
1,428

 
100.0
%
 
 
Office
 
2,650

 
3,418

 
138

 
78.2
%
 
 
Total
 
13,236

 
14,989

 
1,566

 
98.7
%
 
 
 
 
 
 
 
 
 
 
 
Other
 
Industrial
 
84,369

 
112,280

 
19,102

 
95.7
%
 
 
Office
 
12,063

 
17,418

 
716

 
92.7
%
 
 
Total
 
96,432

 
129,698

 
19,818

 
95.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TOTAL
 
Industrial
 
412,054

 
547,630

 
83,220

 
97.1
%
 
 
Office
 
74,921

 
104,714

 
4,082

 
94.4
%
 
 
Total
 
$
486,975

 
$
652,344

 
87,302

 
97.0
%
 
 
 
 
 
 
 
 
 
 
 
Joint Venture Properties in Operation (3)
 
 
 
 
 
 
 
 
Industrial
 
$
47,677

 
$
66,462

 
11,019

 
96.3
%
 
 
Office
 
96,936

 
154,167

 
3,277

 
97.1
%
 
 
Total
 
$
144,613

 
$
220,629

 
14,296

 
96.5
%
 
 
 
 
 
 
 
 
 
 
 

(1)
Net rent represents the contractual rent per square foot multiplied by the tenant's square feet leased at December 31, 2017 for tenants in occupancy. As of December 31, 2017, average net rent per square foot for the Wholly Owned Properties in Operation was $5.75 and for the Joint Venture Properties in Operation was $10.48. Net rent does not include the tenant's obligation to pay property operating expenses and real estate taxes. If a tenant at December 31, 2017 was within a free rent period its rent would equal zero for the purposes of this metric.
(2)
Straight line rent and operating expense reimbursement represents the straight line rent including operating expense recoveries per square foot multiplied by the tenant's square feet leased at December 31, 2017 for tenants in occupancy. As of December 31, 2017, average straight line rent and operating expense reimbursement per square foot for the Wholly Owned Properties in Operation was $7.70 and for the Joint Venture Properties in Operation was $15.99.
(3)
Joint Venture Properties in Operation represent the 65 properties owned by unconsolidated joint ventures in which the Company has an interest.

20


The expiring number of tenants, square feet and annual rent by year for the Properties in Operation as of December 31, 2017 are as follows (in thousands except number of tenants and % of annual rent):
 
 
Industrial
 
Office
 
Total
 
 
Number of Tenants
 
Square Feet
 
Net Rent (1)
 
% of Annual Rent
 
Number of Tenants
 
Square Feet
 
Net Rent (1)
 
% of Annual Rent
 
Number of Tenants
 
Square Feet
 
Net Rent (1)
 
% of Annual Rent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholly Owned Properties in Operation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
187

 
8,441

 
$
41,135

 
8.8
%
 
17

 
286

 
$
5,132

 
5.6
%
 
204

 
8,727

 
$
46,267

 
8.3
%
2019
 
205

 
11,867

 
63,910

 
13.7
%
 
29

 
237

 
5,223

 
5.7
%
 
234

 
12,104

 
69,133

 
12.4
%
2020
 
201

 
14,568

 
79,815

 
17.1
%
 
24

 
330

 
7,674

 
8.4
%
 
225

 
14,898

 
87,489

 
15.6
%
2021
 
152

 
8,146

 
46,427

 
9.9
%
 
12

 
177

 
3,496

 
3.8
%
 
164

 
8,323

 
49,923

 
8.9
%
2022
 
173

 
13,018

 
79,525

 
17.0
%
 
11

 
455

 
8,534

 
9.3
%
 
184

 
13,473

 
88,059

 
15.7
%
2023
 
70

 
3,796

 
23,660

 
5.1
%
 
12

 
420

 
9,728

 
10.6
%
 
82

 
4,216

 
33,388

 
6.0
%
2024
 
36

 
5,018

 
28,186

 
6.0
%
 
7

 
273

 
5,811

 
6.4
%
 
43

 
5,291

 
33,997

 
6.1
%
2025
 
29

 
3,391

 
18,801

 
4.0
%
 
1

 
14

 
230

 
0.3
%
 
30

 
3,405

 
19,031

 
3.4
%
2026
 
24

 
2,790

 
18,298

 
3.9
%
 
8

 
827

 
14,595

 
16.0
%
 
32

 
3,617

 
32,893

 
5.9
%
2027
 
26

 
3,667

 
23,540

 
5.0
%
 
4

 
64

 
1,216

 
1.3
%
 
30

 
3,731

 
24,756

 
4.4
%
Thereafter
 
22

 
6,122

 
44,495

 
9.5
%
 
16

 
772

 
29,718

 
32.6
%
 
38

 
6,894

 
74,213

 
13.3
%
Total
 
1,125

 
80,824

 
$
467,792

 
100.0
%
 
141

 
3,855

 
$
91,357

 
100.0
%
 
1,266

 
84,679

 
$
559,149

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Joint Venture Properties in Operation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
15

 
1,971

 
$
8,535

 
16.0
%
 
18

 
422

 
$
13,379

 
9.7
%
 
33

 
2,393

 
$
21,914

 
11.4
%
2019
 
7

 
783

 
4,189

 
7.8
%
 
14

 
72

 
1,982

 
1.4
%
 
21

 
855

 
6,171

 
3.2
%
2020
 
10

 
2,215

 
9,215

 
17.2
%
 
6

 
50

 
1,388

 
1.0
%
 
16

 
2,265

 
10,603

 
5.5
%
2021
 
6

 
526

 
2,853

 
5.3
%
 
11

 
81

 
2,911

 
2.1
%
 
17

 
607

 
5,764

 
3.0
%
2022
 
17

 
2,134

 
10,219

 
19.1
%
 
13

 
117

 
3,524

 
2.5
%
 
30

 
2,251

 
13,743

 
7.2
%
2023
 
4

 
585

 
3,363

 
6.3
%
 
11

 
1,227

 
48,466

 
35.0
%
 
15

 
1,812

 
51,829

 
27.0
%
2024
 
6

 
527

 
3,134

 
5.9
%
 
4

 
21

 
867

 
0.6
%
 
10

 
548

 
4,001

 
2.1
%
2025
 

 

 

 
%
 
2

 
22

 
1,092

 
0.8
%
 
2

 
22

 
1,092

 
0.6
%
2026
 
1

 
614

 
3,987

 
7.5
%
 
2

 
15

 
533

 
0.4
%
 
3

 
629

 
4,520

 
2.4
%
2027
 
2

 
241

 
1,797

 
3.4
%
 
2

 
6

 
183

 
0.1
%
 
4

 
247

 
1,980

 
1.0
%
Thereafter
 
5

 
1,019

 
6,189

 
11.5
%
 
11

 
1,149

 
64,000

 
46.4
%
 
16

 
2,168

 
70,189

 
36.6
%
Total
 
73

 
10,615

 
$
53,481

 
100.0
%
 
94

 
3,182

 
$
138,325

 
100.0
%
 
167

 
13,797

 
$
191,806

 
100.0
%

(1)
Net rent represents the contractual rent per square foot multiplied by the tenants' square feet leased on the date of lease expiration for the tenants in occupancy on December 31, 2017. Net rent does not include the tenant's obligation to pay property operating expenses and real estate taxes.

21


The table below highlights, for the Properties in Operation, the Company's top ten industrial tenants and top ten office tenants as of December 31, 2017. The table reflects, for the tenants in the JV Properties in Operation, the Company's ownership percentage of the respective joint venture.
 
 
Percentage of
Top 10 Industrial Tenants
 
Annual Rent
Amazon.com
 
2.1
%
Home Depot USA, Inc.
 
1.7
%
The Proctor & Gamble Distributing LLC
 
1.4
%
XPO Last Mile, Inc.
 
1.3
%
Ryder Integrated Logistics, Inc.
 
1.3
%
Wakefern Food Corp.
 
1.2
%
Kellogg Sales Company
 
1.1
%
Geodis Logistics LLC
 
1.1
%
Broder Bros., Co.
 
0.9
%
The Clorox Company
 
0.9
%
 
 
13.0
%
 
 
 
 
 
Percentage of
Top 10 Office Tenants
 
Annual Rent
The Vanguard Group, Inc.
 
4.2
%
Comcast Corporation
 
2.7
%
GlaxoSmithKline LLC
 
1.5
%
United States of America
 
1.2
%
The Pennsylvania Hospital
 
0.8
%
Yellow Book USA, Inc.
 
0.7
%
Deutsche Post DHL Group
 
0.6
%
Centene Management Company, LLC
 
0.5
%
Franklin Square Holdings, LP
 
0.5
%
Thomas Jefferson University Hospitals
 
0.4
%
 
 
13.1
%
The table below details the vacancy activity for the Properties in Operation during the year ended December 31, 2017:
 
Year Ended
 
December 31, 2017
 
Square Feet
 
Wholly Owned Properties in Operation
 
JV Properties in Operation
 
Properties in Operation
Vacancy Activity
 
 
 
 
 
Vacancy at January 1, 2017
3,043,270

 
535,259

 
3,578,529

Acquisitions
46

 

 
46

Completed development
583,334

 

 
583,334

Dispositions
(293,112
)
 

 
(293,112
)
Expirations
18,600,917

 
1,863,092

 
20,464,009

Property structural changes/other
(6,377
)
 
(588
)
 
(6,965
)
Leasing activity
(19,305,466
)
 
(1,896,219
)
 
(21,201,685
)
Vacancy at December 31, 2017
2,622,612

 
501,544

 
3,124,156

 
 
 
 
 
 
Lease transaction costs per square foot (1)
$
2.71

 
$
3.53

 
$
2.78

(1)
Transaction costs include tenant improvement and lease transaction costs.

ITEM 3. LEGAL PROCEEDINGS
The Company was not a party to any material litigation as of December 31, 2017.

22



ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

23


PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND RELATED ISSUER PURCHASES OF EQUITY SECURITIES
The Common Shares are traded on the New York Stock Exchange under the symbol "LPT." There is no established public trading market for the Common Units. The following table sets forth, for the calendar quarters indicated, the high and low closing prices of the Common Shares on the New York Stock Exchange, and the dividends declared per Common Share for such calendar quarter.
 
 
High
 
Low
 
Dividends Declared Per Common Share
2017
 
 
 
 
 
 
Fourth Quarter
 
$
45.29

 
$
41.24

 
$
0.40

Third Quarter
 
43.35

 
40.36

 
0.40

Second Quarter
 
42.48

 
38.73

 
0.40

First Quarter
 
40.85

 
37.56

 
0.40

2016
 
 
 
 
 
 
Fourth Quarter
 
$
40.66

 
$
36.37

 
$
0.475

Third Quarter
 
42.25

 
38.95

 
0.475

Second Quarter
 
39.72

 
33.12

 
0.475

First Quarter
 
33.46

 
27.30

 
0.475

As of February 23, 2018, the Common Shares were held by 857 holders of record. Since its initial public offering in 1994, the Company has paid regular and uninterrupted quarterly dividends.
In February 2018, the Board of Trustees declared a dividend of $0.40 per share to be paid in April 2018. 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 Code, the general economic environment and such other factors as the Board of Trustees deems relevant. The Company’s Board of Trustees reviews the dividend quarterly, and there can be no assurance about the amount of future quarterly distribution payments.

24


The following line graph compares the cumulative total shareholder return on Common Shares for the period beginning December 31, 2012 and ended December 31, 2017 with the cumulative total return on the Standard and Poor's 500 Stock Index ("S&P 500") and the NAREIT Equity REIT Total Return Index ("NAREIT Index") over the same period. Total return values for the S&P 500, the NAREIT Index and the Company's Common Shares were calculated based on cumulative total return assuming the investment of $100 in the NAREIT Index, the S&P 500 and the Company's Common Shares on December 31, 2012, and assuming reinvestment of dividends in all cases.

mdachart2017.jpg

The performance graph above is being furnished as part of this Annual Report solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish the Company’s stockholders with such information and, therefore, is not deemed to be filed, or incorporated by reference in any filing, by the Company or the Operating Partnership under the Securities Act of 1933 or the Securities Exchange Act of 1934.


25


ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth Selected Financial Data for the Trust and the Operating Partnership as of and for the five years ended December 31, 2017. 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 years have been reclassified to conform to current-year presentation.
Operating Data
 
YEAR ENDED DECEMBER 31,
(In thousands, except per share data)
 
2017
 
2016
 
2015
 
2014
 
2013
Total operating revenue
 
$
719,778

 
$
710,698

 
$
773,960

 
$
756,620

 
$
610,529

Income from continuing operations
 
$
271,066

 
$
354,154

 
$
235,359

 
$
162,208

 
$
85,186

Income from discontinued operations
 
$
18,979

 
$
11,991

 
$
10,565

 
$
62,263

 
$
134,833

Net income
 
$
290,045

 
$
366,145

 
$
245,924

 
$
224,471

 
$
220,019

Basic income per common share/unit:
 
 
 
 
 
 
 
 
 
 
  Income from continuing operations
 
$
1.79

 
$
2.36

 
$
1.55

 
$
1.07

 
$
0.60

  Income from discontinued operations
 
$
0.13

 
$
0.08

 
$
0.07

 
$
0.41

 
$
1.01

  Income available to common shareholders/unitholders
 
$
1.92

 
$
2.44

 
$
1.62

 
$
1.48

 
$
1.61

Diluted income per common share/unit:
 
 
 
 
 
 
 
 
 
 
  Income from continuing operations
 
$
1.78

 
$
2.35

 
$
1.54

 
$
1.07

 
$
0.60

  Income from discontinued operations
 
$
0.13

 
$
0.08

 
$
0.07

 
$
0.41

 
$
1.00

  Income available to common shareholders/unitholders
 
$
1.91

 
$
2.43

 
$
1.61

 
$
1.48

 
$
1.60

Dividends paid per common share
 
$
1.675

 
$
1.90

 
$
1.90

 
$
1.90

 
$
1.90

Trust - weighted average number of shares outstanding - basic (1)
 
146,742

 
146,204

 
148,243

 
147,216

 
130,180

Trust - weighted average number of shares outstanding - diluted (2)
 
147,541

 
146,889

 
148,843

 
147,886

 
130,909

Operating Partnership - weighted average number of units outstanding - basic (1)
 
150,270

 
149,740

 
151,783

 
150,770

 
133,858

Operating Partnership - weighted average number of units outstanding - diluted (2)
 
151,069

 
150,425

 
152,383

 
151,440

 
134,587

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data
 
DECEMBER 31,
(In thousands)
 
2017
 
2016
 
2015
 
2014
 
2013
Net real estate
 
$
5,365,870

 
$
5,114,990

 
$
5,714,502

 
$
5,743,573

 
$
5,527,393

Total assets
 
$
6,439,757

 
$
5,992,813

 
$
6,557,629

 
$
6,612,014

 
$
6,759,062

Total indebtedness
 
$
2,909,545

 
$
2,556,936

 
$
3,147,016

 
$
3,149,873

 
$
3,237,021

Liberty Property Trust shareholders' equity
 
$
3,087,358

 
$
3,003,391

 
$
2,972,581

 
$
3,046,961

 
$
3,056,059

Owners' equity (Liberty Property Limited Partnership)
 
$
3,148,366

 
$
3,062,923

 
$
3,030,254

 
$
3,106,312

 
$
3,117,062

 
 
 
 
 
 
 
 
 
 
 
Other Data
 
YEAR ENDED DECEMBER 31,
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2014
 
2013
Net cash provided by operating activities
 
$
336,631

 
$
341,062

 
$
379,121

 
$
311,140

 
$
340,509

Net cash (used in) provided by investing activities
 
$
(465,652
)
 
$
614,927

 
$
(89,660
)
 
$
(106,337
)
 
$
(1,197,914
)
Net cash provided by (used in) financing activities
 
$
96,231

 
$
(939,507
)
 
$
(331,860
)
 
$
(326,843
)
 
$
999,619

NAREIT Funds from operations available to common shareholders - diluted (3)
 
$
390,644

 
$
356,895

 
$
410,993

 
$
375,678

 
$
335,535

Total leaseable square footage of Wholly Owned Properties in Operation at end of period (in thousands)
 
87,302

 
86,037

 
89,718

 
91,258

 
89,528

Total leaseable square footage of JV Properties in Operation at end of period (in thousands)
 
14,296

 
13,060

 
14,018

 
14,297

 
13,491

Wholly Owned Properties in Operation at end of period
 
509

 
505

 
610

 
669

 
712

JV Properties in Operation at end of period
 
65

 
63

 
81

 
83

 
79

Wholly Owned Properties in Operation percentage leased at end of period
 
97
%
 
96
%
 
94
%
 
93
%
 
91
%
JV Properties in Operation percentage leased at end of period
 
97
%
 
96
%
 
93
%
 
92
%
 
92
%

(1)
Basic weighted average number of shares includes vested Common Shares (Liberty Property Trust) or Common Units (Liberty Property Limited Partnership) outstanding during the year.

26


(2)
Diluted weighted average number of shares includes the vested and unvested Common Shares (Liberty Property Trust) or Common Units (Liberty Property Limited Partnership) outstanding during the year as well as the dilutive effect of outstanding options.
(3)
The National Association of Real Estate Investment Trusts ("NAREIT") has issued a standard definition for Funds from operations (as defined below). The Securities and Exchange Commission has agreed to the disclosure of this non-US GAAP financial measure on a per share basis in its Release No. 34-47226, Conditions for Use of Non-US GAAP Financial Measures. The Company believes that the calculation of NAREIT Funds from operations is helpful to investors and management as it is a measure of the Company's operating performance that excludes depreciation and amortization and gains and losses from property dispositions. As a result, year over year comparison of NAREIT Funds from operations reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, providing perspective not immediately apparent from net income. In addition, management believes that NAREIT Funds from operations provides useful information to the investment community about the Company's financial performance when compared to other REITs since NAREIT Funds from operations is generally recognized as the standard for reporting the operating performance of a REIT. NAREIT Funds from operations available to common shareholders is defined by NAREIT as net income (computed in accordance with generally accepted accounting principles ("US GAAP")), excluding gains (or losses) from sales of property and impairment - real estate assets, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. NAREIT Funds from operations available to common shareholders does not represent net income or cash flows from operations as defined by US GAAP and does not necessarily indicate that cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. NAREIT Funds from operations available to common shareholders also does not represent cash flows generated from operating, investing or financing activities as defined by US GAAP. A reconciliation of NAREIT Funds from operations to net income may be found in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.

27



Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Liberty Property Trust (the “Trust”) is a self-administered and self-managed Maryland real estate investment trust (“REIT”). Substantially all of the Trust’s assets are owned directly or indirectly, and substantially all of the Trust’s operations are conducted directly or indirectly, by its subsidiary, Liberty Property Limited Partnership, a Pennsylvania limited partnership (the “Operating Partnership” and, collectively with the Trust and their consolidated subsidiaries, the “Company”).
The Company owns and operates industrial properties nationally and owns and operates office properties in a focused group of office markets. Additionally, the Company owns certain assets in the United Kingdom.
As of December 31, 2017, the Company owned and operated 461 industrial and 48 office properties (the “Wholly Owned Properties in Operation”) totaling 87.3 million square feet. In addition, as of December 31, 2017, the Company owned 20 properties under development, which when completed are expected to comprise 5.6 million square feet (the “Wholly Owned Properties under Development”). The Company owned 10 properties held for redevelopment (the "Wholly Owned Properties held for Redevelopment") totaling 1.0 million square feet and 1,563 acres of developable land, substantially all of which is zoned for commercial use. Additionally, as of December 31, 2017, the Company had an ownership interest, through unconsolidated joint ventures, in 47 industrial and 18 office properties totaling 14.3 million square feet (the "JV Properties in Operation" and, together with the Wholly Owned Properties in Operation, the "Properties in Operation"), three properties under development, which when completed are expected to comprise 552,000 square feet and a 217-room Four Seasons Hotel (the "JV Properties under Development" and, collectively with the Wholly Owned Properties under Development, the "Properties under Development"). One property held for redevelopment, totaling 48,000 square feet (the "JV Property Held for Redevelopment" and, collectively with the Wholly Owned Properties held for Redevelopment, the "Properties Held for Redevelopment" and, collectively with the Properties in Operation and the Properties under Development, the "Properties"), and 347 acres of developable land, substantially all of which is zoned for commercial use.
The Company focuses on creating value for shareholders and increasing profitability and cash flow. With respect to its Properties in Operation, the Company endeavors to maintain high occupancy levels while maximizing rental rates and controlling costs. The Company pursues development opportunities that it believes will create value and yield acceptable returns. The Company also acquires properties that it believes will create long-term value, and disposes of properties that no longer fit within the Company’s strategic objectives or in situations where it can optimize cash proceeds. The Company’s strategy with respect to product and market selection favors industrial properties and markets with strong demographic and economic fundamentals, and to a lesser extent, metro-office properties. The Company also believes that long-term trends generally indicate potential erosion in the value of certain suburban office properties. Accordingly, the Company announced a strategic shift whereby it plans to divest of its remaining suburban office properties, and to reinvest those proceeds in acquisitions in targeted industrial markets and new development. The Company anticipates that this strategy will yield benefits over time, including a higher rate of rental growth and a lower level of lease transaction costs and other capital costs for industrial properties as opposed to suburban office properties. The Company believes that this strategy has resulted in an improvement in the average quality and geographic location of the Company’s properties. The Company believes that the benefits of the strategy will greatly outweigh the short-term reduction in net cash from operating activities that has resulted from the disposition of the suburban office assets. There can be no assurance, however, that the benefits of the Company's strategy will be realized.
The Company’s operating results depend primarily upon income from rental operations and are substantially influenced by rental demand for the Properties in Operation. During the year ended December 31, 2017, straight line rents on renewal and replacement leases were on average 14.2% higher than rents on expiring leases. During the year ended December 31, 2017, the Company leased 25.2 million square feet and, as of that date, attained occupancy of 97.0% for the Wholly Owned Properties in Operation and 96.5% for the JV Properties in Operation for a combined occupancy of 96.9% for the Properties in Operation. At December 31, 2016, occupancy for the Wholly Owned Properties in Operation was 96.4% and for the JV Properties in Operation was 95.9% for a combined occupancy for the Properties in Operation of 96.4%.
Based on the Company's current outlook, the Company anticipates that property level operating income for the Same Store (defined below) group of properties will increase for the full year 2018, compared to 2017, driven primarily by new and renewal leases being executed at higher rental rates than those of expiring leases, particularly for the Company's industrial properties. The Company expects Same Store occupancy levels to remain relatively consistent with those in 2017.
The assumptions presented above are forward-looking and are based on the Company’s future view of market and general economic conditions, as well as other risks outlined below under the caption “Forward-Looking Statements.”  There can be no assurance

28


that the Company’s actual results will not differ materially from assumptions set forth above.  The Company assumes no obligation to update these assumptions in the future.
Wholly Owned Capital Activity
Acquisitions
During the year ended December 31, 2017, the Company acquired eight operating properties for an aggregate purchase price of $256.4 million. These properties contain an aggregate of 1.9 million square feet of leaseable space and were 94.6% leased as of December 31, 2017. The Company also acquired nine parcels of land totaling 253 acres for an aggregate purchase price of $40.0 million.
Dispositions
During the year ended December 31, 2017, the Company sold 10 Wholly Owned Properties containing an aggregate of 2.3 million square feet as well as 113 acres of land for aggregate proceeds of $367.3 million.
Development
During the year ended December 31, 2017, the Company brought into service 17 Wholly Owned Properties under Development representing 2.9 million square feet and a Total Investment of $259.0 million. As of December 31, 2017, the Company had 20 Wholly Owned Properties under Development, which are expected to comprise, upon completion, 5.6 million square feet and are expected to represent a Total Investment of $526.7 million. These Wholly Owned Properties under Development were 50.2% pre-leased as of December 31, 2017.
“Total Investment” for a Property Under Development is defined as the sum of the land costs and the costs of land improvements, building and building improvements, lease transaction costs, and where appropriate, other development costs and carrying costs. 
Unconsolidated Joint Venture Activity
The Company periodically enters into unconsolidated joint venture relationships in connection with the execution of its real estate operating strategy.
Acquisitions/Dispositions
During the year ended December 31, 2017, an unconsolidated joint venture in which the Company holds a 20% interest acquired one redevelopment property for a purchase price of $15.0 million. This property, which contains 48,000 square feet of leaseable space, was 100% occupied as of December 31, 2017.
During the year ended December 31, 2017, none of the unconsolidated joint ventures in which the Company holds an interest sold any operating properties or land parcels.
Consistent with the Company's strategy, from time to time the Company may consider selling assets to or purchasing assets from an unconsolidated joint venture in which the Company holds an interest.
Development
During the year ended December 31, 2017, an unconsolidated joint venture in which the Company held an interest brought into service a built to suit project totaling 154,000 square feet and representing a Total Investment of $11.6 million. As of December 31, 2017, this completed development property was 100.0% leased. As of December 31, 2017, the Company had one JV Property under Development, which is expected to comprise, upon completion, 302,000 square feet and is expected to represent a Total Investment of $21.1 million. This JV Property under Development was not pre-leased as of December 31, 2017.
In addition, joint ventures in which the Company held an interest continued the development of the Comcast Technology Center. During the year ended December 31, 2017, 1.1 million square feet of office space representing a Total Investment by the joint ventures of $599.6 million was brought into service. The remaining 250,000 square feet of office space and the 217-room Four Seasons hotel representing an aggregate Total Investment by the joint ventures of $354.1 million was included as JV Properties under Development as of December 31, 2017.


29


Forward-Looking Statements
When used throughout this report, the words "believes," "anticipates," "estimates" and "expects" and similar expressions are intended to identify forward-looking statements. Such statements indicate that assumptions have been used that are subject to a number of risks and uncertainties that could cause actual financial results or management plans and objectives to differ materially from those projected or expressed herein, including: the effect of national and regional economic conditions; rental demand; the Company's ability to continue to implement its plans for repositioning the portfolio; the Company's ability to identify, and enter into agreements with, suitable joint venture partners in situations where it believes such arrangements are advantageous; the Company's ability to identify and secure additional properties and sites, both for itself and the joint ventures to which it is a party, that meet its criteria for acquisition or development; the availability and cost of capital; the effect of prevailing market interest rates; risks related to the integration of the operations of entities that we have acquired or may acquire; risks related to litigation; and other risks described in Item 1A. Risk Factors and, from time to time, in the Company's filings with the SEC. Given these uncertainties, readers are cautioned not to place undue reliance on such statements.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("US GAAP"). The preparation of these financial statements requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases these estimates, judgments and assumptions on historical experience and on other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The following critical accounting policies discussion reflects what the Company believes are the more significant estimates, assumptions and judgments used in the preparation of its Consolidated Financial Statements. This discussion of critical accounting policies is intended to supplement the description of the accounting policies in the footnotes to the Company's Consolidated Financial Statements and to provide additional insight into the information used by management when evaluating significant estimates, assumptions and judgments. For further discussion of our significant accounting policies, see Note 2 to the Consolidated Financial Statements included in this report.
Capitalized Costs
Acquisition costs related to the purchase of vacant operating properties and land are capitalized and included in net real estate.  During the year ended December 31, 2015 and the nine months ended September 30, 2016, acquisition costs related to the purchase of operating properties with in-place tenants were expensed as incurred. Acquisition-related expenses for the nine months ended September 30, 2016 and the year ended December 31, 2015 were $172,000 and $365,000, respectively. As described further in Note 2 to the Company's Consolidated Financial Statements, on October 1, 2016, the Company early adopted ASU 2017-01, Clarifying the Definition of a Business, which stipulates that acquisition costs related to the purchase of operating properties with in-place leases should also be capitalized.
The Company capitalizes costs associated with development and redevelopment activities, capital improvements, tenant improvements, and leasing activities, including compensation costs. Expenditures directly related to the improvement of real estate, including interest and other costs capitalized on development and redevelopment projects and land being readied for development, are included in net real estate and are stated at cost. The Company considers a development property substantially complete upon the completion of tenant build-out, but no later than one year after the completion of major construction activity. These capitalized costs include pre-construction costs essential to the development of the property, construction costs, interest costs, real estate taxes, development related compensation and other costs incurred during the period of development. The determination to capitalize rather than expense costs requires the Company to evaluate the status of the development activity. The total of capitalized compensation costs directly related to the development, redevelopment, capital improvements, and tenant improvements for the years ended December 31, 2017, 2016 and 2015 was $5.5 million, $7.2 million and $5.5 million, respectively.
Certain employees of the Company are compensated for leasing services related to the Company's properties. The compensation directly related to signed leases is capitalized and amortized as a deferred leasing cost. The total of this capitalized compensation was $3.6 million, $3.8 million and $4.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Capitalized interest for the years ended December 31, 2017, 2016 and 2015 was $21.0 million, $24.1 million and $16.7 million, respectively.

30


Revenue Recognition
Rental revenue is recognized on a straight line basis over the noncancelable terms of the respective leases. Deferred rent receivable represents the amount by which straight line rental revenue exceeds rents currently billed in accordance with the lease agreements. Above-market and below-market lease values for acquired properties are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management's estimate of fair market lease rates for each corresponding in-place lease. The capitalized above or below-market lease values are amortized as a component of rental revenue over the remaining term of the respective leases and any bargain renewal option periods, where appropriate.
Revenue and expense associated with service fee development is accounted for under the percentage of completion method. Revenues are recognized on the percentage of completion method based on applicable costs incurred with respect to each development agreement. The Company uses the relative sales value method to allocate costs and recognize profits from service fee development. Under the relative sales value method, estimates of aggregate project revenues and aggregate project costs are used to determine the allocation of project cost of sales and the resulting profit in each accounting period. In subsequent periods, cost of sale allocations and the resulting profits are adjusted to reflect changes in the actual and estimated costs and revenues of each project. Provisions for estimated losses on uncompleted contracts are recognized immediately in the period in which such losses are determined.
Allowance for Doubtful Accounts
The Company continually monitors the liquidity and creditworthiness of its tenants. Based on these reviews, provisions are established, and an allowance for doubtful accounts for estimated losses resulting from the inability of its tenants to make required rental payments is maintained. As of December 31, 2017 and 2016, the Company's allowance for doubtful accounts totaled $6.6 million and $7.3 million, respectively. The Company recognized bad debt expense of $0.6 million, $0.6 million and $2.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Impairment of Real Estate
The Company evaluates its real estate investments upon the occurrence of significant adverse changes in operations to assess whether any impairment indicators are present that could affect the recovery of the recorded value. Indicators the Company uses to determine whether an impairment evaluation is necessary include the low occupancy level of the property, holding period for the property, strategic decisions regarding future development plans for a property under development and land held for development and other market factors. If impairment indicators are present, the Company performs an undiscounted cash flow analysis and compares the net carrying amount of the property to the property's estimated undiscounted future cash flow over the anticipated holding period. The Company assesses the expected undiscounted cash flows based upon a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, current market rental rates, changes in market rental rates, operating costs, capitalization rates and holding periods. For these assumptions, the Company considers its experience and historical performance in the various markets and data provided by market research organizations. If any real estate investment is considered impaired, the carrying value of the property is written down to its estimated fair value.If held for sale, a property is not considered impaired unless its estimated fair value (less costs to sell) is less than the property's book value at the balance sheet date. The Company estimates fair value based on the discounting of future expected cash flows at a risk adjusted interest rate. During the years ended December 31, 2017, 2016 and 2015, the Company recognized impairment losses of $10.6 million, $3.9 million and $18.2 million, respectively. The determination of whether an impairment exists requires the Company to make estimates, judgments and assumptions about the future cash flows. The Company has applied reasonable estimates and judgments in determining the level of impairments recognized. Should external or internal circumstances change requiring the need to shorten the holding periods or adjust the estimated future cash flows of the Company’s assets, the Company could be required to record impairment charges in the future.

31


Intangibles
The Company allocates the purchase price of real estate acquired to land, building and improvements and intangibles based on the relative fair value of each component. The value ascribed to in-place leases is based on the rental rates for the existing leases compared to the Company's estimate of the market lease rates for leases of similar terms and present valuing the difference based on an interest rate which reflects the risks associated with the leases acquired. Origination values are also assigned to in-place leases, and, where appropriate, value is assigned to customer relationships. Origination cost estimates include the costs to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. Additionally, the Company estimates carrying costs during the expected lease-up periods including real estate taxes, other operating expenses and lost rentals at contractual rates. Such amounts are also included in origination costs. The amounts allocated to the intangible relating to in-place leases, which are included in deferred financing and leasing costs or in other liabilities in the accompanying consolidated balance sheets, are amortized to rental income for market rental rate intangibles and to depreciation and amortization for origination costs on a straight line basis over the remaining term of the related leases. In the event that a tenant terminates its lease, the unamortized portion of the intangible is written off.
Investments in Unconsolidated Joint Ventures
The Company analyzes its investments in joint ventures to determine if the joint venture is considered a variable interest entity and would require consolidation. The Company accounts for its investments in unconsolidated joint ventures using the equity method of accounting as the Company exercises significant influence over, but does not control, these entities. These investments are recorded initially at cost and subsequently adjusted for equity in earnings and cash contributions and distributions.
On a periodic basis, management assesses whether there are any indicators that the value of the Company's investments in unconsolidated joint ventures may be impaired. An investment is impaired if management's estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.
Management estimated the fair value of its ownership interest in the joint ventures considering the estimated fair value of the real estate assets owned by the joint ventures and the related indebtedness as well as the working capital assets and liabilities of the joint ventures and the terms of the related joint venture agreements. The Company's estimates of fair value of the real estate assets are based on a discounted cash flow analysis incorporating a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, current market rental rates, changes in market rental rates, operating costs, capitalization rates, holding periods and discount rates. For these assumptions, the Company considered its experience and historical performance in the various markets and data provided by market research organizations. In assessing whether an impairment is other-than-temporary, the Company considers several factors. The longevity and severity of the impairment are considered as well as the expected time for recovery of value to occur, if ever.
During the years ended December 31, 2017 and 2015 the Company concluded that certain of the properties owned by the Liberty Washington, LP joint venture were impaired and the joint venture recorded an impairment charge. The Company's share of these impairment charges were $4.0 million and $11.5 million, respectively, and are reflected in equity in earnings of unconsolidated joint ventures in the Company's 2017 and 2015 consolidated statement of comprehensive income.
There were no impairments recorded by the unconsolidated joint ventures in which the Company held an interest during the year ended December 31, 2016.
Derivative Instruments and Hedging Activities
Derivative instruments and hedging activities require management to make judgments on the nature of its derivatives and their effectiveness as hedges. These judgments determine if the changes in fair value of the derivative instruments are reported in the consolidated statements of comprehensive income as a component of net income or as a component of other comprehensive income and as a component of equity on the Consolidated Balance Sheets. While management believes its judgments are reasonable, a change in a derivative’s effectiveness as a hedge could materially affect expenses, net income and equity.

32


Results of Operations
The following discussion is based on the consolidated financial statements of the Company. It compares the results of operations of the Company for the year ended December 31, 2017 with the results of operations of the Company for the year ended December 31, 2016, and the results of operations of the Company for the year ended December 31, 2016 with the results of operations of the Company for the year ended December 31, 2015. As a result of the varying levels of development, acquisition and disposition activities by the Company in 2017, 2016 and 2015, the overall operating results of the Company during such periods are not directly comparable. However, certain data, including the Same Store (as defined below) comparison, do lend themselves to direct comparison.
This information should be read in conjunction with the accompanying consolidated financial statements and notes included elsewhere in this report.
Comparison of Year Ended December 31, 2017 to Year Ended December 31, 2016
Rental Revenue
Rental revenue was $486.2 million for the year ended December 31, 2017 compared to $519.4 million for the same period in 2016. This decrease of $33.2 million was primarily due to the net result of decreased rental revenue related to $1.2 billion of property dispositions since January 1, 2016, offset by increased rental revenue related to acquisitions and completed development for the same period and an increase of $9.8 million related to the Company's Same Store portfolio (see below).
Operating Expense Reimbursement
Operating expense reimbursement was $150.9 million for the year ended December 31, 2017 compared to $178.4 million for the same period in 2016. This decrease of $27.5 million was primarily due to lower reimbursements associated with an aggregate decrease of $33.2 million in rental property expense and real estate taxes (as detailed below).
Rental Property Expense
Rental property expense was $66.0 million for the year ended December 31, 2017 compared to $94.2 million for the same period in 2016. This decrease of $28.2 million was primarily due to a reduction in expense resulting from the sale of suburban office and high finish flex properties partially offset by increased expenses resulting from the acquisition and completed development of industrial properties. Rental property expense includes utilities, insurance, janitorial, landscaping, snow removal and other costs necessary to maintain a property.
Real Estate Taxes
Real estate taxes were $90.2 million for the year ended December 31, 2017 compared to $95.2 million for the same period in 2016. This decrease of $5.0 million was primarily due to the net result of decreased real estate taxes related to property dispositions since January 1, 2016, offset by increased real estate taxes related to acquisitions and completed development for the same period. The decrease was also offset by higher real estate tax assessments for the Company's Same Store properties.
Segments
The Company evaluates the performance of the Wholly Owned Properties in Operation in terms of net operating income by reportable segment (see Note 18 to the Company’s Consolidated Financial Statements for a reconciliation of this measure to net income). Net operating income includes operating revenue from external customers, rental property expense, real estate taxes, amortization of lease transaction costs and other operating expenses which relate directly to the management and operation of the assets within each reportable segment. The following table identifies changes in reportable segment net operating income (dollars in thousands):

33


Reportable Segment Net Operating Income:
 
Year Ended December 31,
 
PERCENTAGE
INCREASE
(DECREASE)
 
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Carolinas/Richmond
$
53,132

 
$
46,170

 
15.1
%
(1) 
Chicago/Minneapolis
39,231

 
45,258

 
(13.3
%)
(2) 
Florida
39,850

 
62,177

 
(35.9
%)
(2) 
Houston
32,300

 
32,499

 
(0.6
%)
 
Lehigh/Central PA
119,304

 
102,209

 
16.7
%
(1) 
Philadelphia
35,279

 
30,862

 
14.3
%
(1) 
Southeastern PA
35,641

 
53,947

 
(33.9
%)
(2) 
United Kingdom
7,657

 
6,390

 
19.8
%
(3) 
Other
86,127

 
89,274

 
(3.5
%)
 
Total reportable segment net operating income
$
448,521

 
$
468,786

 
(4.3
%)
 

(1)
The increase was primarily due to an increase in average gross investment in operating real estate.
(2)
The decrease was primarily due to a decrease in average gross investment in operating real estate offset by an increase in occupancy.
(3)
The increase was primarily due to an increase in the foreign exchange rate.

Same Store
Property level operating income, exclusive of termination fees, for the Same Store properties is identified in the table below.
The Same Store results were affected by changes in occupancy and rental rates as detailed below for the respective periods.
 
Year Ended
 
December 31,
 
2017
 
2016
Average occupancy %
96.5
%
 
96.3
%
Average rental rate - cash basis (1)
$
5.64

 
$
5.51

Average rental rate - straight line basis (2)
$
7.56

 
$
7.43

(1)
Represents the average contractual rent per square foot for the year ended December 31, 2017 or 2016 for tenants in occupancy in the Same Store properties. Cash basis rent does not include the tenant's obligation to pay property operating expenses and real estate taxes. If a tenant was within a free rent period its rent would equal zero for purposes of this metric.
(2)
Represents the average straight line rent and operating expense reimbursement per square foot for the year ended December 31, 2017 or 2016 for tenants in occupancy in the Same Store properties.
Management generally considers the performance of the Same Store properties to be a useful financial performance measure because the results are directly comparable from period to period. In addition, Same Store property level operating income and Same Store cash basis property level operating income are considered by management to be more reliable indicators of the portfolio’s baseline performance. The Same Store properties consist of the 468 properties totaling approximately 78.8 million square feet owned on January 1, 2016. Properties that were acquired, or on which development was completed, during the years ended December 31, 2017 and 2016 are excluded from the Same Store properties. Properties that were acquired, or on which development was completed, are included in Same Store properties when they have been purchased in the case of acquisitions, and placed into service in the case of completed development, prior to the beginning of the earliest period presented in the comparison. The 10 properties sold during the year ended December 31, 2017 and the 125 properties sold during 2016 are also excluded.
Set forth below is a schedule comparing the property level operating income, on a straight line basis and on a cash basis, for the Same Store properties for the years ended December 31, 2017 and 2016. Same Store property level operating income and cash basis property level operating income are non-US GAAP measures and do not represent income before gain on property dispositions, income taxes and equity in earnings of unconsolidated joint ventures because they do not reflect the consolidated operations of the Company. Investors should review Same Store results, along with Funds from operations (see “Liquidity and Capital Resources” below), US GAAP net income and cash flow from operating activities, investing activities and financing activities when considering

34


the Company’s operating performance. Also set forth below is a reconciliation of Same Store property level operating income and cash basis property level operating income to net income (in thousands).
 
Year Ended
 
December 31, 2017
 
December 31, 2016
Reconciliation of non-US GAAP financial measure – Same Store:
 
 
 
Net income
$
290,045

 
$
366,145

Discontinued operations (1)
(18,979
)
 
(11,991
)
Equity in earnings of unconsolidated joint ventures
(17,155
)
 
(21,970
)
Income taxes
1,992

 
1,971

Gain on property dispositions
(100,387
)
 
(219,270
)
Interest expense
88,857

 
112,299

Loss on debt extinguishment
49

 
27,099

Interest and other income
(7,778
)
 
(13,817
)
Impairment charges - real estate assets
3,946

 
3,879

Development service fee expense
85,805

 
12,165

Depreciation and amortization expense
175,137

 
196,705

Expensed pursuit costs
5,066

 
1,016

General and administrative expense
56,975

 
67,088

Development service fee income
(82,673
)
 
(12,941
)
Termination fees (2)
(4,016
)
 
(4,220
)
Non-same store property level operating income - continuing operations
(34,080
)
 
(74,604
)
Same store property level operating income
442,804

 
429,554

Straight line rent
(10,593
)
 
(11,663
)
Same store cash basis property level operating income
$
432,211

 
$
417,891

 
 
 
 
Same Store:
 
 
 
Rental revenue
$
442,269

 
$
432,481

Operating expenses:
 
 
 
Rental property expense
67,241

 
70,324

Real estate taxes
76,232

 
74,685

Operating expense recovery
(144,008
)
 
(142,082
)
Unrecovered operating expenses
(535
)
 
2,927

Property level operating income
442,804

 
429,554

Less straight line rent
10,593

 
11,663

Cash basis property level operating income