Liberty Property Trust

Transcription

1 Liberty Property Trust 2000 Annual Report

2 Liberty Property Trust Enhancing people s lives through extraordinary work environments Liberty Property Trust is a real estate company that develops, acquires and manages quality office and industrial properties. One of the country s largest real estate investment trusts (REITs), Liberty s portfolio consists of over 48 million square feet, providing superior business environments for almost 2,000 companies. We increase the value of our portfolio through expert property management, marketing and development. We believe the key to continued growth and success is our balanced pursuit of four basic tenets. First, we create shareholder value by maximizing returns on our capital through sound investment and by deploying capital and other resources in a thoughtful and responsible manner. Second, we manage wisely by applying our employees special skills and deep knowledge to provide our customers with innovative real estate solutions. Third, we earn trust by delivering on our commitments and by treating our shareholders, our customers, our employees and our vendors with respect. And fourth, we make a difference in our communities through good corporate citizenship. These are the things that Liberty stands for. This is our commitment to all the people whose lives we touch. Sunflowers at 18 Great Valley Parkway, Malvern, PA

3 Financial Highlights As of and for the year ended December 31, (in thousands except per share amounts and number of properties) Revenue from Real Estate $ 528,589 $ 466,522 $ 382,980 $ 225,361 $ 148,727 EBITDA $ 383,350 $ 340,120 $ 263,226 $ 160,788 $ 105,389 Funds from Operations $ 234,194 $ 210,982 $ 173,829 $ 102,519 $ 64,917 Funds from Operations per Share $ 3.17 $ 2.89 $ 2.56 $ 2.21 $ 1.91 Dividends Paid per Share $ 2.13 (1) $ 1.87 $ 1.71 $ 1.65 $ 1.61 Number of Properties Owned Square Feet of Properties Owned 48,216 46,219 44,168 32,453 20,617 Real Estate Assets before Depreciation $3,548,365 $3,254,751 $3,028,142 $2,106,028 $1,180,385 Total Assets $3,396,355 $3,118,133 $2,931,408 $2,093,858 $1,152,560 Market Capitalization $4,019,455 $3,489,649 $3,294,534 $2,723,393 $1,576,637 (1) Reflects increase in dividend effective as of third quarter. Current annualized dividend rate is $2.28. $1.91 Funds from Operations (per share) $2.21 $2.56 $2.89 $3.17 Revenue from Real Estate (in millions) $383 $467 $529 Market Capitalization (in millions) $2,723 $3,490 $3,295 $4,019 $149 $225 $1,

4 To Our Shareholders Liberty made significant progress in The core business remained solid and stable and we intensified our focus on areas that will drive growth and impact long-term profitability. 2.5% 96 Dividend Growth (per share) 2.4% % % % 00 FFO growth Liberty increased funds from operations per share by 9.7% in 2000, the result of the continued execution of our strategy: developing wisely, acquiring opportunistically, and maximizing the value of our core portfolio. In 2000, we brought $193 million in development properties into service at stabilized returns of 13.0%, and invested $105 million in acquisitions at stabilized returns of 12.1%. We also increased the occupancy of our portfolio to 96.1%, and increased operating income from same store properties by 3.6%. Dividend growth We increased our dividend by 9.6%, to $2.28 per share, annualized. This dividend increase was a result of the increase in our earnings, and was necessary to comply with REIT tax laws. Our dividend continues to provide shareholders with a reliable return on their investment. We have increased our dividend every year since 1996, and we anticipate that it will increase at a rate that approximates our earnings growth. Return to shareholders We are pleased to report that our shareholders received a 24.2% total return on their investment for the year. Liberty s total return for the most recent three- and five-year periods has outperformed the total return of the NAREIT composite index. Managing for the future Liberty continued to grow through its flexible and well-balanced strategy. This strategy allows us to adjust our investments to changing market conditions while keeping focused on our strengths and competitive advantages. It is those strengths our people, our experience and our passion for this business that create the solid foundation on which we will continue to build. In 2000, more than ever, we continued to bring the necessary elements together to make Liberty the premier REIT in the country. We are committed to exceeding our tenants expectations on a regular basis, so we refocused the company s customer service efforts, including the measurement of our effectiveness in serving our tenants. Recognizing that the company s most valuable resource is our people, we stepped up our investment in our training programs. Helping our people develop cutting-edge skills fosters increased competence and employee satisfaction and ensures that doing business with Liberty is a positive and professional experience. The company also established an internal assurance function to assist in managing risk and promoting best practices throughout the organization. These efforts will help all employees to work more efficiently and effectively, and ultimately, to continue to increase value. Finally, we enhanced our national marketing function in order to capitalize on our real estate expertise across various markets and to leverage the strong relationships we maintain with our tenants. 80% 96 72% 97 Payout Ratio 68% 98 69% 99 70% 00 2

5 Liberty has a strong commitment to attracting, developing and maintaining the best personnel at all levels of the organization. We have been able to recognize the significant contributions of some seasoned veterans of the company by promoting from within. Additionally, we have gained fresh perspectives by hiring accomplished talent from outside the company. We believe the continuous improvement of our employees skills and our processes, our dedication and our focus, and the daily evolution and evaluation of our business will continue to propel Liberty to the top of the REIT world. 53.4% 96 Debt to Gross Assets 45.3% 42.8% 44.0% 45.7% A solid asset base Liberty s portfolio is in excellent condition. The properties are well located in stable and desirable markets and are leased to a diverse range of highquality tenants. To keep this asset base strong, we balance our development and strategic acquisitions with our disposition program. This program involves continual review and evaluation of markets and individual properties, resulting in the disposition of properties and, in some cases, withdrawing from certain markets. These processes enable us to upgrade our portfolio and provide capital for reinvestment opportunities. Proactive property management High standards of property management and customer service are crucial in any economic climate. Key to Liberty s results in the coming year will be the performance of our core portfolio maintaining high occupancy levels and continuing to achieve rental increases. We view our tenant relationships as our lifeblood, so we strive to exceed customer expectations and are passionately committed to providing environments that enhance employee productivity. We believe our commitment to our tenants success underpins our own success and continued profitability. A prudent financial structure We remain committed to maintaining the strength of our balance sheet. Our leverage, measured in terms of debt-to-gross assets, and our interest and preferred coverage ratios are conservative and virtually unchanged over the past four years. We believe that a strong and flexible financial structure is a key element to success in the capitalintensive real estate industry. A culture for success No less important, we foster a corporate culture that supports our people while challenging them to be leaders. From Minneapolis to Boca Raton, we are tremendously proud of our employees dedication to our tenants, and to making this a stronger company. Through innovative incentive compensation programs, every employee now has the opportunity to become a shareholder. Every employee understands that our shareholders look to Liberty to provide an investment they can truly count on one that offers stability and solid, predictable value creation. Liberty will continue to strive to set new standards for property management, development and the creation of shareholder value. We are not satisfied being just a leading company in the industry, rather we are enthusiastically committed to being the premier company. Willard G. Rouse III Chairman, President and Chief Executive Officer 3

6 A Balanced Approach

7 Imagine what the world would look like if architecture were simply a matter of constructing buildings. If architects made no attempt to strike a balance between the functional and the aesthetic. Britain s Houses of Parliament without Big Ben. The U.S. Capitol Building without the Rotunda. Notre Dame Cathedral without stained glass. Of course, in their current forms these structures embody the true spirit of what architecture and the human forces behind it can achieve. More than just functional, they enhance and enrich our lives through their balance of utility and ornament. At Liberty, we believe that the principle of balance is just as important in building and running a successful business. In fact, we ve learned that balancing the need to maximize short-term profits with the need to create environments that respect and enhance the lives of the people who use them creates the greatest value over the long term. This commitment to achieving a favorable balance forms the basis of our corporate philosophy and pervades our corporate culture. For example, we balance short-term demand with long-term growth prospects when securing leasing agreements. We balance the needs of our tenants with the needs and interests of the communities we serve when we develop properties. Even within our ranks, we encourage and assist our employees in striking a balance between their personal and professional lives. We realize the importance of providing premium quality environments that are both highly functional and highly habitable for the people who call them home for 40 or more hours a week. We do it with architecture, flowers, artwork, amenities and superior management, as opposed to marble arches and stained glass windows. Of all the balances Liberty strikes, none is more significant than that between seeking financial and market stability and stimulating steady and predictable growth. The way we see it, one element drives the other. This prudent approach supports us in the face of challenging market cycles and provides us with the ability to excel in times of market opportunity. We think that s an advantageous position that benefits everyone that is important to our company shareholders, tenants and employees alike. Photo on opposite page: High Tide at 1200 Riverplace Boulevard, Jacksonville, FL 5

8 From A Stable Structure

9 The first step in creating and maintaining a balanced approach is the building of a solid base. Such a base provides a source of strength and stability for both current and future endeavors. It becomes your rock and your safe harbor in uncertain times. At Liberty, we ve built our base through the diversification of our market presence, our properties and the companies that we serve. This approach minimizes our risk by keeping our proverbial eggs in a wide range of carefully selected baskets. For example, Liberty is not overly dependent on supply and demand factors in any one geographic market. That s because we don t feel the need to try to dominate the markets that we currently serve. Instead we concentrate our investment dollars in those markets that are currently providing the best balance of high yet steady returns. This strategy is designed to enable us to generate outstanding returns on our investments while minimizing our vulnerability during an acute sector slump or a general economic slowdown. Liberty also maintains a diverse portfolio in terms of property types. We concentrate on developing and acquiring high quality buildings that are functional, flexible and desirable in just about any market climate. The key to this Building Type (by base rent) 51% Office approach is our ability to provide properties that can be easily transitioned from one use to another, depending upon demand or a particular tenant s changing needs. Market Diversification (by base rent) 29% Southeastern Pennsylvania 10% Lehigh Valley 9% Jacksonville 9% Michigan 8% New Jersey 8% Virginia 8% The Carolinas 7% Minnesota 4% South Florida 3% Tampa 3% Maryland 2% United Kingdom Finally, Liberty has developed a diverse tenant base from a wide variety of industries. This further minimizes our risk in regard to sector slowdowns such as the one the hi-tech area is experiencing. We achieve this balanced base by approaching and analyzing potential tenant relationships individually. We serve tenants with a preference for quality and a willingness to work with us to create fair and flexible agreements and to form lasting and mutually beneficial relationships. Through this comprehensive diversification, Liberty has built a strong and stable base and a platform for steady and predictable growth. 23% Industrial Distribution 26% Industrial Flex 7

10 Springs Steady Growth

11 96 97 Occupancy 92.8% 94.6% 95.0% 94.9% 96.1% Perhaps the best way to reach new heights, paradoxically, is to keep your feet firmly planted on the ground. The stability and maneuverability provided by our solid base enables us to choose when and how we want to grow. We grow by creating value through premium-quality property management, disciplined development and opportunistic acquisitions. Our property management approach is rooted in the philosophy that current and potential tenants value quality space and service, regardless of economic conditions. So while the prices of that space and service may change, the preference for Liberty properties and management remains constant. We dedicate ourselves to the development of high-quality, long-term and proactive tenant relationships and the delivery of impeccable service. We listen to our tenants, understand their needs, and develop creative solutions in a timely fashion. In our day-to-day interaction with our tenants, we go beyond what is merely expected of us in order to provide the highest quality service possible. We also make an effort to work with tenants who are having difficulties, in order to preserve the relationship and make sure that it remains beneficial to both parties. Through this approach Liberty has achieved an impressive rate of repeat business and tenant retention, including the expansion of tenant relationships into other markets. Another aspect of Liberty s balanced growth strategy is our highly structured and disciplined development process. An even blend of entrepreneurial spirit and centralized control, this process creates a framework in which projects are objectively evaluated and compared, applies accumulated expertise to ensure the highest quality and efficiency of operations, and challenges managers to create the most value possible by competing for capital. This process creates a competitive advantage that can be employed offensively during a good economy and defensively during a challenging one. Liberty exercises the same level of judgment regarding acquisitions. Our decision-making is driven by return and by opportunity. Our extensive market knowledge, coupled with our property management and development expertise, enable us to purchase underperforming assets and create value. This responsible approach is intended to provide steady and predictable growth through value creation. 96 Development Yields 12.8% 12.8% 12.6% 13.0% 11.9% Balance, stability, experience and commitment are the key competitive advantages we bring to our tenants, and it is these elements that support our efforts to provide our shareholders with a secure investment that provides a consistent and reliable return. 9

12 Financial Contents Selected Financial Data 11 Management s Discussion and Analysis of Financial Condition and Results of Operations 13 Consolidated Balance Sheets 20 Consolidated Statements of Operations 21 Consolidated Statements of Shareholders Equity 22 Consolidated Statements of Cash Flows 23 Notes to Consolidated Financial Statements 24 Report of Independent Auditors 35 Market for Registrant s Common Equity and Related Shareholders Matters 35 Corporate Information 36

13 Selected Financial Data The following table sets forth Selected Financial Data for Liberty Property Trust as of and for the years ended December 31, 2000, 1999, 1998, 1997 and The information set forth below should be read in conjunction with Management s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto appearing elsewhere in this report. Certain amounts from prior periods have been restated to conform to current-year presentation. Liberty Property Trust Year Ended December 31, (In thousands, except per share amounts) Operating Data Total revenue $532,963 $472,498 $388,378 $229,999 $153,688 Rental and real estate tax expense 148, , ,345 61,079 40,853 Interest expense 108,295 99,663 78,617 51,067 39,555 General and administrative expenses 19,260 16,127 15,522 10,650 8,023 Depreciation and amortization 93,472 84,464 67,932 40,752 28,203 Income before property dispositions, extraordinary item and minority interest 163, , ,962 66,451 37,054 Gain (loss) on property dispositions 18,386 13,188 (1,285) 2, Income before extraordinary item and minority interest 181, , ,677 68,969 37,631 Extraordinary item loss on extinguishment of debt 2,103 1,145 2,919 Income before minority interest 179, , ,677 66,050 37,631 Minority interest 20,209 13,524 8,062 5,606 3,891 Net income 159, , ,615 60,444 33,740 Preferred share distributions 11,000 11,000 11,000 4,247 Income available to common shareholders $148,271 $130,324 $ 97,615 $ 56,197 $ 33,740 Distributions paid on common shares and units $153,657 $133,387 $109,361 $ 70,615 $ 52,569 Distributions paid on preferred shares and units $ 21,070 $ 14,784 $ 11,000 $ 2,414 $ Per Share Data Earnings per share Basic: Income per common share before extraordinary item $ 2.23 $ 1.98 $ 1.60 $ 1.45 $ 1.14 Extraordinary item $ (0.03) $ (0.02) $ $ (0.06) $ Income per common share $ 2.20 $ 1.96 $ 1.60 $ 1.39 $ 1.14 Diluted: Income per common share before extraordinary item $ 2.20 $ 1.97 $ 1.59 $ 1.44 $ 1.14 Extraordinary item $ (0.03) $ (0.02) $ $ (0.06) $ Income per common share $ 2.17 $ 1.95 $ 1.59 $ 1.38 $ 1.14 Distributions paid per common share $ 2.13 $ 1.87 $ 1.71 $ 1.65 $ 1.61 Distributions paid per preferred share $ 2.20 $ 2.20 $ 2.20 $ 0.48 $ Weighted average number of shares outstanding basic (1) 67,442 66,495 61,036 40,493 29,603 Weighted average number of shares outstanding diluted (2) 68,173 66,727 61,315 40,806 29,678 (continued) 11

14 Selected Financial Data (continued) Liberty Property Trust As of and for the year ended December 31, (Dollars in thousands) Other Data Cash provided by operating activities $ 240,735 $ 212,421 $ 219,223 $ 136,596 $ 68,643 Cash used by investing activities (308,750) (238,778) (839,542) (864,562) (267,099) Cash provided by financing activities 63,589 21, , , ,439 Funds from operations (3) 234, , , ,519 64,917 Balance Sheet Data Net real estate $3,213,950 $2,984,577 $2,819,119 $1,956,717 $1,061,234 Total assets 3,396,355 3,118,133 2,931,408 2,093,858 1,152,560 Total indebtedness 1,703,896 1,491,238 1,423, , ,709 Shareholders equity 1,320,805 1,294,607 1,267, , ,532 Other Data Total leasable square footage of properties at end of period (in thousands) 48,216 46,219 44,168 32,453 20,617 Number of properties at end of period Percentage leased at end of period 96% 95% 95% 95% 93% (1) Basic weighted average number of shares includes only Common Shares outstanding during the year. (2) Diluted weighted average number of shares outstanding includes the dilutive effect of outstanding options. Such number excludes Common Shares issuable upon conversion of the Convertible Debentures, because to do so would have been antidilutive for the periods presented. (3) Funds from operations is defined by the National Association of Real Estate Investment Trusts ( NAREIT ) as net income (computed in accordance with generally accepted accounting principles ( GAAP )), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations does not represent net income or cash flows from operations as defined by GAAP and does not necessarily indicate that cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the Company s operating performance or to cash flows as a measure of liquidity. Funds from operations also does not represent cash flows generated from operating, investing or financing activities as defined by GAAP. 12

15 Management s Discussion and Analysis of Financial Condition and Results of Operations Overview The following discussion and analysis is based on a consolidated view of the Company. Geographic segment data for the years ended December 31, 2000, 1999, and 1998 are included in the accompanying notes to the consolidated financial statements. In 2000, the Company continued to focus on creating value and increasing profitability and cash flow. With respect to its core portfolio of Properties in Operation, the Company endeavors to maintain and increase its high occupancy levels while increasing rental rates. The Company pursues development opportunities that it believes will create value and yield high returns. The Company also acquires properties which it believes will provide high returns and create long-term value, and disposes of Properties which no longer fit with the Company s strategic objectives or in situations where it can optimize cash proceeds. The Company s operating results depend primarily upon income from rental operations. This income is substantially influenced by rental demand for the Properties in Operation. In addition, the Company s continued growth is dependent upon its ability to maintain property occupancy rates and increase rental rates on the Properties in Operation. The occupancy rate of the Properties in Operation has been in the 95% to 96% range for the last three years and was 96.1% at December 31, The Company will seek to maintain and increase its overall occupancy and also will seek to increase rental rates in replacement and renewal leases. Stable or increasing occupancy, along with increases in rental rates, would allow the Properties in Operation to continue to provide a comparable or increasing level of income from rental operations. The Company also seeks to achieve growth in operating income from rental operations through controlling expenses, maintenance and expansion of its development pipeline, and acquisition of additional rental properties where management has identified opportunities which will create shareholder value over the long term. In 2000, the Company completed development of 24 properties and the expansion of one property totaling approximately 2.3 million leasable square feet for a Total Investment of $193.2 million. In 1999, the Company completed development of 41 properties totaling approximately 3.4 million leasable square feet for a Total Investment of $285.7 million. In addition, as of December 31, 2000, the Company had 49 Properties Under Development expected to generate, upon completion, approximately six million leasable square feet of suburban office and industrial space for a Total Investment of approximately $408.7 million. The Company expects to complete the Properties Under Development over the next eight quarters. The Company acquired 14 properties consisting of approximately 1.4 million leasable square feet during 2000 for a Total Investment of approximately $105.2 million as compared to the acquisition of 13 properties consisting of approximately 775,000 leasable square feet during 1999 for a Total Investment of approximately $63.1 million. The Company will seek to continue to achieve attractive returns on acquisitions. In 2000, the Company disposed of 20 Properties totaling approximately 1.7 million leasable square feet and 11 parcels of land for an aggregate of $122.5 million. In 1999, the Company disposed of 28 Properties totaling approximately 2.1 million leasable square feet and six parcels of land for an aggregate of $118.7 million. The Company anticipates the selective disposition of Properties to continue. The Company continued to strengthen its balance sheet in 2000 by accessing the private equity and public debt markets. The Company raised approximately $20.0 million through the issuance of 9.125% Series C Cumulative Redeemable Preferred Units. In addition, the Company issued $200.0 million principal amount of investment grade rated 10-year unsecured notes. The composition of the Properties in Operation as of December 31, 2000 and 1999 is as follows (in thousands): Total Percent of Total Square Feet Square Feet Percent Occupied December 31, December 31, December 31, Type Industrial Distribution 20,173 19, % 42.1% 97.7% 95.3% Industrial Flex 12,605 12, % 27.7% 95.9% 94.1% Office 15,438 13, % 30.2% 94.2% 95.0% Total 48,216 46, % 100.0% 96.1% 94.9% 13

16 Forward-Looking Statements When used throughout this report, the words believes, anticipates, 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 which 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; the Company s ability to identify and secure additional properties and sites that meet its criteria for acquisition or development; the availability and cost of capital; and the effect of prevailing market interest rates; and other risks described from time to time in the Company s filings with the Securities and Exchange Commission. Given these uncertainties, readers are cautioned not to place undue reliance on such statements. The Company undertakes no obligation to update statements that may be made to reflect any future events or circumstances. 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, 2000 with the results of operations of the Company for the year ended December 31, 1999, and the results of operations of the Company for the year ended December 31, 1999 with the results of operations of the Company for the year ended December 31, As a result of the significant level of development, acquisition and disposition activities by the Company in 2000 and 1999, the overall operating results of the Company during such periods are not directly comparable. However, certain data, including the Same Store comparison, do lend themselves to direct comparison. This information should be read in conjunction with the accompanying consolidated financial statements and notes included elsewhere in this report. Comparison of Year Ended December 31, 2000 to Year Ended December 31, Total revenue (principally rental revenue and operating expense reimbursement) increased to $533.0 million for the year ended December 31, 2000 from $472.5 million for the year ended December 31, This increase was primarily due to the increase in the number of Properties in Operation during the respective periods. As of December 31, 2000, the Company had 652 Properties in Operation compared to 634 properties at December 31, The following is a summary of the Company s acquisition, development and disposition activity for the years ended December 31, 2000 and 1999: Number Total Number Total of Investment (1) of Investment (1) Buildings or Proceeds Buildings or Proceeds (In millions) (In millions) Properties owned as of: Beginning January Acquisitions 14 $ $ 63.1 Completed developments Dispositions (20) (28) Ending December (1) The Total Investment for a Property is defined as the Property s purchase price plus closing costs and management s estimate, as determined at the time of acquisition, of the cost of necessary building improvements in the case of acquisitions, or land costs and land and building improvement costs in the case of development projects, and where appropriate, other development costs and carrying costs required to reach rent commencement. 14

17 Additionally, the Company sold 11 parcels of land for approximately $18.1 million during the year ended December 31, 2000 as compared to six parcels of land for approximately $8.8 million during the year ended December 31, Furthermore, total revenue increased because the operating expense recovery percentage (the ratio of operating expense reimbursement to rental property expenses and real estate taxes) increased to 97.0% for the year ended December 31, 2000 from 95.5% for the year ended December 31, 1999 due to the increase in average occupancy during the year. Rental property and real estate tax expenses increased to $148.7 million for the year ended December 31, 2000 from $129.4 million for the year ended December 31, This increase is due to the increase in the number of Properties in Operation. Property level operating income for the Same Store properties (properties owned since January 1, 1999) increased to $309.2 million for the year ended December 31, 2000 from $298.5 million for the year ended December 31, 1999, on a straight line basis (which recognizes rental revenue evenly over the life of the lease), and increased to $303.0 million for the year ended December 31, 2000 from $292.3 million for the year ended December 31, 1999, on a cash basis. These increases, each equaling 3.6%, are primarily due to increases in rental rates, and to a modest extent due to increases in occupancy. 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, 2000 and 1999 (in thousands). Straight Line Basis Cash Basis Rental revenue $ 312,856 $ 302,665 $ 306,692 $ 296,521 Operating expense: Rental property expense 80,342 77,125 80,342 77,125 Real estate taxes 42,136 37,114 42,136 37,114 Operating expense recovery (118,787) (110,064) (118,787) (110,064) Unrecovered operating expenses 3,691 4,175 3,691 4,175 Property level operating income $ 309,165 $ 298,490 $ 303,001 $ 292,346 General and administrative expenses increased to $19.3 million for the year ended December 31, 2000 from $16.1 million for the year ended December 31, This $3.2 million increase is due to the increase in personnel and other related overhead costs necessitated by the increase in the number of Properties in Operation during the respective periods, and the funding of initiatives which the Company undertook related to training, internal assurance, property management and national marketing. Depreciation and amortization expenses increased to $93.5 million for the year ended December 31, 2000 from $84.5 million for the year ended December 31, This increase is due to the increase in the number of Properties in Operation during the respective periods. Interest expense increased to $108.3 million for the year ended December 31, 2000 from $99.7 million for the year ended December 31, This increase is due to an increase in the average debt outstanding for the respective periods which was $1,589.8 million in 2000 and $1,474.6 million in This increase is also due to an increase in the weighted average interest rates for the periods, to 7.57% in 2000 from 7.33% in In 2000, the Company realized a gain on sale of $18.4 million, due to the sale of 20 Properties and 11 parcels of land for an aggregate of $122.5 million. In 1999, the Company realized a gain on sale of $13.2 million, due to the sale of 28 Properties and six parcels of land for an aggregate of $118.7 million. In 2000, the Company repurchased $10.9 million principal amount of its Convertible Debentures resulting in the recognition of an extraordinary loss of $2.1 million. In 1999, the Company repurchased $6.6 million principal amount of its Convertible Debentures resulting in the recognition of an extraordinary loss of $1.1 million. These losses represent the redemption premiums and the write-off of related deferred financing costs. As a result of the foregoing, the Company s income before minority interest increased to $179.5 million for the year ended December 31, 2000 from $154.8 million for the year ended December 31, In addition, net income increased to $159.3 million for the year ended December 31, 2000 from $141.3 million for the year ended December 31,

18 Comparison of Year Ended December 31, 1999 to Year Ended December 31, Total revenue (principally rental revenue and operating expense reimbursement) increased to $472.5 million for the year ended December 31, 1999 from $388.4 million for the year ended December 31, This increase was primarily due to the increase in the number of Properties in Operation during the respective periods. As of December 31, 1999, the Company had 634 Properties in Operation compared to 608 properties at December 31, The following is a summary of the Company s acquisition, development and disposition activity for the years ended December 31, 1999 and 1998: Total Total Number of Investment Number of Investment Buildings or Proceeds Buildings or Proceeds (In millions) (In millions) Properties owned as of: Beginning January Acquisitions 13 $ $626.3 Completed Development Dispositions (28) (10) 18.9 Ending December Furthermore, total revenue increased because the operating expense recovery percentage (the ratio of operating expense reimbursement to rental property expenses and real estate taxes) increased to 95.5% for the year ended December 31, 1999 from 93.4% for the year ended December 31, 1998 due to the increase in average occupancy during the year. Rental property and real estate tax expenses increased to $129.4 million for the year ended December 31, 1999 from $108.3 million for the year ended December 31, This increase is due to the increase in the number of Properties in Operation. Property level operating income for the Prior Year Same Store properties (properties owned since January 1, 1998) increased to $219.6 million for the year ended December 31, 1999 from $209.9 million for the year ended December 31, 1998, on a straight line basis, (which recognizes rental revenue evenly over the life of the lease), and increased to $216.3 million for the year ended December 31, 1999 from $206.7 million for the year ended December 31, 1998, on a cash basis. These increases, each equaling 4.6%, are primarily due to increases in rental rates, and to a modest extent due to increases in occupancy. Set forth below is a schedule comparing the property level operating income, on a straight line basis and on a cash basis, for the Prior Year Same Store properties for the years ended December 31, 1999 and 1998 (in thousands). Straight Line Basis Cash Basis Rental revenue $ 222,736 $ 214,630 $ 219,424 $ 211,421 Operating expense: Rental property expense 57,619 56,444 57,619 56,444 Real estate taxes 25,985 24,292 25,985 24,292 Operating expense recovery (80,434) (75,974) (80,434) (75,974) Unrecovered operating expenses 3,170 4,762 3,170 4,762 Property level operating income $219,566 $209,868 $216,254 $206,659 General and administrative expenses increased to $16.1 million for the year ended December 31, 1999 from $15.5 million for the year ended December 31, This $600,000 increase is due to the increase in personnel and other related overhead costs necessitated by the increase in the number of Properties in Operation during the respective periods. The increase is somewhat mitigated by the benefit of certain economies of scale experienced by the Company in owning and operating the increased number of Properties in Operation. 16

19 Depreciation and amortization expenses increased to $84.5 million for the year ended December 31, 1999 from $67.9 million for the year ended December 31, This increase is due to the increase in the number of Properties in Operation during the respective periods. Interest expense increased to $99.7 million for the year ended December 31, 1999 from $78.6 million for the year ended December 31, This increase is due to an increase in the average debt outstanding for the respective periods which was $1,474.6 million in 1999 and $1,233.3 million in This increase is also due to an increase in the weighted average interest rates for the periods, to 7.33% in 1999 from 7.29% in In 1999, the Company realized a gain on sale of $13.2 million, due to the sale of 28 Properties for $109.9 million. In 1998, the Company realized a loss on sale of $1.3 million, due to the sale of 10 Properties for $18.9 million. In 1999, the Company repurchased $6.6 million principal amount of its Convertible Debentures. This resulted in the recognition of an extraordinary loss in 1999 of $1.1 million. This loss represented the redemption premium and the writeoff of related deferred financing costs. There were no extraordinary items in As a result of the foregoing, the Company s income before minority interest increased to $154.8 million for the year ended December 31, 1999 from $116.7 million for the year ended December 31, In addition, net income increased to $141.3 million for the year ended December 31, 1999 from $108.6 million for the year ended December 31, Liquidity and Capital Resources As of December 31, 2000, the Company had cash and cash equivalents of $4.6 million. Net cash flow provided by operating activities increased to $240.7 million for the year ended December 31, 2000 from $212.4 million for the year ended December 31, This $28.3 million increase was primarily due to the increase in cash flow generated by the greater number of Properties in Operation during the latter period. Net cash flow provided by operations is the primary source of liquidity to fund distributions to shareholders and for the recurring capital expenditures and re-leasing costs for the Company s Properties in Operation. Net cash used in investing activities increased to $308.8 million for the year ended December 31, 2000 from $238.8 million for the year ended December 31, The primary reason for this $70.0 million increase was an increase in investment in land held for development and an increase in investment in Properties in Operation. Net cash provided by financing activities increased by $42.6 million to $63.6 million for the year ended December 31, 2000 from $21.0 million for the year ended December 31, Net cash provided by financing activities includes proceeds from the issuance of equity and debt net of debt repayments and shareholder distributions. It is a source of capital utilized by the Company to fund investment activities and the increase in such funding activities for 2000 is consistent with the increase in the level of the Company s investment activities as described above. The Company believes that its undistributed cash flow from operations is adequate to fund its operating needs. The Company funds its development and acquisitions with long-term capital sources to include proceeds from the disposition of Properties. In 2000, the Company increased its borrowing capacity and obtained a $450 million unsecured credit facility (the Credit Facility ) replacing the $325 million credit facility due May 2000 and a $90 million term loan due January The Company uses debt financing to lower its overall cost of capital which increases our return to our shareholders. The Company staggers its debt maturities and maintains debt levels it considers to be prudent. In determining its debt levels, the Company considers various financial measures to include debt to gross assets and interest coverage and earnings to fixed charges ratios. The Company s capital structure and financial policies have earned the Company prospective senior debt ratings of BBB from Standard and Poor s Ratings Group ( S&P ) and Baa3 from Moody s Investors Services, Inc. ( Moody s ). The interest rate on borrowings under the Credit Facility fluctuates based upon ratings from Moody s and S&P. At the Company s current ratings, the interest rate for borrowings under the Credit Facility is 115 basis points over LIBOR. 17

20 As of December 31, 2000, $362.0 million in mortgage loans and $1,095.0 million in unsecured notes were outstanding. The interest rates on $1,451.0 million of mortgage loans and unsecured notes are fixed and range from 6.0% to 8.8%. Interest rates on $6.0 million of mortgage loans float with a municipal bond index none of which is subject to a cap. The weighted average remaining term for the mortgage loans and unsecured notes is 7.4 years. The scheduled maturities of principal amortization of the Company s mortgage loans and the unsecured notes outstanding and the related weighted average interest rates are as follows (in thousands): Mortgages Weighted Principal Principal Unsecured Average Amortization Maturities Notes (1) Total Interest Rate 2001 $ 9,222 $ 22,534 $ $ 31, % , , , % ,127 26,606 50,000 84, % ,206 16, , , % , , , % ,047 30, , , % , , , % ,280 28,823 33, % ,163 42, , , % , , , % ,105 3,303 4, % ,674 17, % ,000 75, % , , % (1) The $75,000 of unsecured notes due 2013 is putable in $59,579 $302,446 $1,095,000 $1,457, % General The Company believes that its existing sources of capital will provide sufficient funds to finance its continued development and acquisition activities. The Company s existing sources of capital include the public debt and equity markets, proceeds from property dispositions and net cash provided from its operating activities. Additionally, the Company expects to incur variable rate debt, including borrowings under the Credit Facility from time to time. In 2000, the Company received approximately $19.5 million in aggregate net proceeds from the issuance of 9.125% Series C Cumulative Redeemable Preferred Units, and approximately $197.1 million in aggregate net proceeds from the issuance of unsecured notes. The Company used the aggregate net proceeds from the issuance of preferred units and unsecured notes primarily to pay down the Credit Facility, which is used to fund development and acquisition activity. In 1999, the Company received $93.0 million in aggregate net proceeds from the issuance of 9.25% Series B Cumulative Redeemable Preferred Units, $135.0 million from the closing of a two-year unsecured term loan, and $246.0 million in aggregate net proceeds from the issuance of unsecured notes. The Company used the aggregate net proceeds from issuance of the preferred units, term loan and unsecured notes primarily to pay down the credit facility, which is used to fund development and acquisition activity. In October 1999, the Board of Trustees authorized a share repurchase program under which the Company may purchase up to $100 million of the Company s Common Shares, Preferred Shares or Convertible Debentures. Through December 31, 2000, the Company purchased 59,100 Common Shares and purchased Convertible Debentures exchangeable into 877,950 Common Shares. The total cost for the purchase of the Common Shares and Convertible Debentures was approximately $21.9 million. In September 2000, the quarterly Common Share dividend was increased to $0.57 per share from $0.52 per share. The Company s annual Common Share dividend paid was $2.13 per share, $1.87 per share and $1.71 per share in 2000, 1999 and 1998, respectively. In 2000, the Company s dividend payout ratio was approximately 67% of Funds from operations per share. The Company has an effective S-3 shelf registration statement on file with the Securities and Exchange Commission (the Shelf Registration Statement ). As of March 15, 2001, pursuant to the Shelf Registration Statement, the Trust has the capacity to issue up to $688.4 million in equity securities and the Operating Partnership has the capacity to issue up to $261.1 million in debt securities. 18

21 In March 2001, the Company issued $250 million principal amount, 7.25% senior notes due March 15, The aggregate net proceeds from such issuance were approximately $246.2 million. The Company used the aggregate net proceeds primarily to pay down the Credit Facility, which is used to fund development and acquisition activity. Calculation of Funds from Operations Management generally considers Funds from operations (as defined below) a useful financial performance measure of the operating performance of an equity REIT, because, together with net income and cash flows, Funds from operations provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and capital expenditures. Funds from operations is defined by NAREIT as net income (computed in accordance with generally accepted accounting principles ( GAAP )), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations does not represent net income or cash flows from operations as defined by GAAP and does not necessarily indicate that cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the Company s operating performance or to cash flows as a measure of liquidity. Funds from operations also does not represent cash flows generated from operating, investing or financing activities as defined by GAAP. Funds from operations for the years ended December 31, 2000, 1999 and 1998 are as follows: Year Ended December 31, (In thousands) Income available to common shareholders $148,271 $130,324 $ 97,615 Add back: Minority interest less preferred unit distributions 10,139 9,741 8,062 Depreciation and amortization 92,067 82,960 66,867 Extraordinary item loss on extinguishment on debt 2,103 1,145 (Gain) loss on sale of property (18,386) (13,188) 1,285 Funds from operations $234,194 $210,982 $173,829 Inflation Inflation has remained relatively low during the last three years, and as a result, has not had a significant impact on the Company during this period. The Credit Facility and certain other indebtedness bear interest at a variable rate; therefore, the amount of interest payable under the Credit Facility and such other indebtedness will be influenced by changes in shortterm interest rates, which tend to be sensitive to inflation. To the extent an increase in inflation would result in increased operating costs, such as in insurance, real estate taxes or utilities, substantially all of the tenants leases require the tenants to absorb these costs as part of their rental obligations. In addition, inflation also may have the effect of increasing market rental rates. Quantitative and Qualitative Disclosures about Market Risk The following discussion about the Company s risk management includes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from the results discussed in the forward-looking statements. The Company s primary market risk exposure is to changes in interest rates. The Company is exposed to market risk related to its Credit Facility and certain other indebtedness as discussed in Management s Discussion and Analysis of Financial Condition and Results of Operation Liquidity and Capital Resources and Inflation. The interest on the Credit Facility and such other indebtedness is subject to fluctuations in the market. The Company also uses long-term and medium-term debt as a source of capital. These debt instruments are typically issued at fixed interest rates. When these debt instruments mature, the Company typically refinances such debt at then-existing market interest rates which may be more or less than the interest rates on the maturing debt. In addition, the Company may attempt to reduce interest rate risk associated with a forecasted issuance of new debt. In order to reduce interest rate risk associated with these transactions, the Company occasionally enters into interest rate protection agreements. If the interest rates for variable rate debt were 100 basis points higher or lower during 2000, the Company s interest expense would have been increased or decreased by approximately $1.5 million. If the interest rates for fixed rate debt maturing and to be refinanced in 2001 are 100 basis points higher or lower than its current weighted average rate of 7.2%, the Company s interest expense would be increased or decreased by approximately $55,000. Due to the uncertainty of fluctuations in interest rates, the specific actions that might be taken by management to mitigate the impact of such fluctuations and their possible effects, the sensitivity analysis assumes no changes in the Company s financial structure. 19