Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2010
or
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o |
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Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number
001-9106 (Brandywine Realty Trust)
000-24407 (Brandywine Operating Partnership, L.P.)
Brandywine Realty Trust
Brandywine Operating Partnership, L.P.
(Exact name of registrant as specified in its charter)
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MARYLAND (Brandywine Realty Trust)
DELAWARE (Brandywine Operating Partnership L.P.)
(State or other jurisdiction of
Incorporation or organization)
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23-2413352
23-2862640
(I.R.S. Employer
Identification No.) |
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555 East Lancaster Avenue
Radnor, Pennsylvania
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19087 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (610) 325-5600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
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Brandywine Realty Trust
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Yes þ
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No o |
Brandywine Operating Partnership, L.P.
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Yes þ
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No o |
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
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Brandywine Realty Trust
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Yes o
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No o |
Brandywine Operating Partnership, L.P.
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Yes o
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No o |
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a
non-accelerated filer. See definitions of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act.
Brandywine Realty Trust:
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Large accelerated filer
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þ
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Accelerated filer
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o |
Non-accelerated filer
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o
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Smaller reporting company
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o |
Brandywine Operating Partnership, L.P.:
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Large accelerated filer
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o
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Accelerated filer
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o |
Non-accelerated filer
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þ
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Smaller reporting company
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o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
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Brandywine Realty Trust
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Yes o No þ |
Brandywine Operating Partnership, L.P.
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Yes o No þ |
A total of 131,385,832 Common Shares of Beneficial Interest, par value $0.01 per share, were
outstanding as of April 30, 2010.
TABLE OF CONTENTS
Filing Format
This combined Form 10-Q is being filed separately by Brandywine Realty Trust and Brandywine Operating Partnership, L.P.
2
PART I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share information)
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March 31, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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Real estate investments: |
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Rental properties |
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$ |
4,452,085 |
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$ |
4,512,618 |
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Accumulated depreciation |
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(731,626 |
) |
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(716,956 |
) |
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Operating real estate investments, net |
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3,720,459 |
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3,795,662 |
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Construction-in-progress |
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307,144 |
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271,962 |
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Land inventory |
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105,556 |
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97,368 |
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Total real
estate investments, net |
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4,133,159 |
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4,164,992 |
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Cash and cash equivalents |
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7,590 |
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1,567 |
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Accounts receivable, net |
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16,476 |
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10,934 |
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Accrued rent receivable, net |
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86,570 |
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87,173 |
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Investment in real estate ventures, at equity |
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77,472 |
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75,458 |
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Deferred costs, net |
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103,117 |
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106,097 |
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Intangible assets, net |
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95,085 |
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105,163 |
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Notes receivable |
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59,474 |
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59,008 |
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Other assets |
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56,185 |
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53,358 |
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Total assets |
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$ |
4,635,128 |
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$ |
4,663,750 |
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LIABILITIES AND BENEFICIARIES EQUITY |
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Mortgage notes payable |
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$ |
506,156 |
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$ |
551,720 |
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Borrowing under credit facilities |
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160,000 |
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92,000 |
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Unsecured term loan |
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183,000 |
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183,000 |
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Unsecured senior notes, net of discounts |
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1,581,693 |
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1,627,857 |
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Accounts payable and accrued expenses |
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95,621 |
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88,599 |
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Distributions payable |
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21,999 |
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21,799 |
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Tenant security deposits and deferred rents |
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53,745 |
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58,572 |
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Acquired below market leases, net |
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34,847 |
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37,087 |
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Deferred income |
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47,184 |
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47,379 |
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Other liabilities |
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30,965 |
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33,997 |
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Total liabilities |
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2,715,210 |
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2,742,010 |
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Commitments and contingencies (Note 16) |
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Brandywine Realty Trusts equity: |
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Preferred Shares (shares authorized-20,000,000): |
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7.50% Series C Preferred Shares, $0.01 par value; issued and outstanding-
2,000,000 in 2010 and 2009, respectively |
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20 |
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20 |
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7.375% Series D Preferred Shares, $0.01 par value; issued and outstanding-
2,300,000 in 2010 and 2009, respectively |
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23 |
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23 |
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Common Shares of Brandywine Realty Trusts beneficial interest, $0.01 par value; shares
authorized 200,000,000; 130,174,303 and 128,849,176 issued in 2010 and 2009, respectively
and 130,013,432 and 128,597,412 outstanding in 2010 and 2009, respectively |
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1,299 |
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1,286 |
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Additional paid-in capital |
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2,626,342 |
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2,610,421 |
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Deferred compensation payable in common stock |
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5,988 |
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5,549 |
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Common shares in treasury, at cost, 160,871 and 251,764 in 2010 and 2009,
respectively |
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(4,518 |
) |
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(7,205 |
) |
Common shares in grantor trust, 296,294 in 2010 and 255,700 in 2009 |
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(5,988 |
) |
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(5,549 |
) |
Cumulative earnings |
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500,828 |
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501,384 |
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Accumulated other comprehensive loss |
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(7,375 |
) |
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(9,138 |
) |
Cumulative distributions |
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(1,235,017 |
) |
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(1,213,359 |
) |
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Total Brandywine Realty Trusts equity |
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1,881,602 |
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1,883,432 |
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Non-controlling interests |
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38,316 |
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38,308 |
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Total equity |
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1,919,918 |
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1,921,740 |
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Total liabilities and equity |
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$ |
4,635,128 |
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$ |
4,663,750 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share information)
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For the three-month periods |
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ended March 31, |
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2010 |
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2009 |
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Revenue: |
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Rents |
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$ |
115,509 |
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$ |
120,285 |
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Tenant reimbursements |
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21,483 |
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20,688 |
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Termination fees |
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1,754 |
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113 |
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Third party management fees, labor reimbursement and leasing |
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3,467 |
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4,764 |
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Other |
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921 |
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881 |
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Total revenue |
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143,134 |
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146,731 |
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Operating Expenses: |
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Property operating expenses |
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45,148 |
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43,422 |
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Real estate taxes |
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13,052 |
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14,832 |
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Third party management expenses |
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1,412 |
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2,115 |
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Depreciation and amortization |
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52,622 |
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51,215 |
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General and administrative expenses |
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6,092 |
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4,958 |
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Total operating expenses |
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118,326 |
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116,542 |
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Operating income |
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24,808 |
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|
30,189 |
|
Other Income (Expense): |
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Interest income |
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|
865 |
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|
579 |
|
Interest expense |
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(31,524 |
) |
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(35,646 |
) |
Interest expense amortization of deferred financing costs |
|
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(1,011 |
) |
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|
(1,252 |
) |
Equity in income of real estate ventures |
|
|
1,296 |
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|
586 |
|
(Loss) gain on early extinguishment of debt |
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(1,192 |
) |
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|
6,639 |
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Income (loss) from continuing operations |
|
|
(6,758 |
) |
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|
1,095 |
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Discontinued operations: |
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Income from discontinued operations |
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10 |
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1,538 |
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Net gain on disposition of discontinued operations |
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|
6,349 |
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|
194 |
|
Provision for impairment |
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(3,700 |
) |
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Total discontinued operations |
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6,359 |
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(1,968 |
) |
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Net loss |
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(399 |
) |
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(873 |
) |
Net income (loss) from discontinued operations attributable to non-controlling interests LP units |
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(136 |
) |
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61 |
|
Net income attributable to non-controlling interests partners share
of consolidated real estate ventures |
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6 |
|
Net income attributable to non-controlling interests LP units |
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|
187 |
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28 |
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Net income (loss) attributable to non-controlling interests |
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|
51 |
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|
95 |
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Net loss attributable to Brandywine Realty Trust |
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(348 |
) |
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(778 |
) |
Distribution to Preferred Shares |
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(1,998 |
) |
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(1,998 |
) |
Amount allocated to unvested restricted shareholders |
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(128 |
) |
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(37 |
) |
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Net loss attributable to Common Shareholders of Brandywine Realty Trust |
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$ |
(2,474 |
) |
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$ |
(2,813 |
) |
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Basic earnings per Common Share: |
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Continuing operations |
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$ |
(0.07 |
) |
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$ |
(0.01 |
) |
Discontinued operations |
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0.05 |
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|
(0.02 |
) |
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$ |
(0.02 |
) |
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$ |
(0.03 |
) |
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Diluted earnings per Common Share: |
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Continuing operations |
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$ |
(0.07 |
) |
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$ |
(0.01 |
) |
Discontinued operations |
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|
0.05 |
|
|
|
(0.02 |
) |
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$ |
(0.02 |
) |
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$ |
(0.03 |
) |
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Basic weighted average shares outstanding |
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128,767,718 |
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|
88,210,384 |
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Diluted weighted average shares outstanding |
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128,767,718 |
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88,210,384 |
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Net (loss) income attributable to Brandywine Realty Trust |
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Income (loss) from continuing operations |
|
$ |
(6,571 |
) |
|
$ |
1,129 |
|
Income (loss) from discontinued operations |
|
|
6,223 |
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|
(1,907 |
) |
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Net loss |
|
$ |
(348 |
) |
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$ |
(778 |
) |
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The accompanying notes are an integral part of these consolidated financial statements.
4
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
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For the three-month periods |
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ended March 31, |
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2010 |
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2009 |
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Net loss |
|
$ |
(399 |
) |
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$ |
(873 |
) |
Comprehensive income: |
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Unrealized gain on derivative financial instruments |
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|
1,816 |
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|
10,287 |
|
Reclassification of realized (gains)/losses on derivative financial
instruments to operations, net |
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(15 |
) |
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(20 |
) |
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Total comprehensive income |
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1,801 |
|
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|
10,267 |
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Comprehensive income |
|
|
1,402 |
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|
9,394 |
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Comprehensive (income) loss attributable to non-controlling interest |
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|
13 |
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|
95 |
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Comprehensive income attributable to Brandywine Realty Trust |
|
$ |
1,415 |
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|
$ |
9,489 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF BENEFICIARIES EQUITY
For the Three-Month Periods Ended March 31, 2010 and 2009
(unaudited, in thousands, except number of shares)
March 31, 2010
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Number of Rabbi |
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Common Shares of |
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Deferred |
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Accumulated |
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Number of |
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Par Value of |
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Number of |
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Par Value of |
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Number of |
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Number of |
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Trust/Deferred |
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Brandywine Realty |
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Compensation |
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Other |
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Preferred C |
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Preferred C |
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Preferred D |
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Preferred D |
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Common |
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Treasury |
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Compensation |
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Trusts beneficial |
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Additional Paid- |
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Common Shares |
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Payable in |
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Common Shares in |
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Cumulative |
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Comprehensive |
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Cumulative |
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Non-Controlling |
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Shares |
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Shares |
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Shares |
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Shares |
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Shares |
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Shares |
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Shares |
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interest |
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in Capital |
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in Treasury |
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Common Stock |
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Grantor Trust |
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Earnings |
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Income (Loss) |
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Distributions |
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Interests |
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Total |
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BALANCE, December 31, 2009 |
|
|
2,000,000 |
|
|
$ |
20 |
|
|
|
2,300,000 |
|
|
$ |
23 |
|
|
|
128,849,176 |
|
|
|
251,764 |
|
|
|
255,700 |
|
|
$ |
1,286 |
|
|
$ |
2,610,421 |
|
|
$ |
(7,205 |
) |
|
$ |
5,549 |
|
|
$ |
(5,549 |
) |
|
$ |
501,384 |
|
|
$ |
(9,138 |
) |
|
$ |
(1,213,359 |
) |
|
$ |
38,308 |
|
|
$ |
1,921,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(348 |
) |
|
|
|
|
|
|
|
|
|
|
(51 |
) |
|
|
(399 |
) |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,763 |
|
|
|
|
|
|
|
38 |
|
|
|
1,801 |
|
Issuance of Common Shares of Beneficial Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,325,200 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
16,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,434 |
|
Equity issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(336 |
) |
Bonus Share Issuance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,607 |
) |
|
|
32,607 |
|
|
|
|
|
|
|
|
|
|
|
871 |
|
|
|
369 |
|
|
|
(369 |
) |
|
|
(502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369 |
|
Vesting of Restricted Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,286 |
) |
|
|
8,989 |
|
|
|
|
|
|
|
(897 |
) |
|
|
1,816 |
|
|
|
103 |
|
|
|
(103 |
) |
|
|
(1,145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(226 |
) |
Restricted Stock Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
745 |
|
Restricted Performance Units
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154 |
|
Share Issuance from/to Deferred Compensation Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73 |
) |
|
|
|
|
|
|
(1,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33 |
) |
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190 |
|
Outperformance Plan Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
Adjustment to Non-controlling Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
480 |
|
|
|
|
|
Cumulative Effect of Accounting Change for
Variable Interest Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,439 |
|
|
|
|
|
|
|
|
|
|
|
(38 |
) |
|
|
1,401 |
|
Preferred Share distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,998 |
) |
|
|
|
|
|
|
(1,998 |
) |
Distributions declared ($0.15 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,660 |
) |
|
|
(421 |
) |
|
|
(20,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March 31, 2010 |
|
|
2,000,000 |
|
|
$ |
20 |
|
|
|
2,300,000 |
|
|
$ |
23 |
|
|
|
130,174,303 |
|
|
|
160,871 |
|
|
|
296,294 |
|
|
$ |
1,299 |
|
|
$ |
2,626,342 |
|
|
$ |
(4,518 |
) |
|
$ |
5,988 |
|
|
$ |
(5,988 |
) |
|
$ |
500,828 |
|
|
$ |
(7,375 |
) |
|
$ |
(1,235,017 |
) |
|
$ |
38,316 |
|
|
$ |
1,919,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Common Shares of |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Par Value of |
|
|
Number of |
|
|
Par Value of |
|
|
Number of |
|
|
Number of |
|
|
Rabbi Trust/Deferred |
|
|
Brandywine Realty |
|
|
|
|
|
|
|
|
|
|
Compensation |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred C |
|
|
Preferred C |
|
|
Preferred D |
|
|
Preferred D |
|
|
Common |
|
|
Treasury |
|
|
Compensation |
|
|
Trusts beneficial |
|
|
Additional Paid- |
|
|
Common Shares |
|
|
Payable in |
|
|
Common Shares in |
|
|
Cumulative |
|
|
Comprehensive |
|
|
Cumulative |
|
|
Non-Controlling |
|
|
|
|
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
interest |
|
|
in Capital |
|
|
in Treasury |
|
|
Common Stock |
|
|
Grantor Trust |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Distributions |
|
|
Interests |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2008 |
|
|
2,000,000 |
|
|
$ |
20 |
|
|
|
2,300,000 |
|
|
$ |
23 |
|
|
|
88,610,053 |
|
|
|
451,116 |
|
|
|
215,742 |
|
|
$ |
882 |
|
|
$ |
2,351,428 |
|
|
$ |
(14,121 |
) |
|
$ |
6,274 |
|
|
$ |
(6,274 |
) |
|
$ |
498,716 |
|
|
$ |
(17,005 |
) |
|
$ |
(1,150,406 |
) |
|
$ |
52,961 |
|
|
$ |
1,722,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(778 |
) |
|
|
|
|
|
|
|
|
|
|
(95 |
) |
|
|
(873 |
) |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,471 |
|
|
|
|
|
|
|
(204 |
) |
|
|
10,267 |
|
Vesting of Restricted Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,924 |
) |
|
|
8,971 |
|
|
|
|
|
|
|
(657 |
) |
|
|
2,313 |
|
|
|
56 |
|
|
|
(56 |
) |
|
|
(1,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(205 |
) |
Restricted Stock Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737 |
|
Share Issuance from/to Deferred Compensation Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,719 |
) |
|
|
|
|
|
|
(19,668 |
) |
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
(668 |
) |
|
|
668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21 |
) |
Share Choice Plan Issuance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46 |
) |
Stock Option Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
Outperformance Plan Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
306 |
|
Other consolidated real
estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149 |
|
|
|
149 |
|
Preferred Share distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,998 |
) |
|
|
|
|
|
|
(1,998 |
) |
Distributions declared ($0.10
per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,055 |
) |
|
|
(281 |
) |
|
|
(9,336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March 31, 2009 |
|
|
2,000,000 |
|
|
$ |
20 |
|
|
|
2,300,000 |
|
|
$ |
23 |
|
|
|
88,600,253 |
|
|
|
384,192 |
|
|
|
205,045 |
|
|
$ |
882 |
|
|
$ |
2,351,859 |
|
|
$ |
(11,808 |
) |
|
$ |
5,662 |
|
|
$ |
(5,662 |
) |
|
$ |
496,077 |
|
|
$ |
(6,534 |
) |
|
$ |
(1,161,459 |
) |
|
$ |
52,530 |
|
|
$ |
1,721,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
|
ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(399 |
) |
|
$ |
(873 |
) |
Adjustments to reconcile net loss to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
40,283 |
|
|
|
39,403 |
|
Amortization: |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
1,011 |
|
|
|
1,252 |
|
Amortization of debt discount |
|
|
310 |
|
|
|
1,111 |
|
Deferred leasing costs |
|
|
5,085 |
|
|
|
4,493 |
|
Acquired above (below) market leases, net |
|
|
(1,548 |
) |
|
|
(1,741 |
) |
Acquired lease intangibles |
|
|
7,198 |
|
|
|
8,729 |
|
Deferred compensation costs |
|
|
1,355 |
|
|
|
1,021 |
|
Straight-line rent |
|
|
(2,915 |
) |
|
|
(1,912 |
) |
Provision for doubtful accounts |
|
|
1,309 |
|
|
|
3,234 |
|
Provision for impairment in real estate |
|
|
|
|
|
|
3,700 |
|
Real estate venture income in excess of distributions |
|
|
(1,114 |
) |
|
|
(656 |
) |
Net gain on sale of interests in real estate |
|
|
(6,349 |
) |
|
|
(194 |
) |
Loss (gain) on early extinguishment of debt |
|
|
1,192 |
|
|
|
(6,639 |
) |
Cumulative interest accretion of repayments of unsecured notes |
|
|
(1,586 |
) |
|
|
(202 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(795 |
) |
|
|
1,376 |
|
Other assets |
|
|
(4,387 |
) |
|
|
(2,258 |
) |
Accounts payable and accrued expenses |
|
|
6,424 |
|
|
|
15,430 |
|
Tenant security deposits and deferred rents |
|
|
(3,937 |
) |
|
|
1,129 |
|
Other liabilities |
|
|
(1,199 |
) |
|
|
(2,525 |
) |
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
39,938 |
|
|
|
63,878 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Sales of properties, net |
|
|
10,445 |
|
|
|
8,650 |
|
Capital expenditures |
|
|
(45,808 |
) |
|
|
(30,484 |
) |
Investment in unconsolidated Real Estate Ventures |
|
|
|
|
|
|
(14,961 |
) |
Escrowed cash |
|
|
|
|
|
|
31,385 |
|
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income |
|
|
393 |
|
|
|
555 |
|
Decrease in cash due to the deconsolidation of variable interest entities |
|
|
(1,382 |
) |
|
|
|
|
Leasing costs |
|
|
(11,009 |
) |
|
|
(5,146 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(47,361 |
) |
|
|
(10,001 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
122,000 |
|
|
|
140,000 |
|
Repayments of Credit Facility borrowings |
|
|
(54,000 |
) |
|
|
(93,000 |
) |
Repayments of mortgage notes payable |
|
|
(2,303 |
) |
|
|
(3,205 |
) |
Repayments of unsecured notes |
|
|
(46,479 |
) |
|
|
(68,243 |
) |
Debt financing costs |
|
|
3 |
|
|
|
18 |
|
Net proceeds from issuance of shares |
|
|
16,100 |
|
|
|
|
|
Distributions paid to shareholders |
|
|
(21,454 |
) |
|
|
(28,443 |
) |
Distributions to noncontrolling interest |
|
|
(421 |
) |
|
|
(845 |
) |
|
|
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
13,446 |
|
|
|
(53,718 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
6,023 |
|
|
|
159 |
|
Cash and cash equivalents at beginning of period |
|
|
1,567 |
|
|
|
3,924 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
7,590 |
|
|
$ |
4,083 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest during the quarter ended March 31, 2010
and 2009 of $3,245 and $1,574, respectively |
|
$ |
13,551 |
|
|
$ |
13,108 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
|
|
|
|
Note receivable issued in a property sale transaction |
|
|
|
|
|
|
950 |
|
Change in capital expenditures financed through accounts payable at period end |
|
|
(889 |
) |
|
|
5,899 |
|
Change in capital expenditures financed through retention payable at period end |
|
|
2,520 |
|
|
|
1,068 |
|
Change in unfunded tenant allowance |
|
|
411 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
7
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
1. THE COMPANY
Brandywine Realty Trust, a Maryland real estate investment trust, or REIT, is a self-administered
and self-managed real estate investment trust, that provides leasing, property management,
development, redevelopment, acquisition and other tenant-related services for a portfolio of office
and industrial properties. Brandywine Realty Trust owns its assets and conducts its operations
through Brandywine Operating Partnership, L.P., a Delaware limited partnership (the Operating
Partnership) and subsidiaries of the Operating Partnership. Brandywine Realty Trust, the Operating
Partnership and their consolidated subsidiaries are collectively referred to below as the
Company. The Companys common shares of beneficial interest are publicly traded on the New York
Stock Exchange under the ticker symbol BDN.
As of March 31, 2010, the Company owned 213 office properties, 21 industrial facilities and three
mixed-use properties (collectively, the Properties) containing an aggregate of approximately
23.5 million net rentable square feet. The Company also has two properties under development and
two properties under redevelopment containing an aggregate 1.6 million net rentable square feet.
Therefore, as of March 31, 2010, the Company owns 241 properties containing an aggregate of
25.1 million net rentable square feet. In addition, as of March 31, 2010, the Company owned
economic interests in 15 unconsolidated real estate ventures that contain approximately 4.6 million
net rentable square feet (collectively, the Real Estate Ventures). The Properties and the
properties owned by the Real Estate Ventures are located in or near Philadelphia, Pennsylvania,
Metropolitan Washington, D.C., Southern and Central New Jersey, Richmond, Virginia, Wilmington,
Delaware, Austin, Texas and Oakland, Concord, Carlsbad and Rancho Bernardo, California.
Brandywine Realty Trust is the sole general partner of the Operating Partnership and, as of March
31, 2010, owned a 97.9% interest in the Operating Partnership. The Company conducts its
third-party real estate management services business primarily through wholly-owned management
company subsidiaries.
As of March 31, 2010, the management company subsidiaries were managing properties containing an
aggregate of approximately 34.1 million net rentable square feet, of which approximately 25.1
million net rentable square feet related to Properties owned by the Company and approximately 9.1
million net rentable square feet related to properties owned by third parties and Real Estate
Ventures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared by the Company pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management, all adjustments
(consisting solely of normal recurring matters) for a fair statement of the financial position of
the Company as of March 31, 2010, the results of its operations for the three-month periods ended
March 31, 2010 and 2009 and its cash flows for the three-month periods ended March 31, 2010 and
2009 have been included. The results of operations for such interim periods are not necessarily
indicative of the results for a full year. These consolidated financial statements should be read
in conjunction with the Companys consolidated financial statements and footnotes included in the
Companys 2009 Annual Report on Form 10-K filed with the SEC on March 1, 2010.
Reclassifications and Revisions
Certain amounts have been reclassified in prior years to conform to the current year presentation.
The reclassifications are primarily due to the treatment of sold or held for sale properties as
discontinued operations on the statement of operations for all periods presented.
8
Principles of Consolidation
When the Company obtains an economic interest in an entity, the Company evaluates the entity to
determine if the entity is deemed a variable interest entity (VIE), and if the Company is deemed
to be the primary beneficiary, in accordance with the accounting standard for the consolidation of
variable interest entities. When an entity is not deemed to be a VIE, the Company considers the
provisions of the same accounting standard to determine whether a general partner, or the general
partners as a group, controls a limited partnership or similar entity when the limited partner have
certain rights. The Company consolidates (i) entities that are VIEs and of which the Company is
deemed to be the primary beneficiary and (ii) entities that are non-VIEs which the Company controls
and the limited partners neither have the ability to dissolve the entity or remove the Company
without cause nor any substantive participating rights. Entities that the Company accounts for
under the equity method (i.e., at cost, increased or decreased by the Companys share of earnings
or losses, plus contributions, less distributions) include (i) entities that are VIEs and of which
the Company is not deemed to be the primary beneficiary (ii) entities that are non-VIEs which the
Company does not control, but over which the Company has the ability to exercise significant
influence and (iii) entities that are non-VIEs that the Company controls through its general
partner status, but the limited partners in the entity have the substantive ability to dissolve the
entity or remove the Company without cause or have substantive participating rights. The Company
will reconsider its determination of whether an entity is a VIE and who the primary beneficiary is,
and whether or not the limited partners in an entity have substantive rights, if certain events
occur that are likely to cause a change in the original determinations. The portion of the entities
that are consolidated but not owned by the Company is presented as non-controlling interest as of
and during the periods consolidated. All intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Management makes significant
estimates regarding revenue, valuation of real estate and related intangible assets and
liabilities, impairment of long-lived assets, allowance for doubtful accounts and deferred costs.
Operating Properties
Operating properties are carried at historical cost less accumulated depreciation and impairment
losses. The cost of operating properties reflects their purchase price or development cost.
Acquisition related costs are expensed as incurred. Costs incurred for the renovation and
betterment of an operating property are capitalized to the Companys investment in that property.
Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments,
which improve or extend the life of the asset, are capitalized and depreciated over their estimated
useful lives. Fully-depreciated assets are removed from the accounts.
Purchase Price Allocation
The Company allocates the purchase price of properties to net tangible and identified intangible
assets acquired based on fair values. Above-market and below-market in-place lease values for
acquired properties are recorded based on the present value (using an interest rate which reflects
the risks associated with the leases acquired) of the difference between (i) the contractual
amounts to be paid pursuant to the in-place leases and (ii) the Companys estimate of the fair
market lease rates for the corresponding in-place leases, measured over a period equal to the
remaining non-cancelable term of the lease (includes the below market fixed renewal period).
Capitalized above-market lease values are amortized as a reduction of rental income over the
remaining non-cancelable terms of the respective leases. Capitalized below-market lease values are
amortized as an increase to rental income over the remaining non-cancelable terms of the respective
leases, including any below market fixed-rate renewal periods.
Other intangible assets also include amounts representing the value of tenant relationships
and in-place leases based on the Companys evaluation of the specific characteristics of each
tenants lease and the Companys overall relationship with the respective tenant. The Company
estimates the cost to execute leases with terms similar to the remaining lease terms of the
in-place leases, including leasing commissions, legal and other related expenses. This intangible
asset is amortized to expense over the remaining term of the respective leases. Company estimates
of value are made using methods similar to those used by independent appraisers or by using
independent appraisals. Factors considered by the Company in this analysis include an estimate of
the carrying costs during the expected lease-up periods considering current market conditions and
costs to execute similar leases. In estimating carrying costs, the Company includes real estate
taxes, insurance and other operating expenses and estimates of lost rentals at market rates during
the expected lease-up periods, which primarily range from three to twelve months. The Company also
considers information obtained about each property as a result of its pre-acquisition due
diligence, marketing and leasing activities in estimating the fair value of the tangible and
intangible assets acquired. The Company also uses the information obtained as a result of its
pre-acquisition due diligence as part of its consideration of the accounting standard governing
asset retirement obligations and when necessary, will record a conditional asset retirement
obligation as part of its purchase price.
9
Characteristics considered by the Company in allocating value to its tenant relationships include
the nature and extent of the Companys business relationship with the tenant, growth prospects for
developing new business with the tenant, the tenants credit quality and expectations of lease
renewals, among other factors. The value of tenant relationship intangibles is amortized over the
remaining initial lease term and expected renewals, but in no event longer than the remaining
depreciable life of the building. The value of in-place leases is amortized over the remaining
non-cancelable term of the respective leases and any fixed-rate renewal periods.
In the event that a tenant terminates its lease, the unamortized portion of each intangible,
including in-place lease values and tenant relationship values, would be charged to expense and
market rate adjustments (above or below) would be recorded to revenue.
Impairment or Disposal of Long-Lived Assets
The accounting standard for property, plant and equipment provides a single accounting model for
long-lived assets as held-for-sale, broadens the scope of businesses to be disposed of that qualify
for reporting as discontinued operations and changes the timing of recognizing losses on such
operations.
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The review of recoverability is based on an
estimate of the future undiscounted cash flows (excluding interest charges) expected to result from
the long-lived assets use and eventual disposition. These cash flows consider factors such as
expected future operating income, trends and prospects, as well as the effects of leasing demand,
competition and other factors. If impairment exists due to the inability to recover the carrying
value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value
exceeds the estimated fair-value of the property. The Company is required to make subjective
assessments as to whether there are impairments in the values of the investments in long-lived
assets. These assessments have a direct impact on its net income because recording an impairment
loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash
flows is highly subjective and is based in part on assumptions regarding future occupancy, rental
rates and capital requirements that could differ materially from actual results in future periods.
Although the Companys strategy is generally to hold its properties over the long-term, the Company
will dispose of properties to meet its liquidity needs or for other strategic needs. If the
Companys strategy changes or market conditions otherwise dictate an earlier sale date, an
impairment loss may be recognized to reduce the property to the lower of the carrying amount or
fair value less costs to sell, and such loss could be material. If the Company determines that
impairment has occurred and the assets are classified as held and used, the affected assets must be
reduced to their fair-value.
Where properties have been identified as having a potential for sale, additional judgments are
required related to the determination as to the appropriate period over which the undiscounted cash
flows should include the operating cash flows and the amount included as the estimated residual
value. Management determines the amounts to be included based on a probability weighted cash flow.
This requires significant judgment. In some cases, the results of whether an impairment is
indicated are sensitive to changes in assumptions input into the estimates, including the hold
period until expected sale.
During the Companys impairment review for the three months period ended March 31, 2010, it
was determined that no impairment charges were necessary. For the three months period ended March
31, 2009, the Company determined that one of its properties, during testing for impairment under
the held and used model, had a historical cost greater than the probability weighted undiscounted
cash flows. Accordingly, the recorded amount was reduced to an amount based on managements
estimate of the current fair value. This property was sold in the second quarter of the prior year.
Revenue Recognition
Rental revenue is recognized on the straight-line basis from the later of the date of the
commencement of the lease or the date of acquisition of the property subject to existing leases,
which averages minimum rents over the terms of the leases. The straight-line rent adjustment
increased revenue by approximately $2.0 million and $1.1 million for the three-month periods ended
March 31, 2010 and 2009, respectively. Deferred rents on the balance sheet represent rental
revenue received prior to their due dates and amounts paid by the tenant for certain improvements
considered to be landlord assets that will remain as the Companys property at the end of the
tenants lease term. The amortization of the amounts paid by the tenant for such improvements is
calculated on a straight-line basis over the term of the tenants lease and is a component of
straight-line rental income and increased revenue by $0.9 million and $0.8 million for the
three-month periods ended March 31, 2010 and 2009, respectively. Lease incentives, which are
included as reductions of rental revenue in the accompanying consolidated statements of operations,
are recognized on a straight-line basis over the term of the lease. Lease incentives decreased
revenue by $0.8 million and $0.2 million for the three-month periods ended March 31, 2010 and 2009,
respectively.
Leases also typically provide for tenant reimbursement of a portion of common area maintenance and
other operating expenses to the extent that a tenants pro rata share of expenses exceeds a base
year level set in the lease or to the extent that the tenant has a lease on a triple net basis. For
certain leases, significant assumptions and judgments are made by the Company in determining the
lease term
such as when termination options are provided to the tenant. The lease term impacts the period
over which minimum rents are determined and recorded and also considers the period over which lease
related costs are amortized. Termination fees received from tenants, bankruptcy settlement fees,
third party management fees, labor reimbursement and leasing income are recorded when earned.
10
Stock-Based Compensation Plans
The Company maintains a shareholder-approved equity-incentive plan known as the Amended and
Restated 1997 Long-Term Incentive Plan (the 1997 Plan). The 1997 Plan is administered by the
Compensation Committee of the Companys Board of Trustees. Under the 1997 Plan, the Compensation
Committee is authorized to award equity and equity-based awards, including incentive stock options,
non-qualified stock options, restricted shares and performance-based shares. As of March 31, 2010,
0.8 million common shares remained available for future awards under the 1997 Plan. Through March
31, 2010, all options awarded under the 1997 Plan had a one to ten-year term.
The Company incurred stock-based compensation expense of $1.1 million and $1.0 million during the
three-month periods ended March 31, 2010 and 2009, respectively, of which $0.2 million were
capitalized for each period, respectively, as part of the Companys review of employee salaries
eligible for capitalization. The expensed amounts are included in general and administrative
expense on the Companys consolidated income statement in the respective periods.
Accounting for Derivative Instruments and Hedging Activities
The Company accounts for its derivative instruments and hedging activities in accordance with the
accounting standard for derivative and hedging activities. The accounting standard requires the
Company to measure every derivative instrument (including certain derivative instruments embedded
in other contracts) at fair value and record them in the balance sheet as either an asset or
liability. See disclosures below related to the Companys adoption of the accounting standard for
fair value measurements and disclosures.
For derivatives designated as fair value hedges, the changes in fair value of both the
derivative instrument and the hedged item are recorded in earnings. For derivatives designated as
cash flow hedges, the effective portions of changes in the fair value of the derivative are
reported in other comprehensive income.
The Company actively manages its ratio of fixed-to-floating rate debt. To manage its fixed and
floating rate debt in a cost-effective manner, the Company, from time to time, enters into interest
rate swap agreements as cash flow hedges, under which it agrees to exchange various combinations of
fixed and/or variable interest rates based on agreed upon notional amounts.
Fair Value Measurements
The Company estimates the fair value of its outstanding derivatives and
available-for-sale-securities in accordance with the accounting standard for fair value
measurements and disclosures. The accounting standard defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. It also establishes a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be used to measure
fair value. Financial assets and liabilities recorded on the Consolidated Balance Sheets are
categorized based on the inputs to the valuation techniques as follows:
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access. |
|
|
|
Level 2 inputs are inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. Level 2 inputs may
include quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted prices), such as
interest rates, foreign exchange rates, and yield curves that are observable at commonly
quoted intervals. |
|
|
|
Level 3 inputs are unobservable inputs for the asset or liability, which is typically
based on an entitys own assumptions, as there is little, if any, related market activity
or information. |
In instances where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value hierarchy within which
the entire fair value measurement falls is based on the lowest level input that is significant to
the fair value measurement in its entirety. The Companys assessment of the significance of a
particular input to the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
11
The following table sets forth the Companys financial assets and liabilities that were accounted
for at fair value on a recurring basis as of March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
March 31, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2010 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
220 |
|
|
$ |
220 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
5,505 |
|
|
$ |
|
|
|
$ |
5,505 |
|
|
$ |
|
|
The following table sets forth the Companys financial assets and liabilities that were accounted
for at fair value on a recurring basis as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
December 31, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
431 |
|
|
$ |
431 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
7,320 |
|
|
$ |
|
|
|
$ |
7,320 |
|
|
$ |
|
|
Non-financial assets and liabilities recorded at fair value on a non-recurring basis to which the
Company would apply the accounting standard where a measurement was required under fair value would
include:
|
|
|
Non-financial assets and liabilities initially measured at fair value in an
acquisition or business combination that are not remeasured at least annually at fair
value, |
|
|
|
Long-lived assets measured at fair value due to an impairment in accordance with
the accounting standard for the impairment or disposal of long-lived assets, |
|
|
|
Equity and cost method investments measured at fair value due to an impairment in
accordance with the accounting standard for investments, |
|
|
|
Notes receivable adjusted for any impairment in its value in accordance with the
accounting standard for loan receivables, and, |
|
|
|
Asset retirement obligations initially measured at fair value under the accounting
standard for asset retirement obligations. |
There were no items that were accounted for at fair value on a non-recurring basis during the first
quarter of 2010.
Income Taxes
Brandywine Realty Trust has elected to be treated as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the Code). In order to continue to qualify as a REIT,
Brandywine Realty Trust is required to, among other things, distribute at least 90% of its annual
REIT taxable income to its stockholders and meet certain tests regarding the nature of its income
and assets. As a REIT, Brandywine Realty Trust is not subject to federal and state income taxes
with respect to the portion of its income that meets certain criteria and is distributed annually
to its stockholders. Accordingly, no provision for federal and state income taxes is included in
the accompanying consolidated financial statements with respect to the operations of Brandywine
Realty Trust. Brandywine Realty Trust intends to continue to operate in a manner that allows it to
meet the requirements for taxation as a REIT. If Brandywine Realty Trust fails to qualify as a REIT
in any taxable year, Brandywine Realty Trust will be subject to federal and state income taxes and
may not be able to qualify as a REIT for the four subsequent tax years. Brandywine Realty Trust is
subject to certain local income taxes. Provision for such taxes has been included in general and
administrative expenses in Brandywine Realty Trusts Consolidated Statements of Operations and
Comprehensive Income.
12
Brandywine Realty Trust has elected to treat several of its subsidiaries as REITs under Sections
856 through 860 of the Code. As a result, each subsidiary REIT generally is not subject to federal
and state income taxation at the corporate level to the extent it distributes annually at least
100% of its REIT taxable income to its stockholders and satisfies certain other organizational and
operational requirements. Each subsidiary REIT has met these requirements and, accordingly, no
provision has been made for federal
and state income taxes in the accompanying consolidated financial statements. If any subsidiary
REIT fails to qualify as a REIT in any taxable year, that subsidiary REIT will be subject to
federal and state income taxes and may not be able to qualify as a REIT for the four subsequent
taxable years. In addition, this non-qualification can adversely impact Brandywine Realty Trusts
ability to qualify as a REIT. Also, each subsidiary REIT may be subject to local income taxes.
Brandywine Realty Trust has elected to treat several of its subsidiaries as taxable REIT
subsidiaries (each a TRS). A TRS is subject to federal, state and local income tax. In general, a
TRS may perform non-customary services for tenants, hold assets that Brandywine Realty Trust, as a
REIT, cannot hold directly and generally may engage in any real estate or non-real estate related
business.
Accounting Pronouncements Adopted During 2010
In January 2010, the FASB issued a new accounting standard for distributions to stockholders with
components of stock and cash. The guidance clarifies that in calculating earnings per share, an
entity should account for the stock portion of the distribution as a stock issuance and not as a
stock dividend. The new standard is effective for fiscal years and interim periods ending after
December 15, 2009, and should be applied on a retrospective basis. The Companys adoption of the
new standard did not have a material impact on its consolidated financial position or results of
operations.
In January 2010, the FASB issued an amendment to the accounting standard for fair value
measurements and disclosures. The amendment clarifies and provides additional disclosure
requirements related to recurring and non-recurring fair value measurements. This amendment is
effective for fiscal years and interim periods ending after December 15, 2009. The Companys
adoption of the new standard did not have a material impact on its consolidated financial position
or results of operations.
In December 2009, the FASB issued a new accounting standard governing transfer of financial assets.
This new standard is a revision to the existing accounting standard for the transfer and servicing
of financial assets and amends the guidance on accounting for transfers of financial assets,
including securitization transactions, where entities have continued exposure to risks related to
transferred financial assets. The new accounting standard also expands the disclosure requirements
for such transactions. This amendment is effective for fiscal years beginning after November 15,
2009. The Companys adoption of the new standard did not have a material impact on its consolidated
financial position or results of operations.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the
consolidation of variable interest entities (VIE). The elimination of the concept of a qualifying
special-purpose entity (QSPE) removes the exception from applying the consolidation guidance within
this amendment. This amendment requires an enterprise to perform a qualitative analysis when
determining whether or not it must consolidate a VIE. The amendment also requires an enterprise to
continuously reassess whether it must consolidate a VIE. Additionally, the amendment requires
enhanced disclosures about an enterprises involvement with VIEs and any significant change in risk
exposure due to that involvement, as well as how its involvement with VIEs impacts the enterprises
financial statements. Finally, an enterprise will be required to disclose significant judgments and
assumptions used to determine whether or not to consolidate a VIE. This amendment was adopted on
January 1, 2010 and applied prospectively.
As a result of the adoption of the amendment to the accounting and disclosure requirements for the
consolidation of VIEs, the Company has determined that it will no longer consolidate three of the
VIEs that it has previously consolidated. In reaching its conclusion, the Company considered the
requirements provided by the accounting standard to qualitatively assess if the Company is the
primary beneficiary of the VIEs based on whether the Company has (i) the power to direct those
matters that most significantly impact the activities of the VIE and (ii) the obligation to absorb
losses or the right to receive benefits of the VIE that could potentially be significant to the
VIE. The Companys consideration included an assessment of each of the entities with which it has
involvement and review of applicable documents such as, but not limited to applicable partnership
agreements, real estate venture agreements, LLC agreements, management and leasing agreements. As
of January 1, 2010, the Company held interests in 17 real estate ventures, 15 of which are
unconsolidated and two of which the Company continues to consolidate. The Companys basis in
reaching its conclusion for these entities is provided below:
Previously Consolidated:
Four Tower Bridge and Six Tower Bridge Ventures
Each of the Four Tower Bridge and Six Tower Bridge Real Estate Ventures was formed as limited
partnerships to own and manage an office property located in Conshohocken, Pennsylvania. The
Company entered into these ventures with two other partners during 1997 and 1998, respectively.
The other partner in Four Tower Bridge owns 35% interest and the other partner in Six Tower Bridge
owns a 37% interest in the partnership entities. These Real Estate Ventures were determined to be
VIEs and were previously consolidated in the Companys financial statements in accordance with the
amended accounting standard for the consolidation of VIEs. The Real Estate Ventures were
determined to be VIEs due to insufficient equity at the latest reconsideration event. However,
upon the Companys adoption of the new accounting standard on January 1, 2010, the Company has
determined that will no longer consolidate these Real Estate Ventures after it was determined that
the partners have shared power in the ventures and no related party
considerations were identified. All significant decisions are approved by both partners in the
venture. Based on the facts and circumstances provided, the Company deconsolidated these two Real
Estate Ventures in accordance with the new accounting standard.
13
Coppell Associates
Coppell Associates is a Real Estate Venture that owns one property in Austin, Texas. The Company
entered into this venture with another partner which owns a 50% interest in the partnership. This
Real Estate Venture is a VIE and was previously consolidated in the Companys financial statements
in accordance with the amended accounting standard for the consolidation of VIEs. The venture was
determined to be a VIE due to insufficient equity at the latest reconsideration event. However,
upon the Companys adoption of the new accounting standard on January 1, 2010, the Company has
determined that will no longer consolidate this Real Estate Venture after it concluded that the
partners have shared power in the venture. All significant decisions are approved by both partners
in the venture. Based on the facts and circumstances provided, the Company deconsolidated this
Real Estate Venture in accordance with the new accounting standard.
Other VIEs:
PJP VII
The Company holds a 25% interest in a Real Estate Venture that it entered into with two other
partners. One of the other partners has 50% ownership interest in the venture while the other one
has ownership interest of 25%. This venture is considered a VIE due to the fact that at the last
reconsideration event, it entered into a construction loan to fund the building construction of the
property and it was determined that there was insufficient equity in the joint venture. In
addition, this loan has not been refinanced as of March 31, 2010 and the Company guarantees $0.7
million or 8.75% of the total construction note. It is expected that this entity will remain a VIE
until the venture refinances the construction loan into a permanent financing. It was determined
that the Company does not have the power to direct the significant economic activities of the Real
Estate Venture in accordance with the standard and as a result is not the primary beneficiary of
this real estate venture.
Residence Inn Hotel
The Company holds a 50% interest in a Real Estate Venture that owns a Residence Inn Hotel located
in Conshohocken, Pennsylvania. The Company has two other partners in this venture with one of them
having a 46.4% interest while the other one has 3.6% interest. The Real Estate Venture was
considered as a VIE in accordance with the amended accounting standard for the consolidation of
VIEs due to the participating rights of the non-equity holder hotel manager. However, the Company
has determined that the partners have shared power in the venture. All significant decisions are
approved by all partners in the venture. Accordingly this Real Estate Venture was not consolidated
in the financial statements of the Company. Upon the adoption of the new accounting standard, the
Company still has the same determination that it does not have the power to control the business of
the Real Estate Venture and that it is still appropriate to account for this venture under the
equity method of accounting.
G&I VI Interchange Office LLC
The Company holds a 20% interest in a Real Estate Venture that owns a portfolio of 29 office
properties located in Montgomery, Bucks, and Lehigh counties in Pennsylvania. The Company has one
other partner in this venture with an 80% ownership interest. The Real Estate Venture was
considered as a VIE in accordance with the amended accounting standard for the consolidation of
VIEs. The venture continues to be determined a VIE due to the disproportionate voting rights. The
Company has determined that it is not the primary beneficiary of the venture. Accordingly, this
Real Estate Venture was not consolidated in the financial statements of the Company. Upon the
adoption of the new accounting standard, the Company still has the same determination that it does
not have the power to control the business of the Real Estate Venture and that it is still
appropriate to account for this venture under the equity method of accounting.
Seven Tower Bridge
The Company has a 10% total ownership interest in a Real Estate Venture that will develop a
suburban office building in Conshohocken, Pennsylvania. The Company has three other partners in
this venture having ownership interests of 50%, 20%, and 20%, respectively. This venture is
considered a VIE as the property is under development and there is insufficient equity to fund the
construction. The Company has determined that it is not the primary beneficiary of the venture.
Accordingly, this Real Estate Venture was not consolidated in the financial statements of the
Company. Upon the adoption of the new accounting standard, the Company still has the same
determination that it does not have the power to control the business of the Real Estate Venture
and that it is still appropriate to account for this venture under the equity method of accounting.
14
VIEs that Continue to be Consolidated:
Projects Related to the Companys Tax Credit Transactions
During 2008, the Company closed two transactions with US Bancorp related to the historic
rehabilitation of the 30th Street Post Office and the Cira Garage Project both located in
Philadelphia, Pennsylvania. The real estate ventures created to facilitate the tax credit
transactions were considered as VIEs because the equity investment at risk is not sufficient to
permit the entities to receive the tax credits without the financial support from US Bancorp. The
Company has also concluded that it is the primary beneficiary of the projects based on the
contractual arrangements that obligate the Company to deliver tax benefits and provide other
guarantees to USB and that entitle the Company through fee arrangements to receive substantially
all available cash flow from the projects. Please refer to Note 14 for a detailed discussion of
these transactions as well as the amount of deferred income related to these VIEs that the Company
has included in its consolidated balance sheets. There were no other significant amounts included
in the Companys consolidated balance sheet related to these entities as the related amounts were
eliminated during consolidation.
Other Unconsolidated Real Estate Venture
In accordance with the Companys adoption of the accounting standard for the consolidation of VIEs,
it was determined that the Company would not consolidate the Real Estate Ventures below based on
the evaluation of the substantive participating rights of the partners in each venture under the
voting interest model:
|
|
|
Two Tower Bridge (Company as co-General Partner with 35% Ownership Interest) |
|
|
|
Eight Tower Bridge (Company as Limited Partner with Preferred Equity Interest) |
|
|
|
PJP Real Estate Ventures (Company as Operating Member with 25% to 30% Ownership
Interest) |
|
|
|
Macquarie BDN Office LLC (Company as Operating Member with 20% Ownership Interest) |
|
|
|
Broadmoor Joint Venture (Company as co-Managing Venturer with 50% Ownership Interest) |
|
|
|
1000 Chesterbrook (Company as co-General Partner with 50% Ownership Interest) |
The other unconsolidated real estate ventures described above are not VIEs as the other partners
in the ventures have either the substantive participating rights in the entities normal business
operations or the power to direct the activities is shared amongst the partners. As a result of
the Companys review, it has concluded that it is appropriate to account for these entities as
unconsolidated Real Estate Ventures under the equity method of accounting.
Additional Considerations
The supporting real estate venture agreements of the entities listed above provided a
straightforward determination of whether the Company has control to direct the business activities
of the entities. Where the Company has concluded that control is shared, it is generally because
of at least one other partner and the Company must agree on decisions that are considered
significant. The Company has also determined that it is not the primary beneficiary in these
entities as it does not have the power to direct the activities that most significantly impact the
economic performance of these entities. Also, if shared control was determined and the Company was
considered to be a related party, the Company is not the party deemed to be the most closely
associated with the business. For entities that the Company has determined to be VIEs but for
which it is not the primary beneficiary, its maximum exposure to loss is the carrying amount of its
investments, as the Company has not provided any guarantees other than the guarantee described for
PJP VII which was approximately $0.7 million at March 31, 2010. Also, for all entities determined
to be VIEs, the Company does not provide financial support to the real estate ventures through
liquidity arrangements, guarantees or other similar commitments, other than perhaps through its
general partner standing.
In accordance with the Companys adoption of the accounting standard as discussed in detail above,
the Companys consolidated balance sheet as of March 31, 2010 and certain line items from its
statements of operations for the three months ended March 31, 2010 have been reduced by the
following amounts as a result of deconsolidating the three VIEs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Balance Sheets |
|
|
Before Deconsolidation |
|
Balance Sheet: |
|
As Reported |
|
|
of Deconsolidated VIEs |
|
|
of VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, net |
|
$ |
4,133,159 |
|
|
$ |
37,126 |
|
|
$ |
4,170,285 |
|
Cash and cash equivalents |
|
|
7,590 |
|
|
|
1,382 |
|
|
|
8,972 |
|
Receivables, net |
|
|
103,046 |
|
|
|
1,478 |
|
|
|
104,524 |
|
Deferred costs, net |
|
|
103,117 |
|
|
|
1,199 |
|
|
|
104,316 |
|
Other assets |
|
|
288,216 |
|
|
|
3,034 |
|
|
|
291,250 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,635,128 |
|
|
$ |
44,219 |
|
|
$ |
4,679,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
2,430,849 |
|
|
$ |
42,877 |
|
|
$ |
2,473,726 |
|
Accounts payable and accrued expenses |
|
|
95,621 |
|
|
|
822 |
|
|
|
96,443 |
|
Other liabilities |
|
|
188,740 |
|
|
|
624 |
|
|
|
189,364 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,715,210 |
|
|
|
44,323 |
|
|
|
2,759,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Companys equity |
|
|
1,881,602 |
|
|
|
(142 |
) |
|
|
1,881,460 |
|
Noncontrolling interests |
|
|
38,316 |
|
|
|
38 |
|
|
|
38,354 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity |
|
$ |
4,635,128 |
|
|
$ |
44,219 |
|
|
$ |
4,679,347 |
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Income Statements |
|
|
Before Deconsolidation |
|
Income Statement: |
|
As Reported |
|
|
of Deconsolidated VIEs |
|
|
of VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
143,134 |
|
|
$ |
2,081 |
|
|
$ |
145,215 |
|
Property operating expenses |
|
|
45,148 |
|
|
|
370 |
|
|
|
45,518 |
|
Real estate taxes |
|
|
13,052 |
|
|
|
88 |
|
|
|
13,140 |
|
Third party management fees |
|
|
1,412 |
|
|
|
|
|
|
|
1,412 |
|
Depreciation and amortization |
|
|
52,622 |
|
|
|
495 |
|
|
|
53,117 |
|
General and administrative expenses |
|
|
6,092 |
|
|
|
|
|
|
|
6,092 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
24,808 |
|
|
|
1,128 |
|
|
|
25,936 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
31,524 |
|
|
|
974 |
|
|
|
32,498 |
|
Other expenses, net |
|
|
42 |
|
|
|
154 |
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(6,758 |
) |
|
$ |
|
|
|
$ |
(6,758 |
) |
|
|
|
|
|
|
|
|
|
|
The adoption of the accounting standard discussed above increased net cash used in investing
activities, as reflected in the statements of cash flows by $1.4 million during the three months
ended March 31, 2010. The impact of the adoption to the operating and financing activities
subtotals in the statement of cash flows was not material. The related cash pertains to cash owned
by the deconsolidated VIEs.
The difference between the net amount removed from the Companys consolidated balance sheet and the
amount of the Companys retained interest in the deconsolidated VIEs, amounting to $1.4 million, is
recognized as a cumulative effect of accounting change to cumulative earnings in the Companys
consolidated balance sheets.
3. REAL ESTATE INVESTMENTS
As of March 31, 2010 and December 31, 2009 the gross carrying value of the Companys operating
properties was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
682,364 |
|
|
$ |
690,441 |
|
Building and improvements |
|
|
3,354,972 |
|
|
|
3,393,498 |
|
Tenant improvements |
|
|
414,749 |
|
|
|
428,679 |
|
|
|
|
|
|
|
|
|
|
$ |
4,452,085 |
|
|
$ |
4,512,618 |
|
|
|
|
|
|
|
|
Acquisitions and Dispositions
The Company did not complete any acquisitions during the periods covered in these financial
statements.
On January 14, 2010, the Company sold Westmoreland Plaza, a 121,815 net rentable square feet office
property located in Richmond, Virginia, for a sales price of $10.8 million. This sale is included
in discontinued operations (see Note 10).
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of March 31, 2010, the Company had an aggregate investment of approximately $77.5 million in its
15 unconsolidated Real Estate Ventures. The Company formed these ventures with unaffiliated third
parties, or acquired them, to develop office properties or to acquire land in anticipation of
possible development of office properties. Thirteen of the Real Estate Ventures own 48 office
buildings that contain an aggregate of approximately 4.6 million net rentable square feet, one Real
Estate Venture owns three acres of undeveloped parcel of land and one Real Estate Venture developed
a hotel property that contains 137 rooms in Conshohocken, PA.
The Company accounts for its unconsolidated interests in its Real Estate Ventures using the
equity method. The Companys unconsolidated interests range from 3% to 65%, subject to specified
priority allocations of distributable cash in certain of the Real Estate Ventures.
The amounts reflected in the following tables (except for the Companys share of equity and income)
are based on the historical financial information of the individual Real Estate Ventures. One of
the Real Estate Ventures, acquired in connection with the Prentiss Properties Trust merger in 2006,
had a negative equity balance on a historical cost basis as a result of historical depreciation and
distribution of excess financing proceeds. The Company reflected its acquisition of this Real
Estate Venture interest at its relative fair value as of the date of the purchase of Prentiss. The
difference between allocated cost and the underlying equity in the net assets of the investee is
accounted for as if the entity were consolidated (i.e., allocated to the Companys relative share
of assets and liabilities with an adjustment to recognize equity in earnings for the appropriate
additional depreciation/amortization). The Company does not record
operating losses of the Real Estate Ventures in excess of its investment balance unless the Company
is liable for the obligations of the Real Estate Venture or is otherwise committed to provide
financial support to the Real Estate Venture.
16
The following is a summary of the financial position of the Real Estate Ventures as of March 31,
2010 and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 (a) |
|
|
|
|
|
|
|
|
|
|
Net property |
|
$ |
531,052 |
|
|
$ |
503,932 |
|
Other assets |
|
|
120,105 |
|
|
|
96,643 |
|
Other Liabilities |
|
|
42,254 |
|
|
|
37,774 |
|
Debt |
|
|
518,241 |
|
|
|
470,232 |
|
Equity |
|
|
90,662 |
|
|
|
92,569 |
|
Companys share of equity (Companys basis) |
|
|
77,472 |
|
|
|
75,458 |
|
|
|
|
(a)- |
|
Includes the three real estate ventures that were deconsolidated upon the adoption of
the new accounting standard for the consolidation of VIEs. |
The following is a summary of results of operations of the Real Estate Ventures for the three-month
periods ended March 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
|
ended March 31, |
|
|
|
2010 |
|
|
2009 (a) |
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
24,069 |
|
|
$ |
26,564 |
|
Operating expenses |
|
|
8,695 |
|
|
|
9,566 |
|
Interest expense, net |
|
|
7,738 |
|
|
|
7,152 |
|
Depreciation and amortization |
|
|
6,222 |
|
|
|
8,822 |
|
Net income |
|
|
1,415 |
|
|
|
1,024 |
|
Companys share of income (Companys basis) |
|
|
1,296 |
|
|
|
586 |
|
|
|
|
(a)- |
|
Includes the three real estate ventures that were deconsolidated upon the adoption of
the new accounting standard for the consolidation of VIEs. |
As of March 31, 2010, the Company had guaranteed repayment of approximately $0.7 million of loans
on behalf of certain Real Estate Ventures. The Company also provides customary environmental
indemnities in connection with construction and permanent financing both for its own account and on
behalf of its Real Estate Ventures.
5. DEFERRED COSTS
As of March 31, 2010 and December 31, 2009, the Companys deferred costs were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing Costs |
|
$ |
127,714 |
|
|
$ |
(54,732 |
) |
|
$ |
72,982 |
|
Financing Costs |
|
|
40,832 |
|
|
|
(10,697 |
) |
|
|
30,135 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
168,546 |
|
|
$ |
(65,429 |
) |
|
$ |
103,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing Costs |
|
$ |
124,391 |
|
|
$ |
(50,643 |
) |
|
$ |
73,748 |
|
Financing Costs |
|
|
42,965 |
|
|
|
(10,616 |
) |
|
|
32,349 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
167,356 |
|
|
$ |
(61,259 |
) |
|
$ |
106,097 |
|
|
|
|
|
|
|
|
|
|
|
17
During the three months ended March 31, 2010 and 2009, the Company capitalized internal direct
leasing costs of $1.8 million and $1.2 million, respectively, in accordance with the accounting
standard for the capitalization of leasing costs.
6. INTANGIBLE ASSETS
As of March 31, 2010 and December 31, 2009, the Companys intangible assets were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
118,974 |
|
|
$ |
(72,568 |
) |
|
$ |
46,406 |
|
Tenant relationship value |
|
|
96,263 |
|
|
|
(51,809 |
) |
|
|
44,454 |
|
Above market leases acquired |
|
|
14,831 |
|
|
|
(10,606 |
) |
|
|
4,225 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
230,068 |
|
|
$ |
(134,983 |
) |
|
$ |
95,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
75,065 |
|
|
$ |
(40,218 |
) |
|
$ |
34,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
123,456 |
|
|
$ |
(71,402 |
) |
|
$ |
52,054 |
|
Tenant relationship value |
|
|
97,566 |
|
|
|
(49,374 |
) |
|
|
48,192 |
|
Above market leases acquired |
|
|
15,674 |
|
|
|
(10,757 |
) |
|
|
4,917 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
236,696 |
|
|
$ |
(131,533 |
) |
|
$ |
105,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
75,325 |
|
|
$ |
(38,238 |
) |
|
$ |
37,087 |
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, the Companys annual amortization for its intangible assets/liabilities
is as follows (in thousands, and assuming no early lease terminations):
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
Liabilities |
|
2010 |
|
$ |
20,897 |
|
|
$ |
6,068 |
|
2011 |
|
|
22,427 |
|
|
|
7,012 |
|
2012 |
|
|
17,201 |
|
|
|
6,275 |
|
2013 |
|
|
12,432 |
|
|
|
5,836 |
|
2014 |
|
|
9,125 |
|
|
|
4,348 |
|
Thereafter |
|
|
13,003 |
|
|
|
5,308 |
|
|
|
|
|
|
|
|
Total |
|
$ |
95,085 |
|
|
$ |
34,847 |
|
|
|
|
|
|
|
|
18
7. DEBT OBLIGATIONS
The following table sets forth information regarding the Companys debt obligations outstanding at
March 31, 2010 and December 31, 2009 (in thousands):
MORTGAGE DEBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
March 31, |
|
|
December 31, |
|
|
Interest |
|
Maturity |
Property / Location |
|
2010 |
|
|
2009 |
|
|
Rate |
|
Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
Plymouth Meeting Exec. |
|
|
41,848 |
|
|
|
42,042 |
|
|
7.00% ( a ) |
|
Dec-10 |
Four Tower Bridge |
|
|
|
|
|
|
10,158 |
|
|
6.62% ( b ) |
|
Feb-11 |
Arboretum I, II, III & V |
|
|
20,885 |
|
|
|
21,046 |
|
|
7.59% |
|
Jul-11 |
Midlantic Drive/Lenox Drive/DCC I |
|
|
57,802 |
|
|
|
58,215 |
|
|
8.05% |
|
Oct-11 |
Research Office Center |
|
|
39,803 |
|
|
|
39,999 |
|
|
5.30% ( a ) |
|
Oct-11 |
Concord Airport Plaza |
|
|
35,326 |
|
|
|
35,594 |
|
|
5.55% ( a ) |
|
Jan-12 |
Six Tower Bridge |
|
|
|
|
|
|
13,557 |
|
|
7.79% ( b ) |
|
Aug-12 |
Newtown Square/Berwyn Park/Libertyview |
|
|
59,202 |
|
|
|
59,557 |
|
|
7.25% |
|
May-13 |
Coppell Associates II |
|
|
|
|
|
|
2,711 |
|
|
6.89% ( b ) |
|
Dec-13 |
Southpoint III |
|
|
3,095 |
|
|
|
3,255 |
|
|
7.75% |
|
Apr-14 |
Tysons Corner |
|
|
97,659 |
|
|
|
98,056 |
|
|
5.36% ( a ) |
|
Aug-15 |
Coppell Associates I |
|
|
|
|
|
|
16,600 |
|
|
5.75% ( b ) |
|
Feb-16 |
Two Logan Square |
|
|
89,800 |
|
|
|
89,800 |
|
|
7.57% |
|
Apr-16 |
One Logan Square |
|
|
60,000 |
|
|
|
60,000 |
|
|
4.50% |
|
Jul-16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
505,420 |
|
|
|
550,590 |
|
|
|
|
|
Plus: unamortized fixed-rate debt premiums, net |
|
|
736 |
|
|
|
1,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
506,156 |
|
|
$ |
551,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNSECURED DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
Bank Term Loan |
|
|
183,000 |
|
|
|
183,000 |
|
|
LIBOR + 0.80% |
|
Oct-10 ( c ) |
$300.0M 5.625% Guaranteed Notes due 2010 |
|
|
197,816 |
|
|
|
198,545 |
|
|
5.61% |
|
Dec-10 |
Credit Facility |
|
|
160,000 |
|
|
|
92,000 |
|
|
LIBOR + 0.725% |
|
Jun-11 ( c ) |
$345.0M 3.875% Guaranteed Exchangeable Notes due 2026 |
|
|
91,735 |
|
|
|
127,960 |
|
|
5.50% |
|
Oct-11 ( d ) |
$300.0M 5.750% Guaranteed Notes due 2012 |
|
|
176,787 |
|
|
|
187,825 |
|
|
5.77% |
|
Apr-12 |
$250.0M 5.400% Guaranteed Notes due 2014 |
|
|
242,681 |
|
|
|
242,681 |
|
|
5.53% |
|
Nov-14 |
$250.0M 7.500% Guaranteed Notes due 2015 |
|
|
250,000 |
|
|
|
250,000 |
|
|
7.75% |
|
May-15 |
$250.0M 6.000% Guaranteed Notes due 2016 |
|
|
250,000 |
|
|
|
250,000 |
|
|
5.95% |
|
Apr-16 |
$300.0M 5.700% Guaranteed Notes due 2017 |
|
|
300,000 |
|
|
|
300,000 |
|
|
5.75% |
|
May-17 |
Indenture IA (Preferred Trust I) |
|
|
27,062 |
|
|
|
27,062 |
|
|
LIBOR + 1.25% |
|
Mar-35 |
Indenture IB (Preferred Trust I) |
|
|
25,774 |
|
|
|
25,774 |
|
|
LIBOR + 1.25% |
|
Apr-35 |
Indenture II (Preferred Trust II) |
|
|
25,774 |
|
|
|
25,774 |
|
|
LIBOR + 1.25% |
|
Jul-35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
1,930,629 |
|
|
|
1,910,621 |
|
|
|
|
|
Less: unamortized exchangeable debt discount |
|
|
(2,678 |
) |
|
|
(4,327 |
) |
|
|
|
|
unamortized fixed-rate debt discounts, net |
|
|
(3,258 |
) |
|
|
(3,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unsecured indebtedness |
|
$ |
1,924,693 |
|
|
$ |
1,902,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Obligations |
|
$ |
2,430,849 |
|
|
$ |
2,454,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Loans were assumed upon acquisition of the related property. Interest rates presented above
reflect the market rate at the time of acquisition. |
|
(b) |
|
These loans were removed from the Companys balance sheet due to the deconsolidation of the
related VIEs as discussed in Note 2. |
|
(c) |
|
These loans may be extended to June 29, 2012 at the Companys discretion. |
|
(d) |
|
On October 20, 2011, the holders of the Exchangeable Notes have the right to request the
redemption of all or a portion of the Exchangeable Notes they hold at a price equal to 100% of
the principal amount plus accrued and unpaid interest. Accordingly, the Exchangeable Notes
have been presented with an October 20, 2011 maturity date. |
During the three-month periods ended March 31, 2010 and 2009, the Companys weighted-average
effective interest rate on its mortgage notes payable was 6.43% and 6.40%, respectively.
19
During the three-months ended March 31, 2010, the Company repurchased $48.0 million of its
outstanding unsecured Notes in a series of transactions which are summarized in the table below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase |
|
|
|
|
|
|
|
|
|
|
Deferred Financing |
|
Notes |
|
Amount |
|
|
Principal |
|
|
Loss |
|
|
Amortization |
|
2010 5.625% Notes |
|
$ |
754 |
|
|
$ |
730 |
|
|
$ |
(17 |
) |
|
$ |
1 |
|
2012 5.750% Notes |
|
|
11,648 |
|
|
|
11,038 |
|
|
|
(368 |
) |
|
|
29 |
|
3.875% Notes |
|
|
36,383 |
|
|
|
36,225 |
|
|
|
(807 |
) |
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48,785 |
|
|
$ |
47,993 |
|
|
$ |
(1,192 |
) |
|
$ |
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company utilizes credit facility borrowings for general business purposes, including the
acquisition, development and redevelopment of properties and the repayment of other debt. The
maturity date of the $600.0 million Credit Facility (the Credit Facility) is June 29, 2011
(subject to an extension of one year, at the Companys option, upon its payment of an extension fee
equal to 15 basis points of the committed amount under the Credit Facility). The per annum variable
interest rate on the outstanding balances is LIBOR plus 0.725%. The interest rate and facility fee
are subject to adjustment upon a change in the Companys unsecured debt ratings. The Company has
the option to increase the Credit Facility to $800.0 million subject to the absence of any defaults
and the Companys ability to acquire additional commitments from its existing lenders or new
lenders. As of March 31, 2010, the Company had $160.0 million of borrowings, $14.0 million in
letters of credit outstanding, and a $51.0 million holdback in connection with its historic tax
credit transaction leaving $375.0 million of unused availability. During the three-month periods
ended March 31, 2010 and 2009, the weighted-average interest rate on Credit Facility borrowings was
0.96% and 3.02%, respectively.
The Credit Facility requires the maintenance of ratios related to minimum net worth, debt-to-total
capitalization and fixed charge coverage and includes non-financial covenants. The Company was in
compliance with all financial covenants as of March 31, 2010.
On June 29, 2009, the Company entered into a forward financing commitment to borrow up to $256.5
million under two separate loans which are secured by mortgages on the 30th
Street Post Office (the Post Office project), the Cira South Garage (the garage project) and by
the leases of space at these facilities upon the completion of these projects. Of the total
borrowings, $209.7 million and $46.8 million will be allocated to the Post Office project and to
the garage project, respectively. The Company paid a $17.7 million commitment fee, which includes a
$1.5 million arrangement fee, in connection with this commitment. The total loan amount together
with the net commitment fee was deposited in an escrow account to be administered by The Bank of
New York Mellon (the trustee). In accordance with the trust agreement between the lender and the
trustee, the lender assigned its rights under the loans to the Trust. The Trust issued certificates
to third parties in an amount equal to the funding commitment. Upon investment of the escrow
account in a portfolio of U.S. Government treasuries, the net commitment fee of $16.2 million will
be used together with the interest earned on the escrow account to pay interest costs of the loans
through August 26, 2010 which is also the anticipated completion date of the projects and the
expected funding date. In order for funding to occur, certain conditions must be met by the Company
which primarily relate to the completion of the projects and the commencement of the rental
payments from the respective leases with the IRS on these properties. The loans will bear interest
at 5.93% and require principal and interest payments based on a twenty year amortization schedule.
The Company intends to use the loan proceeds to reduce borrowings under its credit facility and for
general corporate purposes. As of March 31, 2010, the commitment fee is included as part of the
deferred costs in the Companys consolidated balance sheet as it believes the funding is probable
of occurring. The Company will amortize this cost over the term of the loan starting on the date
the funding of the loans has occurred. In the event that the Company believes the funding will not
occur, this cost will be written off in the period that such determination is made. In addition,
should the funding not occur either because the Company does not meet the conditions or the Company
decides not to proceed with the funding, a termination fee is payable (see Note 16).
The Company accounts for its outstanding 3.875% Guaranteed Exchangeable Notes in accordance with
the accounting standard for convertible debt instruments. The accounting standard requires the
initial proceeds from convertible debt that may be settled in cash to be bifurcated between a
liability component and an equity component. The accounting standard requires the initial proceeds
from the Companys issuance of the 3.875% Guaranteed Exchangeable Notes to be allocated between a
liability component and an equity component in a manner that reflects interest expense at the
interest rate of a similar nonconvertible debt that could have been issued by the Company at such
time. This is accomplished through the creation of a discount on the debt that would be accreted
using the
effective interest method as additional non-cash interest expense over the period the debt is
expected to remain outstanding (i.e. through the first optional redemption date).
20
The principal amount outstanding of the 3.875% Guaranteed Exchangeable Notes was $91.7 at March 31,
2010 and $128.0 million at December 31, 2009, respectively. At certain times and upon certain
events, the notes are exchangeable for cash up to their principal amount and, with respect to the
remainder, if any, of the exchange value in excess of such principal amount, cash or common shares.
The initial exchange rate is 25.4065 shares per $1,000 principal amount of notes (which is
equivalent to an initial exchange price of $39.36 per share). The carrying amount of the equity
component is $24.4 million and is reflected within Additional paid-in capital in the Companys
consolidated balance sheets. The unamortized debt discount is $2.7 million at March 31, 2010 and
$4.3 million at December 31, 2009, respectively, and will be amortized through October 15, 2011.
The effective interest rate at March 31, 2010 and December 31, 2009 was 5.5%. The Company
recognized contractual coupon interest of $1.1 million and $2.7 million for the three month periods
ended March 31, 2010 and 2009, respectively. In addition, the Company recognized interest on
amortization of debt discount of $0.5 million and $1.0 million for the three month periods ended
March 31, 2010 and 2009, respectively. Debt discount write-offs resulting from debt repurchases
amounted to $1.1 million and $0.2 million for the three month periods ended March 31, 2010 and
2009, respectively.
As of March 31, 2010, the Companys aggregate scheduled principal payments of debt obligations,
excluding amortization of discounts and premiums, are as follows (in thousands):
|
|
|
|
|
2010 |
|
$ |
428,691 |
|
2011 |
|
|
372,860 |
|
2012 |
|
|
214,853 |
|
2013 |
|
|
58,688 |
|
2014 |
|
|
246,158 |
|
Thereafter |
|
|
1,114,799 |
|
|
|
|
|
Total principal payments |
|
|
2,436,049 |
|
Net unamortized premiums/discounts |
|
|
(5,200 |
) |
|
|
|
|
Outstanding indebtedness |
|
$ |
2,430,849 |
|
|
|
|
|
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value disclosure was determined by the Company using available market
information and discounted cash flow analyses as of March 31, 2010 and December 31, 2009,
respectively. The discount rate used in calculating fair value is the sum of the current risk free
rate and the risk premium on the date of measurement of the instruments or obligations.
Considerable judgment is necessary to interpret market data and to develop the related estimates of
fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that
the Company could realize upon disposition. The use of different estimation methodologies may have
a material effect on the estimated fair value amounts. The Company believes that the carrying
amounts reflected in the Consolidated Balance Sheets at March 31, 2010 and December 31, 2009
approximate the fair values for cash and cash equivalents, accounts receivable, other assets,
accounts payable and accrued expenses.
The following are financial instruments for which the Company estimates of fair value differ from
the carrying amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage payable, net of premiums |
|
$ |
505,420 |
|
|
$ |
481,819 |
|
|
$ |
551,873 |
|
|
$ |
523,745 |
|
Unsecured notes payable, net of discounts |
|
$ |
1,509,019 |
|
|
$ |
1,505,604 |
|
|
$ |
1,557,011 |
|
|
$ |
1,497,356 |
|
Variable Rate Debt Instruments |
|
$ |
421,610 |
|
|
$ |
406,953 |
|
|
$ |
353,610 |
|
|
$ |
341,210 |
|
Notes Receivable |
|
$ |
72,455 |
(a) |
|
$ |
62,776 |
|
|
$ |
71,989 |
(a) |
|
$ |
62,776 |
|
|
|
|
(a) |
|
For purposes of this disclosure, one of the notes is presented gross of the recognized
deferred gain of $12.9 million arising from the sale of two properties in the prior year
accounted for under the accounting standard for installment sales. |
9. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
Risk Management
In the course of its on-going business operations, the Company encounters economic risk. There are
three main components of economic risk: interest rate risk, credit risk and market risk. The
Company is subject to interest rate risk on its interest-bearing liabilities. Credit risk is
primarily the risk of inability or unwillingness of tenants to make contractually required
payments. Market risk is the risk of declines in the value of properties due to changes in rental
rates, interest rates or other market factors affecting the valuation of properties held by the
Company.
21
Risks and Uncertainties
Deteriorating economic conditions have generally resulted in a reduction of the availability of
financing and higher borrowing costs. These factors, coupled with a slowing economy, have reduced
the volume of real estate transactions and created credit stresses on most businesses. The Company
believes that vacancy rates will increase through 2010 and possibly beyond as the current economic
climate negatively impacts tenants in the Properties. The current financial markets also have an
adverse effect on the Companys other counter parties such as the counter parties in its derivative
contracts.
The Company expects that the impact of the current state of the economy, including high
unemployment and the unprecedented volatility and illiquidity in the financial and credit markets,
will continue to have a dampening effect on the fundamentals of its business, including increases
in past due accounts, tenant defaults, lower occupancy and reduced effective rents. These
conditions would negatively affect the Companys future net income and cash flows and could have a
material adverse effect on its financial condition.
The Companys Credit Facility, Bank Term Loan and the indenture governing the unsecured public debt
securities (Note 7) contain restrictions, requirements and other limitations on the ability to
incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt
service coverage ratios and minimum ratios of unencumbered assets to unsecured debt which it must
maintain. The ability to borrow under the Credit Facility is subject to compliance with such
financial and other covenants. In the event that the Company fails to satisfy these covenants, it
would be in default under the Credit Facility, the Bank Term Loan and the indenture and may be
required to repay such debt with capital from other sources. Under such circumstances, other
sources of capital may not be available, or may be available only on unattractive terms.
Availability of borrowings under the Credit Facility is subject to a traditional material
adverse effect clause. Each time the Company borrows it must represent to the lenders that there
have been no events of a nature which would have a material adverse effect on the business, assets,
operations, condition (financial or otherwise) or prospects of the Company taken as a whole or
which could negatively effect the ability of the Company to perform its obligations under the
Credit Facility. While the Company believes that there are currently no material adverse effect
events, the Company is operating in unprecedented economic times and it is possible that such
events could arise which would limit the Companys borrowings under the Credit Facility. If an
event occurs which is considered to have a material adverse effect, the lenders could consider the
Company in default under the terms of the Credit Facility and the borrowings under the Credit
Facility if any, would become due and payable. If the Company is unable to obtain a waiver, this
would have a material adverse effect on the Companys financial position and results of operations.
The Company was in compliance with all financial covenants as of March 31, 2010. Management
continuously monitors the Companys compliance with and anticipated compliance with the covenants.
Certain of the covenants restrict managements ability to obtain alternative sources of capital.
While the Company currently believes it will remain in compliance with its covenants, in the event
of a continued slow-down and continued crisis in the credit markets, the Company may not be able to
remain in compliance with such covenants and if the lender would not provide a waiver, it could
result in an event of default.
Use of Derivative Financial Instruments
The Companys use of derivative instruments is limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposures and not for speculative
purposes. The principal objective of such arrangements is to minimize the risks and/or costs
associated with the Companys operating and financial structure, as well as to hedge specific
transactions. The counterparties to these arrangements are major financial institutions with which
the Company and its affiliates may also have other financial relationships. The Company is
potentially exposed to credit loss in the event of non-performance by these counterparties.
However, because of the high credit ratings of the counterparties, the Company does not anticipate
that any of the counterparties will fail to meet these obligations as they come due. The Company
does not hedge credit or property value market risks through derivative financial instruments.
The Company formally assesses, both at inception of the hedge and on an on-going basis, whether
each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If
management determines that a derivative is not highly-effective as a hedge or if a derivative
ceases to be a highly-effective hedge, the Company will discontinue hedge accounting prospectively.
The related ineffectiveness would be charged to the Statement of Operations.
22
The valuation of these instruments is determined using widely accepted valuation techniques
including discounted cash flow analysis on the expected cash flows of each derivative. This
analysis reflects the contractual terms of the derivatives, including the period to maturity, and
uses observable market-based inputs, including interest rate curves and implied volatilities. The
fair values of interest rate swaps are determined using the market standard methodology of netting
the discounted future fixed cash receipts (or payments) and the discounted expected variable cash
payments (or receipts). The variable cash payments (or receipts) are based on an expectation of
future interest rates (forward curves) derived from observable market interest rate curves.
To comply with the provisions of accounting standard for fair value measurements and disclosures,
the Company incorporates credit valuation adjustments to appropriately reflect both its own
nonperformance risk and the respective counterpartys nonperformance risk in the fair value
measurements. In adjusting the fair value of its derivative contracts for the effect of
nonperformance risk, the Company has considered the impact of netting and any applicable credit
enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives
fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with
its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the
likelihood of default by itself and its counterparties. However, as of March 31, 2010 and
December 31, 2009, the Company has assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions and has determined that the credit
valuation adjustments are not significant to the overall valuation of its derivatives. As a result,
the Company has determined that its derivative valuations in their entirety are classified in Level
2 of the fair value hierarchy.
The fair value of the hedges at March 31, 2010 and December 31, 2009 is included
in other liabilities and accumulated other comprehensive income in the accompanying balance sheet.
The following table summarizes the terms and fair values of the Companys derivative financial
instruments at March 31, 2010 and December 31, 2009 (in thousands). The notional amounts present
the Companys use of these instruments, but do not represent exposure to credit, interest rate or
market risks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge |
|
Hedge |
|
|
|
|
|
Notional Amount |
|
|
|
|
|
|
Trade |
|
|
Maturity |
|
|
Fair Value |
|
Product |
|
Type |
|
Designation |
|
3/31/2010 |
|
|
12/31/2009 |
|
|
Strike |
|
|
Date |
|
|
Date |
|
|
3/31/2010 |
|
|
12/31/2009 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
$ |
137,400 |
|
|
$ |
123,000 |
(a) |
|
|
4.709 |
% |
|
|
9/20/07 |
|
|
|
10/18/10 |
|
|
$ |
3,893 |
|
|
$ |
5,162 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
4.415 |
% |
|
|
10/19/07 |
|
|
|
10/18/10 |
|
|
|
600 |
|
|
|
827 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
3.747 |
% |
|
|
11/26/07 |
|
|
|
10/18/10 |
|
|
|
502 |
|
|
|
688 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,774 |
|
|
|
25,774 |
|
|
|
2.975 |
% |
|
|
10/16/08 |
|
|
|
10/30/10 |
|
|
|
510 |
|
|
|
643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
213,174 |
|
|
$ |
198,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,505 |
|
|
$ |
7,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)- |
|
Notional amount accreting up to $155,000 through October 8, 2010. |
|
(b)- |
|
Hedging unsecured variable rate debt. |
Concentration of Credit Risk
Concentrations of credit risk arise when a number of tenants related to the Companys investments
or rental operations are engaged in similar business activities, or are located in the same
geographic region, or have similar economic features that would cause their inability to meet
contractual obligations, including those to the Company, to be similarly affected. The Company
regularly monitors its tenant base to assess potential concentrations of credit risk. Management
believes the current credit risk portfolio is reasonably well diversified and does not contain
any unusual concentration of credit risk. No tenant accounted for 5% or more of the Companys
rents during the three-month periods ended March 31, 2010 and 2009. Recent developments in the
general economy and the global credit markets have had a significant adverse effect on companies
in numerous industries. The Company has tenants concentrated in various industries that may be
experiencing adverse effects from the current economic conditions and the Company could be
adversely affected if such tenants go into default under their leases.
23
10. DISCONTINUED OPERATIONS
For the three-month period ended March 31, 2010, income from discontinued operations relates to the
one property that the Company sold during 2010. The following table summarizes the revenue and
expense information for the property classified as discontinued operations for the three-month
period ended March 31, 2010 (in thousands):
|
|
|
|
|
|
|
Three-month period |
|
|
|
ended March 31, 2010 |
|
Revenue: |
|
|
|
|
Tenant reimbursements |
|
$ |
48 |
|
|
|
|
|
|
Expenses: |
|
|
|
|
Property operating expenses |
|
|
25 |
|
Real estate taxes |
|
|
2 |
|
Depreciation & amortization |
|
|
11 |
|
|
|
|
|
Total operating expenses |
|
|
38 |
|
Income from discontinued operations before gain on
sale of interests in real estate |
|
|
10 |
|
|
|
|
|
|
Net gain on sale of interest in real estate |
|
|
6,349 |
|
|
|
|
|
Income from discontinued operations |
|
|
6,359 |
|
Income from discontinued operations attributable
to non-controlling interest |
|
|
(136 |
) |
|
|
|
|
Income from discontinued operations attributable
to Brandywine Realty Trust |
|
$ |
6,223 |
|
|
|
|
|
For the three-month period ended March 31, 2009, income from discontinued operations relates
to properties that the Company sold through March 31, 2010. The following table summarizes the
revenue and expense information for properties classified as discontinued operations for the
three-month period ended March 31, 2009 (in thousands):
|
|
|
|
|
|
|
Three-month period |
|
|
|
ended March 31, 2010 |
|
Revenue: |
|
|
|
|
Rents |
|
$ |
3,525 |
|
Tenant reimbursements |
|
|
1,792 |
|
Other |
|
|
105 |
|
|
|
|
|
Total revenue |
|
|
5,422 |
|
|
|
|
|
|
Expenses: |
|
|
|
|
Property operating expenses |
|
|
1,824 |
|
Real estate taxes |
|
|
648 |
|
Depreciation and amortization |
|
|
1,411 |
|
Provision for impairment |
|
|
3,700 |
|
|
|
|
|
Total operating expenses |
|
|
7,583 |
|
|
|
|
|
|
Interest income |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
Income from discontinued operations before gain on
sale of interests in real estate |
|
|
(2,162 |
) |
|
|
|
|
|
Net gain on sale of interests in real estate |
|
|
194 |
|
|
|
|
|
Income from discontinued operations |
|
|
(1,968 |
) |
Income from discontinued operations attributable to non-controlling interests |
|
|
61 |
|
|
|
|
|
Income from discontinued operations attributable to Brandywine Realty Trust |
|
$ |
(1,907 |
) |
|
|
|
|
Discontinued operations have not been segregated in the consolidated statements of cash flows.
Therefore, amounts for certain captions will not agree with respective data in the consolidated
statements of operations.
11. NON-CONTROLLING INTERESTS IN OPERATING PARTNERSHIP
As of March 31, 2010 and December 31, 2009, the aggregate book value of the non-controlling
interests (which reflect units in the Operating Partnership not owned by the Company) in the
accompanying consolidated balance sheet was $38.3 million, and the Company believes that the
aggregate settlement value of these interests was approximately $34.3 million and $32.0 million,
respectively. This amount is based on the number of units outstanding and the closing share price
on the balance sheet date.
24
12. BENEFICIARIES EQUITY
Earnings per Share (EPS)
The following table details the number of shares and net income used to calculate basic and diluted
earnings per share (in thousands, except share and per share amounts; results may not add due to
rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(6,758 |
) |
|
$ |
(6,758 |
) |
|
$ |
1,095 |
|
|
$ |
1,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations attributable to non-controlling interests |
|
|
187 |
|
|
|
187 |
|
|
|
34 |
|
|
|
34 |
|
Amount allocable to unvested restricted shareholders |
|
|
(128 |
) |
|
|
(128 |
) |
|
|
(37 |
) |
|
|
(37 |
) |
Preferred share dividends |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations available to common shareholders |
|
|
(8,697 |
) |
|
|
(8,697 |
) |
|
|
(906 |
) |
|
|
(906 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
6,359 |
|
|
|
6,359 |
|
|
|
(1,968 |
) |
|
|
(1,968 |
) |
Net income (loss) from discontinued operations attributable to non-controlling interests |
|
|
(136 |
) |
|
|
(136 |
) |
|
|
61 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common shareholders |
|
|
6,223 |
|
|
|
6,223 |
|
|
|
(1,907 |
) |
|
|
(1,907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
(2,474 |
) |
|
$ |
(2,474 |
) |
|
$ |
(2,813 |
) |
|
$ |
(2,813 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
128,767,718 |
|
|
|
128,767,718 |
|
|
|
88,210,384 |
|
|
|
88,210,384 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
128,767,718 |
|
|
|
128,767,718 |
|
|
|
88,210,384 |
|
|
|
88,210,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common shareholders |
|
$ |
(0.07 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
Discontinued operations attributable to common shareholders |
|
|
0.05 |
|
|
|
0.05 |
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities totaling 2,809,108 and 2,816,621 as of March 31, 2010 and 2009, respectively, were
excluded from the earnings per share computations because their effect would have been
anti-dilutive.
The contingent securities/stock based compensation impact is calculated using the treasury stock
method and relates to employee awards settled in shares of the Company. The effect of these
securities is anti-dilutive for periods that the Company incurs a net loss available to common
shareholders and therefore is excluded from the dilutive earnings per share calculation in such
periods.
Unvested restricted shares are considered participating securities which require the use of the
two-class method for the computation of basic and diluted earnings per share. For the three months
ended March 31, 2010 and 2009, earnings representing nonforfeitable dividends as noted in the table
above were allocated to the unvested restricted shares.
Common and Preferred Shares
On March 24, 2010, the Company declared a distribution of $0.15 per Common Share, totaling $19.7
million, which was paid on April 19, 2010 to shareholders of record as of April 5, 2010. On March
24, 2010, the Company declared distributions on its Series C Preferred Shares and Series D
Preferred Shares to holders of record as of March 30, 2010. These shares are entitled to a
preferential return of 7.50% and 7.375%, respectively. Distributions paid on April 15, 2010 to
holders of Series C Preferred Shares and Series D Preferred Shares totaled $0.9 million and $1.1
million, respectively.
In March 2010, the Company commenced a continuous equity offering program (the Offering Program),
under which the Company may sell up to an aggregate amount of 15,000,000 common shares until March
10, 2013. The Company may sell common shares in amounts and at times to be determined by the
Company. Actual sales will depend on a variety of factors as determined by the Company, including
market conditions, the trading price of its common shares and determinations by the Company of the
appropriate sources of funding. In conjunction with the Offering Program, the Company engaged
sales agents who received compensation, in aggregate, of 2% of the gross sales price per share sold
in the quarter ended March 31, 2010. During the quarter ended March 31, 2010, the Company sold
1,325,200 shares under this program at an average sales price of $12.32 per share resulting in net
proceeds of $16.1 million. The Company used the net proceeds from the sales to repay balances on
its unsecured revolving credit facility and for general corporate purposes.
25
Common Share Repurchases
The Company maintains a share repurchase program under which the Board has authorized the Company
to repurchase its common shares from time to time. The Board initially authorized this program in
1998 and has periodically replenished capacity under the program. On May 2, 2006 the Companys
Board restored capacity to 3.5 million common shares.
The Company did not repurchase any shares during the three-month period ended March 31, 2010. As of
March 31, 2010, the Company may purchase an additional 0.5 million shares under the plan.
Repurchases may be made from time to time in the open market or in privately negotiated
transactions, subject to market conditions and compliance with legal requirements. The share
repurchase program does not contain any time limitation and does not obligate the Company to
repurchase any shares. The Company may discontinue the program at any time.
13. SHARE BASED AND DEFERRED COMPENSATION
Stock Options
At March 31, 2010, the Company had 3,129,372 options outstanding under its shareholder approved
equity incentive plan. There were 2,463,333 options unvested as of March 31, 2010 and $2.5 million
of unrecognized compensation expense associated with these options recognized over a weighted
average of 1.8 years. During the three months ended March 31, 2010 and 2009, the Company recognized
$0.2 million and $0.1 million of compensation expense, respectively, included in general and
administrative expense related to unvested options. The Company has also capitalized a nominal
amount of compensation expense for both periods as part of the Companys review of employee
salaries eligible for capitalization.
Option activity as of March 31, 2010 and changes during the three months ended March 31, 2010 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining Contractual |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Value |
|
Outstanding at January 1, 2010 |
|
|
2,404,567 |
|
|
$ |
15.48 |
|
|
|
8.38 |
|
|
$ |
(9,816,670 |
) |
Granted |
|
|
724,805 |
|
|
|
11.31 |
|
|
|
9.93 |
|
|
|
652,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010 |
|
|
3,129,372 |
|
|
|
|
|
|
|
8.55 |
|
|
$ |
(7,216,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested/Exercisable at March 31, 2010 |
|
|
666,038 |
|
|
$ |
14.52 |
|
|
|
7.42 |
|
|
$ |
(5,239,721 |
) |
Restricted Share Awards
As of March 31, 2010, 850,690 restricted shares were outstanding and vest over three to seven years
from the initial grant date. The remaining compensation expense to be recognized at March 31, 2010
was approximately $6.9 million. That expense is expected to be recognized over a weighted average
remaining vesting period of 2.0 years. The Company recognized compensation expense related to
outstanding restricted shares of $0.8 million and $0.4 million during the three months ended March
31, 2010 and 2009, respectively, of which $0.2 million was capitalized for each period as part of
the Companys review of employee salaries eligible for capitalization. The expensed amounts are
included in general and administrative expense on the Companys consolidated statement of
operations in the respective periods.
26
The following table summarizes the Companys restricted share activity for the three-months ended
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair value |
|
Non-vested at January 1, 2010 |
|
|
708,580 |
|
|
$ |
9.69 |
|
Granted |
|
|
219,596 |
|
|
|
11.56 |
|
Vested |
|
|
(77,486 |
) |
|
|
22.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2010 |
|
|
850,690 |
|
|
$ |
10.79 |
|
|
|
|
|
|
|
|
Restricted Performance Share Units Plan
On March 4, 2010 and April 1, 2009, the Companys Compensation Committee awarded an aggregate of
120,955 and 488,292 share-based awards, respectively, to its executives. These awards are referred
to as Restricted Performance Share Units, or RPSUs. The RPSUs represent the right to earn common
shares. The number of common shares, if any, deliverable to award recipients depends on the
Companys performance based on its total return to shareholders during the three year measurement
period that commenced on January 1, 2010 (in the case of the March 4, 2010 awards) and January 1,
2009 (in the case of the April 1, 2009 awards) and that ends on the earlier of December 31, 2012 or
December 2011 (as applicable) or the date of a change of control, compared to the total shareholder
return of REITs within an index over such respective periods. The awards are also contingent upon
the continued employment of the participants through the performance periods (with exceptions for
death, disability and qualifying retirement). Dividends are deemed credited to the performance
units accounts and are applied to acquire more performance units for the account of the unit
holder at the price per common share ending on the dividend payment date. If earned, awards will
be settled in common shares in an amount that reflects both the number of performance units in the
holders account at the end of the applicable
measurement period and the Companys total return to shareholders during the applicable three year
measurement period relative to the total shareholder return of the REIT within the index.
If the total shareholder return during the measurement period places the Company at or above a
certain percentile as compared to its peers based on an industry-based index at the end of the
measurement period then the number of shares that will be delivered shall equal a certain
percentage of the participants base units.
The fair values of the 2010 and 2009 awards on the grant date were $2.0 million and $1.1 million,
respectively, and are being amortized over the said cliff vesting period. On the date of each
grant, the awards were valued using a Monte Carlo simulation. For the three-month period ended
March 31, 2010, the Company recognized total compensation expense for both awards of $0.2 related
to this plan of which a nominal amount was capitalized as part of the Companys review of employee
salaries eligible for capitalization.
Outperformance Program
On August 28, 2006, the Compensation Committee of the Companys Board of Trustees adopted a
long-term incentive compensation program (the outperformance program) under the 1997 Plan. The
outperformance program provided for share-based awards, with share issuances (if any), to take the
form of both vested and restricted common shares and with any share issuances contingent upon the
Companys total shareholder return during a three year measurement period exceeding specified
performance hurdles. These hurdles were not met and, accordingly, no shares were delivered under
the outperformance program and the outperformance program, has terminated in accordance with its
terms. The awards under the outperformance program were accounted for in accordance with the
accounting standard for stock-based compensation. The aggregate grant date fair value of the awards
under the outperformance program, as adjusted for estimated forfeitures, was approximately
$5.9 million (with the values determined through a Monte Carlo simulation) and are being amortized
into expense over the five-year vesting period beginning on the grant dates using a graded vesting
attribution model. For the three-month periods ended March 31, 2010 and 2009, the Company
recognized $0.1 million and $0.3 million, respectively, of compensation expenses related to the
outperformance program.
Employee Share Purchase Plan
On May 9, 2007, the Companys shareholders approved the 2007 Non-Qualified Employee Share Purchase
Plan (the ESPP). The ESPP is intended to provide eligible employees with a convenient means to
purchase common shares of the Company through payroll deductions and voluntary cash purchases at an
amount equal to 85% of the average closing price per share for a specified period. Under the plan
document, the maximum participant contribution for the 2010 plan year is limited to the lesser of
20% of compensation or $25,000. The number of shares reserved for issuance under the ESPP is 1.25
million. During the three-month periods ended March 31, 2010 and 2009, employees made purchases of
$0.1 million for each period under the ESPP and the Company recognized nominal amounts of
compensation expense related to the ESPP. The Board of Trustees of the Company may terminate the
ESPP at its sole discretion at anytime.
27
Deferred Compensation
In January 2005, the Company adopted a Deferred Compensation Plan (the Plan) that allows trustees
and certain key employees to voluntarily defer compensation. Compensation expense is recorded for
the deferred compensation and a related liability is recognized. Participants may elect designated
benchmark investment options for the notional investment of their deferred compensation. The
deferred compensation obligation is adjusted for deemed income or loss related to the investments
selected. At the time the participants defer compensation, the Company records a liability, which
is included in the Companys consolidated balance sheet. The liability is adjusted for changes in
the market value of the participants selected investments at the end of each accounting period, and
the impact of adjusting the liability is recorded as an increase or decrease to compensation cost.
For the three month periods ended March 31, 2010 and 2009, the Company recorded a net increase in
compensation costs of $0.3 million and a net reduction of $0.2 million, respectively, in connection
with the Plan due to the change in market value of the participant investments in the Plan.
The deferred compensation obligations are unfunded, but the Company has purchased company-owned
life insurance policies and mutual funds, which can be utilized as a funding source for the
obligations under the Plan. Participants in the Plan have no interest in any assets set aside by
the Company to meet its obligations under the Plan. For the three months period ended March 31,
2010 and 2009, the Company recorded a net decrease in compensation cost of $0.3 million and a net
increase of $0.1 million, respectively, in connection with the investments in the Company-owned
policies and mutual funds.
Participants in the Plan may elect to have all or a portion of their deferred compensation invested
in the Companys common shares. The Company holds these shares in a rabbi trust, which is subject
to the claims of the Companys creditors in the event of the Companys bankruptcy or insolvency.
The Plan does not provide for diversification of a participants deferral allocated to the Company
common share and deferrals allocated to Company common share can only be settled with a fixed
number of shares. In accordance with the accounting standard for deferred compensation arrangements
where amounts earned are held in a rabbi trust and invested, the deferred compensation obligation
associated with Companys common share is classified as a component of shareholders equity and the
related shares are treated as shares to be issued and are included in total shares outstanding. At
March 31,
2010 and 2009, there were 0.3 million and 0.2 million shares, respectively, to be issued included
in total shares outstanding. Subsequent changes in the fair value of the common shares are not
reflected in operations or shareholders equity of the Company.
14. TAX CREDIT TRANSACTIONS
Historic Tax Credit Transaction
On November 17, 2008, the Company closed a transaction with US Bancorp (USB) related to the
historic rehabilitation of the 30th Street Post Office in Philadelphia, Pennsylvania (Project),
an 862,692 square foot office building which is 100% pre-leased to the Internal Revenue Service
(expected commencement of the IRS lease is August 2010). USB has agreed to contribute approximately
$67.9 million of Project costs and advanced $10.2 million of that contemporaneously with the
closing of the transaction. USB advanced another $23.8 million in December 2009. The remaining
funds will be advanced upon achievement of certain construction milestones and compliance with the
federal rehabilitation regulations. In return for the investment, USB will, upon completion of the
Project , receive substantially all of the rehabilitation credits available under section 47 of the
Internal Revenue Code.
In exchange for its contributions into the Project, USB is entitled to substantially all of the
benefits derived from the tax credit, but does not have a material interest in the underlying
economics of the property. This transaction also includes a put/call provision whereby the Company
may be obligated or entitled to repurchase USBs interest in the Project. The Company believes the
put will be exercised and an amount attributed to that puttable non-controlling interest obligation
is included in other liabilities and is being accreted to the expected fixed put price.
Based on the contractual arrangements that obligate the Company to deliver tax benefits and provide
other guarantees to USB and that entitle the Company through fee arrangements to receive
substantially all available cash flow from the Project, the Company concluded that the Project
should be consolidated. The Company also concluded that capital contributions received from USB, in
substance, are consideration that the Company receives in exchange for its obligation to deliver
tax credits and other tax benefits to USB. These receipts other than the amounts allocated to the
put obligation will be recognized as revenue in the consolidated financial statements beginning
when the obligation to USB is relieved upon delivery of the expected tax benefits net of any
associated costs. The tax credit is subject to 20% recapture per year beginning one year after the
completion of the Project in September 2010. The total USB contributions made amounting to $34.0
million is presented within deferred income in the Companys consolidated balance sheet at March
31, 2010 and December 31, 2009. The contributions were recorded net of the amount allocated to
non-controlling interest as described above of $0.8 million. The Company anticipates that
beginning in September 2011 it will recognize the cash received as revenue over the five year
credit recapture period as defined in the Internal Revenue Code. The Company also expects that USB
will exercise the put/call provision in December 2015 when the recapture period ends.
28
Direct and incremental costs incurred in structuring the arrangement are deferred and will be
recognized as expense in the consolidated financial statements upon the recognition of the related
revenue as discussed above. The deferred cost at March 31, 2010 is $2.4 million and is included in
other assets on the Companys consolidated balance sheet. Amounts included in interest expense
related to the accretion of the non-controlling interest liability and the 2% return expected to be
paid to USB on its non-controlling interest aggregate to $0.1 million for the three-months ended
March 31, 2010.
New Markets Tax Credit Transaction
On December 30, 2008, the Company entered into a transaction with USB related to the Cira Garage
Project (garage project) in Philadelphia, Pennsylvania and expects to receive a net benefit of
$7.8 million under a qualified New Markets Tax Credit Program (NMTC). The NMTC was provided for
in the Community Renewal Tax Relief Act of 2000 (the Act) and is intended to induce investment
capital in underserved and impoverished areas of the United States. The Act permits taxpayers
(whether companies or individuals) to claim credits against their Federal income taxes for up to
39% of qualified investments in qualified, active low-income businesses or ventures.
USB contributed $13.3 million into the garage project and as such they are entitled to
substantially all of the benefits derived from the tax credit, but they do not have a material
interest in the underlying economics of the garage project. This transaction also includes a
put/call provision whereby the Company may be obligated or entitled to repurchase USBs interest.
The Company believes the put will be exercised and an amount attributed to that obligation is
included in other liabilities. The said put price is insignificant.
Based on the contractual arrangements that obligate the Company to deliver tax benefits and provide
various other guarantees to USB, the Company concluded that the investment entities established to
facilitate the NMTC transaction should be consolidated. The USB contribution of $13.3 million is
included in deferred income on the Companys consolidated balance sheet at March 31, 2010 and
December 31, 2009. The USB contribution other than the amount allocated to the put obligation will
be recognized as income in the consolidated financial statements when the tax benefits are
delivered without risk of recapture to the tax credit investors and the Companys obligation is
relieved. The Company anticipates that it will recognize the net cash received as revenue within
other income/expense in the year ended December 31, 2015. The NMTC is subject to 100% recapture for a
period of seven years as provided in the Internal Revenue Code. The Company expects that USB will
exercise the put/call provision in December 2015 at the end of the recapture period.
Direct and incremental costs incurred in structuring the arrangement are deferred and will be
recognized as expense in the consolidated financial statements upon the recognition of the related
revenue as discussed above. The deferred cost at March 31, 2010 is $5.3 million and is included in
other assets on the Companys consolidated balance sheet.
15. SEGMENT INFORMATION
As of March 31, 2010, the Company manages its portfolio within six segments: (1) Pennsylvania,
(2) Metropolitan Washington D.C, (3) New Jersey/Delaware, (4) Richmond, Virginia, (5) Austin, Texas
and (6) California. The Pennsylvania segment includes properties in Chester, Delaware, and
Montgomery counties in the Philadelphia suburbs and the City of Philadelphia in Pennsylvania. The
Metropolitan Washington, D.C. segment includes properties in Northern Virginia and suburban
Maryland. The New Jersey/Delaware segment includes properties in Burlington, Camden and Mercer
counties and counties in the southern and central part of New Jersey and in New Castle county in
the state of Delaware. The Richmond, Virginia segment includes properties primarily in Albemarle,
Chesterfield, Goochland and Henrico counties and Durham, North Carolina. The Austin, Texas segment
includes properties in Austin. The California segment includes properties in Oakland, Concord,
Carlsbad and Rancho Bernardo. The corporate group is responsible for cash and investment
management, development of certain real estate properties during the construction period, and
certain other general support functions. Land held for development and construction in progress are
transferred to operating properties by region upon completion of the associated construction or
project.
29
Segment information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
Metropolitan, D.C. |
|
|
/Delaware |
|
|
Virginia |
|
|
Austin, Texas |
|
|
California |
|
|
Corporate |
|
|
Total |
|
As of March 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,687,603 |
|
|
$ |
1,355,916 |
|
|
$ |
598,098 |
|
|
$ |
292,613 |
|
|
$ |
265,655 |
|
|
$ |
252,200 |
|
|
$ |
|
|
|
$ |
4,452,085 |
|
Construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307,144 |
|
|
|
307,144 |
|
Land inventory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,556 |
|
|
|
105,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,726,267 |
|
|
$ |
1,356,206 |
|
|
$ |
598,122 |
|
|
$ |
297,958 |
|
|
$ |
282,093 |
|
|
$ |
251,972 |
|
|
$ |
|
|
|
$ |
4,512,618 |
|
Construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271,962 |
|
|
|
271,962 |
|
Land inventory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,368 |
|
|
|
97,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended March 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
58,276 |
|
|
$ |
34,742 |
|
|
$ |
26,795 |
|
|
$ |
9,399 |
|
|
$ |
8,387 |
|
|
$ |
5,905 |
|
|
$ |
(370 |
) |
|
$ |
143,134 |
|
Property operating expenses, real estate taxes and
third party management expenses |
|
|
24,714 |
|
|
|
12,382 |
|
|
|
13,099 |
|
|
|
3,659 |
|
|
|
3,480 |
|
|
|
2,731 |
|
|
|
(453 |
) |
|
|
59,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
33,562 |
|
|
$ |
22,360 |
|
|
$ |
13,696 |
|
|
$ |
5,740 |
|
|
$ |
4,907 |
|
|
$ |
3,174 |
|
|
$ |
83 |
|
|
$ |
83,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended March 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
59,052 |
|
|
$ |
35,174 |
|
|
$ |
25,528 |
|
|
$ |
9,316 |
|
|
$ |
8,594 |
|
|
$ |
7,374 |
|
|
$ |
1,693 |
|
|
$ |
146,731 |
|
Property operating expenses, real estate taxes and
third party management expenses |
|
|
23,038 |
|
|
|
13,900 |
|
|
|
12,317 |
|
|
|
3,656 |
|
|
|
3,861 |
|
|
|
3,342 |
|
|
|
255 |
|
|
|
60,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
36,014 |
|
|
$ |
21,274 |
|
|
$ |
13,211 |
|
|
$ |
5,660 |
|
|
$ |
4,733 |
|
|
$ |
4,032 |
|
|
$ |
1,438 |
|
|
$ |
86,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Net operating income is defined as total revenue less property operating expenses, real estate
taxes and third party management expenses. Segment net operating income includes revenue, real
estate taxes and property operating expenses directly related to operation and management of the
properties owned and managed within the respective geographical region. Segment net operating
income excludes property level depreciation and amortization, revenue and expenses directly
associated with third party real estate management services, expenses associated with corporate
administrative support services, and inter-company eliminations. Below is a reconciliation of
consolidated net operating income to consolidated income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
|
ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(amounts in thousands) |
|
Consolidated net operating income |
|
$ |
83,522 |
|
|
$ |
86,362 |
|
Less: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(31,524 |
) |
|
|
(35,646 |
) |
Deferred financing costs |
|
|
(1,011 |
) |
|
|
(1,252 |
) |
Depreciation and amortization |
|
|
(52,622 |
) |
|
|
(51,215 |
) |
Administrative expenses |
|
|
(6,092 |
) |
|
|
(4,958 |
) |
Plus: |
|
|
|
|
|
|
|
|
Interest income |
|
|
865 |
|
|
|
579 |
|
Equity in income of real estate ventures |
|
|
1,296 |
|
|
|
586 |
|
Gain (loss) on early extinguishment of debt |
|
|
(1,192 |
) |
|
|
6,639 |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(6,758 |
) |
|
|
1,095 |
|
Income from discontinued operations |
|
|
6,359 |
|
|
|
(1,968 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(399 |
) |
|
$ |
(873 |
) |
|
|
|
|
|
|
|
16. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved from time to time in litigation on various matters, including disputes with
tenants and disputes arising out of agreements to purchase or sell properties. Given the nature of
the Companys business activities, these lawsuits are considered routine to the conduct of its
business. The result of any particular lawsuit cannot be predicted, because of the very nature of
litigation, the litigation process and its adversarial nature, and the jury system. The Company
does not expect that the liabilities, if any, that may ultimately result from such legal actions
will have a material adverse effect on the consolidated financial position, results of operations
or cash flows of the Company.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state,
and local governments. The Companys compliance with existing laws has not had a material adverse
effect on its financial condition and results of operations, and the Company does not believe it
will have a material adverse effect in the future. However, the Company cannot predict the impact
of unforeseen environmental contingencies or new or changed laws or regulations on its current
Properties or on properties that the Company may acquire.
Ground Rent
Future minimum rental payments under the terms of all non-cancellable ground leases under which the
Company is the lessee are expensed on a straight-line basis regardless of when payments are due.
Minimum future rental payments on non-cancelable leases at March 31, 2010 are as follows (in
thousands):
|
|
|
|
|
2010 |
|
$ |
1,739 |
|
2011 |
|
|
2,318 |
|
2012 |
|
|
2,318 |
|
2013 |
|
|
2,318 |
|
2014 |
|
|
2,409 |
|
Thereafter |
|
|
285,686 |
|
One of the land leases for a property (currently under development) provides for contingent
rent participation by the lessor in certain capital transactions and net operating cash flows of
the property after certain returns are achieved by the Company. Such amounts, if any, will be
reflected as contingent rent when incurred. The leases also provide for payment by the Company of
certain operating costs relating to the land, primarily real estate taxes. The above schedule of
future minimum rental payments does not include any contingent rent amounts nor any reimbursed
expenses.
31
Other Commitments or Contingencies
As part of the Companys September 2004 acquisition of a portfolio of properties from The
Rubenstein Company (which the Company refers to as the TRC acquisition), the Company acquired its
interest in Two Logan Square, a 704,061 square foot office building in Philadelphia, primarily
through its ownership of a second and third mortgage secured by this property. This property is
consolidated as the borrower is a variable interest entity and the Company, through its ownership
of the second and third mortgages, is the primary beneficiary. The Company currently does not
expect to take title to Two Logan Square until, at the earliest, September 2019. If the Company
takes fee title to Two Logan Square upon a foreclosure of its mortgage, the Company has agreed to
pay an unaffiliated third party that holds a residual interest in the fee owner of this property an
amount equal to $0.6 million (if the Company must pay a state and local transfer upon taking title)
and $2.9 million (if no transfer tax is payable upon the transfer).
The Company is currently being audited by the Internal Revenue Service for its 2004 tax year. The
audit concerns the tax treatment of the transaction in September 2004 in which the Company acquired
a portfolio of properties through the acquisition of a limited partnership. At this time it does
not appear that an adjustment, if any, would result in a material tax liability for the Company.
However, an adjustment could raise a question as to whether a contributor of partnership interests
in the 2004 transaction could assert a claim against the Company under the tax protection agreement
entered into as part of the transaction.
As part of the Companys 2006 acquisition of Prentiss Properties Trust, the TRC acquisition in 2004
and several of our other transactions, the Company agreed not to sell certain of the properties it
acquired in transactions that would trigger taxable income to the former owners. In the case of the
TRC acquisition, the Company agreed not to sell acquired properties for periods up to 15 years from
the date of the TRC acquisition as follows at March 31, 2010: One Rodney Square and 130/150/170
Radnor Financial Center (January 2015); and One Logan Square, Two Logan Square and Radnor Corporate
Center (January 2020). In the Prentiss acquisition, the Company assumed the obligation of Prentiss
not to sell Concord Airport Plaza before March 2018. The Companys agreements generally provide
that it may dispose of the subject properties only in transactions that qualify as tax-free
exchanges under Section 1031 of the Internal Revenue Code or in other tax deferred transactions. If
the Company were to sell a restricted property before expiration of the restricted period in a
non-exempt transaction, the Company may be required to make significant payments to the parties who
sold it the applicable property on account of tax liabilities attributed to them.
The Company invests in its properties and regularly incurs capital expenditures in the ordinary
course to maintain the properties. The Company believes that such expenditures enhance its
competitiveness. The Company also enters into construction, utility and service contracts in the
ordinary course of business which may extend beyond one year. These contracts typically provide
for cancellation with insignificant or no cancellation penalties.
During 2008, in connection with the development of the PO Box/IRS and Cira Garage projects, the
Company entered into a historic tax credit and new market tax credit arrangement, respectively.
The Company is required to be in compliance with various laws, regulations and contractual
provisions that apply to its historic and new market tax credit arrangements. Non-compliance with
applicable requirements could result in projected tax benefits not being realized and require a
refund or reduction of investor capital contributions, which are reported as deferred income in the
Companys consolidated balance sheet, until such time as its obligation to deliver tax benefits is
relieved. The remaining compliance periods for its tax credit arrangements runs through 2015. The
Company does not anticipate that any material refunds or reductions of investor capital
contributions will be required in connection with these arrangements.
On June 29, 2009, the Company entered into a forward financing commitment to borrow up to $256.5
million under two separate loans which are secured by mortgages on the Post Office project, the
garage project and by the leases of space at these facilities upon the completion of these
projects. In order for funding to occur, certain conditions must be met by the Company including
the completion of the projects and the commencement of the rental payments from the respective
leases on these properties. The expected funding date is scheduled on August 26, 2010 which is also
the anticipated completion date of the projects. In the event the conditions were not met, the
Company has the right to extend the funding date by paying an extension fee amounting to $1.8
million for each 30 day extension within the allowed two year extension period. In addition, the
Company can also voluntarily elect to terminate the loans during the forward period including the
extension period by paying a termination fee. The Company is also subject to the termination fee if
the conditions were not met on the final advance date. The termination fee is calculated as the
greater of the 0.5% of the total available principal to be funded or the difference between the
present value of the scheduled interest and principal payments (based on the principal amount to be
funded and the then 20-year treasury rate plus 50 basis points) from the funding date through the
loans maturity date and the amount to be funded. In addition, deferred financing costs related to these
loans will be accelerated if the Company chose to terminate the forward financing commitment.
32
17. SUBSEQUENT EVENTS
During April 2010, the Company sold a total of 1,372,400 shares at an average sales price of $12.79
per share under the Offering Program (see Note 12). The Company received net proceeds of
approximately $17.4 million from these sales after sales commissions and expenses of $0.2 million.
The Company used the net proceeds from the sale to repay balances on its unsecured revolving credit
facility and for general corporate purposes.
The Company has evaluated subsequent events through the date the financial statements were issued.
33
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit and per unit information)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Real estate investments: |
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
4,452,085 |
|
|
$ |
4,512,618 |
|
Accumulated depreciation |
|
|
(731,626 |
) |
|
|
(716,956 |
) |
|
|
|
|
|
|
|
Operating real estate investments, net |
|
|
3,720,459 |
|
|
|
3,795,662 |
|
Construction-in-progress |
|
|
307,144 |
|
|
|
271,962 |
|
Land inventory |
|
|
105,556 |
|
|
|
97,368 |
|
|
|
|
|
|
|
|
Total real
estate investments, net |
|
|
4,133,159 |
|
|
|
4,164,992 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
7,590 |
|
|
|
1,567 |
|
Accounts receivable, net |
|
|
16,476 |
|
|
|
10,934 |
|
Accrued rent receivable, net |
|
|
86,570 |
|
|
|
87,173 |
|
Investment in real estate ventures, at equity |
|
|
77,472 |
|
|
|
75,458 |
|
Deferred costs, net |
|
|
103,117 |
|
|
|
106,097 |
|
Intangible assets, net |
|
|
95,085 |
|
|
|
105,163 |
|
Notes receivable |
|
|
59,474 |
|
|
|
59,008 |
|
Other assets |
|
|
56,185 |
|
|
|
53,358 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,635,128 |
|
|
$ |
4,663,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
506,156 |
|
|
$ |
551,720 |
|
Borrowing under credit facilities |
|
|
160,000 |
|
|
|
92,000 |
|
Unsecured term loan |
|
|
183,000 |
|
|
|
183,000 |
|
Unsecured senior notes, net of discounts |
|
|
1,581,693 |
|
|
|
1,627,857 |
|
Accounts payable and accrued expenses |
|
|
95,621 |
|
|
|
88,599 |
|
Distributions payable |
|
|
21,999 |
|
|
|
21,799 |
|
Tenant security deposits and deferred rents |
|
|
53,745 |
|
|
|
58,572 |
|
Acquired below market leases, net |
|
|
34,847 |
|
|
|
37,087 |
|
Deferred income |
|
|
47,184 |
|
|
|
47,379 |
|
Other liabilities |
|
|
30,965 |
|
|
|
33,997 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,715,210 |
|
|
|
2,742,010 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15) |
|
|
|
|
|
|
|
|
Redeemable limited partnership units at redemption value;
2,809,108 issued and outstanding in 2010 and 2009, respectively |
|
|
46,070 |
|
|
|
44,620 |
|
|
|
|
|
|
|
|
|
|
Brandywine Operating Partnerships equity: |
|
|
|
|
|
|
|
|
7.50% Series D Preferred Mirror Units; issued and outstanding-
2,000,000 in 2010 and 2009, respectively |
|
|
47,912 |
|
|
|
47,912 |
|
7.375% Series E Preferred Mirror Units; issued and outstanding-
2,300,000 in 2010 and 2009, respectively |
|
|
55,538 |
|
|
|
55,538 |
|
General Partnership Capital, 130,174,303 and 128,849,176 units issued in 2010
and 2009, respectively and 130,013,432 and
128,597,412 units outstanding
in 2010 and 2009, respectively |
|
|
1,777,735 |
|
|
|
1,783,033 |
|
Accumulated other comprehensive loss |
|
|
(7,337 |
) |
|
|
(9,428 |
) |
|
|
|
|
|
|
|
Total Brandywine Operating Partnerships equity |
|
|
1,873,848 |
|
|
|
1,877,055 |
|
Non-controlling interest consolidated real estate ventures |
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
|
Total Equity |
|
|
1,873,848 |
|
|
|
1,877,120 |
|
|
|
|
|
|
|
|
Total liabilities and partners equity |
|
$ |
4,635,128 |
|
|
$ |
4,663,750 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
34
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit information)
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods |
|
|
|
ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
115,509 |
|
|
$ |
120,285 |
|
Tenant reimbursements |
|
|
21,483 |
|
|
|
20,688 |
|
Termination fees |
|
|
1,754 |
|
|
|
113 |
|
Third party management fees, labor reimbursement and leasing |
|
|
3,467 |
|
|
|
4,764 |
|
Other |
|
|
921 |
|
|
|
881 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
143,134 |
|
|
|
146,731 |
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
45,148 |
|
|
|
43,422 |
|
Real estate taxes |
|
|
13,052 |
|
|
|
14,832 |
|
Third party management expenses |
|
|
1,412 |
|
|
|
2,115 |
|
Depreciation and amortization |
|
|
52,622 |
|
|
|
51,215 |
|
General & administrative expenses |
|
|
6,092 |
|
|
|
4,958 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
118,326 |
|
|
|
116,542 |
|
|
|
|
|
|
|
|
Operating income |
|
|
24,808 |
|
|
|
30,189 |
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
865 |
|
|
|
579 |
|
Interest expense |
|
|
(31,524 |
) |
|
|
(35,646 |
) |
Interest expense amortization of deferred financing costs |
|
|
(1,011 |
) |
|
|
(1,252 |
) |
Equity in income of real estate ventures |
|
|
1,296 |
|
|
|
586 |
|
(Loss) gain on early extinguishment of debt |
|
|
(1,192 |
) |
|
|
6,639 |
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(6,758 |
) |
|
|
1,095 |
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
10 |
|
|
|
1,538 |
|
Net gain on disposition of discontinued operations |
|
|
6,349 |
|
|
|
194 |
|
Provision for impairment |
|
|
|
|
|
|
(3,700 |
) |
|
|
|
|
|
|
|
Total discontinued operations |
|
|
6,359 |
|
|
|
(1,968 |
) |
|
|
|
|
|
|
|
Net loss |
|
|
(399 |
) |
|
|
(873 |
) |
Net income attributable to non-controlling interests |
|
|
|
|
|
|
6 |
|
Net income attributable to Brandywine Operating Partnership |
|
|
(399 |
) |
|
|
(867 |
) |
Distribution to Preferred Shares |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
Amount allocated to unvested restricted shareholders |
|
|
(128 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
|
Net loss attributable to Common Partnership Unitholders of
Brandywine Operating Partnership |
|
$ |
(2,525 |
) |
|
$ |
(2,902 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per Common Partnership Units: |
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.07 |
) |
|
$ |
(0.01 |
) |
Discontinued operations |
|
|
0.05 |
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per Common Partnership Units: |
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.07 |
) |
|
$ |
(0.01 |
) |
Discontinued operations |
|
|
0.05 |
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common partnership units outstanding |
|
|
131,576,826 |
|
|
|
91,027,005 |
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common partnership units outstanding |
|
|
131,576,826 |
|
|
|
91,027,005 |
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Brandywine Operating Partnership |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(6,758 |
) |
|
$ |
1,095 |
|
Income (loss) from discontinued operations |
|
|
6,359 |
|
|
|
(1,968 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(399 |
) |
|
$ |
(873 |
) |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
35
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods |
|
|
|
ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(399 |
) |
|
$ |
(873 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative financial instruments |
|
|
1,816 |
|
|
|
10,287 |
|
Reclassification of realized (gains)/losses on derivative financial
instruments to operations, net |
|
|
(15 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
|
Total comprehensive income |
|
|
1,801 |
|
|
|
10,267 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
1,402 |
|
|
|
9,394 |
|
|
|
|
|
|
|
|
Comprehensive (income) loss attributable to non-controlling interest |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Brandywine Operating Partnership |
|
$ |
1,402 |
|
|
$ |
9,400 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
36
BRANDYWINE OPERATING PARTNERSHIP L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
|
ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(399 |
) |
|
$ |
(873 |
) |
Adjustments to reconcile net loss to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
40,283 |
|
|
|
39,403 |
|
Amortization: |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
1,011 |
|
|
|
1,252 |
|
Amortization of debt discount |
|
|
310 |
|
|
|
1,111 |
|
Deferred leasing costs |
|
|
5,085 |
|
|
|
4,493 |
|
Acquired above (below) market leases, net |
|
|
(1,548 |
) |
|
|
(1,741 |
) |
Acquired lease intangibles |
|
|
7,198 |
|
|
|
8,729 |
|
Deferred compensation costs |
|
|
1,355 |
|
|
|
1,021 |
|
Straight-line rent |
|
|
(2,915 |
) |
|
|
(1,912 |
) |
Provision for doubtful accounts |
|
|
1,309 |
|
|
|
3,234 |
|
Provision for impairment in real estate |
|
|
|
|
|
|
3,700 |
|
Real estate venture income in excess of distributions |
|
|
(1,114 |
) |
|
|
(656 |
) |
Net gain on sale of interests in real estate |
|
|
(6,349 |
) |
|
|
(194 |
) |
Loss (gain) on early extinguishment of debt |
|
|
1,192 |
|
|
|
(6,639 |
) |
Cumulative interest accretion of repayments of unsecured notes |
|
|
(1,586 |
) |
|
|
(202 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(795 |
) |
|
|
1,376 |
|
Other assets |
|
|
(4,387 |
) |
|
|
(2,258 |
) |
Accounts payable and accrued expenses |
|
|
6,424 |
|
|
|
15,430 |
|
Tenant security deposits and deferred rents |
|
|
(3,937 |
) |
|
|
1,129 |
|
Other liabilities |
|
|
(1,199 |
) |
|
|
(2,525 |
) |
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
39,938 |
|
|
|
63,878 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Sales of properties, net |
|
|
10,445 |
|
|
|
8,650 |
|
Capital expenditures |
|
|
(45,808 |
) |
|
|
(30,484 |
) |
Investment in unconsolidated Real Estate Ventures |
|
|
|
|
|
|
(14,961 |
) |
Escrowed cash |
|
|
|
|
|
|
31,385 |
|
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income |
|
|
393 |
|
|
|
555 |
|
Decrease in cash due to the deconsolidation of variable interest entities |
|
|
(1,382 |
) |
|
|
|
|
Leasing costs |
|
|
(11,009 |
) |
|
|
(5,146 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(47,361 |
) |
|
|
(10,001 |
) |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
122,000 |
|
|
|
140,000 |
|
Repayments of Credit Facility borrowings |
|
|
(54,000 |
) |
|
|
(93,000 |
) |
Repayments of mortgage notes payable |
|
|
(2,303 |
) |
|
|
(3,205 |
) |
Repayments of unsecured notes |
|
|
(46,479 |
) |
|
|
(68,243 |
) |
Debt financing costs |
|
|
3 |
|
|
|
18 |
|
Net proceeds from issuance of shares |
|
|
16,100 |
|
|
|
|
|
Distributions paid to preferred and common partnership unitholders |
|
|
(21,875 |
) |
|
|
(29,288 |
) |
|
|
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
13,446 |
|
|
|
(53,718 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
6,023 |
|
|
|
159 |
|
Cash and cash equivalents at beginning of period |
|
|
1,567 |
|
|
|
3,924 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
7,590 |
|
|
$ |
4,083 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest during the quarter ended March 31, 2010
and 2009 of $3,245 and $1,574, respectively |
|
$ |
13,551 |
|
|
$ |
13,108 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
|
|
|
|
Note receivable issued in a property sale transaction |
|
|
|
|
|
|
950 |
|
Change in capital expenditures financed through accounts payable at period end |
|
|
(889 |
) |
|
|
5,899 |
|
Change in capital expenditures financed through retention payable at period end |
|
|
2,520 |
|
|
|
1,068 |
|
Change in unfunded tenant allowance |
|
|
411 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
37
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
1. THE PARTNERSHIP
Brandywine Operating Partnership, L.P. (the Partnership) is the entity through which Brandywine
Realty Trust, a Maryland real estate investment trust (the Company), a self-administered and
self-managed real estate investment trust, conducts its business and own its assets. The
Partnerships activities include acquiring, developing, redeveloping, leasing and managing office
and industrial properties. The Companys common shares of beneficial interest are publicly traded
on the New York Stock Exchange under the ticker symbol BDN.
As of March 31, 2010, the Partnership owned 213 office properties, 21 industrial facilities and
three mixed-use properties (collectively, the Properties) containing an aggregate of
approximately 23.5 million net rentable square feet. The Partnership also has two properties under
development and two properties under redevelopment containing an aggregate 1.6 million net rentable
square feet. Therefore as of March 31, 2010, the Partnership owns 241 properties containing an
aggregate of 25.1 million net rentable square feet. In addition, as of March 31, 2010, the
Partnership owned economic interests in 15 unconsolidated real estate ventures that contain
approximately 4.6 million net rentable square feet (collectively, the Real Estate Ventures). The
Properties and the properties owned by the Real Estate Ventures are located in or near
Philadelphia, Pennsylvania, Metropolitan Washington, D.C., Southern and Central New Jersey,
Richmond, Virginia, Wilmington, Delaware, Austin, Texas and Oakland, Concord, Carlsbad and Rancho
Bernardo, California. The Company is the sole general partner of the Operating Partnership and, as
of March 31, 2010, owned a 97.9% interest in the Operating Partnership. The Partnership conducts
its third-party real estate management services business primarily through wholly-owned management
company subsidiaries.
As of March 31, 2010, the management company subsidiaries were managing properties containing an
aggregate of approximately 34.1 million net rentable square feet, of which approximately
25.1 million net rentable square feet related to Properties owned by the Partnership and
approximately 9.1 million net rentable square feet related to properties owned by third parties and
Real Estate Ventures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared by the Partnership pursuant to the rules
and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management, all adjustments
(consisting solely of normal recurring matters) for a fair statement of the financial position of
the Partnership as of March 31, 2010, the results of its operations for the three-month periods
ended March 31, 2010 and 2009 and its cash flows for the three-month periods ended March 31, 2010
and 2009 have been included. The results of operations for such interim periods are not necessarily
indicative of the results for a full year. These consolidated financial statements should be read
in conjunction with the Partnerships consolidated financial statements and footnotes included in
the Partnerships 2009 Annual Report on Form 10-K filed with the SEC on March 1, 2010.
Reclassifications and Revisions
Certain amounts have been reclassified in prior years to conform to the current year presentation.
The reclassifications are primarily due to the treatment of sold or held for sale properties as
discontinued operations on the statement of operations for all periods presented.
Principles of Consolidation
When the Partnership obtains an economic interest in an entity, the Partnership evaluates the
entity to determine if the entity is deemed a variable interest entity (VIE), and if the
Partnership is deemed to be the primary beneficiary, in accordance with the accounting standard for
the consolidation of variable interest entities. When an entity is not deemed to be a VIE, the
Partnership considers the provisions of the same accounting standard to determine whether a general
partner, or the general partners as a group, controls a limited partnership or similar entity when
the limited partner have certain rights. The Partnership consolidates (i) entities that are VIEs
and of which the Partnership is deemed to be the primary beneficiary and (ii) entities that are
non-VIEs which the Partnership controls and the limited partners neither have the ability to
dissolve the entity or remove the Partnership without cause nor any substantive participating
rights. Entities that the Partnership accounts for under the equity method (i.e., at cost,
increased or decreased by the Partnerships share of earnings or losses, plus contributions, less
distributions) include (i) entities that are VIEs and of which the Partnership is not deemed to be
the primary beneficiary (ii) entities that are non-VIEs which the Partnership does not control, but
over which the Partnership has the ability to exercise significant influence and (iii) entities
that are non-VIEs that the Partnership controls through its general partner status, but the
limited partners in the entity have the substantive ability to dissolve the entity or remove the
Partnership without cause or have substantive participating rights. The Partnership will reconsider
its determination of whether an entity is a VIE and who the primary beneficiary is, and whether or
not the limited partners in an entity have substantive rights, if certain events occur that are
likely to cause a change in the original determinations. The portion of the entities that are
consolidated but not owned by the Partnership is presented as non-controlling interest as of and
during the periods consolidated. All intercompany accounts and transactions have been eliminated in
consolidation.
38
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Management makes significant
estimates regarding revenue, valuation of real estate and related intangible assets and
liabilities, impairment of long-lived assets, allowance for doubtful accounts and deferred costs.
Operating Properties
Operating properties are carried at historical cost less accumulated depreciation and impairment
losses. The cost of operating properties reflects their purchase price or development cost.
Acquisition related costs are expensed as incurred. Costs incurred for the renovation and
betterment of an operating property are capitalized to the Partnerships investment in that
property. Ordinary repairs and maintenance are expensed as incurred; major replacements and
betterments, which improve or extend the life of the asset, are capitalized and depreciated over
their estimated useful lives. Fully-depreciated assets are removed from the accounts.
Purchase Price Allocation
The Partnership allocates the purchase price of properties to net tangible and identified
intangible assets acquired based on fair values. Above-market and below-market in-place lease
values for acquired properties are recorded based on the present value (using an interest rate
which reflects the risks associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases and (ii) the Partnerships estimate
of the fair market lease rates for the corresponding in-place leases, measured over a period equal
to the remaining non-cancelable term of the lease. Capitalized above-market lease values are
amortized as a reduction of rental income over the remaining non-cancelable terms of the respective
leases. Capitalized below-market lease values are amortized as an increase to rental income over
the remaining non-cancelable terms of the respective leases, including any below market fixed-rate
renewal periods.
Other intangible assets also include amounts representing the value of tenant relationships and
in-place leases based on the Partnerships evaluation of the specific characteristics of each
tenants lease and the Partnerships overall relationship with the respective tenant. The
Partnership estimates the cost to execute leases with terms similar to the remaining lease terms of
the in-place leases, including leasing commissions, legal and other related expenses. This
intangible asset is amortized to expense over the remaining term of the respective leases.
Partnership estimates of value are made using methods similar to those used by independent
appraisers or by using independent appraisals. Factors considered by the Partnership in this
analysis include an estimate of the carrying costs during the expected lease-up periods considering
current market conditions and costs to execute similar leases. In estimating carrying costs, the
Partnership includes real estate taxes, insurance and other operating expenses and estimates of
lost rentals at market rates during the expected lease-up periods, which primarily range from three
to twelve months. The Partnership also considers information obtained about each property as a
result of its pre-acquisition due diligence, marketing and leasing activities in estimating the
fair value of the tangible and intangible assets acquired. The Partnership also uses the
information obtained as a result of its pre-acquisition due diligence as part of its consideration
of the accounting standard governing asset retirement obligations and when necessary, will record a
conditional asset retirement obligation as part of its purchase price.
Characteristics considered by the Partnership in allocating value to its tenant relationships
include the nature and extent of the Partnerships business relationship with the tenant, growth
prospects for developing new business with the tenant, the tenants credit quality and expectations
of lease renewals, among other factors. The value of tenant relationship intangibles is amortized
over the remaining initial lease term and expected renewals, but in no event longer than the
remaining depreciable life of the building. The value of in-place leases is amortized over the
remaining non-cancelable term of the respective leases and any below market fixed-rate renewal
periods.
In the event that a tenant terminates its lease, the unamortized portion of each intangible,
including market rate adjustments (above or below), in-place lease values and tenant relationship
values, would be charged to expense and market rate adjustments would be recorded to revenue.
39
Impairment or Disposal of Long-Lived Assets
The accounting standard for property, plant and equipment provides a single accounting model for
long-lived assets as held-for-sale, broadens the scope of businesses to be disposed of that qualify
for reporting as discontinued operations and changes the timing of recognizing losses on such
operations.
The Partnership reviews long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The review of recoverability is based on an
estimate of the future undiscounted cash flows (excluding interest charges) expected to result from
the long-lived assets use and eventual disposition. These cash flows consider factors such as
expected future operating income, trends and prospects, as well as the effects of leasing demand,
competition and other factors. If impairment exists due to the inability to recover the carrying
value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value
exceeds the estimated fair-value of the property. The Partnership is required to make subjective
assessments as to whether there are impairments in the values of the investments in long-lived
assets. These assessments have a direct impact on its net income because recording an impairment
loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash
flows is highly subjective and is based in part on assumptions regarding future occupancy, rental
rates and capital requirements that could differ materially from actual results in future periods.
Although the Partnerships strategy is generally to hold its properties over the long-term, the
Partnership will dispose of properties to meet its liquidity needs or for other strategic needs. If
the Companys strategy changes or market conditions otherwise dictate an earlier sale date, an
impairment loss may be recognized to reduce the property to the lower of the carrying amount or
fair value less costs to sell, and such loss could be material. If the Partnership determines that
impairment has occurred and the assets are classified as held and used, the affected assets must be
reduced to their fair-value.
Where properties have been identified as having a potential for sale, additional judgments are
required related to the determination as to the appropriate period over which the undiscounted cash
flows should include the operating cash flows and the amount included as the estimated residual
value. Management
determines the amounts to be included based on a probability weighted cash flow. This requires
significant judgment. In some cases, the results of whether an impairment is indicated are
sensitive to changes in assumptions input into the estimates, including the hold period until
expected sale.
During the Partnerships impairment review for the three months period ended March 31, 2010,
it was determined that no impairment charges were necessary. For the three months period ended
March 31, 2009, the Partnership determined that one of its properties, during testing for
impairment under the held and used model, had a historical cost greater than the probability
weighted undiscounted cash flows. Accordingly, the recorded amount was reduced to an amount based
on managements estimate of the current fair value. This property was sold in the second quarter of
the prior year.
Revenue Recognition
Rental revenue is recognized on the straight-line basis from the later of the date of the
commencement of the lease or the date of acquisition of the property subject to existing leases,
which averages minimum rents over the terms of the leases. The straight-line rent adjustment
increased revenue by approximately $2.0 million and $1.1 million for the three-month periods ended
March 31, 2010 and 2009, respectively. Deferred rents on the balance sheet represent rental
revenue received prior to their due dates and amounts paid by the tenant for certain improvements
considered to be landlord assets that will remain as the Partnerships property at the end of the
tenants lease term. The amortization of the amounts paid by the tenant for such improvements is
calculated on a straight-line basis over the term of the tenants lease and is a component of
straight-line rental income and increased revenue by $0.9 million and $0.8 million for the
three-month periods ended March 31, 2010 and 2009, respectively. Lease incentives, which are
included as reductions of rental revenue in the accompanying consolidated statements of operations,
are recognized on a straight-line basis over the term of the lease. Lease incentives decreased
revenue by $0.8 million and $0.2 million for the three-month periods ended March 31, 2010 and 2009,
respectively.
Leases also typically provide for tenant reimbursement of a portion of common area maintenance and
other operating expenses to the extent that a tenants pro rata share of expenses exceeds a base
year level set in the lease or to the extent that the tenant has a lease on a triple net basis. For
certain leases, significant assumptions and judgments are made by the Partnership in determining
the lease term such as when termination options are provided to the tenant. The lease term impacts
the period over which minimum rents are determined and recorded and also considers the period over
which lease related costs are amortized. Termination fees received from tenants, bankruptcy
settlement fees, third party management fees, labor reimbursement and leasing income are recorded
when earned.
Stock-Based Compensation Plans
The Company maintains a shareholder-approved equity-incentive plan known as the Amended and
Restated 1997 Long-Term Incentive Plan (the 1997 Plan). The 1997 Plan is administered by the
Compensation Committee of the Companys Board of Trustees. Under the 1997 Plan, the Compensation
Committee is authorized to award equity and equity-based awards, including incentive stock options,
non-qualified stock options, restricted shares and performance-based shares. As of March 31, 2010,
0.8 million common shares remained available for future awards under the 1997 Plan. Through March
31, 2010, all options awarded under the 1997 Plan had a one to ten-year term.
40
The Partnership incurred stock-based compensation expense of $1.1 million and $1.0 million during
the three-month periods ended March 31, 2010 and 2009, respectively, of which $0.2 million were
capitalized for each period, respectively, as part of the Partnerships review of employee salaries
eligible for capitalization. The expensed amounts are included in general and administrative
expense on the Partnerships consolidated income statement in the respective periods.
Accounting for Derivative Instruments and Hedging Activities
The Partnership accounts for its derivative instruments and hedging activities in accordance with
the accounting standard for derivative and hedging activities. The accounting standard requires the
Partnership to measure every derivative instrument (including certain derivative instruments
embedded in other contracts) at fair value and record them in the balance sheet as either an asset
or liability. See disclosures
below related to the Partnerships adoption of the accounting standard for fair value measurements
and disclosures.
For derivatives designated as fair value hedges, the changes in fair value of both the
derivative instrument and the hedged item are recorded in earnings. For derivatives designated as
cash flow hedges, the effective portions of changes in the fair value of the derivative are
reported in other comprehensive income.
The Partnership actively manages its ratio of fixed-to-floating rate debt. To manage its fixed and
floating rate debt in a cost-effective manner, the Partnership, from time to time, enters into
interest rate swap agreements as cash flow hedges, under which it agrees to exchange various
combinations of fixed and/or variable interest rates based on agreed upon notional amounts.
Fair Value Measurements
The Partnership estimates the fair value of its outstanding derivatives and
available-for-sale-securities in accordance with the accounting standard for fair value
measurements and disclosures. The accounting standard defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. It also establishes a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be used to measure
fair value. Financial assets and liabilities recorded on the Consolidated Balance Sheets are
categorized based on the inputs to the valuation techniques as follows:
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Partnership has the ability to access. |
|
|
|
|
Level 2 inputs are inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. Level 2 inputs may
include quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted prices), such as
interest rates, foreign exchange rates, and yield curves that are observable at commonly
quoted intervals. |
|
|
|
|
Level 3 inputs are unobservable inputs for the asset or liability, which is typically
based on an entitys own assumptions, as there is little, if any, related market activity
or information. |
In instances where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value hierarchy within which
the entire fair value measurement falls is based on the lowest level input that is significant to
the fair value measurement in its entirety. The Partnerships assessment of the significance of a
particular input to the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
The following table sets forth the Partnerships financial assets and liabilities that were
accounted for at fair value on a recurring basis as of March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
March 31, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2010 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
220 |
|
|
$ |
220 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
5,505 |
|
|
$ |
|
|
|
$ |
5,505 |
|
|
$ |
|
|
41
The following table sets forth the Partnerships financial assets and liabilities that were
accounted for at fair value on a recurring basis as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
December 31, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
431 |
|
|
$ |
431 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
7,320 |
|
|
$ |
|
|
|
$ |
7,320 |
|
|
$ |
|
|
Non-financial assets and liabilities recorded at fair value on a non-recurring basis to which
the Company would apply the accounting standard where a measurement was required under fair value
would include:
|
|
|
Non-financial assets and liabilities initially measured at fair value in an
acquisition or business combination that are not remeasured at least annually at fair
value, |
|
|
|
|
Long-lived assets measured at fair value due to an impairment in accordance
with the accounting standard for the impairment or disposal of long-lived assets, |
|
|
|
|
Equity and cost method investments measured at fair value due to an impairment
in accordance with the accounting standard for investments, |
|
|
|
|
Notes receivable adjusted for any impairment in its value in accordance with
the accounting standard for loan receivables, and, |
|
|
|
|
Asset retirement obligations initially measured at fair value under the accounting standard
for asset retirement obligations. |
There were no items that were accounted for at fair value on a non-recurring basis during the first
quarter of 2010.
Income Taxes
In general, the Partnership is not subject to federal and state income taxes, and accordingly, no
provision for income taxes has been made in the accompanying consolidated financial statements. The
partners of the Partnership are required to include their respective share of the Partnerships
profits or losses in their respective tax returns. The Partnerships tax returns and the amount of
allocable Partnership profits and losses are subject to examination by federal and state taxing
authorities. If such examination results in changes to Partnership profits or losses, then the tax
liability of the partners would be changed accordingly.
The Partnership has elected to treat several of its subsidiaries as real estate investment
trusts (each a REIT) under Sections 856 through 860 of the Code. As a result, each subsidiary
REIT generally is not subject to federal and state income taxation at the corporate level to the
extent it distributes annually at least 100% of its REIT taxable income to its stockholders and
satisfies certain other organizational and operational requirements. Each subsidiary REIT has met
these requirements and, accordingly, no provision has been made for federal and state income taxes
in the accompanying consolidated financial statements. If any subsidiary REIT fails to qualify as a
REIT in any taxable year, that subsidiary REIT will be subject to federal and state income taxes
and may not be able to qualify as a REIT for the four subsequent taxable years. Also, each
subsidiary REIT may be subject to certain local income taxes.
The Partnership has elected to treat several of its subsidiaries as taxable REIT subsidiaries (each
a TRS). A TRS is subject to federal, state and local income tax. In general, a TRS may perform
non-customary services for tenants, hold assets that the Company, as a REIT, cannot hold directly
and generally may engage in any real estate or non-real estate related business.
42
Accounting Pronouncements Adopted During 2010
In January 2010, the FASB issued a new accounting standard for distributions to stockholders with
components of stock and cash. The guidance clarifies that in calculating earnings per share, an
entity should account for the stock portion of the distribution as a stock issuance and not as a
stock dividend. The new standard is effective for fiscal years and interim periods ending after
December 15, 2009, and should be applied on a retrospective basis. The Partnerships adoption of
the new standard did not have a material impact on its consolidated financial position or results
of operations.
In January 2010, the FASB issued an amendment to the accounting standard for fair value
measurements and disclosures. The amendment clarifies and provides additional disclosure
requirements related to recurring and non-recurring fair value measurements. This amendment is
effective for fiscal years and interim periods ending after December 15, 2009. The Partnerships
adoption of the new standard did not have a material impact on its consolidated financial position
or results of operations.
In December 2009, the FASB issued a new accounting standard governing transfer of financial assets.
This new standard is a revision to the existing accounting standard for the transfer and servicing
of financial assets and amends the guidance on accounting for transfers of financial assets,
including securitization transactions, where entities have continued exposure to risks related to
transferred financial assets. The new accounting standard also expands the disclosure requirements
for such transactions. This amendment is effective for fiscal years beginning after November 15,
2009. The Partnerships adoption of the new standard did not have a material impact on its
consolidated financial position or results of operations.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the
consolidation of variable interest entities (VIE). The elimination of the concept of a qualifying
special-purpose entity (QSPE) removes the exception from applying the consolidation guidance within
this amendment. This amendment requires an enterprise to perform a qualitative analysis when
determining whether or not it must consolidate a VIE. The amendment also requires an enterprise to
continuously reassess whether it must consolidate a VIE. Additionally, the amendment requires
enhanced disclosures about an enterprises involvement with VIEs and any significant change in risk
exposure due to that involvement, as well as how its involvement with VIEs impacts the enterprises
financial statements. Finally, an enterprise will be required to disclose significant judgments and
assumptions used to determine whether or not to consolidate a VIE. This amendment was adopted on
January 1, 2010 and applied prospectively.
As a result of the adoption of the amendment to the accounting and disclosure requirements for the
consolidation of VIEs, the Partnership has determined that it will no longer consolidate three of
the VIEs that it has previously consolidated. In reaching its conclusion, the Partnership
considered the requirements provided by the accounting standard to qualitatively assess if the
Partnership is the primary beneficiary of the VIE based on whether the Partnership has (i) the
power to direct those matters that most significantly impact the activities of the VIE and (ii) the
obligation to absorb losses or the right to receive benefits of the VIE that could potentially be
significant to the VIE. The Partnerships consideration included an assessment of each of the
entities with which it has involvement and included review of applicable
documents such as, but not limited to, applicable partnership agreements, real estate venture
agreements, LLC agreements, management and leasing agreements. As of January 1, 2010, the
Partnership held interests in 17 real estate ventures, 15 of which are unconsolidated and two of
which the Partnership continues to consolidate. The Partnerships basis in reaching its conclusion
for these entities is provided below.
Previously Consolidated:
Four Tower Bridge and Six Tower Bridge Ventures
Each of the Four Tower Bridge and Six Tower Bridge Real Estate Ventures was formed as limited
partnerships to own and manage an office property located in Conshohocken, Pennsylvania. The
Partnership entered into these ventures with two other partners during 1997 and 1998, respectively.
The other partner in Four Tower Bridge owns 35% interest and the other partner in Six Tower Bridge
owns a 37% in the partnership entities. These Real Estate Ventures were determined to be VIEs and
were previously consolidated in the Partnerships financial statements in accordance with the
amended accounting standard for the consolidation of VIEs. The ventures were determined to be VIEs
due to insufficient equity at the latest reconsideration event. However, upon the Partnerships
adoption of the new accounting standard on January 1, 2010, the Partnership has determined that
will no longer consolidate these Real Estate Ventures after it was determined that the partners
have shared power in the ventures and no related party considerations were identified. All
significant decisions are approved by both partners in the venture. Based on the facts and
circumstances provided, the Partnership deconsolidated these two Real Estate Ventures in accordance
with the new accounting standard.
43
Coppell Associates
Coppell Associates is a Real Estate Venture that owns one property in Austin, Texas. The
Partnership entered into this venture with another partner which owns a 50% interest in the
partnership. This Real Estate Venture is a VIE and was previously consolidated in the
Partnerships financial statements in accordance with the amended accounting standard for the
consolidation of VIEs. The venture was determined to be a VIE due to insufficient equity at the
latest reconsideration event. However, upon the Partnerships adoption of the new accounting
standard on January 1, 2010, the Partnership has determined that will no longer consolidate this
Real Estate Venture after it concluded that the partners have shared power in the venture. All
significant decisions are approved by both partners in the venture. Based on the facts and
circumstances provided, the Partnership deconsolidated this Real Estate Venture in accordance with
the new accounting standard.
Other VIEs:
PJP VII
The Partnership holds a 25% interest in a Real Estate Venture that it entered into with two other
partners. One of the other partners has 50% ownership interest in the ventures while the other one
has ownership interest of 25%. This venture is considered a VIE due to the fact that at the last
reconsideration event, it entered into a construction loan to fund the building construction of the
property and it was determined that there was insufficient equity in the joint venture. In
addition, this loan has not been refinanced as of March 31, 2010 and the Partnership guarantees
$0.7 million or 8.75% of the total construction note. It is expected that this entity will remain
a VIE until the venture refinances the construction loan into a permanent financing. It was
determined that the Partnership does not have the power to direct the significant economic
activities of the Real Estate Venture in accordance with the standard and as a result is not the
primary beneficiary of this Real Estate Venture.
Residence Inn Hotel
The Partnership holds a 50% interest in a Real Estate Venture that owns a Residence Inn Hotel
located in Conshohocken, Pennsylvania. The Partnership has two other partners in this venture with
one of them having a 46.4% interest while the other one has 3.6% interest. The Real Estate Venture
was considered as a VIE in accordance with the amended accounting standard for the consolidation of
VIEs due to the participating rights of the non-equity holder hotel manager. However, the
Partnership has determined that the partners have shared power in the venture. All significant
decisions are approved by all partners in the
venture. Accordingly this Real Estate Venture was not consolidated in the financial statements of
the Partnership. Upon the adoption of the new accounting standard, the Partnership still has the
same determination that it does not have the power to control the business of the Real Estate
Venture and that it is still appropriate to account for this venture under the equity method of
accounting.
G&I VI Interchange Office LLC
The Partnership holds a 20% ownership interest in a Real Estate Venture that owns a portfolio of 29
office properties located in Montgomery, Bucks, and Lehigh counties in Pennsylvania. The
Partnership has one other partner in this venture with an 80% ownership interest. The Real Estate
Venture was considered as a VIE in accordance with the amended accounting standard for the
consolidation of VIEs. The venture continues to be determined a VIE due to the disproportionate
voting rights. The Partnership has determined that it is not the primary beneficiary of the
venture. Accordingly, this Real Estate Venture was not consolidated in the financial statements of
the Partnership. Upon the adoption of the new accounting standard, the Partnership still has the
same determination that it does not have the power to control the business of the Real Estate
Venture and that it is still appropriate to account for this venture under the equity method of
accounting.
Seven Tower Bridge
The Partnership has a 10% total ownership interest in a Real Estate Venture that will develop a
suburban office building in Conshohocken, PA. The Company has three other partners in this venture
having ownership interests of 50%, 20%, and 20%, respectively. This venture is considered a VIE as
the property is under development and there is insufficient equity to fund the construction. The
Partnership has determined that it is not the primary beneficiary of the venture. Accordingly,
this Real Estate Venture was not consolidated in the financial statements of the Partnership. Upon
the adoption of the new accounting standard, the Partnership still has the same determination that
it does not have the power to control the business of the Real Estate Venture and that it is still
appropriate to account for this venture under the equity method of accounting.
44
VIEs that Continue to be Consolidated:
Projects Related to the Companys Tax Credit Transactions
During 2008, the Partnership closed two transactions with US Bancorp related to the historic
rehabilitation of the 30th Street Post Office and the Cira Garage Project both located in
Philadelphia, Pennsylvania. The real estate ventures created to facilitate the tax credit
transactions were considered as VIEs because the equity investment at risk is not sufficient to
permit the entities to receive the tax credits without the financial support from US Bancorp. The
Partnership has also concluded that it is the primary beneficiary of the projects based on the
contractual arrangements that obligate the Partnership to deliver tax benefits and provide other
guarantees to USB and that entitle the Partnership through fee arrangements to receive
substantially all available cash flow from the projects. Please refer to Note 13 for a detailed
discussion of these transactions as well as the amount of deferred income related to these VIEs
that the Partnership has included in its consolidated balance sheets. There were no other
significant amounts included in the Partnerships consolidated balance sheet related to these
entities as the related amounts were eliminated during consolidation.
Other Unconsolidated Real Estate Ventures
In accordance with the Partnerships adoption of the accounting standard for the consolidation of
VIEs, it was determined that the Partnership would not consolidate the real estate ventures below
based on the evaluation of substantive participating rights of the partners in each venture under
the voting interest model:
|
|
|
Two Tower Bridge (Partnership as co-General Partner with 35% Ownership Interest) |
|
|
|
|
Eight Tower Bridge (Partnership as Limited Partner with Preferred Equity Interest) |
|
|
|
|
PJP Real Estate Ventures (Partnership as Operating Member with 25% to 30% Ownership
Interest) |
|
|
|
|
Macquarie BDN Office LLC (Partnership as Operating Member with 20% Ownership Interest) |
|
|
|
|
Broadmoor Joint Venture (Partnership as co-Managing Venturer with 50% Ownership
Interest) |
|
|
|
|
DRA Venture* (Partnership as General Partner with 20% Ownership Interest) |
|
|
|
|
1000 Chesterbrook (Partnership as co-General Partner with 50% Ownership Interest) |
The other unconsolidated real estate ventures described above are not VIEs as the other partners
in the ventures have either the substantive participating rights in the entities normal business
operations or the power to direct the activities is shared amongst the partners. As a result of
the Partnerships review, it has concluded that it is appropriate to account for these entities as
unconsolidated real estate ventures under the equity method of accounting.
Additional Considerations
The supporting real estate venture agreements of the entities listed above provided a
straightforward determination of whether the Partnership has control to direct the business
activities of the entities. Where the Partnership has concluded that control is shared, it is
generally because at least one other partner and the Partnership must agree on decisions that are
considered significant. The Partnership has also determined that it is not the primary beneficiary
in these entities as it does not have the power to direct the activities that most significantly
impact the economic performance of these entities. Also, if shared control was determined and the
Partnership was considered to be a related party, the Partnership is not the party deemed to be
mostly closely associated with the business. For entities that the Partnership has determined to be
VIEs but for which it is not the primary beneficiary, its maximum exposure to loss is the carrying
amount of its investments, as the Partnership has not provided any guarantees other than the
guarantee described for PJP VII which was approximately $0.7 million at March 31, 2010. Also, for
all entities determined to be VIEs, the Partnership does not provide financial support to the real
estate ventures through liquidity arrangements, guarantees or other similar commitments, other than
perhaps through its general partner standing.
45
In accordance with the Partnerships adoption of the accounting standard as discussed in detail
above, the Partnerships consolidated balance sheet as of March 31, 2010 and certain line items
from its statements of operations for the three months ended March 31, 2010 have been reduced by
the following amounts as a result of deconsolidating the three VIEs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Balance Sheets |
|
|
Before Deconsolidation |
|
Balance Sheet: |
|
As Reported |
|
|
of Deconsolidated VIEs |
|
|
of VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, net |
|
$ |
4,133,159 |
|
|
$ |
37,126 |
|
|
$ |
4,170,285 |
|
Cash and cash equivalents |
|
|
7,590 |
|
|
|
1,382 |
|
|
|
8,972 |
|
Receivables, net |
|
|
103,046 |
|
|
|
1,478 |
|
|
|
104,524 |
|
Deferred costs, net |
|
|
103,117 |
|
|
|
1,199 |
|
|
|
104,316 |
|
Other assets |
|
|
288,216 |
|
|
|
3,034 |
|
|
|
291,250 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,635,128 |
|
|
$ |
44,219 |
|
|
$ |
4,679,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
2,430,849 |
|
|
$ |
42,877 |
|
|
$ |
2,473,726 |
|
Accounts payable and
accrued expenses |
|
|
95,621 |
|
|
|
822 |
|
|
|
96,443 |
|
Other liabilities |
|
|
188,740 |
|
|
|
624 |
|
|
|
189,364 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,715,210 |
|
|
|
44,323 |
|
|
|
2,759,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable units |
|
|
46,070 |
|
|
|
|
|
|
|
46,070 |
|
Partners equity |
|
|
1,873,848 |
|
|
|
(104 |
) |
|
|
1,873,744 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Partners Equity |
|
$ |
4,635,128 |
|
|
$ |
44,219 |
|
|
$ |
4,679,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Income Statements |
|
|
Before Deconsolidation |
|
Income Statement: |
|
As Reported |
|
|
of Deconsolidated VIEs |
|
|
of VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
143,134 |
|
|
$ |
2,081 |
|
|
$ |
145,215 |
|
Property operating expenses |
|
|
45,148 |
|
|
|
370 |
|
|
|
45,518 |
|
Real estate taxes |
|
|
13,052 |
|
|
|
88 |
|
|
|
13,140 |
|
Third party management fees |
|
|
1,412 |
|
|
|
|
|
|
|
1,412 |
|
Depreciation and amortization |
|
|
52,622 |
|
|
|
495 |
|
|
|
53,117 |
|
General and administrative
expenses |
|
|
6,092 |
|
|
|
|
|
|
|
6,092 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
24,808 |
|
|
|
1,128 |
|
|
|
25,936 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
31,524 |
|
|
|
974 |
|
|
|
32,498 |
|
Other expenses, net |
|
|
42 |
|
|
|
154 |
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(6,758 |
) |
|
$ |
|
|
|
$ |
(6,758 |
) |
|
|
|
|
|
|
|
|
|
|
The adoption of the accounting standard discussed above increased net cash used in investing
activities, as reflected in the statements of cash flows by $1.4 million during the three months
ended March 31, 2010. The impact of the adoption to the operating and financing activities
subtotals in the statement of cash flows was not material. The related cash pertains to cash owned
by the deconsolidated VIEs.
The difference between the net amount removed from the Partnerships consolidated balance sheet and
the amount of the Partnerships retained interest in the deconsolidated VIEs amounting to $1.4
million is recognized as a cumulative effect of accounting change to cumulative earnings in the
Partnerships consolidated balance sheets.
3. REAL ESTATE INVESTMENTS
As of March 31, 2010 and December 31, 2009 the gross carrying value of the Partnerships operating
properties was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
682,364 |
|
|
$ |
690,441 |
|
Building and improvements |
|
|
3,354,972 |
|
|
|
3,393,498 |
|
Tenant improvements |
|
|
414,749 |
|
|
|
428,679 |
|
|
|
|
|
|
|
|
|
|
$ |
4,452,085 |
|
|
$ |
4,512,618 |
|
|
|
|
|
|
|
|
Acquisitions and Dispositions
The Partnership did not complete any acquisitions during the periods covered in these financial
statements.
On January 14, 2010, the Partnership sold Westmoreland Plaza, a 121,815 net rentable square feet
property located in Richmond, Virginia, for a sales price of $10.8 million. This sale is included
in discontinued operations (see Noted 10).
46
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of March 31, 2010, the Partnership had an aggregate investment of approximately $77.5 million in
its 15 unconsolidated Real Estate Ventures. The Partnership formed these ventures with unaffiliated
third parties, or acquired them, to develop office properties or to acquire land in anticipation of
possible development of office properties. Thirteen of the Real Estate Ventures own 48 office
buildings that contain an aggregate of approximately 4.6 million net rentable square feet, one Real
Estate Venture owns three acres of undeveloped parcel of land, and one Real Estate Venture
developed a hotel property that contains 137 rooms in Conshohocken, PA.
The Partnership accounts for its interests in its unconsolidated Real Estate Ventures using the
equity method. The Partnerships unconsolidated interests range from 3% to 65%, subject to
specified priority allocations of distributable cash in certain of the Real Estate Ventures.
The amounts reflected in the following tables (except for the Partnerships share of equity and
income) are based on the historical financial information of the individual Real Estate Ventures.
One of the Real Estate Ventures, acquired in connection with the Prentiss Properties Trust merger
in 2006, had a negative equity
balance on a historical cost basis as a result of historical depreciation and distribution of
excess financing proceeds. The Partnership reflected its acquisition of this Real Estate Venture
interest at its relative fair value as of the date of the purchase of Prentiss. The difference
between allocated cost and the underlying equity in the net assets of the investee is accounted for
as if the entity were consolidated (i.e., allocated to the Partnerships relative share of assets
and liabilities with an adjustment to recognize equity in earnings for the appropriate additional
depreciation/amortization). The Partnership does not record operating losses of the Real Estate
Ventures in excess of its investment balance unless the Partnership is liable for the obligations
of the Real Estate Venture or is otherwise committed to provide financial support to the Real
Estate Venture.
The following is a summary of the financial position of the Real Estate Ventures as of March 31,
2010 and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 (a) |
|
|
|
|
|
|
|
|
|
|
Net property |
|
$ |
531,052 |
|
|
$ |
503,932 |
|
Other assets |
|
|
120,105 |
|
|
|
96,643 |
|
Other Liabilities |
|
|
42,254 |
|
|
|
37,774 |
|
Debt |
|
|
518,241 |
|
|
|
470,232 |
|
Equity |
|
|
90,662 |
|
|
|
92,569 |
|
Partnerships share of equity (Partnerships basis) |
|
|
77,472 |
|
|
|
75,458 |
|
|
|
|
(a) - |
|
Includes the three real estate ventures that were deconsolidated upon the adoption of the new
accounting standard for the consolidation of VIEs. |
The following is a summary of results of operations of the Real Estate Ventures for the three-month
periods ended March 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
|
ended March 31, |
|
|
|
2010 |
|
|
2009 (a) |
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
24,069 |
|
|
$ |
26,564 |
|
Operating expenses |
|
|
8,695 |
|
|
|
9,566 |
|
Interest expense, net |
|
|
7,738 |
|
|
|
7,152 |
|
Depreciation and amortization |
|
|
6,222 |
|
|
|
8,822 |
|
Net income |
|
|
1,415 |
|
|
|
1,024 |
|
Partnerships share of income (Partnerships basis) |
|
|
1,296 |
|
|
|
586 |
|
|
|
|
(a) - |
|
Includes the three real estate ventures that were deconsolidated upon the adoption of the new accounting standard for the consolidation of VIEs. |
As of March 31, 2010, the Partnership had guaranteed repayment of approximately $0.7 million of
loans on behalf of certain Real Estate Ventures. The Partnership also provides customary
environmental indemnities
in connection with construction and permanent financing both for its own account and on behalf of
its Real Estate Ventures.
47
5. DEFERRED COSTS
As of March 31, 2010 and December 31, 2009, the Partnerships deferred costs were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing Costs |
|
$ |
127,714 |
|
|
$ |
(54,732 |
) |
|
$ |
72,982 |
|
Financing Costs |
|
|
40,832 |
|
|
|
(10,697 |
) |
|
|
30,135 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
168,546 |
|
|
$ |
(65,429 |
) |
|
$ |
103,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing Costs |
|
$ |
124,391 |
|
|
$ |
(50,643 |
) |
|
$ |
73,748 |
|
Financing Costs |
|
|
42,965 |
|
|
|
(10,616 |
) |
|
|
32,349 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
167,356 |
|
|
$ |
(61,259 |
) |
|
$ |
106,097 |
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2010 and 2009, the Partnership capitalized internal
direct leasing costs of $1.8 million and $1.2 million, respectively, in accordance with the
accounting standard for the capitalization of leasing costs.
6. INTANGIBLE ASSETS
As of March 31, 2010 and December 31, 2009, the Partnerships intangible assets were comprised of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
118,974 |
|
|
$ |
(72,568 |
) |
|
$ |
46,406 |
|
Tenant relationship value |
|
|
96,263 |
|
|
|
(51,809 |
) |
|
|
44,454 |
|
Above market leases acquired |
|
|
14,831 |
|
|
|
(10,606 |
) |
|
|
4,225 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
230,068 |
|
|
$ |
(134,983 |
) |
|
$ |
95,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
75,065 |
|
|
$ |
(40,218 |
) |
|
$ |
34,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
123,456 |
|
|
$ |
(71,402 |
) |
|
$ |
52,054 |
|
Tenant relationship value |
|
|
97,566 |
|
|
|
(49,374 |
) |
|
|
48,192 |
|
Above market leases acquired |
|
|
15,674 |
|
|
|
(10,757 |
) |
|
|
4,917 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
236,696 |
|
|
$ |
(131,533 |
) |
|
$ |
105,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
75,325 |
|
|
$ |
(38,238 |
) |
|
$ |
37,087 |
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, the Partnerships annual amortization for its intangible
assets/liabilities is as follows (in thousands and assuming no early lease terminations):
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
Liabilities |
|
2010 |
|
$ |
20,897 |
|
|
$ |
6,068 |
|
2011 |
|
|
22,427 |
|
|
|
7,012 |
|
2012 |
|
|
17,201 |
|
|
|
6,275 |
|
2013 |
|
|
12,432 |
|
|
|
5,836 |
|
2014 |
|
|
9,125 |
|
|
|
4,348 |
|
Thereafter |
|
|
13,003 |
|
|
|
5,308 |
|
|
|
|
|
|
|
|
Total |
|
$ |
95,085 |
|
|
$ |
34,847 |
|
|
|
|
|
|
|
|
48
7. DEBT OBLIGATIONS
The following table sets forth information regarding the Partnerships debt obligations outstanding
at March 31, 2010 and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
Interest |
|
|
Maturity |
|
Property / Location |
|
2010 |
|
|
2009 |
|
|
Rate |
|
|
Date |
|
MORTGAGE DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plymouth Meeting Exec. |
|
|
41,848 |
|
|
|
42,042 |
|
|
|
7.00%(a) |
|
|
Dec-10 |
Four Tower Bridge |
|
|
|
|
|
|
10,158 |
|
|
|
6.62%(b) |
|
|
Feb-11 |
Arboretum I, II, III & V |
|
|
20,885 |
|
|
|
21,046 |
|
|
|
7.59% |
|
|
Jul-11 |
Midlantic Drive/Lenox Drive/DCC I |
|
|
57,802 |
|
|
|
58,215 |
|
|
|
8.05% |
|
|
Oct-11 |
Research Office Center |
|
|
39,803 |
|
|
|
39,999 |
|
|
|
5.30%(a) |
|
|
Oct-11 |
Concord Airport Plaza |
|
|
35,326 |
|
|
|
35,594 |
|
|
|
5.55%(a) |
|
|
Jan-12 |
Six Tower Bridge |
|
|
|
|
|
|
13,557 |
|
|
|
7.79%(b) |
|
|
Aug-12 |
Newtown Square/Berwyn Park/Libertyview |
|
|
59,202 |
|
|
|
59,557 |
|
|
|
7.25% |
|
|
May-13 |
Coppell Associates II |
|
|
|
|
|
|
2,711 |
|
|
|
6.89%(b) |
|
|
Dec-13 |
Southpoint III |
|
|
3,095 |
|
|
|
3,255 |
|
|
|
7.75% |
|
|
Apr-14 |
Tysons Corner |
|
|
97,659 |
|
|
|
98,056 |
|
|
|
5.36%(a) |
|
|
Aug-15 |
Coppell Associates I |
|
|
|
|
|
|
16,600 |
|
|
|
5.75%(b) |
|
|
Feb-16 |
Two Logan Square |
|
|
89,800 |
|
|
|
89,800 |
|
|
|
7.57% |
|
|
Apr-16 |
One Logan Square |
|
|
60,000 |
|
|
|
60,000 |
|
|
|
4.50% |
|
|
Jul-16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
505,420 |
|
|
|
550,590 |
|
|
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt premiums, net |
|
|
736 |
|
|
|
1,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
506,156 |
|
|
$ |
551,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNSECURED DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Term Loan |
|
|
183,000 |
|
|
|
183,000 |
|
|
LIBOR + 0.80% |
|
Oct-10 (c) |
$300.0M 5.625% Guaranteed Notes due 2010 |
|
|
197,816 |
|
|
|
198,545 |
|
|
|
5.61% |
|
|
Dec-10 |
Credit Facility |
|
|
160,000 |
|
|
|
92,000 |
|
|
LIBOR + 0.725% |
|
Jun-11 (c) |
$345.0M 3.875% Guaranteed Exchangeable Notes due 2026 |
|
|
91,735 |
|
|
|
127,960 |
|
|
|
5.50% |
|
|
Oct-11 (d) |
$300.0M 5.750% Guaranteed Notes due 2012 |
|
|
176,787 |
|
|
|
187,825 |
|
|
|
5.77% |
|
|
Apr-12 |
$250.0M 5.400% Guaranteed Notes due 2014 |
|
|
242,681 |
|
|
|
242,681 |
|
|
|
5.53% |
|
|
Nov-14 |
$250.0M 7.500% Guaranteed Notes due 2015 |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
7.75% |
|
|
May-15 |
$250.0M 6.000% Guaranteed Notes due 2016 |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
5.95% |
|
|
Apr-16 |
$300.0M 5.700% Guaranteed Notes due 2017 |
|
|
300,000 |
|
|
|
300,000 |
|
|
|
5.75% |
|
|
May-17 |
Indenture IA (Preferred Trust I) |
|
|
27,062 |
|
|
|
27,062 |
|
|
LIBOR + 1.25% |
|
Mar-35 |
Indenture IB (Preferred Trust I) |
|
|
25,774 |
|
|
|
25,774 |
|
|
LIBOR + 1.25% |
|
Apr-35 |
Indenture II (Preferred Trust II) |
|
|
25,774 |
|
|
|
25,774 |
|
|
LIBOR + 1.25% |
|
Jul-35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
1,930,629 |
|
|
|
1,910,621 |
|
|
|
|
|
|
|
|
|
Less: unamortized exchangeable debt discount |
|
|
(2,678 |
) |
|
|
(4,327 |
) |
|
|
|
|
|
|
|
|
unamortized fixed-rate debt discounts, net |
|
|
(3,258 |
) |
|
|
(3,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unsecured indebtedness |
|
$ |
1,924,693 |
|
|
$ |
1,902,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Obligations |
|
$ |
2,430,849 |
|
|
$ |
2,454,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Loans were assumed upon acquisition of the related property. Interest rates presented above
reflect the market rate at the time of acquisition. |
|
(b) |
|
These loans were removed from the Partnerships balance sheet due to the deconsolidation of
the related VIEs as discussed in Note 2. |
|
(c) |
|
These loans may be extended to June 29, 2012 at the Companys discretion. |
|
(d) |
|
On October 20, 2011, the holders of the Exchangeable Notes have the right to request the
redemption of all or a portion of the Exchangeable Notes they hold at a price equal to 100% of
the principal amount plus accrued and unpaid interest. Accordingly, the Exchangeable Notes
have been presented with an October 20, 2011 maturity date. |
During the three-month periods ended March 31, 2010 and 2009, the Partnerships weighted-average
effective interest rate on its mortgage notes payable was 6.43% and 6.40%, respectively.
49
During the three-months ended March 31, 2010, the Partnership repurchased $48.0 million of its
outstanding unsecured Notes in a series of transactions which are summarized in the table below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase |
|
|
|
|
|
|
|
|
|
|
Deferred Financing |
|
Notes |
|
Amount |
|
|
Principal |
|
|
Loss |
|
|
Amortization |
|
2010 5.625% Notes |
|
$ |
754 |
|
|
$ |
730 |
|
|
$ |
(17 |
) |
|
$ |
1 |
|
2012 5.750% Notes |
|
|
11,648 |
|
|
|
11,038 |
|
|
|
(368 |
) |
|
|
29 |
|
3.875% Notes |
|
|
36,383 |
|
|
|
36,225 |
|
|
|
(807 |
) |
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48,785 |
|
|
$ |
47,993 |
|
|
$ |
(1,192 |
) |
|
$ |
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Partnership utilizes credit facility borrowings for general business purposes, including the
acquisition, development and redevelopment of properties and the repayment of other debt. The
maturity date of the $600.0 million Credit Facility (the Credit Facility) is June 29, 2011
(subject to an extension of one year, at the Partnerships option, upon its payment of an extension
fee equal to 15 basis points of the committed amount under the Credit Facility). The per annum
variable interest rate on the outstanding balances is LIBOR plus 0.725%. The interest rate and
facility fee are subject to adjustment upon a change in the Partnerships unsecured debt ratings.
The Partnership has the option to increase the Credit Facility to $800.0 million subject to the
absence of any defaults and the Companys ability to acquire additional commitments from its
existing lenders or new lenders. As of March 31, 2010, the Partnership had $160.0 million of
borrowings, $14.0 million in letters of credit outstanding, and a $51.0 million holdback in
connection with its historic tax credit transaction leaving $375.0 million of unused availability.
During the three-month periods ended March 31, 2010 and 2009, the weighted-average interest rate on
Credit Facility borrowings was 0.96% and 3.02%, respectively.
The Credit Facility requires the maintenance of ratios related to minimum net worth, debt-to-total
capitalization and fixed charge coverage and includes non-financial covenants. The Partnership was
in compliance with all financial covenants as of March 31, 2010.
On June 29, 2009, the Partnership entered into a forward financing commitment to borrow up to
$256.5 million under two separate loans which are secured by mortgages on the 30th
Street Post Office (the Post Office project), the Cira South Garage (the garage project) and by
the leases of space at these facilities upon the completion of these projects. Of the total
borrowings, $209.7 million and $46.8 million will be allocated to the Post Office project and to
the garage project, respectively. The Partnership paid a $17.7 million commitment fee, which
includes a $1.5 million arrangement fee, in connection with this commitment. The total loan amount
together with the net commitment fee was deposited in an escrow account to be administered by The
Bank of New York Mellon (the trustee). In accordance with the trust agreement between the lender
and the trustee, the lender assigned its rights under the loans to the Trust. The Trust issued
certificates to third parties in an amount equal to the funding commitment. Upon investment of the
escrow account in a portfolio of U.S. Government treasuries, the net commitment fee of $16.2
million will be used together with the interest earned on the escrow account to pay interest costs
of the loans through August 26, 2010 which is also the anticipated completion date of the projects
and the expected funding date. In order for funding to occur, certain
conditions must be met by the Partnership which primarily relate to the completion of the projects
and the commencement of the rental payments from the respective leases with the IRS on these
properties. The loans will bear interest at 5.93% and require principal and interest payments based
on a twenty year amortization schedule. The Partnership intends to use the loan proceeds to reduce
borrowings under its credit facility and for general corporate purposes. As of March 31, 2010, the
commitment fee is included as part of the deferred costs in the Partnerships consolidated balance
sheet as it believes the funding is probable of occurring. The Partnership will amortize this cost
over the term of the loan starting on the date the funding of the loans has occurred. In the event
that the Partnership believes the funding will not occur, this cost will be written off in the
period that such determination was made. In addition, should the funding not occur either because
the Partnership does not meet the conditions or the Partnership decides not to proceed with the
funding, a termination fee is payable (see Note 16).
The Partnership accounts for its outstanding 3.875% Guaranteed Exchangeable Notes in accordance
with the accounting standard for convertible debt instruments. The accounting standard requires the
initial proceeds from convertible debt that may be settled in cash to be bifurcated between a
liability component and an equity component. The accounting standard requires the initial proceeds
from the Partnerships issuance of the 3.875% Guaranteed Exchangeable Notes to be allocated between
a liability component and an equity component in a manner that reflects interest expense at the
interest rate of a similar nonconvertible debt that could have been issued by the Partnership at
such time. This is accomplished through the creation of a discount on the debt that would be
accreted using the effective interest method as additional non-cash interest expense over the
period the debt is expected to remain outstanding (i.e. through the first optional redemption
date).
50
The principal amount outstanding of the 3.875% Guaranteed Exchangeable Notes was $91.7 at March 31,
2010 and $128.0 million at December 31, 2009, respectively. At certain times and upon certain
events, the notes are exchangeable for cash up to their principal amount and, with respect to the
remainder, if any, of the exchange value in excess of such principal amount, cash or common shares.
The initial exchange rate is 25.4065 shares per $1,000 principal amount of notes (which is
equivalent to an initial exchange price of $39.36 per share). The carrying amount of the equity
component is $24.4 million and is reflected within Additional paid-in capital in the Partnerships
consolidated balance sheets. The unamortized debt discount is $2.7 million at March 31, 2010 and
$4.3 million at December 31, 2009, respectively, and will be amortized through October 15, 2011.
The effective interest rate at March 31, 2010 and December 31, 2009 was 5.5%. The Partnership
recognized contractual coupon interest of $1.1 million and $2.7 million for the three month periods
ended March 31, 2010 and 2009, respectively. In addition, the Partnership recognized interest on
amortization of debt discount of $0.5 million and $1.0 million for the three month periods ended
March 31, 2010 and 2009, respectively. Debt discount write-offs resulting from debt repurchases
amounted to $1.1 million and $0.2 million for the three month periods ended March 31, 2010 and
2009, respectively.
As of March 31, 2010, the Partnerships aggregate scheduled principal payments of debt obligations,
excluding amortization of discounts and premiums, are as follows (in thousands):
|
|
|
|
|
2010 |
|
$ |
428,691 |
|
2011 |
|
|
372,860 |
|
2012 |
|
|
214,853 |
|
2013 |
|
|
58,688 |
|
2014 |
|
|
246,158 |
|
Thereafter |
|
|
1,114,799 |
|
|
|
|
|
Total principal payments |
|
|
2,436,049 |
|
Net unamortized premiums/discounts |
|
|
(5,200 |
) |
|
|
|
|
Outstanding indebtedness |
|
$ |
2,430,849 |
|
|
|
|
|
8. FAIR VALUE OF FINANCIAL STATEMENTS
The following fair value disclosure was determined by the Partnership using available market
information and discounted cash flow analyses as of March 31, 2010 and December 31, 2009,
respectively. The discount rate used in calculating fair value is the sum of the current risk free
rate and the risk premium on the date of measurement of the instruments or obligations.
Considerable judgment is necessary to interpret market data and to develop the related estimates of
fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that
the Partnership could realize upon disposition. The use of different estimation methodologies may
have a material effect on the estimated fair value amounts. The Partnership believes that the
carrying amounts
reflected in the Consolidated Balance Sheets at March 31, 2010 and December 31, 2009 approximate
the fair values for cash and cash equivalents, accounts receivable, other assets, accounts payable
and accrued expenses.
The following are financial instruments for which the Partnership estimates of fair value differ
from the carrying amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage payable, net of premiums |
|
$ |
505,420 |
|
|
$ |
481,819 |
|
|
$ |
551,873 |
|
|
$ |
523,745 |
|
Unsecured notes payable, net of discounts |
|
$ |
1,509,019 |
|
|
$ |
1,505,604 |
|
|
$ |
1,557,011 |
|
|
$ |
1,497,356 |
|
Variable Rate Debt Instruments |
|
$ |
421,610 |
|
|
$ |
406,953 |
|
|
$ |
353,610 |
|
|
$ |
341,210 |
|
Notes Receivable |
|
$ |
72,455 |
(a) |
|
$ |
62,776 |
|
|
$ |
71,989 |
(a) |
|
$ |
62,776 |
|
|
|
|
(a) |
|
For purposes of this disclosure, one of the notes is presented gross of the recognized deferred gain of $12.9 million
arising from the sale of two properties in the prior year accounted for under the accounting standard for installment sales. |
9. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
Risk Management
In the course of its on-going business operations, the Partnership encounters economic risk. There
are three main components of economic risk: interest rate risk, credit risk and market risk. The
Partnership is subject to interest rate risk on its interest-bearing liabilities. Credit risk is
primarily the risk of inability or unwillingness of tenants to make contractually required
payments. Market risk is the risk of declines in the value of properties due to changes in rental
rates, interest rates or other market factors affecting the valuation of properties held by the
Partnership.
51
Risks and Uncertainties
Deteriorating economic conditions have generally resulted in a reduction of the availability of
financing and higher borrowing costs. These factors, coupled with a slowing economy, have reduced
the volume of real estate transactions and created credit stresses on most businesses. The
Partnership believes that vacancy rates will increase through 2010 and possibly beyond as the
current economic climate negatively impacts tenants in the Properties. The current financial
markets also have an adverse effect on the Partnerships other counter parties such as the counter
parties in its derivative contracts.
The Partnership expects that the impact of the current state of the economy, including high
unemployment and the unprecedented volatility and illiquidity in the financial and credit markets,
will continue to have a dampening effect on the fundamentals of its business, including increases
in past due accounts, tenant defaults, lower occupancy and reduced effective rents. These
conditions would negatively affect the Partnerships future net income and cash flows and could
have a material adverse effect on its financial condition.
The Partnerships Credit Facility, Bank Term Loan and the indenture governing the unsecured public
debt securities (Note 7) contain restrictions, requirements and other limitations on the ability to
incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt
service coverage ratios and minimum ratios of unencumbered assets to unsecured debt which it must
maintain. The ability to borrow under the Credit Facility is subject to compliance with such
financial and other covenants. In the event that the Partnership fails to satisfy these covenants,
it would be in default under the Credit Facility, the Bank Term Loan and the indenture and may be
required to repay such debt with capital from other sources. Under such circumstances, other
sources of capital may not be available, or may be available only on unattractive terms.
Availability of borrowings under the Credit Facility is subject to a traditional material adverse
effect clause. Each time the Partnership borrows it must represent to the lenders that there have
been no events of a nature which would have a material adverse effect on the business, assets,
operations, condition (financial or otherwise) or prospects of the Partnership taken as a whole or
which could negatively effect the ability of the Partnership to perform its obligations under the
Credit Facility. While the Partnership believes that there are currently no material adverse effect
events, the Partnership is operating in unprecedented economic times and it is possible that such
events could arise which would limit the Partnerships borrowings under the Credit Facility. If an
event occurs which is considered to have a material adverse effect, the lenders could consider the
Partnership in default under the terms of the Credit Facility and the borrowings under the Credit
Facility if any, would become due and payable. If the Partnership is unable to obtain a waiver,
this would have a material adverse effect on the Partnerships financial position and results of
operations.
The Partnership was in compliance with all financial covenants as of March 31, 2010. Management
continuously monitors the Partnerships compliance with and anticipated compliance with the
covenants. Certain of the covenants restrict managements ability to obtain alternative sources of
capital. While the Partnership currently believes it will remain in compliance with its covenants,
in the event of a continued slow-down and continued crisis in the credit markets, the Partnership
may not be able to remain in compliance with such covenants and if the lender would not provide a
waiver, it could result in an event of default.
Use of Derivative Financial Instruments
The Partnerships use of derivative instruments is limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposures and not for speculative
purposes. The principal objective of such arrangements is to minimize the risks and/or costs
associated with the Partnerships operating and financial structure, as well as to hedge specific
transactions. The counterparties to these arrangements are major financial institutions with which
the Partnership and its affiliates may also have other financial relationships. The Partnership is
potentially exposed to credit loss in the event of non-performance by these counterparties.
However, because of the high credit ratings of the counterparties, the Partnership does not
anticipate that any of the counterparties will fail to meet these obligations as they come due. The
Partnership does not hedge credit or property value market risks through derivative financial
instruments.
The Partnership formally assesses, both at inception of the hedge and on an on-going basis, whether
each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If
management determines that a derivative is not highly-effective as a hedge or if a derivative
ceases to be a highly-effective hedge, the Partnership will discontinue hedge accounting
prospectively. The related ineffectiveness would be charged to the Statement of Operations.
The valuation of these instruments is determined using widely accepted valuation techniques
including discounted cash flow analysis on the expected cash flows of each derivative. This
analysis reflects the contractual terms of the derivatives, including the period to maturity, and
uses observable market-based inputs, including interest rate curves and implied volatilities. The
fair values of interest rate swaps are determined using the market standard methodology of netting
the discounted future fixed cash receipts (or payments) and the discounted expected variable cash
payments (or receipts). The variable cash payments (or receipts) are based on an expectation of
future interest rates (forward curves) derived from observable market interest rate curves.
52
To comply with the provisions of accounting standard for fair value measurements and disclosures,
the Partnership incorporates credit valuation adjustments to appropriately reflect both its own
nonperformance risk and the respective counterpartys nonperformance risk in the fair value
measurements. In adjusting the fair value of its derivative contracts for the effect of
nonperformance risk, the Partnership has considered the impact of netting and any applicable credit
enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Partnership has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads
to evaluate the likelihood of default by itself and its counterparties. However, as of March 31,
2010 and December 31, 2009, the Partnership has assessed the significance of the impact of the
credit valuation adjustments on the overall valuation of its derivative positions and has
determined that the credit valuation adjustments are not significant to the overall valuation of
its derivatives. As a result, the Partnership has determined that its derivative valuations in
their entirety are classified in Level 2 of the fair value hierarchy.
The fair value of the hedges at March 31, 2010 and December 31, 2009 is included in other
liabilities and accumulated other comprehensive income in the accompanying balance sheet.
The following table summarizes the terms and fair values of the Partnerships derivative financial
instruments at March 31, 2010 and December 31, 2009 (in thousands). The notional amounts present
the Partnerships use of these instruments, but do not represent exposure to credit, interest rate
or market risks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge |
|
Hedge |
|
|
|
|
|
Notional Amount |
|
|
|
|
|
|
Trade |
|
|
Maturity |
|
|
Fair Value |
|
Product |
|
Type |
|
Designation |
|
3/31/2010 |
|
|
12/31/2009 |
|
|
Strike |
|
|
Date |
|
|
Date |
|
|
3/31/2010 |
|
|
12/31/2009 |
|
Swap |
|
Interest Rate |
|
|
Cash Flow |
(b) |
|
$ |
137,400 |
|
|
$ |
123,000 |
(a) |
|
|
4.709 |
% |
|
|
9/20/07 |
|
|
|
10/18/10 |
|
|
$ |
3,893 |
|
|
$ |
5,162 |
|
Swap |
|
Interest Rate |
|
|
Cash Flow |
(b) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
4.415 |
% |
|
|
10/19/07 |
|
|
|
10/18/10 |
|
|
|
600 |
|
|
|
827 |
|
Swap |
|
Interest Rate |
|
|
Cash Flow |
(b) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
3.747 |
% |
|
|
11/26/07 |
|
|
|
10/18/10 |
|
|
|
502 |
|
|
|
688 |
|
Swap |
|
Interest Rate |
|
|
Cash Flow |
(b) |
|
|
25,774 |
|
|
|
25,774 |
|
|
|
2.975 |
% |
|
|
10/16/08 |
|
|
|
10/30/10 |
|
|
|
510 |
|
|
|
643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
213,174 |
|
|
$ |
198,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,505 |
|
|
$ |
7,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) - |
|
Notional amount accreting up to $155,000 through October 8, 2010. |
|
(b) - |
|
Hedging unsecured variable rate debt. |
Concentration of Credit Risk
Concentrations of credit risk arise when a number of tenants related to the Partnerships
investments or rental operations are engaged in similar business activities, or are located in the
same geographic region, or have similar economic features that would cause their inability to meet
contractual obligations, including those to the Partnership, to be similarly affected. The
Partnership regularly monitors its tenant base to assess potential concentrations of credit risk.
Management believes the current credit risk portfolio is reasonably well diversified and does not
contain any unusual concentration of credit risk. No tenant accounted for 5% or more of the
Partnerships rents during the three-month periods ended March 31, 2010 and 2009. Recent
developments in the general economy and the global credit markets have had a significant adverse
effect on companies in numerous industries. The Partnership has tenants concentrated in various
industries that may be experiencing adverse effects from the current economic conditions and the
Partnership could be adversely affected if such tenants go into default under their leases.
53
10. DISCONTINUED OPERATIONS
For the three-month period ended March 31, 2010, income from discontinued operations relates to the
one property that the Partnership sold during 2010. The following table summarizes the revenue and
expense information for the properties classified as discontinued operations for the three-month
period ended March 31, 2010 (in thousands):
|
|
|
|
|
|
|
Three-month period |
|
|
|
ended March 31, 2010 |
|
Revenue: |
|
|
|
|
Tenant reimbursements |
|
$ |
48 |
|
|
|
|
|
|
Expenses: |
|
|
|
|
Property operating expenses |
|
|
25 |
|
Real estate taxes |
|
|
2 |
|
Depreciation & amortization |
|
|
11 |
|
|
|
|
|
Total operating expenses |
|
|
38 |
|
Income from discontinued operations before gain on
sale of interests in real estate |
|
|
10 |
|
|
|
|
|
|
Net gain on sale of interests in real estate |
|
|
6,349 |
|
|
|
|
|
Income from discontinued operations attributable
to Brandywine Operating Partnership |
|
$ |
6,359 |
|
|
|
|
|
For the three-month periods ended March 31, 2009, income from discontinued operations relates to
properties that the Partnership sold through March 31, 2010. The following table summarizes the
revenue and expense information for properties classified as discontinued operations for the
three-month periods ended March 31, 2009 (in thousands):
|
|
|
|
|
|
|
Three-month period |
|
|
|
ended March 31, 2009 |
|
Revenue: |
|
|
|
|
Rents |
|
$ |
3,525 |
|
Tenant reimbursements |
|
|
1,792 |
|
Other |
|
|
105 |
|
|
|
|
|
Total revenue |
|
|
5,422 |
|
|
|
|
|
|
Expenses: |
|
|
|
|
Property operating expenses |
|
|
1,824 |
|
Real estate taxes |
|
|
648 |
|
Depreciation and amortization |
|
|
1,411 |
|
Provision for impairment |
|
|
3,700 |
|
|
|
|
|
Total operating expenses |
|
|
7,583 |
|
|
Interest income |
|
|
(1 |
) |
|
|
|
|
|
Income from discontinued operations before gain on
sale of interests in real estate |
|
|
(2,162 |
) |
|
|
|
|
|
Net gain on sale of interests in real estate |
|
|
194 |
|
|
|
|
|
Income from discontinued operations attributable to Brandywine Operating Partnership |
|
$ |
(1,968 |
) |
|
|
|
|
Discontinued operations have not been segregated in the consolidated statements of cash flows.
Therefore, amounts for certain captions will not agree with respective data in the consolidated
statements of operations.
54
11. PARTNERS EQUITY
Earnings per Common Partnership Unit
The following table details the number of units and net income used to calculate basic and diluted
earnings per common partnership unit (in thousands, except unit and per unit amounts; results may
not add due to rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(6,758 |
) |
|
$ |
(6,758 |
) |
|
$ |
1,095 |
|
|
$ |
1,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations attributable to non-controlling interests |
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
Amount allocable to unvested restricted shareholders |
|
|
(128 |
) |
|
|
(128 |
) |
|
|
(37 |
) |
|
|
(37 |
) |
Preferred share dividends |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations available to common unitholders |
|
|
(8,884 |
) |
|
|
(8,884 |
) |
|
|
(934 |
) |
|
|
(934 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common unitholders |
|
|
6,359 |
|
|
|
6,359 |
|
|
|
(1,968 |
) |
|
|
(1,968 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders |
|
$ |
(2,525 |
) |
|
$ |
(2,525 |
) |
|
$ |
(2,902 |
) |
|
$ |
(2,902 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
131,576,826 |
|
|
|
131,576,826 |
|
|
|
91,027,005 |
|
|
|
91,027,005 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
131,576,826 |
|
|
|
131,576,826 |
|
|
|
91,027,005 |
|
|
|
91,027,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common unitholders |
|
$ |
(0.07 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
Discontinued operations attributable to common unitholders |
|
|
0.05 |
|
|
|
0.05 |
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common unitholders |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted shares are considered participating securities which require the use of the
two-class method for the computation of basic and diluted earnings per share. For the three-months
ended March 31, 2010 and 2009, earnings representing nonforfeitable dividends as noted in the table
above were allocated to the unvested restricted shares.
Common Partnership Unit and Preferred Mirror Units
On March 24, 2010, the Partnership declared a distribution of $0.15 per Common Partnership Unit,
totaling $19.7 million, which was paid on April 19, 2010 to unitholders of record as of April 5,
2010.
On March 24, 2010, the Partnership declared distributions on its Series C Preferred Mirror Units
and Series D Preferred Mirror Units to holders of record as of March 30, 2010. These units are
entitled to a preferential return of 7.50% and 7.375%,
respectively. Distributions paid on April 15, 2010 to holders of Series C Preferred Mirror Units
and Series D Preferred Mirror Units totaled $0.9 million and $1.1 million, respectively.
In March 2010, the Company commenced a continuous equity offering program (the Offering Program),
under which the Company may sell up to an aggregate amount of 15,000,000 common shares until March
10, 2013. The Company may sell common shares in amounts and at times to be determined by the
Company. Actual sales will depend on a variety of factors as determined by the Company, including
market conditions, the trading price of its common shares and determinations by the Company of the
appropriate sources of funding. In conjunction with the Offering Program, the Company engaged
sales agents who received compensation, in aggregate, of 2% of the gross sales price per share sold
in the quarter ended March 31, 2010. During the quarter ended March 31, 2010, the Company sold
1,325,200 shares under this program at an average sales price of $12.32 per share resulting in net
proceeds of $16.1 million. The Company contributed the net proceeds from the sale of its shares to
the Partnership and the Partnership then issued 1,325,200 common partnership units to the Company.
The Partnership used the net proceeds from the sales to repay balances on its unsecured revolving
credit facility and for general corporate purposes.
Common Share Repurchases
The Company maintains a share repurchase program under which the Board has authorized the Company
to repurchase its common shares from time to time. The Board initially authorized this program in
1998 and has periodically replenished capacity under the program. On May 2, 2006 the Companys
Board restored capacity to 3.5 million common shares.
Neither the Company nor the Partnership repurchased any shares during the three-month period ended
March 31, 2010. As of March 31, 2010, the Company and the Partnership may purchase an additional
0.5 million shares under the plan.
Repurchases may be made from time to time in the open market or in privately negotiated
transactions, subject to market conditions and compliance with legal requirements. The share
repurchase program does not contain any time limitation and does not obligate the Company or the
Partnership to repurchase any shares. The Company and the Partnership may discontinue the program
at any time.
55
12. SHARE BASED AND DEFERRED COMPENSATION
Stock Options
At March 31, 2010, the Company had 3,129,372 options outstanding under its shareholder approved
equity incentive plan. There were 2,463,333 options unvested as of March 31, 2010 and $2.5 million
of unrecognized compensation expense associated with these options recognized over a weighted
average of 1.8 years. During the three months ended March 31, 2010 and 2009, the Partnership
recognized $0.2 million and $0.1 million of compensation expense, respectively, included in general
and administrative expense related to unvested options. The Partnership has also capitalized a
nominal amount of compensation expense for both periods as part of the Partnerships review of
employee salaries eligible for capitalization.
Option activity as of March 31, 2010 and changes during the three months ended March 31, 2010 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining Contractual |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Value |
|
Outstanding at January 1, 2010 |
|
|
2,404,567 |
|
|
$ |
15.48 |
|
|
|
8.38 |
|
|
$ |
(9,816,670 |
) |
Granted |
|
|
724,805 |
|
|
|
11.31 |
|
|
|
9.93 |
|
|
|
652,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010 |
|
|
3,129,372 |
|
|
|
|
|
|
|
8.55 |
|
|
$ |
(7,216,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested/Exercisable at March 31, 2010 |
|
|
666,038 |
|
|
$ |
14.52 |
|
|
|
7.42 |
|
|
$ |
(5,239,721 |
) |
Restricted Share Awards
As of March 31, 2010, 850,690 restricted shares were outstanding and vest over three to seven years
from the initial grant date. The remaining compensation expense to be recognized at March 31, 2010
was approximately $6.9 million. That expense is expected to be recognized over a weighted average
remaining vesting period of 2.0 years. The Partnership recognized compensation expense related to
outstanding restricted shares of $0.8 million and $0.4 million during the three-months ended March
31, 2010 and 2009, respectively, of which $0.2 million was capitalized for each period as part of
the Partnerships review of employee salaries eligible for capitalization. The expensed amounts
are included in general and administrative expense on the Partnerships consolidated statements of
operations in the respective periods.
The following table summarizes the Partnerships restricted share activity for the three-months
ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair value |
|
Non-vested at January 1, 2010 |
|
|
708,580 |
|
|
$ |
9.69 |
|
Granted |
|
|
219,596 |
|
|
|
11.56 |
|
Vested |
|
|
(77,486 |
) |
|
|
22.21 |
|
|
|
|
|
|
|
|
Non-vested at March 31, 2010 |
|
|
850,690 |
|
|
$ |
10.79 |
|
|
|
|
|
|
|
|
Restricted Performance Share Units Plan
On March 4, 2010 and April 1, 2009, the Companys Compensation Committee awarded an aggregate of
120,955 and 488,292 share-based awards, respectively, to its executives. These awards are referred
to as Restricted Performance Share Units, or RPSUs. The RPSUs represent the right to earn common
shares. The number of common shares, if any, deliverable to award recipients depends on the
Companys performance based on its total return to shareholders during the three year measurement
period that commenced on January 1, 2010 (in the case of the March 4, 2010 awards) and January 1,
2009 (in the case of the April 1, 2009 awards) and that ends on the earlier of December 31, 2012 or
December 2011 (as applicable) or the date of a change of control, compared to the total shareholder
return of REITs within an index over such respective periods. The awards are also contingent upon
the continued employment of the participants through the performance periods (with exceptions for
death, disability and qualifying retirement). Dividends are deemed credited to the performance
units accounts and are applied to acquire more performance units for the account of the unit
holder at the price per common share ending on the dividend payment date. If earned, awards will
be settled in common shares in an amount that reflects both the number of performance units in the
holders account at the end of the applicable measurement period and the Companys total return to
shareholders during the applicable three year measurement period relative to the total shareholder
return of the REIT within the index.
56
If the total shareholder return during the measurement period places the Partnership at or above a
certain percentile as compared to its peers based on an industry-based index at the end of the
measurement period then the number of shares that will be delivered shall equal a certain
percentage of the participants base units.
The fair values of the 2010 and 2009 awards on the grant date were $2.0 million and $1.1 million,
respectively, and are being amortized over the said cliff vesting period. On the date of each
grant, the awards were valued using a Monte Carlo simulation. For the three-month period ended
March 31, 2010, the Partnership recognized total compensation expense for both awards of $0.2
related to this plan of which a nominal amount was capitalized as part of the Partnerships review
of employee salaries eligible for capitalization.
Outperformance Program
On August 28, 2006, the Compensation Committee of the Companys Board of Trustees adopted a
long-term incentive compensation program (the outperformance program) under the Plan. The
outperformance program provided for share-based awards, with share issuances (if any) to take the
form of both vested and restricted common shares and with any share issuances contingent upon the
Companys total shareholder return during a three year measurement period exceeding specified
performance
hurdles. These hurdles were not met and, accordingly, no shares were delivered under the
outperformance program and the outperformance program has terminated in accordance with its terms.
The awards under the outperformance program were accounted for in accordance with the accounting
standard for stock-based compensation. The aggregate grant date fair values of the awards under the
outperformance program, as adjusted for estimated forfeitures, were approximately $5.9 million
(with the values determined through a Monte Carlo simulation) and are being amortized into expense
over the five-year vesting period beginning on the grant dates using a graded vesting attribution
model. For the three-month periods ended March 31, 2010 and 2009, the Partnership recognized $0.1
million and $0.3 million, respectively, of compensation expenses related to the outperformance
program.
Employee Share Purchase Plan
On May 9, 2007, the Companys shareholders approved the 2007 Non-Qualified Employee Share Purchase
Plan (the ESPP). The ESPP is intended to provide eligible employees with a convenient means to
purchase common shares of the Partnership through payroll deductions and voluntary cash purchases
at an amount equal to 85% of the average closing price per share for a specified period. Under the
plan document, the maximum participant contribution for the 2010 plan year is limited to the lesser
of 20% of compensation or $25,000. The number of shares reserved for issuance under the ESPP is
1.25 million. During the three-month periods ended March 31, 2010 and 2009, employees made
purchases of $0.1 million for each period under the ESPP and the Company recognized nominal amounts
of compensation expense related to the ESPP. The Board of Trustees of the Company may terminate
the ESPP at its sole discretion at anytime.
Deferred Compensation
In January 2005, the Company adopted a Deferred Compensation Plan (the Plan) that allows trustees
and certain key employees to voluntarily defer compensation. Compensation expense is recorded for
the deferred compensation and a related liability is recognized. Participants may elect designated
benchmark investment options for the notational investment of their deferred compensation. The
deferred compensation obligation is adjusted for deemed income or loss related to the investments
selected. At the time the participants defer compensation, the Partnership records a liability,
which is included in the Partnerships consolidated balance sheet. The liability is adjusted for
changes in the market value of the participants selected investments at the end of each accounting
period, and the impact of adjusting the liability is recorded as an increase or decrease to
compensation cost. For the three month periods ended March 31, 2010 and 2009, the Partnership
recorded a net increase in compensation costs of $0.3 million and a net reduction of $0.2 million,
respectively, in connection with the Plan due to the change in market value of the participant
investments in the Plan.
The deferred compensation obligations are unfunded, but the Company has purchased company-owned
life insurance policies and mutual funds, which can be utilized as a funding source for the
obligations under the Plan. Participants in the Plan have no interest in any assets set aside by
the Company to meet its obligations under the Plan. For the three months period ended March 31,
2010 and 2009, the Partnership recorded a net decrease in compensation cost of $0.3 and a net
increase of $0.1, respectively, in connection with the investments in the Company-owned policies
and mutual funds.
Participants in the Plan may elect to have all or a portion of their deferred compensation
invested in the Companys common shares. The Company holds these shares in a rabbi trust, which is
subject to the claims of the Companys creditors in the event of the Companys bankruptcy or
insolvency. The Plan does not provide for diversification of a participants deferral allocated to
the Company common share and deferrals allocated to Company common share can only be settled with a
fixed number of shares. In accordance with the accounting standard for deferred compensation
arrangements where amounts earned are held in a rabbi trust and invested, the deferred
compensation obligation associated with Company common share is classified as a component of
shareholders equity and the related shares are treated as shares to be issued and are included in
total shares outstanding. At March 31, 2010 and 2009, there were 0.3 million and 0.2 million
shares, respectively, to be issued included in total shares outstanding. Subsequent changes in the
fair value of the common shares are not reflected in operations or shareholders equity of the
Company.
57
13. TAX CREDIT TRANSACTIONS
Historic Tax Credit Transaction
On November 17, 2008, the Partnership closed a transaction with US Bancorp (USB) related to the
historic rehabilitation of the 30th Street Post Office in Philadelphia, Pennsylvania (Project),
an 862,692 square foot office building which is 100% pre-leased to the Internal Revenue Service
(expected commencement of the IRS lease is August 2010). USB has agreed to contribute approximately
$67.9 million of Project costs and advanced $10.2 million of that contemporaneously with the
closing of the transaction. USB
advanced another $23.8 million in December 2009. The remaining funds will be advanced upon
achievement of certain construction milestones and its compliance with the federal rehabilitation
regulations. In return for the investment, USB will, upon completion of the Project, receive
substantially all of the rehabilitation credits available under section 47 of the Internal Revenue
Code.
In exchange for its contributions into the Project, USB is entitled to substantially all of the
benefits derived from the tax credit, but does not have a material interest in the underlying
economics of the property. This transaction also includes a put/call provision whereby the
Partnership may be obligated or entitled to repurchase USBs interest in the Project. The
Partnership believes the put will be exercised and an amount attributed to that puttable
non-controlling interest obligation is included in other liabilities and is being accreted to the
expected fixed put price.
Based on the contractual arrangements that obligate the Partnership to deliver tax benefits and
provide other guarantees to USB and that entitle the Company through fee arrangements to receive
substantially all available cash flow from the Project, the Partnership concluded that the Project
should be consolidated. The Partnership also concluded that capital contributions received from
USB, in substance, are consideration that the Partnership receives in exchange for its obligation
to deliver tax credits and other tax benefits to USB. These receipts other than the amounts
allocated to the put obligation will be recognized as revenue in the consolidated financial
statements beginning when the obligation to USB is relieved upon delivery of the expected tax
benefits net of any associated costs. The tax credit is subject to 20% recapture per year
beginning one year after the completion of the Project in September 2010. The total USB
contributions made amounting to $34.0 million is presented within deferred income in the
Partnerships consolidated balance sheet at March 31, 2010 and December 31, 2009. The said
contributions were recorded net of the amount allocated to non-controlling interest as described
above of $0.8 million. The Partnership anticipates that beginning in September 2011 it will
recognize the cash received as revenue over the five year credit recapture period as defined in the
Internal Revenue Code. The Partnership also expects that USB will exercise the put/call provision
in December 2015 when the recapture period ends.
Direct and incremental costs incurred in structuring the arrangement are deferred and will be
recognized as expense in the consolidated financial statements upon the recognition of the related
revenue as discussed above. The deferred cost at March 31, 2010 is $2.4 million and is included in
other assets on the Partnerships consolidated balance sheet. Amounts included in interest expense
related to the accretion of the non-controlling interest liability and the 2% return expected to be
paid to USB on its non-controlling interest aggregate to $0.1 million for the three-months ended
March 31, 2010.
New Markets Tax Credit Transaction
On December 30, 2008, the Partnership entered into a transaction with USB related to the Cira
Garage Project (garage project) in Philadelphia, Pennsylvania and expects to receive a net
benefit of $7.8 million under a qualified New Markets Tax Credit Program (NMTC). The NMTC was
provided for in the Community Renewal Tax Relief Act of 2000 (the Act) and is intended to induce
investment capital in underserved and impoverished areas of the United States. The Act permits
taxpayers (whether companies or individuals) to claim credits against their Federal income taxes
for up to 39% of qualified investments in qualified, active low-income businesses or ventures.
USB contributed $13.3 million into the garage project and as such they are entitled to
substantially all of the benefits derived from the tax credit, but they do not have a material
interest in the underlying economics of the garage project. This transaction also includes a
put/call provision whereby the Partnership may be obligated or entitled to repurchase USBs
interest. The Partnership believes the put will be exercised and an amount attributed to that
obligation is included in other liabilities. The said put price is insignificant.
Based on the contractual arrangements that obligate the Partnership to deliver tax benefits and
provide various other guarantees to USB, the Partnership concluded that the investment entities
established to facilitate the NMTC transaction should be consolidated. The USB contribution of
$13.3 million is included in deferred income on the Partnerships consolidated balance sheet at
March 31, 2010 and December 31, 2009. The USB contribution other than the amount allocated to the
put obligation will be recognized as income in the consolidated financial statements when the tax
benefits are delivered without risk of recapture to the tax credit investors and the Partnerships
obligation is relieved. The Partnership anticipates that it will recognize the net cash received
as revenue within other income/expense in the year ended December 31, 2015. The NMTC is subject to
100% recapture for a period of seven years as provided in the Internal Revenue Code. The
Partnership expects that USB will exercise the put/call provision in December 2015 at the end of
the recapture period.
58
Direct and incremental costs incurred in structuring the arrangement are deferred and will be
recognized as expense in the consolidated financial statements upon the recognition of the related
revenue as discussed above. The deferred cost at March 31, 2010 is $5.3 million and is included in
other assets on the Partnerships consolidated balance sheet.
14. SEGMENT INFORMATION
As of March 31, 2010, the Partnership manages its portfolio within six segments: (1) Pennsylvania,
(2) Metropolitan Washington D.C, (3) New Jersey/Delaware, (4) Richmond, Virginia, (5) California
and (6) Austin, Texas. The Pennsylvania segment includes properties in Chester, Delaware, and
Montgomery counties in the Philadelphia suburbs and the City of Philadelphia in Pennsylvania. The
Metropolitan Washington, D.C. segment includes properties in Northern Virginia and suburban
Maryland. The New Jersey/Delaware segment includes properties in Burlington, Camden and Mercer
counties and in counties in the southern and central part of New Jersey and in New Castle county in
the state of Delaware. The Richmond, Virginia segment includes properties primarily in Albemarle,
Chesterfield, Goochland and Henrico counties and Durham, North Carolina. The California segment
includes properties in Oakland, Concord, Carlsbad and Rancho Bernardo. The Austin, Texas segment
includes properties in Coppell and Austin. The corporate group is responsible for cash and
investment management, development of certain real estate properties during the construction
period, and certain other general support functions. Land held for development and construction in
progress are transferred to operating properties by region upon completion of the associated
construction or project.
59
Segment information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
Metropolitan, D.C. |
|
|
/Delaware |
|
|
Virginia |
|
|
Austin, Texas |
|
|
California |
|
|
Corporate |
|
|
Total |
|
As of March 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,687,603 |
|
|
$ |
1,355,916 |
|
|
$ |
598,098 |
|
|
$ |
292,613 |
|
|
$ |
265,655 |
|
|
$ |
252,200 |
|
|
$ |
|
|
|
$ |
4,452,085 |
|
Construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307,144 |
|
|
|
307,144 |
|
Land inventory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,556 |
|
|
|
105,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,726,267 |
|
|
$ |
1,356,206 |
|
|
$ |
598,122 |
|
|
$ |
297,958 |
|
|
$ |
282,093 |
|
|
$ |
251,972 |
|
|
$ |
|
|
|
$ |
4,512,618 |
|
Construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271,962 |
|
|
|
271,962 |
|
Land inventory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,368 |
|
|
|
97,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended March 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
58,276 |
|
|
$ |
34,742 |
|
|
$ |
26,795 |
|
|
$ |
9,399 |
|
|
$ |
8,387 |
|
|
$ |
5,905 |
|
|
$ |
(370 |
) |
|
$ |
143,134 |
|
Property operating expenses, real estate taxes and
third party management expenses |
|
|
24,714 |
|
|
|
12,382 |
|
|
|
13,099 |
|
|
|
3,659 |
|
|
|
3,480 |
|
|
|
2,731 |
|
|
|
(453 |
) |
|
|
59,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
33,562 |
|
|
$ |
22,360 |
|
|
$ |
13,696 |
|
|
$ |
5,740 |
|
|
$ |
4,907 |
|
|
$ |
3,174 |
|
|
$ |
83 |
|
|
$ |
83,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended March 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
59,052 |
|
|
$ |
35,174 |
|
|
$ |
25,528 |
|
|
$ |
9,316 |
|
|
$ |
8,594 |
|
|
$ |
7,374 |
|
|
$ |
1,693 |
|
|
$ |
146,731 |
|
Property operating expenses, real estate taxes and
third party management expenses |
|
|
23,038 |
|
|
|
13,900 |
|
|
|
12,317 |
|
|
|
3,656 |
|
|
|
3,861 |
|
|
|
3,342 |
|
|
|
255 |
|
|
|
60,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
36,014 |
|
|
$ |
21,274 |
|
|
$ |
13,211 |
|
|
$ |
5,660 |
|
|
$ |
4,733 |
|
|
$ |
4,032 |
|
|
$ |
1,438 |
|
|
$ |
86,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Net operating income is defined as total revenue less property operating expenses, real estate
taxes and third party management expenses. Segment net operating income includes revenue, real
estate taxes and property operating expenses directly related to operation and management of the
properties owned and managed within the respective geographical region. Segment net operating
income excludes property level depreciation and amortization, revenue and expenses directly
associated with third party real estate management services, expenses associated with corporate
administrative support services, and inter-company eliminations. Below is a reconciliation of
consolidated net operating income to consolidated income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
|
ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(amounts in thousands) |
|
Consolidated net operating income |
|
$ |
83,522 |
|
|
$ |
86,362 |
|
Less: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(31,524 |
) |
|
|
(35,646 |
) |
Deferred financing costs |
|
|
(1,011 |
) |
|
|
(1,252 |
) |
Depreciation and amortization |
|
|
(52,622 |
) |
|
|
(51,215 |
) |
Administrative expenses |
|
|
(6,092 |
) |
|
|
(4,958 |
) |
Plus: |
|
|
|
|
|
|
|
|
Interest income |
|
|
865 |
|
|
|
579 |
|
Equity in income of real estate ventures |
|
|
1,296 |
|
|
|
586 |
|
Gain on early extinguishment of debt |
|
|
(1,192 |
) |
|
|
6,639 |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(6,758 |
) |
|
|
1,095 |
|
Income from discontinued operations |
|
|
6,359 |
|
|
|
(1,968 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(399 |
) |
|
$ |
(873 |
) |
|
|
|
|
|
|
|
15. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Partnership is involved from time to time in litigation on various matters, including disputes
with tenants and disputes arising out of agreements to purchase or sell properties. Given the
nature of the Partnerships business activities, these lawsuits are considered routine to the
conduct of its business. The result of any particular lawsuit cannot be predicted, because of the
very nature of litigation, the litigation process and its adversarial nature, and the jury system.
The Partnership does not expect that the liabilities, if any, that may ultimately result from such
legal actions will have a material adverse effect on the consolidated financial position, results
of operations or cash flows of the Partnership.
Environmental
As an owner of real estate, the Partnership is subject to various environmental laws of federal,
state, and local governments. The Partnerships compliance with existing laws has not had a
material adverse effect on its financial condition and results of operations, and the Partnership
does not believe it will have a material adverse effect in the future. However, the Partnership
cannot predict the impact of unforeseen environmental contingencies or new or changed laws or
regulations on its current Properties or on properties that the Partnership may acquire.
Ground Rent
Future minimum rental payments under the terms of all non-cancellable ground leases under which the
Partnership is the lessee are expensed on a straight-line basis regardless of when payments are
due. Minimum future rental payments on non-cancelable leases at March 31, 2010 are as follows (in
thousands):
|
|
|
|
|
2010 |
|
$ |
1,739 |
|
2011 |
|
|
2,318 |
|
2012 |
|
|
2,318 |
|
2013 |
|
|
2,318 |
|
2014 |
|
|
2,409 |
|
Thereafter |
|
|
285,686 |
|
One of the land leases for a property (currently under development) provide for contingent rent
participation by the lessor in certain capital transactions and net operating cash flows of the
property after certain returns are achieved by the Partnership. Such amounts, if any, will be
reflected as contingent rent when incurred. The leases also provide for payment by the Partnership
of certain operating costs relating to the land, primarily real estate taxes. The above schedule of
future minimum rental payments does not include any contingent rent amounts nor any reimbursed
expenses.
61
Other Commitments or Contingencies
As part of the Partnerships September 2004 acquisition of a portfolio of properties from The
Rubenstein Company (which the Partnership refers to as the TRC acquisition), the Partnership
acquired its interest in Two Logan Square, a 704,061 square foot office building in Philadelphia,
primarily through its ownership of a second and third mortgage secured by this property. This
property is consolidated as the borrower is a variable interest entity and the Company, through its
ownership of the second and third mortgages, is the primary beneficiary. The Partnership currently
does not expect to take title to Two Logan Square until, at the earliest, September 2019. If the
Partnership takes fee title to Two Logan Square upon a foreclosure of its mortgage, the Partnership
has agreed to pay an unaffiliated third party that holds a residual interest in the fee owner of
this property an amount equal to $0.6 million (if the Partnership must pay a state and local
transfer upon taking title) and $2.9 million (if no transfer tax is payable upon the transfer).
The Partnership is currently being audited by the Internal Revenue Service for its 2004 tax year.
The audit concerns the tax treatment of the transaction in September 2004 in which the Partnership
acquired a portfolio of properties through the acquisition of a limited partnership. At this time
it does not appear that an adjustment, if any, would result in a material tax liability for the
Partnership. However, an adjustment could raise a question as to whether a contributor of
partnership interests in the 2004 transaction could assert a claim against the Partnership under
the tax protection agreement entered into as part of the transaction.
As part of the Partnerships 2006 acquisition of Prentiss Properties Trust, the TRC acquisition in
2004 and several of our other transactions, the Partnership agreed not to sell certain of the
properties it acquired in transactions that would trigger taxable income to the former owners. In
the case of the TRC acquisition, the Partnership agreed not to sell acquired properties for periods
up to 15 years from the date of the TRC acquisition as follows at December 31, 2009: One Rodney
Square and 130/150/170 Radnor Financial Center (January 2015); and One Logan Square, Two Logan
Square and Radnor Corporate Center (January 2020). In the Prentiss acquisition, the Partnership
assumed the obligation of Prentiss not to sell Concord Airport Plaza before March 2018. The
Partnerships agreements generally provide that it may dispose of the subject properties only in
transactions that qualify as tax-free exchanges under Section 1031 of the Internal Revenue Code or
in other tax deferred transactions. If the Partnership were to sell a restricted property before
expiration of the restricted period in a non-exempt transaction, the Partnership may be required to
make significant payments to the parties who sold it the applicable property on account of tax
liabilities attributed to them.
The Partnership invests in its properties and regularly incurs capital expenditures in the ordinary
course to maintain the properties. The Partnership believes that such expenditures enhance its
competitiveness. The Partnership also enters into construction, utility and service contracts in
the ordinary course of business which may extend beyond one year. These contracts typically
provide for cancellation with insignificant or no cancellation penalties.
During 2008, in connection with the development of the PO Box/IRS and Cira Garage projects, the
Partnership entered into a historic tax credit and new market tax credit arrangement, respectively.
The Partnership is required to be in compliance with various laws, regulations and contractual
provisions that apply to its historic and new market tax credit arrangements. Non-compliance with
applicable requirements could result in projected tax benefits not being realized and require a
refund or reduction of investor capital contributions, which are reported as deferred income in the
Partnerships consolidated balance sheet, until such time as its obligation to deliver tax benefits
is relieved. The remaining compliance periods for its tax credit arrangements runs through 2015.
The Partnership does not anticipate that any material refunds or reductions of investor capital
contributions will be required in connection with these arrangements.
On June 29, 2009, the Partnership entered into a forward financing commitment to borrow up to
$256.5 million under two separate loans which are secured by mortgages on the Post Office project,
the garage project and by the leases of space at these facilities upon the completion of these
projects. In order for funding to occur, certain conditions must be met by the Partnership
including completion of the projects and the commencement of the rental payments from the
respective leases on these properties. The expected funding date is scheduled on August 26, 2010
which is also the anticipated completion date of the projects. In the event the conditions were not
met, the Partnership has the right to extend the funding date by paying an extension fee amounting
to $1.8 million for each 30 day extension within the allowed two year extension period. In
addition, the Partnership can also voluntarily elect to terminate the loans during the forward
period including the extension period by paying a termination fee. The Partnership is also subject
to the termination fee if the conditions were not met on the final advance date. The termination
fee is calculated as the greater of the 0.5% of the total available principal to be funded or the
difference between the present value of the scheduled interest and principal payments (based on the
principal amount to be funded and the then 20-year treasury rate plus 50 basis points) from the
funding date through the loans maturity date and the amount to be funded. In addition, deferred
financing costs related to these loans will be accelerated if the Partnership chose to terminate
the forward financing commitment.
62
16. SUBSEQUENT EVENTS
During April 2010, the Company sold a total of 1,372,400 shares at an average sales price of $12.79
per share under the Offering Program (see Note 11). The Company received net proceeds of
approximately $17.4 million from these sales after sales commissions and expenses of $0.2 million.
The Company contributed the proceeds received from the sale of its shares to the Partnership and
the Partnership then issued 1,372,400 common partnership units to the Company. The Partnership used
the net proceeds from the sale to repay balances on its unsecured revolving credit facility and for
general corporate purposes.
The Partnership has evaluated subsequent events through the date the financial statements were
issued.
63
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. This Quarterly Report on Form 10-Q and other materials filed by us with the SEC (as
well as information included in oral or other written statements made by us) contain statements
that are forward-looking, including statements relating to business and real estate development
activities, acquisitions, dispositions, future capital expenditures, financing sources,
governmental regulation (including environmental regulation) and competition. We intend such
forward-looking statements to be covered by the safe-harbor provisions of the 1995 Act. The words
anticipate, believe, estimate, expect, intend, will, should and similar expressions,
as they relate to us, are intended to identify forward-looking statements. Although we believe that
the expectations reflected in such forward-looking statements are based on reasonable assumptions,
we can give no assurance that our expectations will be achieved. As forward-looking statements,
these statements involve important risks, uncertainties and other factors that could cause actual
results to differ materially from the expected results and, accordingly, such results may differ
from those expressed in any forward-looking statements made by us or on our behalf. Factors that
could cause actual results to differ materially from our expectations include, but are not limited
to:
|
|
|
the continuing impact of the recent credit crisis and global economic slowdown,
which is having and may continue to have a negative effect on the following, among other
things: |
|
|
|
the fundamentals of our business, including overall market occupancy
and rental rates; |
|
|
|
|
the financial condition of our tenants, many of which are financial,
legal and other professional firms, our lenders, counterparties to our derivative
financial instruments and institutions that hold our cash balances and short-term
investments, which may expose us to increased risks of default by these parties; |
|
|
|
|
ability to obtain financing on attractive terms or at all, which may
adversely impact our future interest expense and our ability to pursue acquisition
and development opportunities and refinance existing debt; and |
|
|
|
|
a decline in real estate asset valuations, which may limit our ability
to dispose of assets at attractive prices or obtain or maintain debt financing
secured by our properties or on an unsecured basis. |
|
|
|
changes in local real estate conditions (including changes in rental rates and the
number of properties that compete with our properties); |
|
|
|
|
changes in the economic conditions affecting industries in which our principal
tenants compete; |
|
|
|
|
the unavailability of equity and debt financing for us or our tenants, particularly
in light of the current economic environment; |
|
|
|
|
our failure to lease unoccupied space in accordance with our projections; |
|
|
|
|
our failure to re-lease occupied space upon expiration of leases; |
|
|
|
|
tenant defaults and the bankruptcy of major tenants; |
|
|
|
|
changes in prevailing interest rates; |
|
|
|
|
risks associated with interest rate hedging contracts and the effectiveness of such
arrangements; |
|
|
|
|
failure of acquisitions to perform as expected; |
|
|
|
|
unanticipated costs associated with the acquisition, integration and operation of,
our acquisitions; |
|
|
|
|
unanticipated costs to complete, lease-up and operate our developments and
redevelopments; |
|
|
|
|
impairment charges; |
|
|
|
|
increased costs for, or lack of availability of, adequate insurance, including for
terrorist acts; |
|
|
|
|
risks associated with actual or threatened terrorist attacks; |
|
|
|
|
demand for tenant services beyond those traditionally provided by landlords; |
|
|
|
|
potential liability under environmental or other laws; |
|
|
|
|
failure or bankruptcy of real estate venture partners; |
|
|
|
|
inability of real estate venture partners to fund venture obligations; |
|
|
|
|
failure of dispositions to close in a timely manner; |
|
|
|
|
failure of buyers of properties from us to comply with terms of their financing
agreements to us; |
|
|
|
|
earthquakes and other natural disasters; |
|
|
|
|
risks associated with the unforeseen impact of climate change including existing
and pending laws and regulations governing climate changes to our business operations and
tenants; |
|
|
|
|
risks associated with federal, state and local tax audits; |
|
|
|
|
complex regulations relating to our status as a REIT and the adverse consequences
of our failure to qualify as a REIT; and |
|
|
|
|
the impact of newly adopted accounting principles on our accounting policies and on
period-to-period comparisons of financial results. |
64
Given these uncertainties, and the other risks identified in the Risk Factors section of our 2009
Annual Report on Form 10-K, we caution readers not to place undue reliance on forward-looking
statements. We assume no obligation to update or supplement forward-looking statements that become
untrue because of subsequent events.
The discussion that follows is based primarily on our consolidated financial statements as of March
31, 2010 and December 31, 2009 and for the three-months ended March 31, 2010 and 2009 and should be
read along with the consolidated financial statements and related notes appearing elsewhere in this
report. The ability to compare one period to another may be significantly affected by acquisitions
completed, development properties placed in service and dispositions made during those periods.
OVERVIEW
As of March 31, 2010, our portfolio consisted of 213 office properties, 21 industrial facilities
and three mixed-use properties that contain an aggregate of approximately 23.5 million net rentable
square feet. These 237 properties make up our core portfolio. We also had, as of March 31, 2010,
two properties under development and two properties under redevelopment containing an aggregate
1.6 million net rentable square feet. Therefore, as of March 31, 2010, we own 241 properties with
an aggregate of 25.1 million net rentable square feet. As of March 31, 2010, we also held economic
interests in 15 unconsolidated real estate ventures (the Real Estate Ventures) that we formed
with third parties to develop or own commercial properties. The properties owned by these Real
Estate Ventures contain approximately 4.6 million net rentable square feet.
As of March 31, 2010, we managed our portfolio within six geographic segments: (1) Pennsylvania,
(2) Metropolitan Washington D.C, (3) New Jersey/Delaware, (4) Richmond, Virginia, (5) Austin, Texas
and (6) California. The Pennsylvania segment includes properties in Chester, Delaware, and
Montgomery counties in the Philadelphia suburbs and the City of Philadelphia in Pennsylvania. The
Metropolitan Washington, D.C. segment includes properties in Northern Virginia and suburban
Maryland. The New Jersey/Delaware segment includes properties in Burlington, Camden and Mercer
counties and counties in the southern and central part of New Jersey and in New Castle county in
the state of Delaware. The Richmond, Virginia segment includes properties primarily in Albemarle,
Chesterfield, Goochland and Henrico counties and Durham, North Carolina. The Austin, Texas segment
includes properties in Austin. The California segment includes properties in Oakland, Concord,
Carlsbad and Rancho Bernardo.
We generate cash and revenue from leases of space at our properties and, to a lesser extent, from
the management of properties owned by third parties and from investments in the Real Estate
Ventures. Factors that we evaluate when leasing space include rental rates, costs of tenant
improvements, tenant creditworthiness, current and expected operating costs, the length of the
lease, vacancy levels and demand for office and industrial space. We also generate cash through
sales of assets, including assets that we do not view as core to our portfolio, either because of
location or expected growth potential, and assets that are commanding premium prices from third
party investors.
Our financial and operating performance is dependent upon the demand for office, industrial and
other commercial space in our markets, our leasing results, our acquisition, disposition and
development activity, our financing activity, our cash requirements and economic and market
conditions, including prevailing interest rates.
Deteriorating economic conditions have resulted in a reduction of the availability of financing and
higher borrowing costs. These factors, coupled with a slowing economy, have reduced the volume of
real estate transactions and created credit stresses on most businesses. We believe that vacancy
rates may increase through 2010 and possibly beyond as the current economic climate negatively
impacts tenants in our Properties.
65
We expect that the impact of the current state of the economy, including high unemployment and the
unprecedented volatility and illiquidity in the financial and credit markets, will continue to have
a dampening effect on the fundamentals of our business, including increases in past due accounts,
tenant defaults, lower occupancy and reduced effective rents. These conditions would negatively
affect our future net income and cash flows and could have a material adverse effect on our
financial condition. We believe that the quality of our assets and our strong balance sheet will
enable us to raise debt capital, if necessary, from sources such as traditional term or secured
loans from banks, pension funds and life insurance companies, however these sources are lending
fewer dollars, under stricter terms and at higher borrowing rates, and there can be no assurance
that we will be able to borrow funds on terms that are economically attractive or at all.
We seek revenue growth at our portfolio through an increase in occupancy and rental rates.
Occupancy at our core portfolio at March 31, 2010 was 87.2%. Our overall occupancy at March 31,
2010, including our four properties under development or redevelopment, was 82.0%.
In seeking to increase revenue through our operating, financing and investment activities, we also
seek to minimize operating risks, including (i) tenant rollover risk, (ii) tenant credit risk and
(iii) development risk.
Tenant Rollover Risk:
We are subject to the risk that tenant leases, upon expiration, are not renewed, that space may not
be relet, or that the terms of renewal or reletting (including the cost of renovations) may be less
favorable to us than the current lease terms. Leases accounting for approximately 10.2% of our
aggregate final annualized base rents as of March 31, 2010 (representing approximately 9.8% of the
net rentable square feet of the Properties) expire without penalty in 2010. We maintain an active
dialogue with our tenants in an effort to maximize lease renewals. During the three months ended
March 31, 2010, we achieved a 65.0% retention rate in our core portfolio. If we are unable to renew
leases or relet space under expiring leases, at anticipated rental rates, or if tenants terminate
their leases early, our cash flow would be adversely impacted.
Tenant Credit Risk:
In the event of a tenant default, we may experience delays in enforcing our rights as a landlord
and may incur substantial costs in protecting our investment. Our management regularly evaluates
our accounts receivable reserve policy in light of our tenant base and general and local economic
conditions. Our accounts receivable allowance was $15.6 million or 13.2% of total receivables
(including accrued rent receivable) as of March 31, 2010 compared to $16.4 million or 14.3% of
total receivables (including accrued rent receivable) as of December 31, 2009.
If economic conditions persist or deteriorate further, we may experience increases in past due
accounts, defaults, lower occupancy and reduced effective rents. This condition would negatively
affect our future net income and cash flows and could have a material adverse effect on our
financial condition.
Development Risk:
At March 31, 2010, we were proceeding on two development and two redevelopment sites aggregating
1.6 million square feet with total projected costs of $387.1 million of which $109.7 million
remained to be funded. These amounts include $355.5 million of total project costs for the
combined 30th Street Post Office (100% pre-leased to the Internal Revenue Service) and
Cira South Garage (92.6% pre-leased to the Internal Revenue Service) in Philadelphia, Pennsylvania
of which $104.0 million remained to be funded at March 31, 2010. We are completing the lease-up of
five recently completed developments for which we expect to spend an additional $12.6 million in
2010. We are actively marketing space at these projects to prospective tenants but can provide no
assurance as to the timing or terms of any leases of space at these projects.
As of March 31, 2010, we owned approximately 479 acres of undeveloped land. As market conditions
warrant, we will look to dispose of those parcels that we do not anticipate developing. For land
parcels that we elect to develop, we will be subject to risks and costs associated with land
development, including building moratoriums and inability to obtain necessary zoning, land-use,
building, occupancy and other required governmental approvals, construction cost increases or
overruns and construction delays, and insufficient occupancy rates and rental rates.
66
RECENT PROPERTY TRANSACTIONS
On January 14, 2010, we sold Westmoreland Plaza, a 121,815 net rentable square feet property
located in Richmond, Virginia, for a sales price of $10.8 million.
We continually reassess our portfolio to determine properties that may be in our best interest to
sell depending on strategic or economic factors. From time to time, the decision to sell properties
in the short term could result in an impairment or other loss being taken by us and such losses
could be material to the statement of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements Discussion and Analysis of Financial Condition and Results of Operations discuss our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Certain
accounting policies are considered to be critical accounting policies, as they require management
to make assumptions about matters that are highly uncertain at the time the estimate is made and
changes in accounting policies are reasonably likely to occur from period to period. Management
bases its estimates and assumptions on historical experience and current economic conditions. On an
on-going basis, management evaluates its estimates and assumptions including those related to
revenue, impairment of long-lived assets and the allowance for doubtful accounts. Actual results
may differ from those estimates and assumptions.
Our Annual Report on Form 10-K for the year ended December 31, 2009 contains a discussion of our
critical accounting policies. There have been no significant changes in our critical accounting
policies since December 31, 2009. See also Note 2 in our unaudited consolidated financial
statements for the three months ended March 31, 2010 set forth herein. Management discusses our
critical accounting policies and managements judgments and estimates with our Audit Committee.
RESULTS OF OPERATIONS
Comparison of the Three-Month Periods Ended March 31, 2010 and 2009
The table below shows selected operating information for the Same Store Property Portfolio and
the Total Portfolio. The Same Store Property Portfolio consists of 232 properties containing an
aggregate of approximately 22.8 million net rentable square feet that we owned for the entire
three-month periods ended March 31, 2010 and 2009. This table also includes a reconciliation from
the Same Store Property Portfolio to the Total Portfolio net income (i.e., all properties owned by
us during the three-month periods ended March 31, 2010 and 2009) by providing information for the
properties which were acquired, placed into service, under development or redevelopment and
administrative/elimination information for the three-month periods ended March 31, 2010 and 2009
(in thousands).
The Total Portfolio net income presented in the table is equal to the net income of Brandywine
Realty Trust. The only difference between the reported net income of Brandywine Realty Trust and
Brandywine Operating Partnership is the allocation of the non-controlling interest attributable to
continuing and discontinued operations for limited partnership units that is on the statement of
operations for Brandywine Realty Trust.
67
Comparison of three-months ended March 31, 2010 to the three-months ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently Completed |
|
|
Development/Redevelopment |
|
|
Other |
|
|
|
|
|
|
Same Store Property Portfolio |
|
|
Properties |
|
|
Properties (a) |
|
|
(Eliminations) |
|
|
Total Portfolio |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
(dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash rents |
|
$ |
109,306 |
|
|
$ |
112,305 |
|
|
$ |
(2,999 |
) |
|
$ |
1,913 |
|
|
$ |
2,206 |
|
|
$ |
446 |
|
|
$ |
1,034 |
|
|
$ |
(620 |
) |
|
$ |
1,230 |
|
|
$ |
111,045 |
|
|
$ |
116,775 |
|
|
$ |
(5,730 |
) |
Straight-line rents |
|
|
2,705 |
|
|
|
1,608 |
|
|
|
1,097 |
|
|
|
223 |
|
|
|
207 |
|
|
|
(13 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
7 |
|
|
|
2,915 |
|
|
|
1,783 |
|
|
|
1,132 |
|
Above/below market rent amortization |
|
|
1,419 |
|
|
|
1,667 |
|
|
|
(248 |
) |
|
|
130 |
|
|
|
123 |
|
|
|
|
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
1,549 |
|
|
|
1,727 |
|
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rents |
|
|
113,430 |
|
|
|
115,580 |
|
|
|
(2,150 |
) |
|
|
2,266 |
|
|
|
2,536 |
|
|
|
433 |
|
|
|
932 |
|
|
|
(620 |
) |
|
|
1,237 |
|
|
|
115,509 |
|
|
|
120,285 |
|
|
|
(4,776 |
) |
Tenant reimbursements |
|
|
20,820 |
|
|
|
19,678 |
|
|
|
1,142 |
|
|
|
559 |
|
|
|
639 |
|
|
|
2 |
|
|
|
141 |
|
|
|
102 |
|
|
|
230 |
|
|
|
21,483 |
|
|
|
20,688 |
|
|
|
795 |
|
Termination fees |
|
|
1,647 |
|
|
|
113 |
|
|
|
1,534 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,754 |
|
|
|
113 |
|
|
|
1,641 |
|
Third party management fees, labor reimbursement and leasing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,467 |
|
|
|
4,764 |
|
|
|
3,467 |
|
|
|
4,764 |
|
|
|
(1,297 |
) |
Other, excluding termination fees |
|
|
329 |
|
|
|
309 |
|
|
|
20 |
|
|
|
303 |
|
|
|
22 |
|
|
|
|
|
|
|
80 |
|
|
|
289 |
|
|
|
470 |
|
|
|
921 |
|
|
|
881 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
136,226 |
|
|
|
135,680 |
|
|
|
546 |
|
|
|
3,235 |
|
|
|
3,197 |
|
|
|
435 |
|
|
|
1,153 |
|
|
|
3,238 |
|
|
|
6,701 |
|
|
|
143,134 |
|
|
|
146,731 |
|
|
|
(3,597 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
45,065 |
|
|
|
40,382 |
|
|
|
(4,683 |
) |
|
|
1,845 |
|
|
|
1,599 |
|
|
|
418 |
|
|
|
450 |
|
|
|
(2,180 |
) |
|
|
991 |
|
|
|
45,148 |
|
|
|
43,422 |
|
|
|
(1,726 |
) |
Real estate taxes |
|
|
12,428 |
|
|
|
14,162 |
|
|
|
1,734 |
|
|
|
310 |
|
|
|
320 |
|
|
|
135 |
|
|
|
129 |
|
|
|
179 |
|
|
|
221 |
|
|
|
13,052 |
|
|
|
14,832 |
|
|
|
1,780 |
|
Third party management expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,412 |
|
|
|
2,115 |
|
|
|
1,412 |
|
|
|
2,115 |
|
|
|
703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
78,733 |
|
|
|
81,136 |
|
|
|
(2,403 |
) |
|
|
1,080 |
|
|
|
1,278 |
|
|
|
(118 |
) |
|
|
574 |
|
|
|
3,827 |
|
|
|
3,374 |
|
|
|
83,522 |
|
|
|
86,362 |
|
|
|
(2,840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,092 |
|
|
|
4,958 |
|
|
|
6,092 |
|
|
|
4,958 |
|
|
|
(1,134 |
) |
Depreciation and amortization |
|
|
49,979 |
|
|
|
47,570 |
|
|
|
(2,409 |
) |
|
|
1,337 |
|
|
|
1,337 |
|
|
|
689 |
|
|
|
703 |
|
|
|
617 |
|
|
|
1,605 |
|
|
|
52,622 |
|
|
|
51,215 |
|
|
|
(1,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss) |
|
$ |
28,754 |
|
|
$ |
33,566 |
|
|
$ |
(4,812 |
) |
|
$ |
(257 |
) |
|
$ |
(59 |
) |
|
$ |
(807 |
) |
|
$ |
(129 |
) |
|
$ |
(2,882 |
) |
|
$ |
(3,189 |
) |
|
$ |
24,808 |
|
|
$ |
30,189 |
|
|
$ |
(5,381 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
|
232 |
|
|
|
232 |
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
241 |
|
|
|
241 |
|
|
|
|
|
Square feet |
|
|
22,774 |
|
|
|
22,774 |
|
|
|
|
|
|
|
704 |
|
|
|
704 |
|
|
|
1,606 |
|
|
|
1,606 |
|
|
|
|
|
|
|
|
|
|
|
25,084 |
|
|
|
25,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
865 |
|
|
|
579 |
|
|
|
286 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,524 |
) |
|
|
(35,646 |
) |
|
|
4,122 |
|
Interest expense Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,011 |
) |
|
|
(1,252 |
) |
|
|
241 |
|
Equity in income of real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,296 |
|
|
|
586 |
|
|
|
710 |
|
(Loss) gain on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,192 |
) |
|
|
6,639 |
|
|
|
(7,831 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,758 |
) |
|
|
1,095 |
|
|
|
(7,853 |
) |
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,359 |
|
|
|
(1,968 |
) |
|
|
8,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(399 |
) |
|
$ |
(873 |
) |
|
$ |
474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPLANATORY NOTES |
|
(a) - |
|
Results include: two developments and two redevelopment properties. |
68
Total Revenue
Cash rents from the Total Portfolio decreased by $5.7 million from first quarter 2009 to first
quarter 2010 primarily reflecting:
|
1) |
|
The decrease of $3.0 million of rental income at the same store portfolio as a
result of the decrease in same store occupancy of 160 basis points. |
|
|
2) |
|
The decrease of $0.6 million of rental income due to the decrease in occupancy at
one of our redevelopment properties. |
|
|
3) |
|
The decrease of $1.9 million is due to the deconsolidation of three of our real
estate ventures as a result of the adoption of the new accounting standard for the
consolidation of variable interest entities beginning January 1, 2010. |
Termination fees at the Total Portfolio increased by $1.6 million from the first quarter of 2009 to
the first quarter of 2010 primarily due to increased tenant move-outs during the first quarter of
2010.
Third party management fees, labor reimbursement and leasing decreased by $1.3 million mainly due
to the termination of third party management contracts during the course of 2009 totaling 4.3
million square feet. This is consistent with the decrease in third party management fees.
Property Operating Expenses
Property operating expenses increased by $1.7 million as a result of higher snow removal and
repairs and maintenance expenses totalling $3.6 million during the first quarter of 2010 offset by
a decrease of $1.7 million in bad debt expense during the first quarter of 2010 as compared to the
first quarter of 2009.
Real Estate Taxes
Real estate taxes decreased by $1.8 million due to lower taxes assessed on our properties during
the first quarter of 2010 as compared to the prior year.
General and Administrative Expense
General and Administrative Expense increased by $1.1 million partially due to a one-time bonus
payment made during the first quarter of 2010 and an increase in head count at the executive level
totaling $0.3 million. In addition, we received corporate level tax refunds of $0.2 million during
the first quarter of 2009 that were recorded as a reduction in that period. The remainder of the
increase is the result of various corporate level expenses during the first quarter of 2010, none
of which were individually significant.
Depreciation and Amortization Expense
Depreciation and amortization increased by $1.4 million from first quarter 2009 to first quarter
2010, primarily due to an increase in asset write-off expenses of $1.7 million as a result of early
tenant move-outs during the first quarter of 2010. This was offset by the deconsolidation of three
of our real estate ventures as a result of the adoption of accounting standard for the
consolidation of variable interest entities.
Interest Expense
The decrease in interest expense of $4.1 million is primarily due to the following:
|
|
|
decrease of $2.0 million resulting from the pay-off of an unsecured note at maturity
during the fourth quarter of 2009. |
|
|
|
|
decrease of $0.2 million resulting from a lower weighted average interest rate on our
Credit Facility borrowings at March 31, 2010 compared to March 31, 2009. |
|
|
|
|
decrease of $4.9 million resulting from our buybacks of various unsecured notes
subsequent to the first quarter of 2009. The details of the various purchases completed
during the three months ended March 31, 2010 are noted in the Gain on early extinguishment
of debt section below and details for all purchases during 2009 are included in our Annual
Report on Form 10-K for 2009. |
|
|
|
|
increase of $4.8 million of interest primarily
attributable to the sale of $250.0 million
of unsecured notes in the third quarter of 2009. |
|
|
|
|
increase in capitalized interest of $1.6 million as a result of the increase in
cumulative spending on ongoing development projects. |
69
Equity in income of real estate ventures
Equity in income of real estate ventures increased by $0.7 million from the first quarter 2009 to
first quarter 2010 mainly due to a write-off of our investment in a real estate venture during the
first quarter of 2009 of $0.5 million and the $0.2 million impact related to the deconsolidation of
the three real estate ventures during the current quarter.
(Loss) gain on early extinguishment of debt
During the three months ended March 31, 2010, we repurchased (i) $36.2 million of our 3.875%
Exchangeable Notes, (ii) $0.7 million of our 5.625% Guaranteed Notes due 2010 and (iii) $11.0
million of our 5.750% Guaranteed Notes due 2012 which resulted in a net loss on early
extinguishment of debt of $1.2 million.
During the three months ended March 31, 2009, we repurchased (i) $6.5 million of our 3.875%
Exchangeable Notes, (ii) $44.4 million of our 4.500% Guaranteed Notes due 2009 and (iii) $24.3
million of our 5.625% Guaranteed Notes due 2010 resulting in a net gain on early extinguishment of
debt of $6.6 million.
Discontinued Operations
During the first quarter of 2010, we sold Westmoreland Plaza, a 121,815 net rentable square feet
property located in Richmond, Virginia, for a sales price of $10.8 million. This property had a
nominal amount of net income and we recognized a gain of $6.3 million for its sale.
The March 31, 2009 amounts are reclassified to include the operations of the property sold during
first quarter of 2010, as well as all properties that were sold through the year ended December 31,
2009. Therefore, the discontinued operations amount for the first quarter of 2009 includes total
revenue of $5.4 million, operating expenses of $2.5 million and depreciation and amortization
expense of $1.4 million. During the first quarter of 2009, we also recognized a provision for
impairment of $3.7 million on a property that was sold during the second quarter of 2009.
Net loss
Net loss decreased by $0.5 million from the first quarter of 2009 as a result of the factors
described above. Net loss is significantly impacted by depreciation of operating properties and
amortization of acquired intangibles. These non-cash charges do not directly affect our ability to
pay dividends. Amortization of acquired intangibles will continue the related lease terms or
estimated duration of the tenant relationship.
Loss per Common Share
Loss per share was $0.02 for the first quarter of 2010 as compared to loss per share $0.03 for the
first quarter of 2009 as a result of the factors described above and an increase in the average
number of common shares outstanding. The increase in the average number of common shares
outstanding is primarily the result of a $242.3 million public equity offering of 40,250,000 shares
during the second quarter of 2009.
70
LIQUIDITY AND CAPITAL RESOURCES
General
Our principal liquidity needs for the next twelve months are as follows:
|
|
|
fund normal recurring expenses, |
|
|
|
|
fund capital expenditures, including capital and tenant improvements and leasing
costs, |
|
|
|
|
fund repayment of certain debt instruments when they mature, |
|
|
|
|
fund current development and redevelopment costs, and |
|
|
|
|
fund distributions declared by our Board of Trustees. |
We believe that with the general downturn in the economy, it is likely that vacancy rates may
continue to increase, effective rental rates on new and renewed leases may continue to decrease and
tenant installation costs, including concessions, may continue to increase in most or all of our
markets in 2010 and possibly beyond. As a result our revenue from the overall reduced demand for
office space, our cash flow could be insufficient to cover increased tenant installation costs over
the short-term. If this situation were to occur, we expect that we would finance cash deficits
through borrowings under our Credit Facility and other debt and equity financings.
We believe that our liquidity needs will be satisfied through cash flows generated by operations,
financing activities and selective Property sales. Rental revenue, expense recoveries from tenants,
and other income from operations are our principal sources of cash that we use to pay operating
expenses, debt service, recurring capital expenditures and the minimum distributions required to
maintain our REIT qualification. We seek to increase cash flows from our properties by maintaining
quality standards for our properties that promote high occupancy rates and permit increases in
rental rates while reducing tenant turnover and controlling operating expenses. Our revenue also
includes third-party fees generated by our property management, leasing, development and
construction businesses. We believe our revenue, together with proceeds from property sales and
debt financings, will continue to provide funds for our short-term liquidity needs. However,
material changes in our operating or financing activities may adversely affect our net cash flows.
Such changes, in turn, would adversely affect our ability to fund distributions, debt service
payments and tenant improvements. In addition, a material adverse change in our cash provided by
operations would affect the financial performance covenants under our unsecured credit facility,
unsecured term loan and unsecured notes.
Financial markets have experienced unusual volatility and uncertainty. Our ability to fund
development projects, as well as our ability to repay or refinance debt maturities could be
adversely affected by our inability to secure financing at reasonable terms beyond those already
completed. It is possible, in these unusual and uncertain times that one or more lenders in our
revolving credit facility could fail to fund a borrowing request. Such an event could adversely
affect our ability to access funds from our revolving credit facility when needed.
Our liquidity management remains a priority. We are proactively pursuing new financing
opportunities to ensure an appropriate balance sheet position. As a result of these dedicated
efforts, we are comfortable with our ability to meet future debt maturities and development funding
needs. We believe that our current balance sheet is in an adequate position at the date of this
filing, despite the ongoing disruption in the credit markets.
We use multiple financing sources to fund our long-term capital needs. We use our credit facility
for general business purposes, including the acquisition, development and redevelopment of
properties and the repayment of other debt. We will also consider other properties within our
portfolio as necessary, where it may be in our best interest to obtain a secured mortgage.
Our ability to incur additional debt is dependent upon a number of factors, including our credit
ratings, the value of our unencumbered assets, our degree of leverage and borrowing restrictions
imposed by our current lenders. If more than one rating agency were to downgrade our credit rating,
our access to capital in the unsecured debt market would be more limited and the interest rate
under our existing credit facility and term loan would increase.
Our ability to sell common and preferred shares is dependent on, among other things, general market
conditions for REITs, market perceptions about our company and the current trading price of our
shares. We regularly analyze which source of capital is most advantageous to us at any particular
point in time. In March 2010, we commenced a continuous equity offering program (the Offering
Program), under which we may sell up to an aggregate amount of 15,000,000 common shares until
March 10, 2013. We may sell common shares in amounts and at times to be determined by us. Actual
sales will depend on a variety of factors to be determined by us, including market conditions, the
trading price of our common shares and determinations by us of the appropriate sources of funding.
In conjunction with the Offering Program, we engaged sales agents who received compensation, in
aggregate, of 2% of the gross sales price per share sold in the quarter ended March 31, 2010.
During the quarter ended March 31, 2010, we sold 1,325,200 shares under this program at an average
sales price of $12.32 per share resulting in net proceeds of $16.1 million. We used the net
proceeds from the sales to repay balances on our unsecured credit facility and for general
corporate purposes.
71
We will also consider sales of selected Properties as another source of managing our liquidity.
Asset sales during 2009 and through 2010 have been a source of cash. During 2010, we sold one
property containing 0.1 million in net rentable square feet for net cash proceeds of $10.4 million.
Since mid-2007, we have used proceeds from asset sales to repay existing indebtedness, provide
capital for our development activities and strengthen our financial condition. There is no
guarantee that we will be able to raise similar or even lesser amounts of capital from future asset
sales.
Cash Flows
The following discussion of our cash flows is based on the consolidated statement of cash flows and
is not meant to be a comprehensive discussion of the changes in our cash flows for the periods
presented.
As of March 31, 2010 and December 31, 2009, we maintained cash and cash equivalents of $7.6 million
and $1.6 million, respectively. The following are the changes in cash flow from our activities for
the three-month periods ended March 31 (in thousands):
|
|
|
|
|
|
|
|
|
Activity |
|
2010 |
|
|
2009 |
|
Operating |
|
$ |
39,938 |
|
|
$ |
63,878 |
|
Investing |
|
|
(47,361 |
) |
|
|
(10,001 |
) |
Financing |
|
|
13,446 |
|
|
|
(53,718 |
) |
|
|
|
|
|
|
|
Net cash flows |
|
$ |
6,023 |
|
|
$ |
159 |
|
|
|
|
|
|
|
|
Our principal source of cash flows is from the operation of our properties. We do not restate our
cash flow for discontinued operations.
The net decrease in cash flows from operating activities is primarily the result of the following:
|
|
|
Decrease in average occupancy from 89.6% during the three months ended March 31, 2009 to
88.2% during the three months ended March 31, 2010; |
|
|
|
|
Decrease in the number of operating properties due to dispositions. We sold a total of
five properties subsequent to March 31, 2009; |
|
|
|
|
Timing of cash receipts from our tenants and cash expenditures in the normal course of
operations. |
The net increase in cash flows used in investing activities is primarily attributable to the
following:
|
|
|
Our capital expenditures for tenant and building improvements and leasing commissions
increased by $21.2 million during the three months ended March 31, 2010 when compared to the
three months ended March 31, 2009.; |
|
|
|
|
Decrease in cash of $1.4 million due to the deconsolidation of variable interest
entities; and |
|
|
|
|
Receipt of funds placed in escrow during the last quarter of 2008 related to the Cira
garage project amounting to $31.4 million which was also used to finance the project during
the first quarter of last year. |
The transactions mentioned above which increased cash used in investing activities were offset by
the contributions made during the first quarter of last year from unconsolidated real estate
ventures amounting to $15.0 million and the increase in net proceeds from sales of properties
from $8.7 million during the three months ended March 31, 2009 to $10.4 million during the three
months ended March 31, 2010.
The increase in cash from financing activities is mainly due to the following:
|
|
|
Net proceeds received from the issuance of common shares amounting to $16.1 million. |
|
|
|
|
Decrease in distributions paid to shareholders and on non-controlling interests from
$29.3 million during the three months ended March 31, 2009 to $21.9 million during the three
months ended March 31, 2010. |
|
|
|
|
Increase in the net activity of our credit facility and unsecured notes resulting in
additional proceeds (after repayments of $42.8 million) during the three months ended March
31, 2010 when compared to the three months ended March 31, 2009. |
|
|
|
|
Decrease in repayments of mortgage notes payable from $3.2 million during the three
months ended March 31, 2009 to $2.3 million during the three months ended March 31, 2010. |
72
Capitalization
Indebtedness
During the three-months ended March 31, 2010, we repurchased $48.0 million of our unsecured notes
in a series of transactions which are summarized in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase |
|
|
|
|
|
|
|
|
|
|
Deferred Financing |
|
Notes |
|
Amount |
|
|
Principal |
|
|
Gain |
|
|
Amortization |
|
2010 5.625% Notes |
|
$ |
754 |
|
|
$ |
730 |
|
|
$ |
(17 |
) |
|
$ |
1 |
|
2012 5.750% Notes |
|
|
11,648 |
|
|
|
11,038 |
|
|
|
(368 |
) |
|
|
29 |
|
3.875% Notes |
|
|
36,383 |
|
|
|
36,225 |
|
|
|
(807 |
) |
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48,785 |
|
|
$ |
47,993 |
|
|
$ |
(1,192 |
) |
|
$ |
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes our mortgage notes payable, our unsecured notes and our revolving credit
facility at March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(dollars in thousands) |
|
Balance: |
|
|
|
|
|
|
|
|
Fixed rate (includes variable swapped to fixed) |
|
$ |
2,167,613 |
|
|
$ |
2,246,375 |
|
Variable rate unhedged |
|
|
268,436 |
|
|
|
214,836 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,436,049 |
|
|
$ |
2,461,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Debt: |
|
|
|
|
|
|
|
|
Fixed rate (includes variable swapped to fixed) |
|
|
89.0 |
% |
|
|
91.3 |
% |
Variable rate unhedged |
|
|
11.0 |
% |
|
|
8.7 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average interest rate at period end: |
|
|
|
|
|
|
|
|
Fixed rate (includes variable swapped to fixed) |
|
|
5.9 |
% |
|
|
5.9 |
% |
Variable rate unhedged |
|
|
2.1 |
% |
|
|
2.6 |
% |
Total |
|
|
5.5 |
% |
|
|
5.6 |
% |
The variable rate debt shown above generally bear interest based on various spreads over a LIBOR
term selected by us.
We use credit facility borrowings for general business purposes, including the acquisition,
development and redevelopment of properties and the repayment of other debt. We have the option to
increase the maximum borrowings under our Credit Facility to $800.0 million subject to the absence
of any defaults and our ability to obtain additional commitments from our existing or new lenders.
The Credit Facility requires the maintenance of financial covenants, including ratios related to
minimum net worth, debt to total capitalization and fixed charge coverage and customary
non-financial covenants. We were in compliance with all covenants as of March 31, 2010.
The indenture under which we issued our unsecured notes contain financial covenants, including (1)
a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed 40%, (3) a debt
service coverage ratio of greater than 1.5 to 1.0 and (4) an unencumbered asset value of not less
than 150% of unsecured debt. We were in compliance with all covenants as of March 31, 2010.
We have mortgage loans that are collateralized by certain of our Properties. Payments on mortgage
loans are generally due in monthly installments of principal and interest, or interest only. We
intend to refinance or repay our mortgage loans as they mature through the use of proceeds from
selective Property sales and secured or unsecured borrowings. However, in the current and expected
future economic environment one or more of these sources may not be available on attractive terms
or at all.
73
Our charter documents do not limit the amount or form of indebtedness that we may incur, and our
policies on debt incurrence are solely within the discretion of our Board, subject to financial
covenants in the Credit Facility, indenture and other credit agreements.
As of March 31, 2010, we had guaranteed repayment of approximately $0.7 million of loans on behalf
of certain Real Estate Ventures. We also provide customary environmental indemnities and completion
guarantees in connection with construction and permanent financing both for our own account and on
behalf of certain of the Real Estate Ventures.
Equity
On March 24, 2010, we declared a distribution of $0.15 per Common Share, totaling $19.7 million,
which we paid on April 19, 2010 to shareholders of record as of April 5, 2010. The Operating
Partnership simultaneously declared a $0.15 per unit cash distribution to holders of Class A Units
totaling $0.4 million.
On March 24, 2010, we declared distributions on our Series C Preferred Shares and Series D
Preferred Shares to holders of record as of March 30, 2010. These shares are entitled to a
preferential return of 7.50% and 7.375%, respectively. Distributions paid on April 15, 2010 to
holders of Series C Preferred Shares and Series D Preferred Shares totaled $0.9 million and $1.1
million, respectively.
In March 2010, we commenced a continuous equity offering program (the Offering Program), under
which we may sell up to an aggregate amount of 15,000,000 common shares until March 10, 2013. We
may sell common shares in amounts and at times to be determined by us. Actual sales will depend on
a variety of factors to be determined by us, including market conditions, the trading price of our
common shares and determinations by us of the appropriate sources of funding. In conjunction with
the Offering Program, we engaged sales agents who received compensation, in aggregate, of 2% of the
gross sales price per share sold in the quarter ended March 31, 2010. During the quarter ended
March 31, 2010, we sold 1,325,200 shares under this program at an average sales price of $12.32 per
share resulting in net proceeds of $16.1 million. We used the net proceeds from the sales to repay
balances on our unsecured revolving credit facility and for general corporate purposes.
We maintain a share repurchase program under which our Board has authorized us to repurchase our
common shares from time to time. As of March 31, 2010, there are approximately 0.5 million shares
remaining to be repurchased under this program. Our Board has not limited the duration of the
program; however, it may be terminated at any time.
Shelf Registration Statement
Together with our Operating Partnership, we maintain a shelf registration statement that registered
common shares, preferred shares, depositary shares and warrants and unsecured debt securities.
Subject to our ongoing compliance with securities laws, and if warranted by market conditions, we
may offer and sell equity and debt securities from time to time under the registration statement.
Short- and Long-Term Liquidity
We believe that our cash flow from operations is adequate to fund our short-term liquidity
requirements, excluding principal payments under our debt obligations. Cash flow from operations is
generated primarily from rental revenues and operating expense reimbursements from tenants and
management services income from providing services to third parties. We intend to use these funds
to meet short-term liquidity needs, which are to fund operating expenses, recurring capital
expenditures, tenant allowances, leasing commissions, interest expense and the minimum
distributions required to maintain our REIT qualification under the Internal Revenue Code. We
expect to meet short-term scheduled debt maturities through borrowings under the Credit Facility
and proceeds from asset dispositions. As of March 31, 2010, we have $251.7 million of unsecured
debt and $118.5 million of mortgage debt that is scheduled to mature through December 2011. We
expect to extend our term loan of $183.0 million and for the remaining debt maturities we expect to
have sufficient capacity under our Credit Facility but we will also continue to look to the other
listed sources to fund these maturities.
We expect to meet our long-term liquidity requirements, such as for property acquisitions,
development, investments in real estate ventures, scheduled debt maturities, major renovations,
expansions and other significant capital improvements, through cash from operations, borrowings
under the Credit Facility, additional secured and unsecured indebtedness, the issuance of equity
securities, contributions from joint venture investors and proceeds from asset dispositions.
Many commercial real estate lenders have substantially tightened underwriting standards or have
withdrawn from the lending marketplace. Also, spreads in the investment grade bond market remain
wider than historic spreads. These circumstances have impacted liquidity in the debt markets,
making financing terms less attractive, and in certain cases have resulted in the unavailability of
certain types of debt financing. As a result, we expect debt financings will be more difficult to
obtain and that borrowing costs on new and refinanced debt will be more expensive. Moreover, the
volatility in the financial markets, in general, will make it more difficult or costly, for us to
raise capital through the issuance of common stock, preferred stock or other equity instruments or
through public issuances of debt securities from our shelf registration statements as we have been
able to do in the past. Such conditions would also limit our ability to raise capital through asset
dispositions at attractive prices or at all.
74
Inflation
A majority of our leases provide for tenant reimbursement of real estate taxes and operating
expenses either on a triple net basis or over a base amount. In addition, many of our office leases
provide for fixed base rent increases. We believe that inflationary increases in expenses will be
partially offset by expense reimbursement and contractual rent increases.
Commitments and Contingencies
The following table outlines the timing of payment requirements related to our contractual
commitments as of March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments by Period (in thousands) |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable (a) |
|
$ |
505,421 |
|
|
$ |
49,964 |
|
|
$ |
158,507 |
|
|
$ |
61,617 |
|
|
$ |
235,333 |
|
Revolving credit facility |
|
|
160,000 |
|
|
|
|
|
|
|
160,000 |
|
|
|
|
|
|
|
|
|
Unsecured term loan |
|
|
183,000 |
|
|
|
183,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured debt (a) |
|
|
1,587,629 |
|
|
|
197,816 |
|
|
|
176,787 |
|
|
|
492,681 |
|
|
|
720,345 |
|
Ground leases (b) |
|
|
296,788 |
|
|
|
1,739 |
|
|
|
6,955 |
|
|
|
7,226 |
|
|
|
280,868 |
|
Interest expense |
|
|
608,629 |
|
|
|
119,288 |
|
|
|
193,293 |
|
|
|
215,332 |
|
|
|
80,716 |
|
Development contracts (c) |
|
|
51,053 |
|
|
|
51,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
7,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,400,326 |
|
|
$ |
602,860 |
|
|
$ |
695,542 |
|
|
$ |
776,856 |
|
|
$ |
1,325,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts do not include unamortized discounts and/or premiums. |
|
(b) |
|
Future minimum rental payments under the terms of all non-cancelable ground leases under which
we are the lessee are expensed on a straight-line basis regardless of when payments are due. |
|
(c) |
|
Represents contractual obligations for certain development projects and does not contemplate
all costs expected to be incurred for such developments. |
As part of the TRC acquisition, we acquired our interest in Two Logan Square, a 703,386 square foot
office building in Philadelphia, primarily through our ownership of a second and third mortgage
secured by this property. This property is consolidated as the borrower is a variable interest
entity and we, through our ownership of the second and third mortgages are the primary beneficiary.
We currently do not expect to take title to Two Logan Square until, at the earliest, September
2019. If we take fee title to Two Logan Square upon a foreclosure of our mortgage, we have agreed
to pay an unaffiliated third party that holds a residual interest in the fee owner of this property
an amount equal to $0.6 million (if we must pay a state and local transfer upon taking title) and
$2.9 million (if no transfer tax is payable upon the transfer).
We are currently being audited by the Internal Revenue Service for our 2004 tax year. The audit
concerns the tax treatment of the transaction in September 2004 in which we acquired a portfolio of
properties through the acquisition of a limited partnership. At this time it does not appear that
an adjustment would result in a material tax liability for us. However, an adjustment could raise a
question as to whether a contributor of partnership interests in the 2004 transaction could assert
a claim against us under the tax protection agreement entered into as part of the transaction.
As part of our 2006 acquisition of Prentiss Properties Trust, the TRC acquisition in 2004 and
several of our other transactions, we agreed not to sell certain of the properties we acquired in
transactions that would trigger taxable income to the former owners. In the case of the TRC
acquisition, we agreed not to sell acquired properties for periods up to 15 years from the date of
the TRC acquisition as follows at March 31, 2010: One Rodney Square and 130/150/170 Radnor
Financial Center (January 2015); and One Logan Square, Two Logan Square and Radnor Corporate Center
(January 2020). In the Prentiss acquisition, we assumed the obligation of Prentiss not to sell
Concord Airport Plaza before March 2018. Our agreements generally provide that we may dispose of
the subject properties only in transactions that qualify as tax-free exchanges under Section 1031
of the Internal Revenue Code or in other tax deferred transactions. If we were to sell a restricted
property before expiration of the restricted period in a non-exempt transaction, we would be
required to make significant payments to the parties who sold us the applicable property for tax
liabilities triggered to them.
75
In connection with our development of the PO Box/IRS and Cira Garage projects, during 2008, we
entered into a historic tax credit and new markets tax credit arrangement, respectively. We are
required to be in compliance with various laws, regulations and contractual provisions that apply
to our historic and new market tax credit arrangements. Non-compliance with applicable requirements
could result in projected tax benefits not being realized and therefore, require a refund to USB or
reduction of investor capital contributions, which are reported as deferred income in our
consolidated balance sheet, until such time as our obligation to deliver tax benefits is relieved.
The remaining compliance periods for our tax credit arrangements runs through 2015. We do not
anticipate that any material refunds or reductions of investor capital contributions will be
required in connection with these arrangements.
On June 29, 2009, we entered into a forward financing commitment to borrow up to $256.5 million
under two separate loans which are secured by mortgages on the Post Office project, the garage
project and by the leases of space at these facilities upon the completion of these projects. In
order for funding to occur we need to meet certain conditions which primarily relate to the
completion of the projects and the commencement of the rental payments from the respective leases
on these properties. The expected funding date is scheduled on August 26, 2010 which is also the
anticipated completion date of the projects. In the event the said conditions were not met, we have
the right to extend the funding date by paying an extension fee amounting to $1.8 million for each
30 day extension within the allowed two year extension period. In addition, we can also voluntarily
elect to terminate the loans during the forward period, including the extension period, by paying a
termination fee. We are also subject to the termination fee if the conditions were not met on the
final advance date. The termination fee is calculated as the greater of 0.5% of the total available
principal to be funded or the present value of the scheduled interest and principal payments (based
on the principal amount to be funded and the then 20year treasury rate plus 50 basis points) from
the funding date through the loans maturity date and the amount to be funded. In addition,
deferred financing costs related to these loans will be accelerated if we chose to terminate the
forward financing commitment.
We invest in our properties and regularly incur capital expenditures in the ordinary course to
maintain the properties. We believe that such expenditures enhance our competitiveness. We also
enter into construction, utility and service contracts in the ordinary course of business which may
extend beyond one year. These contracts typically provide for cancellation with insignificant or no
cancellation penalties.
Interest Rate Risk and Sensitivity Analysis
The analysis below presents the sensitivity of the market value of our financial instruments to
selected changes in market rates. The range of changes chosen reflects our view of changes which
are reasonably possible over a one-year period. Market values are the present value of projected
future cash flows based on the market rates chosen.
Our financial instruments consist of both fixed and variable rate debt. As of March 31, 2010, our
consolidated debt consisted of $445.4 million in fixed rate mortgages, $60.0 million of variable
rate mortgages, $183.0 million in an unsecured term loan, $160.0 million of borrowings under our
Credit Facility, and $1,587.6 million in unsecured notes of which $1,535.0 million are fixed rate
borrowings and $52.8 million are variable rate borrowings. All financial instruments were entered
into for other than trading purposes and the net market value of these financial instruments is
referred to as the net financial position. Changes in interest rates have different impacts on the
fixed and variable rate portions of our debt portfolio. A change in interest rates on the fixed
portion of the debt portfolio impacts the net financial instrument position, but has no impact on
interest incurred or cash flows. A change in interest rates on the variable portion of the debt
portfolio impacts the interest incurred and cash flows, but does not impact the net financial
instrument position.
As of March 31, 2010, based on prevailing interest rates and credit spreads, the fair value of our
unsecured notes was $1.5 billion. For sensitivity purposes, a 100 basis point change in the
discount rate equates to a change in the total fair value of our debt, including the Notes, of
approximately $15.1 million at March 31, 2010.
We use derivative instruments to manage interest rate risk exposures and not for speculative
purposes. As of March 31, 2010, we effectively hedged debt with a notional amount of $213.2 million
through four interest rate swap agreements. These instruments have an aggregate fair value of $5.5
million at March 31, 2010.
The total carrying value of our variable rate debt was approximately $421.6 million and $353.6
million at March 31, 2010 and December 31, 2009, respectively. The total fair value of our debt,
excluding the Notes, was approximately $406.9 million and $341.2 million at March 31, 2010 and
December 31, 2009, respectively. For sensitivity purposes, a 100 basis point change in the discount
rate equates to a change in the total fair value of our debt, excluding the Notes of approximately
$2.1 million at March 31, 2010, and a 100 basis point change in the discount rate equates to a
change in the total fair value of our debt of approximately $1.5 million at December 31, 2009.
If market rates of interest increase by 1%, the fair value of our outstanding fixed-rate mortgage
debt would decrease by approximately $14.1 million. If market rates of interest decrease by 1%, the
fair value of our outstanding fixed-rate mortgage debt would increase by approximately $14.8
million.
76
At March 31, 2010, our outstanding variable rate debt based on LIBOR totaled approximately $421.6
million. At March 31, 2010, the interest rate on our variable rate debt was approximately 1.10%. If
market interest rates on our variable rate debt change by 100 basis points, total interest expense
would change by approximately $0.5 million for the quarter ended March 31, 2010.
These amounts were determined solely by considering the impact of hypothetical interest rates on
our financial instruments. Due to the uncertainty of specific actions we may undertake to minimize
possible effects of market interest rate increases, this analysis assumes no changes in our
financial structure.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, commodity prices and
equity prices. In pursuing our business plan, the primary market risk to which we are exposed is
interest rate risk. Changes in the general level of interest rates prevailing in the financial
markets may affect the spread between our yield on invested assets and cost of funds and, in turn,
our ability to make distributions or payments to our shareholders. While we have not experienced
any significant credit losses, in the event of a significant rising interest rate environment
and/or economic downturn, defaults could increase and result in losses to us which adversely affect
our operating results and liquidity.
See Interest Rate Risk and Sensitivity Analysis in Item 2 above.
Item 4. Controls and Procedures
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(a) |
|
Evaluation of disclosure controls and procedures. Under the supervision and with the
participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of our disclosure controls and procedures,
as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act
of 1934, as amended (the Exchange Act) as of the end of the period covered by this
quarterly report and have concluded that the Companys disclosure controls and procedures
are effective. |
|
|
(b) |
|
Changes in internal controls over financial reporting. There was no change in the
Companys internal control over financial reporting that occurred during the period
covered by this quarterly report that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. |
77
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
There has been no material change to the risk factors previously disclosed by us in our Form 10-K
for the fiscal year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the share repurchases during the three-month period ended March 31,
2010:
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|
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|
|
|
|
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|
|
|
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Shares |
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Number of |
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Total |
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|
|
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Purchased as |
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Shares that May |
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Number of |
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Average |
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Part of Publicly |
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Yet Be Purchased |
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Shares |
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Price Paid Per |
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Announced Plans |
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Under the Plans |
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Purchased |
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Share |
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or Programs |
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or Programs (a) |
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2010: |
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|
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|
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January |
|
|
|
|
|
|
|
|
|
|
|
|
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539,200 |
|
February |
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|
|
|
|
|
|
|
|
|
|
|
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539,200 |
|
March |
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|
|
|
|
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|
|
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539,200 |
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|
|
|
|
|
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|
|
|
|
|
|
|
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Total |
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(a) |
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Relates to the remaining share repurchase availability under our Board approved share
repurchase program. There is no expiration date on the share repurchase program. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Reserved
None.
Item 5. Other Information
None.
78
Item 6. Exhibits
(a) Exhibits
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10.1 |
|
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Form of Amended and Restated Change of Control Agreement with
Executive Officers (incorporated by reference to Brandywine Realty
Trusts Current Report on Form 8-K filed on February 4, 2010) |
|
10.2 |
|
|
Employment Agreement dated February 3, 2010 with Howard M. Sipzner
(incorporated by reference to Brandywine Realty Trusts Current
Report on Form 8-K filed on February 4, 2010) ** |
|
10.3 |
|
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Form of Restricted Share Award (incorporated by reference to
Brandywine Realty Trusts Current Report on Form 8-K filed on March
8, 2010) ** |
|
10.4 |
|
|
Form of Performance Unit Award Agreement (incorporated by reference
to Brandywine Realty Trusts Current Report on Form 8-K filed on
March 8, 2010) ** |
|
10.5 |
|
|
Form of Incentive Share Option Agreement (incorporated by reference
to Brandywine Realty Trusts Current Report on Form 8-K filed on
March 8, 2010) ** |
|
10.6 |
|
|
Form of Non-Qualified Share Option Agreement (incorporated by
reference to Brandywine Realty Trusts Current Report on Form 8-K
filed on March 8, 2010) ** |
|
10.7 |
|
|
2010 2012 Performance Share Unit Program (incorporated by reference
to Brandywine Realty Trusts Current Report on Form 8-K filed on
March 8, 2010) ** |
|
31.1 |
|
|
Certification of the Chief Executive Officer of Brandywine Realty
Trust pursuant to 13a-14 under the Securities Exchange Act of 1934 |
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31.2 |
|
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Certification of the Chief Financial Officer of Brandywine Realty
Trust pursuant to 13a-14 under the Securities Exchange Act of 1934 |
|
31.3 |
|
|
Certification of the Chief Executive Officer of Brandywine Realty
Trust, in its capacity as the general partner of Brandywine Operating
Partnership, L.P., pursuant to 13a-14 under the Securities Exchange
Act of 1934 |
|
31.4 |
|
|
Certification of the Chief Financial Officer of Brandywine Realty
Trust, in its capacity as the general partner of Brandywine Operating
Partnership, L.P., pursuant to 13a-14 under the Securities Exchange
Act of 1934 |
|
32.1 |
|
|
Certification of the Chief Executive Officer of Brandywine Realty
Trust pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.2 |
|
|
Certification of the Chief Financial Officer of Brandywine Realty
Trust pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.3 |
|
|
Certification of the Chief Executive Officer of Brandywine Realty
Trust, in its capacity as the general partner of Brandywine Operating
Partnership, L.P., pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.4 |
|
|
Certification of the Chief Financial Officer of Brandywine Realty
Trust, in its capacity as the general partner of Brandywine Operating
Partnership, L.P., pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
** |
|
Management contract or compensatory plan or arrangement |
79
SIGNATURES OF REGISTRANT
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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BRANDYWINE REALTY TRUST |
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(Registrant) |
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Date: May 5, 2010
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By:
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/s/ Gerard H. Sweeney
Gerard H. Sweeney, President and Chief Executive Officer
(Principal Executive Officer)
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Date: May 5, 2010
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By:
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/s/ Howard M. Sipzner
Howard M. Sipzner, Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
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Date: May 5, 2010
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By:
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/s/ Gabriel J. Mainardi
Gabriel J. Mainardi, Vice President and Chief Accounting
Officer
(Principal Accounting Officer)
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80
SIGNATURES OF REGISTRANT
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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BRANDYWINE OPERATING PARTNERSHIP, L.P. |
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(Registrant) |
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BRANDYWINE REALTY TRUST, |
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as general partner |
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Date: May 5, 2010
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By:
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/s/ Gerard H. Sweeney
Gerard H. Sweeney, President and Chief Executive Officer
(Principal Executive Officer)
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Date: May 5, 2010
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By:
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/s/ Howard M. Sipzner
Howard M. Sipzner, Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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Date: May 5, 2010
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By:
|
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/s/ Gabriel J. Mainardi
Gabriel J. Mainardi, Vice President and Chief Accounting
Officer
(Principal Accounting Officer)
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81