Exhibit 99.1

EXPLANATORY NOTE

This exhibit 99.1 to Current Report on Form 8-K contains amended presentations of items 6, 7, 7A, 8 and 15 of the annual reports on Form 10-K for the period ended December 31, 2018 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, 2018. 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 amended items of 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

Table of Contents

INDEX



Index		Page



Item 6.	Selected Financial Data	3

Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	5

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 8.	Financial Statements and Supplementary Data	25

Item 15.	Exhibits and Financial Statement Schedules	109

Signatures		111

Table of Contents

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, 2018. 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)	2018			2017			2016			2015			2014
Total revenue	$	669,960		$	636,467		$	651,585		$	699,708		$	688,695
Income from continuing operations	$	148,786		$	235,739		$	329,411		$	209,508		$	138,301
Income from discontinued operations	$	343,817		$	54,306		$	36,734		$	36,416		$	86,170
Net income	$	492,603		$	290,045		$	366,145		$	245,924		$	224,471
Basic income per common share/unit:
Income from continuing operations	$	0.98		$	1.56		$	2.20		$	1.38		$	0.91
Income from discontinued operations	$	2.28		$	0.36		$	0.24		$	0.24		$	0.57
Income available to common shareholders/unitholders	$	3.26		$	1.92		$	2.44		$	1.62		$	1.48
Diluted income per common share/unit:
Income from continuing operations	$	0.97		$	1.55		$	2.19		$	1.37		$	0.91
Income from discontinued operations	$	2.27		$	0.36		$	0.24		$	0.24		$	0.57
Income available to common shareholders/unitholders	$	3.24		$	1.91		$	2.43		$	1.61		$	1.48
Dividends paid per common share	$	1.60		$	1.675		$	1.90		$	1.90		$	1.90
Trust - weighted average number of shares outstanding - basic ⁽¹⁾	147,275			146,742			146,204			148,243			147,216
Trust - weighted average number of shares outstanding - diluted⁽²⁾	148,221			147,541			146,889			148,843			147,886
Operating Partnership - weighted average number of units outstanding - basic⁽¹⁾	150,795			150,270			149,740			151,783			150,770
Operating Partnership - weighted average number of units outstanding - diluted⁽²⁾	151,741			151,069			150,425			152,383			151,440

Balance Sheet Data	DECEMBER 31,
(In thousands)	2018			2017			2016			2015			2014
Net real estate	$	5,451,080		$	4,700,620		$	4,365,486		$	5,004,883		$	5,080,958
Total assets	$	6,934,394		$	6,439,757		$	5,992,813		$	6,557,629		$	6,612,014
Total indebtedness	$	3,092,746		$	2,909,545		$	2,556,936		$	3,147,016		$	3,149,873
Liberty Property Trust shareholders' equity	$	3,329,861		$	3,087,358		$	3,003,391		$	2,972,581		$	3,046,961
Owners' equity (Liberty Property Limited Partnership)	$	3,396,772		$	3,148,366		$	3,062,923		$	3,030,254		$	3,106,312

Other Data	YEAR ENDED DECEMBER 31,
(Dollars in thousands)	2018			2017			2016			2015			2014
Net cash provided by operating activities	$	383,466		$	336,631		$	341,062		$	379,121		$	311,140
Net cash (used in) provided by investing activities	$	(255,093	)	$	(465,652	)	$	614,927		$	(89,660	)	$	(106,337	)
Net cash (used in) provided by financing activities	$	(55,548	)	$	96,231		$	(939,507	)	$	(331,860	)	$	(326,843	)
NAREIT Funds from operations available to common shareholders - diluted⁽³⁾	$	333,430		$	390,644		$	356,895		$	410,993		$	375,678
Total leaseable square footage of Wholly Owned Properties in Operation at end of period (in thousands)	91,248			87,302			86,037			89,718			91,258
Total leaseable square footage of JV Properties in Operation at end of period (in thousands)	14,853			14,296			13,060			14,018			14,297
Wholly Owned Properties in Operation at end of period	502			509			505			610			669
JV Properties in Operation at end of period	66			65			63			81			83
Wholly Owned Properties in Operation percentage leased at end of period	96		%	97		%	96		%	94		%	93		%
JV Properties in Operation percentage leased at end of period	99		%	97		%	96		%	93		%	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.

Table of Contents


(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.

Table of Contents

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 in the United States nationally, as well as in the United Kingdom.

As previously reported, and as further summarized below, the Company undertook several significant transactions in recent years consistent with its strategy to divest its remaining office Properties (other than its headquarters) and focus its efforts and capital solely on its industrial platform, which favors industrial properties and markets with strong demographic and economic fundamentals. In furtherance of this strategy, the Company has substantially divested of its suburban office Properties, and expects to divest its remaining metro-office Properties over the next few years. The Company plans to reinvest the proceeds of these divestments 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 office properties. The Company believes that this strategy has resulted in an improvement in the average quality and geographic location of its properties. The Company also believes that the benefits of the strategy will outweigh the short-term reduction in operating cash flow resulting from the disposition of its office Properties. There can be no assurance, however, that the benefits of the Company’s strategy will be realized.

As of December 31, 2018 the Company owned the following "Properties in Operation" (square feet in thousands):



	Number of Operating Industrial Properties	Number of Operating Office Properties	Total Number of Properties	Total Square Feet
"Wholly Owned Properties in Operation"	480	22	502	91,248
"JV Properties in Operation" (at 100%)	48	18	66	14,853
"Properties in Operation"	528	40	568	106,101

As of December 31, 2018 the Company owned the following "Properties under Development" and "Properties held for Redevelopment/Value-Added" (square feet upon completion in thousands):



	Number of Properties	Total Square Feet
"Wholly Owned Properties under Development"	29	8,195
"JV Properties under Development" (at 100%)	2	134	⁽¹⁾
"Properties under Development"	31	8,329

"Wholly Owned Properties held for Redevelopment/Value-Added"	7	868
"JV Properties held for Redevelopment/Value-Added" (at 100%)	1	48
"Properties held for Redevelopment/Value-Added"	8	916

(1) Including a 217-room hotel, which is excluded from square footage total.

The Company also owned 1,283 acres of developable land and through unconsolidated joint ventures 339 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.

Table of Contents

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, 2018, straight line rents on renewal and replacement leases were on average 15.4% higher than rents on expiring leases. During the year ended December 31, 2018, the Company leased 22.9 million square feet and, as of that date, attained occupancy of 95.9% for the Wholly Owned Properties in Operation and 98.9% for the JV Properties in Operation for a combined occupancy of 96.3% for the Properties in Operation. At December 31, 2017, occupancy for the Wholly Owned Properties in Operation was 97.0% and for the JV Properties in Operation was 96.5% for a combined occupancy for the Properties in Operation of 96.9%. During the third quarter of 2018, the Sears Holdings Corporation filed for reorganization under Chapter 11 of the federal bankruptcy laws. If the Company's leases with Sears are rejected it could have a negative impact on operating results. This tenant represents 0.8% of square feet of the Company's Properties in Operation and 0.8% of Net Rent. For the tenants in the JV Properties in Operation, Net Rent reflects the Company's ownership percentage of the respective joint ventures.

Based on the Company's current outlook, the Company anticipates that property level operating income for the Same Store (defined below) group of industrial properties will increase for the full year 2019, compared to 2018, driven primarily by new and renewal leases being executed at higher rental rates than those of expiring leases. The Company expects Same Store occupancy levels to remain relatively consistent with those in 2018.

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 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, 2018, the Company acquired 16 operating properties for an aggregate purchase price of $494.3 million. These properties contain an aggregate of 4.1 million square feet of leaseable space and were 61.0% leased as of December 31, 2018. The Company also acquired 12 parcels of land totaling 274.9 acres for an aggregate purchase price of $138.3 million.

Dispositions

During the year ended December 31, 2018, the Company sold 39 Wholly Owned Properties containing an aggregate of 3.4 million square feet, development rights in the UK, and 79.1 acres of land for aggregate proceeds of $873.4 million.

Development

During the year ended December 31, 2018, the Company brought into service 16 Wholly Owned Properties under Development representing 4.7 million square feet and a Total Investment of $434.7 million. As of December 31, 2018, the Company had 29 Wholly Owned Properties under Development, which are expected to comprise, upon completion, 8.2 million square feet and are expected to represent a Total Investment of $735.0 million. These Wholly Owned Properties under Development were 36.3% pre-leased as of December 31, 2018.

“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, 2018, none of the unconsolidated joint ventures in which the Company holds an interest acquired or 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

Table of Contents

During the year ended December 31, 2018, an unconsolidated joint venture in which the Company held an interest brought into service a build-to-suit project totaling 302,000 square feet and representing a Total Investment of $21.0 million. As of December 31, 2018, this completed development property was 100.0% leased. As of December 31, 2018, the Company had one JV Property under Development, which is expected to comprise, upon completion, 134,000 square feet and is expected to represent a Total Investment of $10.3 million. This JV Property under Development was 54.6% pre-leased as of December 31, 2018.

During the year ended December 31, 2018, the joint venture owning the office portion of the Comcast Technology Center brought into service 250,000 square feet of office space representing a Total Investment by such joint venture of $136.1 million. During the year ended December 31, 2017, the joint venture owning the office portion of the Comcast Technology Center brought into service 1.1 million square feet of office space representing a Total Investment by such joint venture of $599.6 million. The office portion of the Project is now substantially complete. The 217-room Four Seasons hotel representing an aggregate Total Investment by the joint venture owning the hotel portion of the Comcast Technology Center of $225.5 million when completed continued to be developed by such joint venture as of December 31, 2018.

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 operating properties and land are capitalized and included in net real estate. Prior to the adoption of ASU 2017-01, Clarifying the Definition of Business, the Company expensed acquisition costs related to the purchase of operating properties with in-place tenants. For the nine months ended September 30, 2016 acquisition costs expensed were $172,000.

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, 2018, 2017 and 2016 was $7.1 million, $5.5 million and $7.2 million, respectively.

Table of Contents

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 $2.7 million, $3.6 million and $3.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Capitalized interest for the years ended December 31, 2018, 2017 and 2016 was $24.5 million, $21.0 million and $24.1 million, respectively.

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.

The Company recognizes development service fee income on a variable basis as a percentage of costs incurred on third party development contracts. Property development services, which are a single performance obligation, continue to be satisfied and recognized over time. The Company measures its progress toward completing the performance obligation under each

arrangement. The measurement of the transfer of value to the customer for these services utilizes the input method (actual costs incurred against anticipated project costs) since this method best depicts the actual transfer of value promised to the customer. Estimated expected losses on such contracts are accrued in the period in which they are determinable. The total amount of consideration to be received from these projects is assessed on a quarterly basis.

The Company is required to make judgments regarding estimated cost overruns that may be incurred relating to an agreement to develop, for a fee, the Comcast Technology Center in Philadelphia, PA (see note 7 to the consolidated financial statements where discussed further). Under this development agreement, the Company has accrued $67.1 million as of December 31, 2018 relating to its development cost guarantees to the joint ventures which own the project and in which the Company holds an interest. There can be no assurances that amounts incurred, including as a result of claims that have been asserted by the third party contractor and certain subcontractors, will not exceed these estimates. The Company is not able to reasonably estimate the amount of additional expenses, if any, that it may incur as a result of such claims, and accordingly any potential exposure of the Company for such claims is not included within the accrual described above. If the Company were to incur additional expenses in connection with its development cost guarantee or in connection with any such claims, such amounts would be accrued when they are determined to be probable of being incurred and are reasonably estimable, and could be material to the Company's results of operations in future periods. If the Company were to subsequently recover any of the cost overruns initially funded by the Company, such recoveries would be recorded when and if realized in future periods.

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, 2018 and 2017, the Company's allowance for doubtful accounts totaled $6.4 million and $6.6 million, respectively. The Company recognized bad debt expense of $1.4 million, $0.6 million and $0.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Table of Contents

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, 2018, 2017 and 2016, the Company recognized impairment losses of $39.7 million, $10.6 million and $3.9 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.

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.

Table of Contents

During the years ended December 31, 2018 and 2017 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 $6.3 million and $4.0 million, respectively, and are reflected in equity in earnings of unconsolidated joint ventures in the Company's 2018 and 2017 consolidated statements 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.

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, 2018 with the results of operations of the Company for the year ended December 31, 2017, and 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. As a result of the varying levels of development, acquisition and disposition activities by the Company in 2018, 2017 and 2016, 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, 2018 to Year Ended December 31, 2017

Rental Revenue

Rental revenue was $453.5 million for the year ended December 31, 2018 compared to $424.2 million for the same period in 2017. This increase of $29.3 million was primarily due to increased rental revenue related to acquisitions and completed development properties and an increase of $13.0 million related to the Company's Industrial Same Store portfolio (see below).

Operating Expense Reimbursement

Operating expense reimbursement was $143.3 million for the year ended December 31, 2018 compared to $129.6 million for the same period in 2017. This increase of $13.7 million was primarily due to an increase in rental property expense and real estate taxes (as detailed below).

Rental Property Expense

Rental property expense was $56.5 million for the year ended December 31, 2018 compared to $52.3 million for the same period in 2017. This increase of $4.2 million resulted from the additional expense for acquisition and completed development properties and an increase of $3.0 million related to increased costs for the Company's Industrial Same Store 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 $90.0 million for the year ended December 31, 2018 compared to $81.8 million for the same period in 2017. This increase of $8.2 million was primarily due to increased real estate taxes for acquisitions and completed development properties and an increase of $3.1 million related to higher real estate tax assessments for the Company's Industrial 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):

Table of Contents

Reportable Segment Net Operating Income:



	Year Ended December 31,				Percentage Increase (Decrease)
	2018		2017		Percentage Increase (Decrease)

Carolinas/Richmond	$	58,722	$	54,652	7.4	%	⁽¹⁾
Chicago/Minneapolis	41,945		40,346		4.0	%	⁽²⁾
Cincinnati/Columbus/Indianapolis	11,860		13,011		(8.8	%)	⁽³⁾
Dallas	12,914		9,367		37.9	%	⁽⁴⁾
Florida	45,467		41,195		10.4	%	⁽⁵⁾
Houston	38,416		33,034		16.3	%	⁽⁶⁾
Lehigh/Central PA	115,232		120,292		(4.2	%)	⁽⁷⁾
Philadelphia	37,349		36,353		2.7	%
Southern California	24,492		10,238		139.2	%	⁽⁵⁾
United Kingdom	15,999		13,744		16.4	%	⁽⁹⁾
Other	86,543		94,277		(8.2	%)	⁽⁸⁾
Total reportable segment net operating income	$	488,939	$	466,509	4.8	%


(1)	The increase was primarily due to an increase in rental rates and average gross investment in operating real estate.


(2)	The increase was primarily due to an increase in rental rates and occupancy.


(3)	The decrease was primarily due to a decrease in occupancy.


(4)	The increase was primarily due to an increase in average gross investment in operating real estate.


(5)	The increase was primarily due to an increase in rental rates, occupancy and average gross investment in operating real estate.


(6)	The increase was primarily due to an increase in occupancy.


(7)	The decrease was primarily due to a decrease in average gross investment in operating real estate, a decrease in occupancy, offset by an increase in rental rates.


(8)	The decrease was primarily due to a decrease in average gross investment in operating real estate.


(9)	The increase was primarily due to an increase in rental rates and average gross investment in operating real estate offset by changes in the foreign exchange rate.

Industrial Same Store

Property level operating income, exclusive of termination fees, for the Industrial Same Store properties is identified in the table below.

The Industrial Same Store results were affected by changes in occupancy and rental rates as detailed below for the respective periods.



	Year Ended
	December 31,
	2018			2017
Average occupancy %	96.8		%	96.7		%
Average rental rate - cash basis ⁽¹⁾	$	5.16		$	4.95
Average rental rate - straight line basis ⁽²⁾	$	6.84		$	6.59


(1)	Represents the average contractual rent per square foot for the year ended December 31, 2018 or 2017 for tenants in occupancy in the Industrial 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, 2018 or 2017 for tenants in occupancy in the Industrial Same Store properties.

Table of Contents

Management generally considers the performance of the Industrial Same Store properties to be a useful financial performance measure because the results are directly comparable from period to period. In addition, Industrial Same Store property level operating income and Industrial Same Store cash basis property level operating income are considered by management to be more reliable indicators of the portfolio’s baseline performance. The Industrial Same Store properties consist of the 431 properties totaling approximately 78.4 million square feet owned on January 1, 2017. Properties that were acquired, or on which development was completed, during the years ended December 31, 2018 and 2017 are excluded from the Industrial Same Store properties. Properties that were acquired, or on which development was completed, are included in Industrial 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 two industrial properties sold during the year ended December 31, 2018 and the four industrial properties sold during 2017 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 Industrial Same Store properties for the years ended December 31, 2018 and 2017. Industrial 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 Industrial 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 the Company’s operating performance. Also set forth below is a reconciliation of Industrial Same Store property level operating income and cash basis property level operating income to net income (in thousands).

Table of Contents



	Year Ended
	December 31, 2018			December 31, 2017
Reconciliation of non-US GAAP financial measure – Industrial Same Store:
Net income	$	492,603		$	290,045
Discontinued operations⁽¹⁾	(343,817		)	(54,306		)
Equity in earnings of unconsolidated joint ventures	(21,382		)	(17,155		)
Income taxes	7,258			1,893
Gain on property dispositions	(81,514		)	(100,387		)
Interest expense	87,642			82,180
Loss on debt extinguishment	—			49
Interest and other income	(12,285		)	(8,116		)
Impairment - real estate assets	32,431			3,946
Development service fee expense	134,825			85,805
Depreciation and amortization expense	161,881			156,085
Other operating expenses	11,994			6,167
General and administrative expense	53,734			56,101
Development service fee income	(73,224		)	(82,673		)
Termination fees ⁽²⁾	(2,070		)	(3,938		)
Non-same store property level operating income - continuing operations	(45,723		)	(27,779		)
Same store property level operating income	402,353			387,917
Less straight line rent	7,286			10,987
Same store cash basis property level operating income	$	395,067		$	376,930

Industrial Same Store:
Rental revenue	$	401,824		$	388,827
Operating expenses:
Rental property expense	53,663			50,630
Real estate taxes	74,530			71,417
Operating expense recovery	(128,722		)	(121,137		)
Unrecovered operating expenses	(529		)	910
Property level operating income	402,353			387,917
Less straight line rent	7,286			10,987
Cash basis property level operating income	$	395,067		$	376,930

(1) Includes termination fee income of $392,000 and termination fee expense of $202,000 for the years ended December 31, 2018 and 2017, respectively.

(2) Termination fees are fees that the Company agrees to accept in consideration for permitting certain tenants to terminate their leases prior to the contractual expiration date.

Development Service Fee Income and Expense

Development Service fee activity was a net loss of $61.6 million and $3.1 million during the years ended December 31, 2018 and 2017, respectively. This increase was primarily due to additional expenses the Company accrued in 2018 in its Philadelphia reportable segment. See Note 7 to the Company's financial statements.

General and Administrative

General and administrative expenses decreased to $53.7 million for the year ended December 31, 2018 compared to $56.1 million for the year ended December 31, 2017. This decrease was primarily due to decreases in incentive compensation expense.

General and administrative expenses include salaries, wages and incentive compensation for general and administrative staff along with related costs, consulting, marketing, public company expenses and other general and administrative costs.

Table of Contents

Other Operating Expenses

Other operating expenses increased to $12.0 million for the year ended December 31, 2018 compared to $6.2 million for the year ended December 31, 2017. This increase was primarily due to costs incurred in connection with the Company's implementation of new financial and operating systems and additional severance costs associated with a reduction in head count associated with real estate sales. Offsetting these increases is a reduction in expensed pursuit costs.

Depreciation and Amortization

Depreciation and amortization increased to $161.9 million for the year ended December 31, 2018 from $156.1 million for the year ended December 31, 2017. This increase was primarily due to depreciation and amortization related to acquisitions and completed development properties since January 1, 2017.

Impairment - Real Estate Assets

Impairment - real estate assets increased to $32.4 million for the year ended December 31, 2018, as compared to $3.9 million for year ended December 31, 2017. In 2018 the Company recognized $32.4 million in impairment charges related to land in its Philadelphia, Florida, Chicago/Minneapolis and the Other reportable segments. In 2017, the Company recognized an impairment charge related to land held for development in the Company's Houston reportable segment. This property was subsequently sold. See Note 19 to the Company's financial statements.

Interest Expense

Interest expense increased to $87.6 million for the year ended December 31, 2018 from $82.2 million for the year ended December 31, 2017. This increase was due to the increase in the average debt outstanding to $2,974.0 million for the year ended December 31, 2018 from $2,756.0 million for the year ended December 31, 2017. The increase was partially offset by an increase in interest capitalized to $24.5 million for the year ended December 31, 2018 compared to $21.0 million for the year ended December 31, 2017 as well as a decrease in the weighted average interest rate to 3.8% for the year ended December 31, 2018 from 3.9% for the year ended December 31, 2017.

Equity in Earnings of Unconsolidated Joint Ventures

Equity in earnings of unconsolidated joint ventures increased to $21.4 million for the year ended December 31, 2018 compared to $17.2 million for the year ended December 31, 2017. This increase was primarily due to the Company's share of results from operations for a completed development building in an unconsolidated joint venture in which the Company holds an interest which was brought into service in January 2018. Additionally, the Company and its partner repaid third party joint venture debt resulting in a decrease in interest expense for another joint venture. Finally, offsetting these increases in joint venture net income is the Company's $6.3 million share of an impairment taken in a joint venture.

Equity in earnings of unconsolidated joint ventures was also impacted by changes in the gain on the sale of land leasehold interests by an unconsolidated joint venture in which the Company holds an interest. The Company's share of these gains was $5.8 million for the year ended December 31, 2018 compared to $8.0 million for the year ended December 31, 2017.

Other

Gain on property dispositions decreased to $81.5 million for the year ended December 31, 2018 from $100.4 million for the year ended December 31, 2017. This decrease resulted from the volume and composition of sales in 2018 as compared to 2017.

Discontinued Operations

A summary of the results of operations for the properties classified as discontinued operations through the respective disposition dates (if applicable) is as follows (in thousands):

Table of Contents



	For the Year Ended
	December 31, 2018			December 31, 2017
Revenue
Rental	$	70,315		$	83,696
Operating expense reimbursement	20,670			33,650
Total Revenue	90,985			117,346
Expenses
Rental Property	12,717			23,104
Real estate taxes	8,970			12,910
Other operating expense	100			(182		)
Interest expense	7,800			8,916
Depreciation and amortization	13,192			25,805
Impairment charges - real estate assets	7,257			6,686
Total Expenses	50,036			77,239
Interest and other income	(185		)	(280		)
Gain on property disposition	303,159			14,578
Income taxes	(106		)	(99		)
Income from discontinued operations	343,817			54,306
Noncontrolling interest - operating partnership	(8,011		)	(1,271		)
Noncontrolling interest – consolidated joint ventures	(495		)	(511		)
Income available to common shareholders	$	335,311		$	52,524

Changes in discontinued operations are reflective of the period of time the properties were held during the respective periods. To the extent that a property is sold, or completed and stabilized during a period, it will only impact the results of such period prior to being sold or completed and stabilized, as the case may be. There were 37 properties classified as discontinued operations and sold during the year ended December 31, 2018 and two properties were classified as discontinued operations and sold during the year ended December 31, 2017.

As a result of the foregoing, the Company’s net income increased to $492.6 million for the year ended December 31, 2018 from $290.0 million for the year ended December 31, 2017.

Comparison of Year Ended December 31, 2017 to Year Ended December 31, 2016

Rental Revenue

Rental revenue was $424.2 million for the year ended December 31, 2017 compared to $476.1 million for the same period in 2016. This decrease of $51.9 million was primarily due to the net result of decreased rental revenue related to property disposition activity since January 1, 2016, offset by increased rental revenue related to acquisitions and completed development for the same comparative periods and an increase of $9.6 million related to the Company's Prior Year Industrial Same Store portfolio (see below).

Operating Expense Reimbursement

Operating expense reimbursement was $129.6 million for the year ended December 31, 2017 compared to $162.5 million for the same period in 2016. This decrease of $32.9 million was primarily due to lower reimbursements associated with the property disposition activity since January 1, 2016.

Rental Property Expense

Rental property expense was $52.3 million for the year ended December 31, 2017 compared to $83.9 million for the same period in 2016. This decrease of $31.6 million was primarily due to a reduction in expense resulting from property disposition activity 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

Table of Contents

Real estate taxes were $81.8 million for the year ended December 31, 2017 compared to $91.8 million for the same period in 2016. This decrease of $10.0 million was primarily due to the net result of decreased real estate taxes related to property disposition activity since January 1, 2016.

Segments

Reportable Segment Net Operating Income:



	Year Ended December 31,				Percentage Increase (Decrease)
	2017		2016		Percentage Increase (Decrease)

Carolinas/Richmond	$	54,652	$	47,872	14.2	%	⁽¹⁾
Chicago/Minneapolis	40,346		47,289		(14.7	%)	⁽²⁾
Cincinnati/Columbus/Indianapolis	13,011		12,064		7.8	%	⁽³⁾
Dallas	9,367		8,281		13.1	%	⁽⁴⁾
Florida	41,195		65,273		(36.9	%)	⁽²⁾
Houston	33,034		33,715		(2.0	%)
Lehigh/Central PA	120,292		103,645		16.1	%	⁽¹⁾
Philadelphia	36,353		33,481		8.6	%	⁽¹⁾
Southern California	10,238		7,100		44.2	%	⁽¹⁾
United Kingdom	13,744		11,369		20.9	%	⁽⁵⁾
Other	94,277		$	123,040	(23.4	%)	⁽²⁾
Total reportable segment net operating income	$	466,509	$	493,129	(5.4	%)


(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 termination fee income and occupancy.


(4)	The increase was primarily due to an increase in average gross investment in operating real estate and occupancy


(5)	The increase was primarily due to an increase in the foreign exchange rate.

Table of Contents

Prior Year Industrial Same Store

Property level operating income, exclusive of termination fees, for the Prior Year Industrial Same Store properties is identified in the table below. The Prior Year Industrial Same Store group was adjusted to reflect industrial properties to align with the comparative presentation of Industrial Same Store Properties for the years 2018 versus 2017. This comparison reflects the Company's strategy to divest its remaining office properties and focus its efforts and capital solely on its industrial platform.

The Prior Year Industrial Same Store results were affected by changes in occupancy and rental rates as detailed below for the respective periods as well as the decrease in the non-recovered portion of the snow removal costs and other weather-related expenses for the respective periods.



	Year Ended
	December 31,
	2017			2016
Average occupancy %	96.6		%	96.5		%
Average rental rate - cash basis ⁽¹⁾	$	5.00		$	4.87
Average rental rate - straight line basis ⁽²⁾	$	6.62		$	6.48


(1)	Represents the average contractual rent per square foot for the year ended December 31, 2017 or 2016 for tenants in occupancy in the Industrial 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 Industrial Same Store properties.

Management generally considers the performance of the Prior Year Industrial Same Store properties to be a useful financial performance measure because the results are directly comparable from period to period. In addition, Prior Year Industrial Same Store property level operating income and Prior Year Industrial Same Store cash basis property level operating income are considered by management to be more reliable indicators of the portfolio’s baseline performance. The Prior Year Industrial Same Store properties consist of the 426 properties totaling approximately 75.2 million square feet owned on January 1, 2016. Industrial properties that were acquired, or on which development was completed, during the years ended December 31, 2017 and 2016 are excluded from the Prior Year Industrial Same Store properties. Industrial properties that were acquired, or on which development was completed, are included in Prior Year Industrial Same Store 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 four industrial properties sold during the year ended December 31, 2017 and the 48 industrial 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 Prior Year Industrial Same Store properties for the years ended December 31, 2017 and 2016. Prior Year Industrial 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 Prior Year Industrial 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 the Company’s operating performance. Also set forth below is a reconciliation of Prior Year Industrial Same Store property level operating income and cash basis property level operating income to net income (in thousands).

Table of Contents



	Year Ended
	December 31, 2017			December 31, 2016
Reconciliation of non-US GAAP financial measure – Prior Year Industrial Same Store:
Net income	$	290,045		$	366,145
Discontinued operations⁽¹⁾	(54,306		)	(36,734		)
Equity in earnings of unconsolidated joint ventures	(17,155		)	(21,970		)
Income taxes	1,893			1,874
Gain on property dispositions	(100,387		)	(219,270		)
Interest expense	82,180			102,958
Loss on debt extinguishment	49			27,099
Interest and other income	(8,116		)	(14,054		)
Impairment charges - real estate assets	3,946			3,879
Development service fee expense	85,805			12,165
Depreciation and amortization expense	156,085			185,778
Other operating expense	6,167			5,017
General and administrative expense	56,101			62,963
Development service fee income	(82,673		)	(12,941		)
Termination fees⁽²⁾	(3,938		)	(2,684		)
Non-same store property level operating income - continuing operations	(42,881		)	(99,392		)
Prior year industrial same store property level operating income	372,815			360,833
Less straight line rent	7,939			8,219
Prior year industrial same store cash basis property level operating income	$	364,876		$	352,614

Prior Year Industrial Same Store:
Rental revenue	$	373,743		$	364,111
Operating expenses:
Rental property expense	50,148			51,543
Real estate taxes	68,011			66,767
Operating expense recovery	(117,231		)	(115,032		)
Unrecovered operating expenses	928			3,278
Property level operating income	372,815			360,833
Less straight line rent	7,939			8,219
Cash basis property level operating income	$	364,876		$	352,614

(1) Includes termination fees of $202,000 and $1.8 million for the years ended December 31, 2017 and 2016, respectively.

(2) Termination fees are fees that the Company agrees to accept in consideration for permitting certain tenants to terminate their leases prior to the contractual expiration date.

Development Service Fee Income and Expense

In the fourth quarter of 2016, the Company entered into an agreement relating to the fee development of an office building at its Camden Waterfront project in Camden, NJ. Project revenues and related costs and expenses are presented on a gross basis as "Development service fee income" and "Development service fee expense" in the Consolidated Statements of Comprehensive Income. Additionally, at the same time, the Company began classifying development fees and expenses relating to its fee development arrangements for certain unconsolidated joint venture projects in a manner consistent with the Camden Waterfront project described above. Previously, development service fee income relating to the Company's unconsolidated joint ventures had been classified as other income and development service fee expense had been classified as general and administrative expense in amounts as follows:

Table of Contents



	Nine months ended
	September 30, 2016
Other income	$	3,789
General and administrative expense	$	3,210

Development Service fee activity was a net loss of $3.1 million during the year ended December 31, 2017 as compared to a net gain of $0.8 million for the year ended December 31, 2016. This decrease was primarily due to additional expenses the Company accrued in 2017 in its Philadelphia reportable segment.

General and Administrative

General and administrative expenses decreased to $56.1 million for the year ended December 31, 2017 compared to $63.0 million for the year ended December 31, 2016. This decrease was partially due to certain expenses which were classified as development service fee expense on the Company's consolidated statements of comprehensive income for the year ended December 31, 2017 and the partial year ended December 31, 2016, as described above. The decrease was also partially due to a decrease in compensation costs.

Other Operating Expenses

Other operating expenses increased to $6.2 million for the year ended December 31, 2017 compared to $5.0 million for the year ended December 31, 2016. This increase was primarily due to expense relating to the write-off of costs associated with certain planned development projects which were terminated. Partially offsetting this amount was less severance costs incurred in 2017 versus 2016.

Depreciation and Amortization

Depreciation and amortization decreased to $156.1 million for the year ended December 31, 2017 from $185.8 million for the year ended December 31, 2016. This decrease was primarily due to the net result of decreased depreciation and amortization related to property dispositions since January 1, 2016 offset by increased depreciation and amortization related to acquisitions and completed development for the same period. The decrease was also due to a reduction in amortization of in-place lease intangibles.

Impairment - Real Estate Assets

Impairment - real estate assets remained unchanged at $3.9 million for the years ended December 31, 2017 and December 31, 2016. In 2016, the Company recognized impairments related to certain properties in the Company's Chicago/Minneapolis reportable segment. These properties were subsequently sold. In 2017, the Company recognized an impairment charge related to land held for development in the Company's Houston reportable segment. This property was subsequently sold.

Interest Expense

Interest expense decreased to $82.2 million for the year ended December 31, 2017 from $103.0 million for the year ended December 31, 2016. This decrease was due to the decrease in the average debt outstanding to $2,756.0 million for the year ended December 31, 2017 from $3,077.7 million for the year ended December 31, 2016 as well as a decrease in the weighted average interest rate to 3.9% for the year ended December 31, 2017 from 4.2% for the year ended December 31, 2016. The decrease was partially offset by a decrease in interest capitalized to $21.0 million for the year ended December 31, 2017 compared to $24.1 million for the year ended December 31, 2016.

Equity in Earnings of Unconsolidated Joint Ventures

Equity in earnings of unconsolidated joint ventures decreased to $17.2 million for the year ended December 31, 2017 compared to $22.0 million for the year ended December 31, 2016. This decrease was primarily due to a decrease in gain on sale of operating properties, a decrease in gain on debt forgiveness and an increase in impairment charges - real estate assets by unconsolidated joint ventures in which the Company holds an interest. The Company's share of recognized gain was $7.3 million for the year ended December 31, 2016 compared to $3.0 million for 2017. The Company's share of debt forgiveness gains was $4.2 million for the year ended December 31, 2016. There were no such gains in 2017. The Company's share of impairment charges - real estate assets was $4.0 million for the year ended December 31, 2017. There were no such charges in 2016.

Table of Contents

Other

Gain on property dispositions decreased to $100.4 million for the year ended December 31, 2017 from $219.3 million for the year ended December 31, 2016. This decrease resulted from the volume and composition of sales in 2017 as compared to 2016.

Discontinued Operations

A summary of the results of operations for the properties classified as discontinued operations through the respective disposition dates (if applicable) is as follows (in thousands):



	For the Year Ended
	December 31, 2017			December 31, 2016
Revenue
Rental	$	83,696		$	67,288
Operating expense reimbursement	33,650			27,835
Total Revenue	117,346			95,123
Expenses
Rental Property	23,104			18,575
Real estate taxes	12,910			7,964
Other operating expense	(182		)	218
Interest expense	8,916			12,119
Depreciation and amortization	25,805			19,312
Impairment charges - real estate assets	6,686			—
Total Expenses	77,239			58,188
Interest and other income	(280		)	(104		)
Gain on property disposition	14,578			—
Income taxes	(99		)	(97		)
Income from discontinued operations	54,306			36,734
Noncontrolling interest - operating partnership	(1,271		)	(856		)
Noncontrolling interest – consolidated joint ventures	(511		)	(258		)
Income available to common shareholders	$	52,524		$	35,620

Changes in discontinued operations are reflective of the period of time the properties were held during the respective periods. To the extent that a property is sold, or completed and stabilized during a period, it will only impact the results of such period prior to being sold or completed and stabilized, as the case may be. There were two properties classified as discontinued operations and sold during the year ended December 31, 2017.

As a result of the foregoing, the Company’s net income decreased to $290.0 million for the year ended December 31, 2017 from $366.1 million for the year ended December 31, 2016.

Liquidity and Capital Resources

Overview

The Company seeks to maintain a conservative balance sheet and pursue a strategy of financial flexibility. The Company's liquidity requirements include operating and general and administrative expenses, shareholder distributions, funding its investment in development properties and joint ventures and satisfying interest requirements and debt maturities. The Company believes that proceeds from operating activities, asset sales, its available cash, borrowing capacity from its Credit Facilities (as defined below) and its other sources of capital including the public debt and equity markets will provide it with sufficient funds to satisfy these obligations.

Activity

As of December 31, 2018, the Company had cash and cash equivalents of $95.8 million, including $10.9 million in restricted cash.

Table of Contents

Net cash provided by operating activities increased to $383.5 million for the year ended December 31, 2018 from $336.6 million for the year ended December 31, 2017. This $46.9 million increase was primarily due to fluctuations in operating assets and liabilities. Net cash flow provided by operating activities is the primary source of liquidity to fund dividends to shareholders, recurring capital expenditures and leasing transaction costs for the Company’s Wholly Owned Properties in Operation.

Net cash used in investing activities decreased to $255.1 million for the year ended December 31, 2018 from $465.7 million for the year ended December 31, 2017. This $210.6 million difference was primarily due to the change in net proceeds from dispositions less cash paid for acquisitions which was $351.9 million in 2018 as compared to $123.5 million in 2017.

Net cash used in financing activities was $55.5 million for the year ended December 31, 2018 compared to net cash provided by financing activities of $96.2 million for the year ended December 31, 2017. This $151.7 million change was primarily due to net debt repayment activity associated with the net dispositions and acquisitions activity described above. Net cash used in financing activities includes proceeds from the issuance of equity and debt, net of debt repayments, equity repurchases and shareholder distributions.

The Company is a party to a credit facility with a maximum availability of $800 million (the "Facility") and a working capital line of credit for $30 million (the "Credit Facilities"). The Company also has a fully drawn delayed draw term loan (the "DDTL") facility for aggregate borrowings of $100 million (together the "Facilities"). The Facilities expire in October 2021 and have two six-month extensions at the Company's option. The interest rate on borrowings under the Facilities fluctuates based upon ratings from Moody's Investor Services, Inc., Standard and Poor's Ratings Group and Fitch, Inc. Based upon the Company’s current credit ratings, borrowings under the Credit Facilities bear interest at LIBOR plus 0.875%. There is also a 0.15% annual facility fee on the aggregate loan commitments of the Credit Facilities. The DDTL currently bears interest at LIBOR plus 0.95%. The Facility contains a competitive bid option, whereby participating lenders bid on the interest rate to be charged. This feature is available for up to 50% of the amount of the Facility. As of December 31, 2018, the Company had $411.8 million outstanding borrowings and $8.3 million of letters of credit issued under the Facilities.

In September 2016, the Company issued $400 million of 3.25% senior unsecured notes due 2026. The Company used a substantial portion of the net proceeds from these notes and the proceeds from asset sales to prepay its 5.5% senior notes due December 2016 in the amount of $300 million, its 6.625% senior notes due October 2017 in the amount of $296.5 million and its 7.5% medium term notes due January 2018 in the amount of $100.0 million. This prepayment resulted in a $27.1 million loss on debt extinguishment.

During the year ended December 31, 2016, the Company purchased an aggregate of 1.4 million common shares for $40.9 million as part of a share repurchase plan.

In October 2017, the Company replaced its existing $800 million credit facility with the new $800 million Facility and a $100 million DDTL.

In October 2017, the Company entered into a working capital line of credit for aggregate borrowings of up to $30 million.

In December 2018, the Company entered into a £129.5 million ten-year mortgage loan secured by properties in the Company's United Kingdom reportable segment at an interest rate of 2.64%.

In January 2019, the Company issued $350 million of 4.375% senior unsecured notes due 2029. The Company used the proceeds to pay down its revolving credit facilities.

In October and November 2018, in anticipation of conducting an offering of senior notes, the Operating Partnership entered into two interest rate lock agreements tied to the U.S. treasury rate. These agreements were settled prior to the consummation of the above-described senior note offering for an aggregate cost to the Operating Partnership of $5.7 million. See Note 20 - Derivative Instruments.

The Company funds its development activities and acquisitions with long-term capital sources and proceeds from the disposition of properties. For the year ended December 31, 2018, a portion of these activities were funded through the Facilities.

The Company uses debt financing to lower its overall cost of capital in an attempt to increase the return to shareholders. The Company staggers its debt maturities and maintains debt levels it considers to be prudent. In determining its debt levels, the Company considers various financial measures including the debt to gross assets ratio and the fixed charge coverage ratio. As of December 31, 2018, the Company’s debt to gross assets ratio was 38.9% and for the year ended December 31, 2018, the fixed charge coverage ratio was 3.5x. Debt to gross assets equals total long-term debt and borrowings under the Facilities divided by total assets plus accumulated depreciation (including accumulated depreciation in assets held for sale). The fixed charge coverage

Table of Contents

ratio equals net income before property dispositions plus interest expense, depreciation and amortization, share based compensation and impairment - real estate assets (including the Company's pro rata share of impairment - real estate assets related to unconsolidated joint ventures), divided by interest expense, including capitalized interest, plus distributions on preferred units. All amounts in the calculation of fixed charge coverage include components within both continuing and discontinued operations.

As of December 31, 2018, $393.8 million of mortgage loans (including $66.8 million fixed via a swap arrangement - see Note 20 to the Company's Consolidated Financial Statements) and $2.3 billion in unsecured notes were outstanding with a weighted average interest rate of 3.90%. The interest rates on $2,693.8 million of mortgage loans and unsecured notes are fixed (including those fixed via swap agreements) and range from 2.6% to 4.8%. The weighted average remaining term for the mortgage loans and unsecured notes as of December 31, 2018 was 5.1 years.

The Company's contractual obligations, as of December 31, 2018, were as follows (in thousands):



	PAYMENTS DUE BY PERIOD
			LESS THAN 1						MORE THAN
Contractual Obligations ⁽¹⁾	TOTAL		YEAR		1-3 YEARS		3-5 YEARS		5 YEARS
Long-term debt ⁽²⁾	$	3,647,768	$	178,986	$	1,104,656	$	834,201	$	1,529,925
Land purchase obligations	49,484		49,484		—		—		—
Operating lease obligations	41,441		1,551		3,554		2,138		34,198
Share of debt of unconsolidated joint ventures⁽²⁾	284,670		20,463		36,066		9,068		219,073
Tenant contractual obligations	17,751		17,751		—		—		—
Share of tenant contractual obligations of unconsolidated joint ventures	530		530		—		—		—
Letters of credit	8,280		8,280		—		—		—
Land improvement and renovation commitments	12,973		9,106		3,867		—		—
Development in progress	244,014		237,940		6,074		—		—
Development commitment ⁽³⁾	11,682		11,682		—		—		—
Share of development in progress of unconsolidated joint ventures	20,567		20,567		—		—		—
Total	$	4,339,160	$	556,340	$	1,154,217	$	845,407	$	1,783,196


(1)	The Company is contractually committed to build a minimum of 60,000 square feet of building space every two years at the Navy Yard Corporate Center in Philadelphia, with certain rights to defer these biennial requirements. The failure by the Company to meet these milestones could result in the loss of the Company’s exclusive development rights with respect to the Navy Yard Corporate Center.


(2)	Includes principal and interest payments. Interest payments assume borrowings under the Facilities and interest rates remain at the December 31, 2018 level until maturity.


(3)	Included in the development commitment is approximately $170.9 million in costs related to the Company's agreement to develop, on a fee basis, an office building and infrastructure improvements for American Water Works in Camden, New Jersey, of which $159.2 million has been incurred. This building was delivered in December 2018.

As discussed above and in Note 7 to the Company's Consolidated Financial Statements, the Company may initially be required to fund cost overruns in connection with its development of the Comcast Technology Center. As of December 31, 2018, the Company accrued $67.1 million relating to such contingency. Such amount is not included in the table above.

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 secured financing of properties, proceeds from property dispositions, equity capital from joint venture partners, remaining capacity of $125.0 million under the Company's at-the-market equity offering program and net cash provided by operating activities. Additionally, the Company expects to incur variable rate debt, including borrowings under the Facilities, from time to time.

The Company's annual Common Share dividend paid was $1.60 per share, $1.675 per share and $1.90 per share in 2018, 2017 and 2016, respectively. Future distribution payments by the Company will be paid at the discretion of the Board of Trustees and will depend on the Company's actual funds from operations and cash flows, the Company’s financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors that 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.

The Company has an effective S-3 shelf registration statement on file with the SEC pursuant to which the Trust and the Operating Partnership may issue an unlimited amount of equity securities and debt securities.

Table of Contents

Off-Balance Sheet Arrangements

As of December 31, 2018, the Company had investments in and advances to unconsolidated joint ventures totaling $351.0 million (see Note 7 to the Company's Consolidated Financial Statements included in this report).

Calculation of Funds from Operations

The National Association of Real Estate Investment Trusts (“NAREIT”) has issued a standard definition for NAREIT Funds from operations (as defined below). The SEC 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 operating 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.

Table of Contents

A reconciliation of NAREIT Funds from operations (“FFO”) available to common shareholders to Net income available to common shareholders for the year ended December 31, 2018, 2017, and 2016 is as follows (in thousands, except per share amounts):



	Year Ended December 31,
	2018			2017			2016
Reconciliation of net income available to common shareholders to NAREIT FFO available to common shareholders - basic:
Net income available to common shareholders	$	479,607		$	282,340		$	356,817
Basic - income available to common shareholders	479,607			282,340			356,817
Basic - income available to common shareholders per weighted average share	$	3.26		$	1.92		$	2.44
Adjustments:
Depreciation and amortization of unconsolidated joint ventures	12,950			10,155			11,014
Depreciation and amortization	173,258			180,117			203,626
(Gain)/loss on property dispositions / impairment - real estate assets of unconsolidated joint ventures	6,347			2,972			(7,012		)
(Gain) on property dispositions / impairment - depreciable real estate assets continuing operations	(54,244		)	(83,800		)	(216,148		)
(Gain) on property dispositions / impairment - depreciable real estate assets discontinued operations	(295,902		)	(7,892		)	—
Noncontrolling interest share in addback for depreciation and amortization and gain on property dispositions / impairment - real estate assets	3,663			(2,379		)	192
NAREIT FFO available to common shareholders – basic	$	325,679		$	381,513		$	348,489
Basic NAREIT FFO available to common shareholders per weighted average share	$	2.21		$	2.60		$	2.38
Reconciliation of net income available to common shareholders to NAREIT FFO available to common shareholders - diluted:
Net income available to common shareholders	$	479,607		$	282,340		$	356,817
Diluted - income available to common shareholders	479,607			282,340			356,817
Diluted - income available to common shareholders per weighted average share	$	3.24		$	1.91		$	2.43
Adjustments:
Depreciation and amortization of unconsolidated joint ventures	12,950			10,155			11,014
Depreciation and amortization	173,258			180,117			203,626
(Gain)/loss on property dispositions / impairment - real estate assets of unconsolidated joint ventures	6,347			2,972			(7,012		)
(Gain) on property dispositions / impairment - depreciable real estate assets continuing operations	(54,244		)	(83,800		)	(216,148		)
(Gain) on property dispositions / impairment - depreciable real estate assets discontinued operations	(295,902		)	(7,892		)	—
Noncontrolling interest less preferred share distributions	11,414			6,752			8,598
NAREIT FFO available to common shareholders - diluted	$	333,430		$	390,644		$	356,895
Diluted NAREIT FFO available to common shareholders per weighted average share	$	2.20		$	2.59		$	2.37
Reconciliation of weighted average shares:
Weighted average common shares - all basic calculations	147,275			146,742			146,204
Dilutive shares for long term compensation plans	946			799			685
Diluted shares for net income calculations	148,221			147,541			146,889
Weighted average common units	3,520			3,528			3,536
Diluted shares for NAREIT FFO calculations	151,741			151,069			150,425

Inflation

Inflation has remained relatively low in recent years, and as a result, it has not had a significant impact on the Company during this period. To the extent an increase in inflation would result in increased operating costs, such as insurance, real estate taxes and

Table of Contents

utilities, the majority of the tenants’ leases require the tenants to absorb these costs as part of their rental obligations. In addition, inflation also may have the effect of increasing market rental rates.

ITEM 7A. 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 carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued interest, dividends and distributions payable and other liabilities are reasonable estimates of fair value because of the short-term nature of these instruments. The fair value of the Company's long-term debt, which is based on estimates by management and on rates quoted on December 31, 2018 for comparable loans, is greater than the aggregate carrying value by approximately $12.0 million at December 31, 2018.

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 Operations - Liquidity and Capital Resources."

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 an issuance of new debt. Our interest rate risk objective is to limit the impact of interest rate changes on earnings and cash flows and lower our overall borrowing costs. To achieve these objectives, from time to time the Company enters into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. The Company does not hold or issue these derivative contracts for trading or speculative purposes.

If the interest rates for variable rate debt were 100 basis points higher or lower during 2018, the Company's interest expense would have increased or decreased by $3.2 million. If the interest rate for the fixed rate debt maturing in 2019 had been 100 basis points higher or lower than its current rate of 3.9%, the Company's interest expense would have increased or decreased by $407,000.

The sensitivity analysis above assumes no changes in the Company's financial structure. It also does not consider future fluctuations in interest rates or the specific actions that might be taken by management to mitigate the impact of such fluctuations.

We are exposed to foreign currency exchange variability related to investments in and earnings from our investments in the United Kingdom. Foreign currency market risk is the possibility that our results of operations or financial position could be better or worse than anticipated because of changes in foreign currency exchange rates. We primarily hedge our foreign currency risk by borrowing in the currency in which we invest, thereby providing a natural hedge. As of December 31, 2018, we had outstanding debt denominated in British pounds sterling of £129.5 million (approximately $165.2 million), which was secured by U.K. real estate assets. As of December 31, 2018 we did not have any foreign currency hedges in place.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and financial statement schedule of Liberty Property Trust and Liberty Property Limited Partnership and the reports thereon of Ernst & Young LLP, an independent registered public accounting firm, with respect thereto are filed as part of this Annual Report on Form 10-K.

Table of Contents

Management's Annual Report on Internal Control Over Financial Reporting

The Trust's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a - 15 (f) and 15d - 15(f). The Trust's internal control system was designed to provide reasonable assurance to the Trust's management and Board of Trustees regarding the preparation and fair presentation of published financial statements.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of the Trust's internal control over financial reporting as of December 31, 2018. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013 Framework). Based on our assessment we believe that, as of December 31, 2018, the Trust's internal control over financial reporting is effective based on those criteria.

The Trust's independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Trust's internal control over financial reporting, which is included in this Annual Report on Form 10-K.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Trustees of Liberty Property Trust

Opinion on Internal Control over Financial Reporting

We have audited Liberty Property Trust’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Liberty Property Trust (the “Trust”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Trust as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and schedules listed in the Index at Item 15 and our report dated February 26, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Trust’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania

February 26, 2019

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Trustees of Liberty Property Trust

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Liberty Property Trust (the “Trust”) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and schedules listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Trust at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Trust’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2019 expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Note 2 to the consolidated financial statements, the Trust changed its method of accounting for determining whether an acquisition is an asset or a business effective October 1, 2016 due to the early adoption of Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”.

Basis for Opinion

These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on the Trust’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Trust’s auditor since 1993.

Philadelphia, Pennsylvania

February 26, 2019, except Notes 3, 4, 6, 8, 16, 18, 19, 21, 22 and 23 as to which the date is November 25, 2019

Table of Contents

Management's Annual Report on Internal Control Over Financial Reporting

The Operating Partnership's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15 (f) and 15d-15(f). The Operating Partnership's internal control system was designed to provide reasonable assurance to the Operating Partnership's management regarding the preparation and fair presentation of published financial statements.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of the Operating Partnership's internal control over financial reporting as of December 31, 2018. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013 Framework). Based on our assessment we believe that, as of December 31, 2018, the Operating Partnership's internal control over financial reporting is effective based on those criteria.

The Operating Partnership's independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Operating Partnership's internal control over financial reporting, which is included in this Annual Report on Form 10-K.

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Partners of Liberty Property Limited Partnership

Opinion on Internal Control over Financial Reporting

We have audited Liberty Property Limited Partnership’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Liberty Property Limited Partnership (the “Operating Partnership”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Operating Partnership as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, owners’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and schedules listed in the Index at Item 15 and our report dated February 26, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Operating Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Operating Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

Definition and Limitations of Internal Control Over Financial Reporting

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania

February 26, 2019

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Partners of Liberty Property Limited Partnership

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Liberty Property Limited Partnership (the “Operating Partnership”) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, owners’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and schedules listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Operating Partnership at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Operating Partnership’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2019 expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Note 2 to the consolidated financial statements, the Operating Partnership changed its method of accounting for determining whether an acquisition is an asset or a business effective October 1, 2016 due to the early adoption of Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”.

Basis for Opinion

These financial statements are the responsibility of the Operating Partnership’s management. Our responsibility is to express an opinion on the Operating Partnership’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

/s/ Ernst & Young LLP

We have served as the Operating Partnership’s auditor since 1993.

Philadelphia, Pennsylvania

February 26, 2019, except Notes 3, 4, 6, 8, 16, 18, 19, 21, 22 and 23 as to which the date is November 25, 2019

Table of Contents

CONSOLIDATED BALANCE SHEETS OF LIBERTY PROPERTY TRUST

(In thousands, except share and unit amounts)



	December 31,
	2018			2017
ASSETS
Real estate:
Land and land improvements	$	1,236,514		$	1,003,215
Building and improvements	4,397,049			3,894,717
Less accumulated depreciation	(941,299		)	(822,069		)
Operating real estate	4,692,264			4,075,863
Development in progress	462,572			294,009
Land held for development	296,244			330,748
Net real estate	5,451,080			4,700,620
Cash and cash equivalents	84,923			11,882
Restricted cash	10,899			13,803
Accounts receivable, net	14,109			9,992
Deferred rent receivable, net	111,372			93,235
Deferred financing and leasing costs, net	157,823			135,741
Investments in and advances to unconsolidated joint ventures	350,981			288,456
Assets held for sale	502,207			913,957
Prepaid expenses and other assets	251,000			272,071
Total assets	$	6,934,394		$	6,439,757
LIABILITIES
Mortgage loans, net	$	395,202		$	267,093
Unsecured notes, net	2,285,698			2,283,513
Credit facilities	411,846			358,939
Accounts payable	62,943			69,387
Accrued interest	22,309			21,796
Dividend and distributions payable	60,560			60,330
Other liabilities	270,396			188,575
Liabilities held for sale	21,131			34,221
Total liabilities	3,530,085			3,283,854
Noncontrolling interest - operating partnership - 301,483 preferred units outstanding as of December 31, 2018 and December 31, 2017	7,537			7,537
EQUITY
Liberty Property Trust shareholders’ equity
Common shares of beneficial interest, $.001 par value, 283,987,000 shares authorized; 147,899,354 and 147,450,691 shares issued and outstanding as of December 31, 2018 and December 31, 2017, respectively	148			147
Additional paid-in capital	3,691,778			3,674,978
Accumulated other comprehensive loss	(55,243		)	(37,797		)
Distributions in excess of net income	(306,822		)	(549,970		)
Total Liberty Property Trust shareholders’ equity	3,329,861			3,087,358
Noncontrolling interest – operating partnership - 3,520,205 common units outstanding as of December 31, 2018 and December 31, 2017	61,471			56,159
Noncontrolling interest – consolidated joint ventures	5,440			4,849
Total equity	3,396,772			3,148,366
Total liabilities, noncontrolling interest - operating partnership and equity	$	6,934,394		$	6,439,757

See accompanying notes.

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME OF LIBERTY PROPERTY TRUST

(In thousands, except per share amounts)



	Year Ended December 31,
	2018			2017			2016
REVENUE
Rental	$	453,467		$	424,236		$	476,122
Operating expense reimbursement	143,269			129,558			162,522
Development service fee income	73,224			82,673			12,941
Total revenue	669,960			636,467			651,585
EXPENSE
Rental property	56,543			52,336			83,906
Real estate taxes	90,047			81,824			91,829
General and administrative	53,734			56,101			62,963
Other operating expense	11,994			6,167			5,017
Interest expense	87,642			82,180			102,958
Loss on debt extinguishment	—			49			27,099
Depreciation and amortization	161,881			156,085			185,778
Development service fee expense	134,825			85,805			12,165
Impairment - real estate assets	32,431			3,946			3,879
Total expense	629,097			524,493			575,594

Interest and other income	12,285			8,116			14,054
Gain on property dispositions	81,514			100,387			219,270
Income taxes	(7,258		)	(1,893		)	(1,874		)
Equity in earnings of unconsolidated joint ventures	21,382			17,155			21,970
Income from continuing operations	148,786			235,739			329,411
Discontinued operations (including net gain of $303.2 million and $14.6 million on property dispositions for the years ended December 31, 2018 and 2017, respectively)	343,817			54,306			36,734
Net income	492,603			290,045			366,145
Noncontrolling interest – operating partnership	(11,886		)	(7,224		)	(9,070		)
Noncontrolling interest – consolidated joint ventures	(1,110		)	(481		)	(258		)
Income available to common shareholders	$	479,607		$	282,340		$	356,817
Net income	$	492,603		$	290,045		$	366,145
Other comprehensive (loss) income - foreign currency translation	(14,161		)	18,066			(34,744		)
Other comprehensive (loss) income - derivative instruments	(3,700		)	605			410
Other comprehensive (loss) income	(17,861		)	18,671			(34,334		)
Total comprehensive income	474,742			308,716			331,811
Less: comprehensive income attributable to noncontrolling interest	(12,581		)	(8,142		)	(8,519		)
Comprehensive income attributable to common shareholders	$	462,161		$	300,574		$	323,292
Earnings per common share
Basic:
Income from continuing operations	$	0.98		$	1.56		$	2.20
Income from discontinued operations	2.28			0.36			0.24
Income per common share – basic	$	3.26		$	1.92		$	2.44
Diluted:
Income from continuing operations	$	0.97		$	1.55		$	2.19
Income from discontinued operations	2.27			0.36			0.24
Income per common share – diluted	$	3.24		$	1.91		$	2.43
Weighted average number of common shares outstanding
Basic	147,275			146,742			146,204
Diluted	148,221			147,541			146,889
Amounts attributable to common shareholders
Income from continuing operations	$	144,296		$	229,816		$	321,197
Discontinued operations	335,311			52,524			35,620
Net income available to common shareholders	$	479,607		$	282,340		$	356,817

See accompanying notes.

Table of Contents

CONSOLIDATED STATEMENTS OF EQUITY OF LIBERTY PROPERTY TRUST

(In thousands, except share amounts)



	NUMBER OF COMMON SHARES		COMMON SHARES OF BENEFICIAL INTEREST			ADDITIONAL PAID-IN CAPITAL			ACCUMULATED OTHER COMPREHENSIVE LOSS			DISTRIBUTIONS IN EXCESS OF NET INCOME			TOTAL LIBERTY PROPERTY TRUST SHAREHOLDERS’ EQUITY			NONCONTROLLING INTEREST - OPERATING PARTNERSHIP			NONCONTROLLING INTEREST - CONSOLIDATED JOINT VENTURES			TOTAL EQUITY			NONCONTROLLING INTEREST - OPERATING PARTNERSHIP (MEZZANINE)
Balance at January 1, 2016	147,577,984		$	148		$	3,669,627		$	(22,506	)	$	(674,688	)	$	2,972,581		$	53,754		$	3,919		$	3,030,254		$	7,537
Net proceeds from the issuance of common shares	802,834		—			13,029			—			—			13,029			—			—			13,029			—
Net income			—			—			—			356,817			356,817			8,598			258			365,673			472
Distributions			—			—			—			(278,764		)	(278,764		)	(6,780		)	(258		)	(285,802		)	(472		)
Share repurchase	(1,396,844	)	(1		)	(40,895		)	—			—			(40,896		)	—			—			(40,896		)	—
Share-based compensation, net of tax withholdings			—			15,699			—			—			15,699			—			—			15,699			—
Other comprehensive loss - foreign currency translation			—			—			(33,925		)	—			(33,925		)	(819		)	—			(34,744		)	—
Other comprehensive income - derivative instruments			—			—			400			—			400			10			—			410			—
Acquisition of noncontrolling interests			—			(1,682		)	—			—			(1,682		)	—			982			(700		)	—
Redemption of noncontrolling interests – common units	9,044		—			132			—			—			132			(132		)	—			—			—
Balance at December 31, 2016	146,993,018		147			3,655,910			(56,031		)	(596,635		)	3,003,391			54,631			4,901			3,062,923			7,537
Net proceeds from the issuance of common shares	447,847		—			8,808			—			—			8,808			—			—			8,808			—
Net income			—			—			—			282,340			282,340			6,752			481			289,573			472
Distributions			—			—			—			(235,675		)	(235,675		)	(5,509		)	(533		)	(241,717		)	(472		)
Share-based compensation, net of tax withholdings			—			10,108			—			—			10,108			—			—			10,108			—
Other comprehensive income - foreign currency translation			—			—			17,643			—			17,643			423			—			18,066			—
Other comprehensive income - derivative instruments			—			—			591			—			591			14			—			605			—
Redemption of noncontrolling interests – common units	9,826		—			152			—			—			152			(152		)	—			—			—
Balance at December 31, 2017	147,450,691		147			3,674,978			(37,797		)	(549,970		)	3,087,358			56,159			4,849			3,148,366			7,537
Net proceeds from the issuance of common shares	448,663		1			7,332			—			—			7,333			—			—			7,333			—
Net income			—			—			—			479,607			479,607			11,414			1,110			492,131			472
Distributions			—			—			—			(236,459		)	(236,459		)	(5,687		)	(519		)	(242,665		)	(472		)
Share-based compensation, net of tax withholdings			—			9,468			—			—			9,468			—			—			9,468			—
Other comprehensive loss - foreign currency translation			—			—			(13,832		)	—			(13,832		)	(329		)	—			(14,161		)	—
Other comprehensive loss - derivative instruments			—			—			(3,614		)	—			(3,614		)	(86		)	—			(3,700		)	—
Balance at December 31, 2018	147,899,354		$	148		$	3,691,778		$	(55,243	)	$	(306,822	)	$	3,329,861		$	61,471		$	5,440		$	3,396,772		$	7,537

See accompanying notes.

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS OF LIBERTY PROPERTY TRUST

(In thousands)



	Year Ended December 31,
	2018			2017			2016
OPERATING ACTIVITIES
Net income	$	492,603		$	290,045		$	366,145
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including discontinued operations	175,815			183,887			207,673
Amortization of deferred financing costs	3,839			3,750			3,974
Expensed pursuit costs	1,795			5,066			1,016
Impairment - real estate assets, including discontinued operations	39,688			10,632			3,879
Loss on debt extinguishment	—			49			27,099
Equity in earnings of unconsolidated joint ventures	(21,382		)	(17,155		)	(21,970		)
Distributions from unconsolidated joint ventures	747			—			—
Gain on property dispositions	(384,673		)	(114,965		)	(219,270		)
Share-based compensation	13,256			14,119			19,850
Development service fee accrual	58,022			6,220			—
Other	(7,524		)	824			(6,128		)
Changes in operating assets and liabilities:
Accounts receivable	(2,682		)	3,512			421
Deferred rent receivable	(18,922		)	(19,605		)	(16,927		)
Prepaid expenses and other assets	23,259			(33,663		)	(32,442		)
Accounts payable	(7,183		)	10,151			8,943
Accrued interest	513			(82		)	(4,276		)
Other liabilities	16,295			(6,154		)	3,075
Net cash provided by operating activities	383,466			336,631			341,062
INVESTING ACTIVITIES
Investment in properties – acquisitions	(497,616		)	(255,639		)	(9,216		)
Investment in properties – other	(44,976		)	(56,104		)	(55,406		)
Investments in and advances to unconsolidated joint ventures	(81,726		)	(46,567		)	(70,581		)
Distributions from unconsolidated joint ventures	39,235			21,042			63,048
Net proceeds from disposition of properties/land	849,528			379,139			1,192,918
Investment in development in progress	(248,587		)	(260,447		)	(342,489		)
Investment in land held for development	(204,522		)	(105,564		)	(107,400		)
Payment of deferred leasing costs	(29,271		)	(37,678		)	(32,682		)
Increase in escrows and other	(37,158		)	(103,834		)	(23,265		)
Net cash (used in) provided by investing activities	(255,093		)	(465,652		)	614,927
FINANCING ACTIVITIES
Net proceeds from issuance of common shares	7,333			8,808			13,029
Share repurchases, including shares related to tax withholdings	(4,760		)	(5,107		)	(46,268		)
Proceeds from unsecured notes	—			—			396,648
Repayments of unsecured notes including prepayment premium	—			—			(723,368		)
Proceeds from mortgage loans	165,229			—			—
Repayments of mortgage loans	(33,561		)	(7,795		)	(29,538		)
Proceeds from credit facility	1,335,214			835,036			591,300
Repayments on credit facility	(1,280,410		)	(476,097		)	(850,300		)
Payment of deferred financing costs	(1,636		)	(5,190		)	(3,550		)
Distributions paid on common shares	(236,336		)	(246,589		)	(279,248		)
Distributions paid on units/noncontrolling interests	(6,621		)	(6,835		)	(8,212		)
Net cash (used in) provided by financing activities	(55,548		)	96,231			(939,507		)
Net increase (decrease) in cash, cash equivalents and restricted cash	72,825			(32,790		)	16,482
(Decrease) increase in cash, cash equivalents and restricted cash related to foreign currency translation	(2,688		)	2,450			(4,828		)
Cash, cash equivalents and restricted cash at beginning of year	25,685			56,025			44,371
Cash, cash equivalents and restricted cash at end of year	$	95,822		$	25,685		$	56,025

See accompanying notes.

Table of Contents

CONSOLIDATED BALANCE SHEETS OF

LIBERTY PROPERTY LIMITED PARTNERSHIP

(In thousands, except unit amounts)



	December 31,
	2018			2017
ASSETS
Real estate:
Land and land improvements	$	1,236,514		$	1,003,215
Building and improvements	4,397,049			3,894,717
Less accumulated depreciation	(941,299		)	(822,069		)
Operating real estate	4,692,264			4,075,863
Development in progress	462,572			294,009
Land held for development	296,244			330,748
Net real estate	5,451,080			4,700,620
Cash and cash equivalents	84,923			11,882
Restricted cash	10,899			13,803
Accounts receivable, net	14,109			9,992
Deferred rent receivable, net	111,372			93,235
Deferred financing and leasing costs, net	157,823			135,741
Investments in and advances to unconsolidated joint ventures	350,981			288,456
Assets held for sale	502,207			913,957
Prepaid expenses and other assets	251,000			272,071
Total assets	$	6,934,394		$	6,439,757
LIABILITIES
Mortgage loans, net	$	395,202		$	267,093
Unsecured notes, net	2,285,698			2,283,513
Credit facilities	411,846			358,939
Accounts payable	62,943

LIBERTY PROPERTY TRUST 8-K