Summary of LIBERTY PROPERTY TRUST

Item 2. 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 operates primarily in the Mid-Atlantic, Southeastern, Midwestern and Southwestern United States. Additionally, the Company owns certain assets in the United Kingdom.
As of June 30, 2009, the Company owned and operated 353 industrial and 289 office properties (the "Wholly Owned Properties in Operation") totaling 64.3 million square feet. In addition, as of June 30, 2009, the Company owned 14 properties under development, which are expected to comprise 2.0 million square feet when completed (the "Wholly Owned Properties under Development") and 1,365 acres of developable land, substantially all of which is zoned for commercial use. Additionally, as of June 30, 2009, the Company had an ownership interest, through unconsolidated joint ventures, in 46 industrial and 49 office properties totaling 13.1 million square feet (the "JV Properties in Operation" and, collectively with the Wholly Owned Properties in Operation, the "Properties in Operation"), four properties under development, which are expected to comprise 1.4 million square feet when completed (the "JV Properties under Development" and, collectively with the Wholly Owned Properties under Development, the "Properties under Development"). The Company also has an ownership interest through unconsolidated joint ventures in 630 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 increasing rental rates and controlling costs. The Company's operating results depend primarily upon income from rental operations and are substantially influenced by rental demand for the Properties in Operation. As a general matter, the Company pursues development opportunities that it believes will create value and yield acceptable returns. The Company also has historically acquired properties that it believes will create long-term value, and disposed of properties that no longer fit within the Company's strategic objectives or in situations where it can optimize cash proceeds. Current market conditions are not favorable for acquisitions, dispositions and development and consequently the Company's potential for growth in operating income from acquisitions and development is anticipated to be limited in 2009.
Current conditions in the global credit markets and declines and weakness in the general economy have negatively impacted the Company's business. Although the credit markets have shown some improvement recently, conditions in the credit markets, and in particular the unsecured credit markets, remain considerably less favorable than they had been prior to the credit crisis and the Company has shifted its financing strategy to include more secured debt and equity sales in order to address its financing needs. Additionally, uncertainty about the pricing of commercial real estate and the absence of available financing to facilitate transactions has dramatically reduced the Company's ability to rely on the proceeds from the sale of real estate to provide proceeds to fund investment opportunities.
Consistent with the dramatic slowdown in the United States and world economies, rental demand for the Properties in Operation declined for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. Despite this trend, the Company successfully leased 4.2 million square feet during the three months ended June 30, 2009 and attained occupancy of 89.6% for the Wholly Owned Properties in Operation and 88.4% for the JV Properties in Operation for a combined occupancy of 89.4% for the Properties in Operation, all as of that date. At December 31, 2008, occupancy for the Wholly Owned Properties in Operation was 91.1% and for the JV Properties in Operation was 92.2% for a combined occupancy for the Properties in Operation of 91.3%. The Company believes that straight line rents on renewal and replacement leases for 2009 will decrease between 0% and 5% compared to rents on expiring leases. Furthermore, the Company believes that average occupancy for its Properties in Operation will decrease by no more than 2% for 2009 compared to 2008.

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WHOLLY OWNED CAPITAL ACTIVITY
Acquisitions
During the six months ended June 30, 2009, conditions for the acquisition of properties were unsettled because of adverse events in the credit markets and the Company did not acquire any operating properties and does not anticipate doing so for the remainder of 2009.
Dispositions
During the six months ended June 30, 2009, market conditions for dispositions were unsettled, which the Company again attributes to adverse conditions in the credit markets. Disposition activity allows the Company to, among other things,
(1) reduce its holdings in certain markets and product types within a market;
(2) lower the average age of the portfolio; (3) optimize the cash proceeds from the sale of certain assets; and (4) obtain funds for investment activities. During the three months ended June 30, 2009, the Company realized proceeds of $34.7 million from the sale of 10 operating properties representing 461,000 square feet. During the six months ended June 30, 2009, the Company realized proceeds of $80.3 million from the sale of 16 operating properties representing 757,000 square feet and 0.3 acres of land. For 2009, the Company believes that it will dispose of $125 million to $200 million of operating properties. Development
During the three months ended June 30, 2009, the Company brought into service three Wholly Owned Properties under Development representing 1.1 million square feet and a Total Investment, as defined below, of $73.6 million, and initiated $12.3 million in real estate development. During the six months ended June 30, 2009, the Company brought into service four Wholly Owned Properties under Development representing 1.2 million square feet and a Total Investment, as defined below, of $89.3 million, and initiated $12.3 million in real estate development. As of June 30, 2009, the projected Total Investment of the Wholly Owned Properties under Development was $297.0 million. For 2009, the Company believes that it will bring into service from its development pipeline approximately $250 million to $350 million of Total Investment in operating real estate.
Although the Company continues to pursue development opportunities, current market conditions are not favorable for development, and the Company currently anticipates only a modest amount of development starts in 2009. Furthermore, any 2009 development starts will be substantially pre-leased. The "Total Investment" for a Property is defined as the Property's purchase price plus closing costs and management's estimate, as determined at the time of acquisition, of the cost of necessary building improvements in the case of acquisitions, or land costs and land and building improvement costs in the case of development projects, and, where appropriate, other development costs and carrying costs.
JOINT VENTURE CAPITAL ACTIVITY
The Company periodically enters into joint venture relationships in connection with the execution of its real estate operating strategy. Acquisitions
During the three and six months ended June 30, 2009, none of the unconsolidated joint ventures in which the Company held an interest acquired any properties. For 2009, the Company believes that property acquisitions by unconsolidated joint ventures in which the Company has an interest will be in the $50 million to $100 million range.
Dispositions
During the three and six months ended June 30, 2009, none of the unconsolidated joint ventures in which the Company held an interest disposed of any properties and the Company does not anticipate doing so for the remainder of 2009. Development
During the three and six months ended June 30, 2009, none of the unconsolidated joint ventures in which the Company held an interest brought any Properties under Development into service. As of June 30, 2009, the projected Total Investment of JV Properties under Development was $190.7 million. For 2009, the Company expects unconsolidated joint ventures in which it holds an interest to bring into service up to $50 million of Total Investment in operating properties.

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PROPERTIES IN OPERATION
The composition of the Company's Properties in Operation as of June 30, 2009 and
2008 was as follows (in thousands, except dollars and percentages):

                                 Net Rent
                              Per Square Foot            Total Square Feet            Percent Occupied
                                  June 30                     June 30                      June 30
                             2009         2008          2009           2008          2009           2008
Wholly Owned Properties
in Operation:
Industrial-Distribution    $   4.34      $  4.48         31,502        27,083           88.5 %        93.6 %
Industrial-Flex            $   9.18      $  9.37         11,497        10,240           87.9 %        88.6 %
Office                     $  14.35      $ 14.18         21,272        19,732           92.1 %        91.6 %

                           $   8.60      $  8.71         64,271        57,055           89.6 %        92.0 %




                                 Net Rent
                              Per Square Foot            Total Square Feet            Percent Occupied
                                  June 30                     June 30                      June 30
                             2009         2008          2009           2008          2009           2008
Joint Venture
Properties in
Operation:
Industrial-Distribution    $   4.23      $  4.09          8,316         7,786           87.7 %        97.1 %
Industrial-Flex            $  27.86      $ 33.97            171           153           81.3 %        89.5 %
Office                     $  25.00      $ 25.26          4,575         4,240           89.9 %        92.6 %

                           $  11.91      $ 11.83         13,062        12,179           88.4 %        95.4 %




                                  Net Rent
                              Per Square Foot          Total Square Feet          Percent Occupied
                                  June 30                   June 30                    June 30
                              2009        2008         2009          2008         2009          2008
 Properties in Operation:
 Industrial-Distribution    $   4.32     $  4.39        39,818       34,869          88.3 %      94.3 %
 Industrial-Flex            $   9.43     $  9.73        11,668       10,393          87.8 %      88.6 %
 Office                     $  16.20     $ 16.14        25,847       23,972          91.7 %      91.8 %

                            $   9.15     $  9.26        77,333       69,234          89.4 %      92.5 %

Geographic segment data for the three and six months ended June 30, 2009 and 2008 are included in Note 2 to the Company's financial statements. Forward-Looking Statements
When used throughout this report, the words "believes," "anticipates" and "expects" and similar expressions are intended to identify forward-looking statements. Such statements indicate that assumptions have been used that are subject to a number of risks and uncertainties 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 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 current credit crisis and its impact on 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 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.

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Critical Accounting Policies and Estimates Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2008, as amended, for a discussion of critical accounting policies which include capitalized costs, revenue recognition, allowance for doubtful accounts, impairment of real estate, intangibles and investments in unconsolidated joint ventures. During the three months ended June 30, 2009, there were no material changes to these policies. 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 three and six months ended June 30, 2009 with the results of operations of the Company for the three and six months ended June 30, 2008. As a result of the varying levels of development, acquisition and disposition activities by the Company in 2009 and 2008, the overall operating results of the Company during such periods are not directly comparable. However, certain data, including the Same Store comparison, do lend themselves to direct comparison.
This information should be read in conjunction with the accompanying condensed consolidated financial statements and notes included elsewhere in this report. Comparison of Three and Six Months Ended June 30, 2009 to Three and Six Months Ended June 30, 2008
Overview
The Company's average gross investment in operating real estate owned for the three months ended June 30, 2009 increased to $5,038.8 million from $4,972.1 million for the three months ended June 30, 2008. This increase in operating real estate resulted in increases in rental revenue, operating expense reimbursement and depreciation and amortization expense. Rental property expenses and real estate taxes were relatively unchanged. For the six months ended June 30, 2009, the Company's average gross investment in real estate owned increased to $5,030.5 million from $5,010.3 million for the six months ended June 30, 2008. This increase in operating real estate resulted in increases in rental revenue, operating expense reimbursement, rental property expense, real estate taxes, and depreciation and amortization expense.
Total operating revenue increased to $185.7 million for the three months ended June 30, 2009 from $180.0 million for the three months ended June 30, 2008 and increased to $372.8 million for the six months ended June 30, 2009 from $367.4 million for the six months ended June 30, 2008. The $5.7 million increase during the three months ended June 30, 2009 compared to the same period in 2008 was primarily due to the increase in investment in operating real estate and the increase in operating revenue from the Same Store group of properties, discussed below, and an increase in "Termination Fees," which totaled $1.0 million for the three months ended June 30, 2009 as compared to $0.7 million for the same period in 2008. The $5.4 million increase during the six months ended June 30, 2009 compared to the same period in 2008 was primarily due to the increase in investment in operating real estate and the increase in operating revenue from the Same Store group of properties, discussed below. These increases were offset by a decrease in "Termination Fees", which totaled $1.4 million for the six months ended June 30, 2009 as compared to $1.9 million for the same period in 2008. 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. Termination Fees are included in rental revenue.

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Segments
The Company evaluates the performance of the Properties in Operation by
reportable segment (see Note 2 to the Company's financial statements for a
reconciliation to net income). The following table identifies changes in
reportable segments (dollars in thousands):
Property Level Operating Income:

                               Three Months Ended          Percentage               Six Months Ended           Percentage
                                    June 30,                Increase                    June 30,                Increase
                              2009           2008          (Decrease)             2009           2008          (Decrease)

Northeast
- Southeastern PA           $  31,560      $  29,502               7.0 %(1)     $  63,099      $  59,281               6.4 %(1)
- Lehigh/Central PA            18,243         17,456               4.5 %(2)        35,785         35,130               1.9 %
- New Jersey                    4,867          4,773               2.0 %            9,517          9,629              (1.2 %)
Midwest                        13,148         12,995               1.2 %           26,282         25,604               2.6 %
Mid-Atlantic                   24,308         24,901              (2.4 %)          47,755         49,591              (3.7 %)(3)
South                          31,321         27,424              14.2 %(1)        62,465         54,305              15.0 %(1)

Philadelphia                    3,855          3,298              16.9 %(4)         7,410         14,663             (49.5 %)(5)
United Kingdom                    875          1,151             (24.0 %)(6)        1,746          1,834              (4.8 %)(6)


Total property level
operating income            $ 128,177      $ 121,500               5.5 %        $ 254,059      $ 250,037               1.6 %

(1) The increase for the three and six months ended June 30, 2009 versus the three and six months ended June 30, 2008 was primarily due to an increase in average gross investment in operating real estate, an increase in occupancy and an increase in rental rates.

(2) The increase for the three months ended June 30, 2009 versus the three months ended June 30, 2008 was primarily due to an increase in average gross investment in operating real estate. This increase was partially offset by a decrease in occupancy and a decrease in rental rates in 2009.

(3) The decrease for the six months ended June 30, 2009 versus the six months ended June 30, 2008 was primarily due to a decrease in occupancy. This decrease was partially offset by an increase in average gross investment in operating real estate and an increase in rental rates in 2009.

(4) The increase for the three months ended June 30, 2009 versus the three months ended June 30, 2008 was primarily due to an increase in average gross investment in operating real estate and an increase in rental rates. This increase was partially offset by a decrease in occupancy in 2009.

(5) The decrease for the six months ended June 30, 2009 versus the six months ended June 30, 2008 was due to the effect of Comcast Center operation during the relevant periods. Comcast Center was a wholly owned 1.25 million square foot property until March 30, 2008 when it was sold into an unconsolidated joint venture.

(6) The decrease for the three and six months ended June 30, 2009 versus the three and six months ended June 30, 2008 was primarily due to a decrease in average gross investment in operating real estate and a decrease in rental rates. This decrease was partially offset by an increase in occupancy in 2009.

Same Store
Property level operating income, exclusive of Termination Fees, for the Same Store properties increased to $122.8 million for the three months ended June 30, 2009 from $121.3 million for the three months ended June 30, 2008, on a straight line basis (which recognizes rental revenue evenly over the life of the lease), and increased to $119.4 million for the three months ended June 30, 2009 from $118.7 million for the three months ended June 30, 2008 on a cash basis. These increases of 1.2% and 0.5%, respectively, are primarily due to an increase in rental rates and an increase in occupancy in the office portfolio. Property level operating income, exclusive of Termination Fees, for the Same Store properties increased to $245.3 million for the six months ended June 30, 2009 from $241.4 million for the six months ended June 30, 2008, on a straight line basis (which recognizes rental revenue evenly over the life of the lease), and increased to $238.4 million for the six months ended June 30, 2009 from $235.6 million for the six months ended June 30, 2008 on a cash basis. These increases of 1.6% and 1.2%, respectively, are primarily due to an increase in rental rates and an increase in occupancy in the office portfolio. Management generally considers the performance of the Same Store properties to be a useful financial performance measure because the results are directly comparable from period to period. Management further believes that the performance comparison should exclude Termination Fees since they are more event specific and are not representative of ordinary performance results. In addition, Same Store property level operating income and Same Store cash basis property level operating income exclusive of Termination Fees is considered by management to be a more reliable indicator of the portfolio's baseline performance. The Same Store properties consist of the 622 properties totaling approximately 59.8 million square feet owned on January 1, 2008, excluding properties sold through June 30, 2009.

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Set forth below is a schedule comparing the property level operating income, on a straight line basis and on a cash basis, for the Same Store properties for the three and six months ended June 30, 2009 and 2008. Same Store property level operating income and cash basis property level operating income are non-GAAP measures and do not represent income before property dispositions, income taxes and equity in earnings of unconsolidated joint ventures because they do not reflect the consolidated operations of the Company. Investors should review Same Store results, along with Funds from operations (see "Liquidity and Capital Resources" section), 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 Same Store property level operating income and cash basis property level operating income to net income (in thousands).

                                                Three Months Ended                         Six Months Ended
                                        June 30, 2009        June 30, 2008        June 30, 2009        June 30, 2008
Same Store:
Rental revenue                         $       125,295      $       123,374      $       250,609      $       246,443
Operating expenses:
Rental property expense                         35,163               36,302               74,071               73,536
Real estate taxes                               20,955               22,328               41,850               41,582
Operating expense recovery                     (53,652 )            (56,577 )           (110,566 )           (110,085 )

Unrecovered operating expenses                   2,466                2,053                5,355                5,033


Property level operating income                122,829              121,321              245,254              241,410
Less straight line rent                          3,436                2,573                6,851                5,769


Cash basis property level operating
income                                 $       119,393      $       118,748      $       238,403      $       235,641


Reconciliation of non-GAAP
financial measure - Same Store:
Cash basis property level operating
income                                 $       119,393      $       118,748      $       238,403      $       235,641
Straight line rent                               3,436                2,573                6,851                5,769

Property level operating income                122,829              121,321              245,254              241,410

Property level operating income -
properties purchased or developed
subsequent to January 1, 2008                    5,354                  577                9,569                8,797
Less: Property level operating
income - properties held for sale
at June 30, 2009                                (1,058 )             (1,059 )             (2,116 )             (2,112 )
Termination fees                                 1,052                  661                1,352                1,942
General and administrative expense             (11,659 )            (13,047 )            (27,222 )            (27,083 )
Depreciation and amortization
expense                                        (42,571 )            (42,508 )            (85,705 )            (85,174 )
Other income (expense)                         (34,217 )            (33,321 )            (68,704 )            (71,583 )
(Loss) gain on property
dispositions                                    (2,050 )                835               (2,344 )              1,476
Income taxes                                      (127 )               (580 )               (344 )             (1,064 )
Equity in earnings of
unconsolidated joint ventures                    1,192                1,010                1,609                1,387
Discontinued operations                          4,467                4,489                5,705                6,778


Net income                             $        43,212      $        38,378      $        77,054      $        74,774

General and Administrative
General and administrative expenses decreased to $11.7 million for the three months ended June 30, 2009 compared to $13.0 million for the three months ended June 30, 2008. The decrease was primarily due to decreases in compensation expenses. General and administrative expenses increased to $27.2 million for the six months ended June 30, 2009 compared to $27.1 million for the six months ended June 30, 2008 as decreases in compensation expenses were offset by an increase due to accelerated vesting of long term incentive compensation due to the years of service and age of certain employees.

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Depreciation and Amortization
Depreciation and amortization increased to $42.6 million for the three months ended June 30, 2009 from $42.5 million for the three months ended June 30, 2008 and $85.7 million for the six months ended June 30, 2009 from $85.2 million for the six months ended June 30, 2008. The increase was primarily due to the . . .