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Liberty Property Trust is a real estate investment trust (REIT) located in Malvern, Pennsylvania, a Philadelphia suburb. Liberty owns and manages more than 50 million square feet of office and industrial properties in ten states and the United Kingdom. The company's portfolio consists of some 400 warehouses and 250 office properties. Liberty is active in acquisitions, targeting single-asset operations, as well as in development, specializing in build-to-suits. The company is best known for transforming the skyline of Philadelphia, building the first structure taller than the statue of the city's founder, William Penn, perched atop City Hall. In 2003 Liberty had a market capitalization of $4.6 billion.
Tracing the Roots of Liberty to the 1972 Founding of Rouse & Associates
Liberty grew out of the real estate business established by Willard ("Bill") Goldsmith Rouse III in 1972. Rouse was born in Baltimore, Maryland, in 1942, part of a family devoted to real estate development. His uncle, James W. Rouse, founded a Baltimore business in 1939 that originated FHA loans for single-family housing, and his father, Willard II, ultimately went to work for the company, which was then named The Rouse Company. In the 1950s it became involved in the financing of strip shopping centers, and then, believing that there was a market for a higher quality retail environment, became part of the movement that led to the development of the contemporary shopping mall. The firm also went on to build projects that revitalized urban waterfront districts, including Manhattan's South Street Seaport. Bill Rouse majored in English at the University of Virginia, graduating in 1966, his education interrupted by a two-year stint in the military. Rather than accept a permanent position with the family business, where he worked part-time while growing up, Rouse looked elsewhere for a job in real estate. He moved to Dallas to work for Texas developer Great Southwest Corporation and leased industrial buildings. He then accepted a position with Los Angeles-based Bernguil Company, charged with the task of developing and leasing a southern New Jersey industrial park, Mid-Atlantic Park, which introduced him to the greater Philadelphia market. Once his project was completed, however, he was instructed to sell the properties. As a result he received an $80,000 share of the sale, but also put himself out of a job. Deciding to stay in the Philadelphia area, he teamed up with a friend named Menard Doswell, along with two colleagues involved in the Mid-Atlantic Park project, George Congdon and Dave Hammers, to form Rouse & Associates in 1972.
At first Rouse chose to operate in the familiar South Jersey territory, building warehouses in Mid-Atlantic Park. Bill Rouse quickly displayed the same innovative spirit of his father and uncle, when he insisted on including sculpture in the landscaping, in the belief that the working environment for warehouse employees was just as important as that for office workers. The company quickly expanded its geographic range to include all of the counties surrounding the city of Philadelphia, in Pennsylvania as well as New Jersey. Rouse also became involved in the Jacksonville, Florida market when Hammers followed a tenant to the area and established a satellite operation. In 1974 the company launched one of its first major projects when it bought 650 acres in Chester County, Pennsylvania, just beyond Philadelphia's "Main Line" community, and began construction of what became the Great Valley Corporate Center, a two-million-square-foot complex of office, industrial, retail, and education facilities. Again Bill Rouse revealed a visionary approach to the development of the business park. Great Valley set a new standard for catering to the needs of the people who worked at such suburban locations. Rouse included educational facilities, for both business and general education, and the first day care center in a business park in the United States.
Also in the 1970s Rouse entered the Maryland market, opening an office in 1977 and then developing some 2.5 million square feet of office and industrial space. In 1979 the company opened an office in Philadelphia in order to develop properties in the city itself. It was also in 1979 that Rouse began to consider operating in the Lehigh Valley, following up on a suggestion from a Philadelphia real estate broker. At the time the region was a small market, but Rouse realized that with the opening of a new highway, I-78, the Lehigh Valley would be advantageously situated between Philadelphia and New York and become a thriving service and distribution area. To take advantage of this opportunity, Rouse established a Lehigh Valley office in 1980 and began to develop more than three million square feet.
Defying Philadelphia Tradition with 1980s Project
In 1981 Rouse opened its first center city Philadelphia property, the Philadelphia Stock Exchange Building, which featured a beautiful center atrium, and served notice that Bill Rouse had great plans for the city. The company's next major project in the city, Liberty Place, would prove to be controversial because it threatened to change Philadelphia's skyline. Early in the 1900s, before the advent of the modern skyscraper, the city had placed a bronze statue of William Penn atop the tower of City Hall. The top of his hat was nearly 548 feet high, some 40 stories. A tradition evolved and was maintained by way of a gentleman's agreement that city real estate developers would not build anything higher than William Penn's hat. In the early 1980s Bill Rouse was developing an office complex in center city, but in order to keep under this arbitrary height he would end up with what he considered an ugly big box complex that would significantly detract from the surrounding neighborhood. According to the Philadelphia Inquirer, Rouse began to think about "cutting one building in half and putting that space on top of the other two. The proposal set off a firestorm of protest for a time. Mr. Rouse would say later that he might not have even considered the idea if he had anticipated the heat of the protest. 'I was well-served by my ignorance,' he said." He finally received approval in 1985, and in 1987 One Liberty Place at 947 feet high became the first building to stand taller than the statue of William Penn. In addition, the complex proved key to the city retaining a major employer, Cigna Corporation, which had considered moving out of Philadelphia but now established its headquarters in Liberty Place.
It was also in the mid-1980s that Bill Rouse encountered difficulties of a different sort in developing projects in Philadelphia. A city councilman, Leland Beloff, and his aide, Robert Rego, had been demanding payoffs from building contractors in order to get their plans through city council. The two men conspired with area mob boss Nicodemo "Little Nicky" Scarfo to extort $1 million from Rouse to receive city acceptance of a waterfront development project. Unlike other developers who simply paid up, Rouse immediately told the FBI. A sting operation was set up and the three men were ultimately convicted of extortion charges and sent to prison.
During the 1980s Rouse made strides in other markets. In 1985 the company started to build its first industrial facilities in New Castle, Delaware. In the Lehigh Valley area Rouse bought 107 acres from Lehigh University and two years later completed the Lehigh Valley Corporate Center, an office park. Rouse in 1988 established an office in the thriving North Carolina market and started construction of Green Point Business Park. The company also became involved overseas, developing a mixed-use business park in Kings Hill, England, the largest of its kind in Europe, which included office, light industrial, and residential space as well as a village center and golf course. Construction commenced in 1991. But the company's expansion during this period proved to be too ambitious. Baltimore's Daily Record in a 1994 article presented an overview of the situation Rouse faced: "Like many developers dependent on the continually growing economy of the 1980s, who assumed continual rental increases and were accustomed to liberal lending practices, Rouse & Associates eventually became trapped in a downward spiral of decreasing values. As economic growth slowed and markets became saturated with space, Rouse & Associates became saddled with debt and unable to react to lowered rental rates fueled by competition. As a result, the company lost dozens of projects to lenders."
After shedding a number of properties Rouse stabilized its financial situation in the early 1990s but still owed around $500 million in mortgages. Rouse became one of many real estate firms that now looked to escape a heavy debt burden by packaging their assets in a REIT that could then be sold in a public offering. The REIT had been created by Congress in 1960 as a way for small investors to become involved in real estate in a manner similar to mutual funds. REITs could be taken public and their shares traded just like stock, and they were also subject to regulation by the Securities and Exchange Commission. Unlike stocks, however, REITs were required by law to pay out at least 95 percent of their taxable income to shareholders each year, a provision that severely limited the ability of REITs to raise funds internally. During the first 25 years of existence, REITs were allowed only to own real estate, a situation that hindered their growth. Third parties had to be contracted to manage the properties. Not until the Tax Reform Act of 1986 changed the nature of real estate investment did REITs begin to be truly viable. Tax shelter schemes that had drained potential investments were shut down by the Act: Interest and depreciation deductions were greatly reduced so that taxpayers could not generate paper losses in order to lower their tax liabilities. The Act also permitted REITs to provide customary services for property, in effect allowing the trusts to operate and manage the properties they owned. Despite these major changes in law, the REIT was still not fully utilized. In the latter half of the 1980s the banks, insurance companies, pension funds, and foreign investors (in particular, the Japanese) provided the bulk of real estate investment funds. The resulting glutted marketplace led to a shakeout. With real estate available at distressed prices in the early 1990s REITs finally became an attractive mainstream investment option. Dozens of real estate firms went public as REITs in 1993.
Completing an Initial Public Offering in 1994
Because The Rouse Company, now headed by Bill Rouse's cousin, was also a publicly traded company, Rouse & Associates decided to call its REIT Liberty Property Trust to avoid investor confusion. Its portfolio included 77 industrial properties totaling 5.9 million square feet and 35 office properties totaling 2.2 million square feet. In June 1994 the initial public offering was completed, netting more than $600 million. As a result, Liberty was able to lower its debt to just $43.7 million. In addition, Liberty arranged a 250 million line of credit, much of which was used to purchase 44 industrial and office properties, as well as to develop several new properties.
Liberty completed a major acquisition in March 1995, paying $125 million for Richmond, Virginia-based warehouse developer Lingerfelt Development Corp. The 26-year-old company had considered converting to REIT ownership, but because of a decline in REIT prices management opted instead for a merger. Before the deal Liberty had no properties in Virginia, but now in one stroke it became a major force in the market while also increasing the REIT's commercial property base by more than 30 percent. Liberty added Lingerfelt's 35 properties and a total of 3.5 million square feet of space. Also in 1995 Liberty bought a number of other properties in New Jersey, Maryland, North Carolina, and Florida. The buying spree continued in 1996, as Liberty bought another 33 properties and completed the development of 19 new properties. By the end of the year the REIT was a $2 billion company, owning more than 20 million square feet of space. Liberty entered three new markets through acquisitions in 1997: Detroit, Michigan; South Carolina; and Minneapolis. It also continued to make purchases and develop projects in its other markets, including the largest industrial development project in its history, a 1.2-million-square-foot distribution facility located in the Lehigh Valley. Liberty's commitment to development increased in 1998, expanding to nearly $400 million.
To maintain its appetite for acquisitions and developments, Liberty arranged for more than $1 billion in financing in 2000. Rumors also were circulating that once again Bill Rouse was eyeing Philadelphia's center city. The REIT built a one-million-square-foot warehouse and distribution facility in the city, which opened in 2001, but that project was upstaged by the announcement that Liberty had commissioned architect Robert A.M. Stern to design another building that would stand taller than the statue of William Penn. The $360 million project, called One Pennsylvania Plaza, was to stand 746 feet high and include 1.23 million square feet of rentable space. It would be located across the street from the Penn Center Suburban Station and become the first Center City Class A office building to be built in more than a decade. The project was not a given, however, requiring the commitment of a major anchor tenant or a significant number of smaller tenants, but it was clearly a passion for Bill Rouse. Unfortunately, he would not be able to devote his complete energies to the project. In December 2001 Rouse, a longtime chain smoker, was diagnosed with lung cancer and began chemotherapy treatment, which he insisted be conducted at 7:30 in the morning to permit him to get to work on time.
As Rouse battled cancer in 2002 he took steps to turn over leadership in Liberty to William P. Hankowsky, the former president of the Philadelphia Industrial Development Corp., the city's economic development agency. He also turned over a great deal of responsibility for the One Pennsylvania Plaza project to executive John Gattuso. According to Philadelphia Inquirer, "Rouse hid in the back office while prospective tenants arrived to view the sales presentation. He did not want to upstage Gattuso." In late 2002 the transition was moved up when Rouse began a second round of chemotherapy. In January 2003 he stepped down as CEO, replaced by Hankowsky, although he retained the chairmanship and planned to remain active in the company. He continued working until he suffered a swift decline and died in May 2003. But in Liberty Property Trust he left behind a firm that was well prepared to carry on business without him.
Principal Subsidiaries: Liberty Property Limited Partnership; Liberty Lehigh Partnership; Liberty Philadelphia Trust; Liberty Property Development Corporation.
Principal Competitors: Brandywine Realty Trust; Duke Realty Corporation; Mack-Cali Realty Corporation.