Edgar Filing: BRANDYWINE REALTY TRUST

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended June 30, 2006

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

(Exact name of registrant as specified in its charter)

Maryland
State or other jurisdiction of
incorporation or organization

23-2413352
(I.R.S. Employer Identification No.)


	555 East Lancaster Avenue, Radnor, Pennsylvania (Address of principal executive offices)		19087 (Zip Code)

(610) 325-5600

Registrant’s telephone number

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. Yes No

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.

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

A total of 90,024,016 Common Shares of Beneficial Interest, par value $0.01 per share, were outstanding as of August 1, 2006.

BRANDYWINE REALTY TRUST

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005	3

	Consolidated Statements of Operations for the three- and six-month periods ended June 30, 2006 and 2005	4

	Consolidated Statements of Other Comprehensive Income for the three- and six-month periods ended June 30, 2006 and 2005	5

	Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2006 and June 30, 2005	6

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47

Item 4.	Controls and Procedures	47

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults Upon Senior Securities	48

Item 4.	Submission of Matters to a Vote of Security Holders	48

Item 5.	Other Information	48

Item 6.	Exhibits	48

	Signatures	50

PART I - FINANCIAL INFORMATION

Item 1. - Financial Statements

BRANDYWINE REALTY TRUST

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share and per share information)

	June 30, 2006			December 31, 2005

ASSETS
Real estate investments:
Operating properties	$	4,688,560		$	2,560,061
Accumulated depreciation		(467,969	)		(390,333	)

Operating real estate investments, net		4,220,591			2,169,728
Construction-in-progress		327,975			273,240
Land held for development		124,787			98,518

Total real estate investments, net		4,673,353			2,541,486
Cash and cash equivalents		26,377			7,174
Escrowed cash		22,006			18,498
Accounts receivable, net		18,781			12,874
Accrued rent receivable, net		61,787			47,034
Marketable securities		188,035			—
Asset held for sale		86,128			—
Investment in unconsolidated ventures		78,480			13,331
Deferred costs, net		52,056			37,602
Intangible assets, net		338,537			78,097
Other assets		46,373			49,649

Total assets	$	5,591,913		$	2,805,745

LIABILITIES AND BENEFICIARIES’ EQUITY
Mortgage notes payable	$	901,064		$	494,777
Secured note payable		183,199			—
Unsecured notes		1,863,062			936,607
Unsecured credit facility		195,000			90,000
Accounts payable and accrued expenses		95,216			52,635
Distributions payable		43,629			28,880
Tenant security deposits and deferred rents		37,350			20,953
Acquired below market leases, net of accumulated amortization of $17,024 and $6,931		102,170			34,704
Other liabilities		7,870			4,466
Mortgage notes payable and other liabilities held for sale		15,411			—

Total liabilities		3,443,971			1,663,022
Minority interest		138,046			37,859
Commitments and contingencies (Note 16)
Beneficiaries’ equity:
Preferred Shares (shares authorized-20,000,000):
7.50% Series C Preferred Shares, $0.01 par value; issued and outstanding- 2,000,000 in 2006 and 2005		20			20
7.375% Series D Preferred Shares, $0.01 par value; issued and outstanding-2,300,000 in 2006 and 2005		23			23
Common Shares of beneficial interest, $0.01 par value; shares authorized 200,000,000; issued and outstanding-90,014,708 in 2006 and 56,179,075 in 2005		900			562
Additional paid-in capital		2,367,341			1,369,913
Cumulative earnings		399,083			413,282
Accumulated other comprehensive income (loss)		980			(3,169	)
Cumulative distributions		(758,451	)		(675,767	)

Total beneficiaries’ equity		2,009,896			1,104,864

Total liabilities, minority interest, and beneficiaries’ equity	$	5,591,913		$	2,805,745

The accompanying notes are an integral part of these consolidated financial statements.

BRANDYWINE REALTY TRUST

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except share and per share information)

	For the three-month periods ended June 30,						For the six-month periods ended June 30,

	2006			2005			2006			2005

Revenue:
Rents	$	149,554		$	81,656		$	290,639		$	162,884
Tenant reimbursements		16,749			11,037			34,641			23,119
Other		4,668			2,774			9,047			8,790

Total revenue		170,971			95,467			334,327			194,793
Operating Expenses:
Property operating expenses		48,962			27,695			97,155			57,574
Real estate taxes		16,684			9,598			33,230			19,255
Depreciation and amortization		72,838			27,820			132,168			56,255
Administrative expenses		7,724			4,378			16,214			9,130

Total operating expenses		146,208			69,491			278,767			142,214

Operating income		24,763			25,976			55,560			52,579
Other Income (Expense):
Interest income		2,573			284			5,223			662
Interest expense		(42,500	)		(17,807	)		(83,467	)		(35,604	)
Equity in income of real estate ventures		463			993			1,428			1,551
Net gain on sale of interests in real estate		2,608			—			2,608			—

Income (loss) before minority interest		(12,093	)		9,446			(18,648	)		19,188
Minority interest - partners’ share of consolidated real estate ventures		84			—			370			—
Minority interest attributable to continuing operations - LP units		520			(381	)		895			(708	)

Income (loss) from continuing operations		(11,489	)		9,065			(17,383	)		18,480
Discontinued operations:
Income (loss) from discontinued operations		134			(140	)		3,728			(140	)
Minority interest - partners’ share of consolidated real estate ventures		(195	)		—			(382	)		—
Minority interest attributable to discontinued operations - LP units		(6	)		5			(161	)		5

Income (loss) from discontinued operations		(67	)		(135	)		3,185			(135	)

Net income (loss)		(11,556	)		8,930			(14,198	)		18,345
Income allocated to Preferred Shares		(1,998	)		(1,998	)		(3,996	)		(3,996	)

Income (loss) allocated to Common Shares	$	(13,554	)	$	6,932		$	(18,194	)	$	14,349

Basic earnings per Common Share:
Continuing operations	$	(0.15	)	$	0.13		$	(0.24	)	$	0.26
Discontinued operations		(0.00	)		(0.00	)		0.04			(0.00	)

	$	(0.15	)	$	0.12		$	(0.20	)	$	0.26

Diluted earnings per Common Share:
Continuing operations	$	(0.15	)	$	0.13		$	(0.24	)	$	0.26
Discontinued operations		(0.00	)		(0.00	)		0.04			(0.00	)

	$	(0.15	)	$	0.12		$	(0.20	)	$	0.26

Dividends declared per common share	$	0.44		$	0.44		$	0.44		$	0.44
Basic weighted average shares outstanding		90,540,237			55,681,668			89,923,528			55,562,384
Diluted weighted average shares outstanding		90,816,019			55,844,239			90,202,854			55,786,070

The accompanying notes are an integral part of these consolidated financial statements.

BRANDYWINE REALTY TRUST

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

(unaudited, in thousands)

	For the three-month periods ended June 30,					For the six-month periods ended June 30,

	2006			2005		2006			2005

Net income (loss)	$	(11,556	)	$	8,930	$	(14,198	)	$	18,345
Other comprehensive income:
Unrealized gain on derivative financial instruments		605			—		2,363			—
Less: minority interest - consolidated real estate venture partner’s share of unrealized gain on derivative financial instruments		(296	)		—		(809	)		—
Realized gain on derivative financial instruments		—			—		3,266			—
Reclassification of realized (gains)/losses on derivative financial instruments to operations, net		9			113		105			226
Unrealized gain (loss) on available-for-sale securities		(184	)		45		(776	)		237

Total other comprehensive income		134			158		4,149			463

Comprehensive income (loss)	$	(11,422	)	$	9,088	$	(10,049	)	$	18,808

The accompanying notes are an integral part of these consolidated financial statements.

BRANDYWINE REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

	Six-month periods ended June 30,

	2006			2005

Cash flows from operating activities:
Net income (loss)	$	(14,198	)	$	18,345
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation		95,051			41,657
Amortization:
Deferred financing costs		1,274			1,293
Deferred leasing costs		5,184			4,057
Acquired above (below) market leases, net		(3,907	)		(787	)
Assumed lease intangibles		33,700			10,584
Deferred compensation costs		1,445			1,387
Straight-line rent		(15,916	)		(6,500	)
Provision for doubtful accounts		1,956			600
Real estate venture income in excess of distributions		(267	)		(647	)
Net gain on sale of interests in real estate		(2,608	)		—
Minority interest		(722	)		703
Changes in assets and liabilities:
Accounts receivable		5,937			3,631
Other assets		8,411			299
Accounts payable and accrued expenses		7,451			(10,399	)
Tenant security deposits and deferred rents		9,976			(1,629	)
Other liabilities		(6,053	)		(89	)

Net cash from operating activities		126,714			62,505
Cash flows from investing activities:
Acquisition of Prentiss		(935,856	)		—
Acquisition of properties		(50,114	)		(38,854	)
Sales of properties, net		144,006			—
Capital expenditures		(102,851	)		(82,033	)
Investment in marketable securtities		175			—
Investment in unconsolidated Real Estate Ventures		(502	)		(119	)
Escrowed cash		(2,115	)		(109	)
Cash distributions from unconsolidated Real Estate Ventures in excess of equity in income		2,215			226
Leasing costs		(12,114	)		(5,448	)

Net cash from investing activities		(957,156	)		(126,337	)
Cash flows from financing activities:
Proceeds from Credit Facility borrowings		310,000			118,000
Repayments of Credit Facility borrowings		(205,000	)		(5,000	)
Proceeds from mortgage notes payable		20,520			—
Repayments of mortgage notes payable		(21,198	)		(10,045	)
Proceeds from term loan		750,000			—
Repayments of term loan		(750,000	)		—
Proceeds from unsecured notes		847,818			—
Proceeds from forward starting swap termination		3,266			—
Repayments on employee stock loans		35			50
Debt financing costs		(6,987	)		(146	)
Exercise of stock options		8,011			10,432
Repurchases of Common Shares and minority interest units		(34,481	)		(239	)
Distributions paid to shareholders		(68,306	)		(53,070	)
Distributions to minority interest holders		(4,033	)		(2,175	)

Net cash from financing activities		849,645			57,807

Increase (decrease) in cash and cash equivalents		19,203			(6,025	)
Cash and cash equivalents at beginning of period		7,174			15,346

Cash and cash equivalents at end of period	$	26,377		$	9,321

Supplemental disclosure:
Cash paid for interest, net of capitalized interest	$	52,881		$	25,923
Supplemental disclosure of non-cash activity:
Common shares issued in the Prentiss acquisition		1,021,269			—
Operating Partnership units issued in the Prentiss acquisition		64,103			—
Mortgage notes payable assumed in the Prentiss acquisition	$	532,607			—
Secured note payable assumed in the Prentiss acquiaition	$	186,116			—

The accompanying notes are an integral part of these consolidated financial statements.

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

1. THE COMPANY

Brandywine Realty Trust, a Maryland real estate investment trust (collectively with its subsidiaries, the “Company”), is a self-administered and self-managed real estate investment trust, or REIT, active in acquiring, developing, redeveloping, leasing and managing office and industrial properties. As of June 30, 2006, the Company owned 278 office properties, 23 industrial facilities and 1 mixed-use property (collectively, the “Properties”) containing an aggregate of approximately 30.3 million net rentable square feet. As of June 30, 2006, the Company owned economic interests in eleven unconsolidated real estate ventures that contain approximately 2.7 million net rentable square feet (the “Real Estate Ventures”) and in four consolidated real estate ventures that own 16 office properties containing approximately 1.6 million net rentable square feet. The Properties and the properties owned by the Real Estate Ventures are located in or areas surrounding Philadelphia, Pennsylvania; Wilmington, Delaware; Austin, Texas; Dallas, Texas; Richmond, Virginia; Northern and Southern California; Southern and Central New Jersey and Northern Virginia.

As more fully described in Note 3, on January 5, 2006, the Company acquired Prentiss Properties Trust (“Prentiss”) under an Agreement and Plan of Merger (the “Merger Agreement”) that the Company entered into with Prentiss on October 3, 2005.

The Company owns its assets through Brandywine Operating Partnership, L.P. a Delaware limited partnership (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership and, as of June 30, 2006, owned a 95.7% interest in the Operating Partnership. The Company conducts its third-party real estate management services business primarily through four management companies (collectively, the “Management Companies”), Brandywine Realty Services Corporation (“BRSCO”), BTRS, Inc., Brandywine Properties I Limited, Inc. (“BPI”), and Brandywine Properties Management, L.P. (“BPM”). BRSCO, BTRS, Inc. and BPI are taxable REIT subsidiaries. The Operating Partnership owns a 95% interest in BRSCO and the remaining 5% interest is owned by a partnership comprised of a current executive and former executive of the Company, each of whom is a member of the Company’s Board of Trustees. The Company owns 100% of BTRS, Inc. BPM is a limited partnership that is 99% owned by Brandywine Acquisition Partners, L.P. The other 1% of BPM is owned by BPI.

As of June 30, 2006, the Management Companies were managing properties containing an aggregate of approximately 44.2 million net rentable square feet, of which approximately 30.3 million net rentable square feet related to Properties owned by the Company and approximately 13.9 million net rentable square feet related to properties owned by third parties and certain Real Estate Ventures.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements have been prepared by the Company without audit except as to the balance sheet as of December 31, 2005, which has been derived from audited data, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. 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, although the Company believes that the included disclosures are adequate to make the information presented not misleading. 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 June 30, 2006, the results of its operations for the three- and six-month periods ended June 30, 2006 and 2005 and its cash flows for the six-month periods ended June 30, 2006 and 2005 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 Company’s consolidated financial statements and footnotes included in the Company’s 2005 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current period presentation.

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

Principles of Consolidation

The accompanying consolidated financial statements include all accounts of the Company, and its majority-owned and/or controlled subsidiaries. The portion of these entities not owned by the Company is presented as minority interest as of and during the periods consolidated. All intercompany accounts and transactions have been eliminated in 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 FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”). The Company consolidates (i) entities that are VIEs where the Company is deemed to be the primary beneficiary and (ii) entities that are non-VIEs which the Company controls. Entities that the Company accounts for under the equity method (i.e., at cost, increased or decreased by the Company’s share of earnings or losses, less distributions) include (i) entities that are VIEs where the Company is not deemed to be the primary beneficiary and (ii) entities that are non-VIEs which the Company does not control, but over which the Company has the ability to exercise significant influence. The Company will reconsider its determination of whether an entity is a VIE and who the primary beneficiary is if certain events occur that are likely to cause a change in the original determinations.

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, 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. Costs incurred for the acquisition and renovation of an operating property are capitalized to the Company’s 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.

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, required us to separately report as discontinued operations the historical operating results attributable to operating properties sold or held for sale and the applicable gain or loss on the disposition of the properties. The consolidated statements of operations for prior periods are also adjusted to conform to this classification. In all cases, gains and losses are recognized using the full accrual method of accounting. Gains relating to transactions which do not meet the requirements of the full accrual method of accounting are deferred and recognized when the full accrual method of accounting criteria are met.

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 Company’s 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 fixed-rate renewal periods.

Other intangible assets also include amounts representing the value of tenant relationships and in-place leases based on

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

the Company’s evaluation of the specific characteristics of each tenant’s lease and the Company’s 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. 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 FIN47, and when necessary, will record a conditional asset retirement obligation as part of its purchase price. 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.

Characteristics considered by the Company in allocating value to its tenant relationships include the nature and extent of the Company’s business relationship with the tenant, growth prospects for developing new business with the tenant, the tenant’s 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 market rate adjustments, in-place lease values and tenant relationship values, would be charged to expense.

Revenue Recognition and Accounts Receivable

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 cumulative difference between lease revenue recognized under this method and contractual lease payment terms is recorded as “accrued rent receivable” on the accompanying balance sheets. The straight-line rent adjustment increased revenue by approximately $8.1 million and $15.6 million for the three- and six-month periods ended June 30, 2006 and approximately $3.1 million and $6.3 million for the three- and six-month periods ended June 30, 2005. Tenant receivables and accrued rent receivables are carried net of the allowances for doubtful accounts of $7.8 million as of June 30, 2006 and $4.9 million as of December 31, 2005. The allowance is based on management’s evaluation of the collectability of receivables, taking into account tenant specific considerations as well as the overall credit of the tenant portfolio. The leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses. Other income is recorded when earned and is primarily comprised of termination fees received from tenants, bankruptcy settlement fees, third party leasing commissions, and third party management fees. Other income includes net termination fees of $1.3 million and $1.9 million for the three- and six-month periods ended June 30, 2006, and $0.9 million and $4.9 million for the three- and six-month periods ended June 30, 2005. Deferred rents represent rental revenue received from tenants prior to their due dates.

Stock-based Compensation Plans

The Company maintains shareholder-approved equity incentive plans. The Compensation Committee of the Company’s Board of Trustees authorizes awards under these plans. In May 2005, the Company’s shareholders approved an amendment to the Amended and Restated 1997 Long-Term Incentive Plan (the “1997 Plan”) that increased the number of common shares that may be issued or subject to award under the 1997 Plan from 5,000,000 to 6,600,000. The May 2005 amendment provided that 500,000 of the shares under the 1997 Plan are available solely for awards under options and share appreciation rights that have an exercise or strike price not less than the market price of the common shares on the date of award, and the remaining 6,100,000 shares are available for any type of award under the 1997 Plan. Incentive stock options may not be granted at exercise prices less than fair value of the shares at the time of grant. All options awarded by the Company to date are non-qualified stock options that generally vested over two to five years. As of June 30, 2006, 2.6 million shares remained available for future award under the 1997 Plan. As part of the Company’s January 2006 acquisition of Prentiss, the Company assumed Prentiss’ three share incentive

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

plans. As of June 30, 2006, approximately 1,685,676 common shares remain available for issuance or subject to award under the assumed Prentiss share incentive plans; however, any such issuances or awards under the assumed Prentiss plan may be made only to those Company employees who had been employed by Prentiss immediately prior to the Company’s acquisition of Prentiss or to those Company employees hired after the Prentiss acquisition.

On January 1, 2002, the Company began to expense the fair value of stock-based compensation awards granted subsequent to January 1, 2002, over the applicable vesting period as a component of general and administrative expenses in the Company s consolidated statements of income. In the three and six-month periods ended June 30, 2006 the Company recognized $669,000 and $1,445,000 of stock-based compensation expense. In the three and six-month periods ended June 30, 2005 the Company recognized and $696,000 and $1,387,000 of stock-based compensation expense.

For stock-based compensation awards granted prior to 2002, the Company accounted for stock options issued under the recognition and measurement provisions of APB No.25, Accounting for Stock Issued to Employees and Related Interpretations. Under this method, no stock-based compensation expense was recognized. Because stock options granted prior to 2002 vested over a three-year term, the resulting compensation cost based on the fair value of the awards on the date of grant, on a pro forma basis would have been expensed in 2003, 2004, and 2005. Accordingly, had the Company applied the fair value recognition provisions of SFAS 123, the net income applicable to common shares would remain the same on a pro forma basis for the three and six month periods ended June 30, 2006, and would have been reduced by $117,000 and $256,000 for the three and six month periods ended June 30, 2005, with no change in basic or diluted net income per share.

The Company’s primary form of share-based compensation has been restricted shares issued under a shareholder approved equity incentive plan that authorizes various equity-based awards. As of June 30, 2006, 352,036 restricted shares were outstanding and vest over five years from the initial grant date. The remaining compensation expense to be recognized associated with the 352,036 restricted shares outstanding at June 30, 2006 was approximately $9.9 million. That expense is expected to be recognized over a weighted average remaining vesting period of 1.9 years. For the three month and six month periods ended June 30, 2006, the Company recognized $669,000 and $1,445,000 of compensation expense related to outstanding restricted shares. The following table summarizes the Company’s restricted share activity for the six-months ended June 30, 2006:

	Shares		Weighted Average Grant Date Fair value

Non-vested at January 1, 2006	316,134		$	25.62
Granted	240,136			30.34
Vested	(160,594	)		26.20
Forfeited	(43,640	)		28.32

Non-vested at June 30, 2006	352,036		$	28.24

At June 30, 2006, the Company had 1,412,300 options outstanding under its shareholder approved equity incentive plan. No options were unvested as of June 30, 2006 and therefore there is no remaining unrecognized compensation expense associated with these options. Option activity as of June 30, 2006 and changes during the six months ended June 30, 2006 were as follows:

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in 000’s)

Outstanding at January 1, 2006	1,276,722		$	26.82	2.15	1,888
Prentiss options converted to Company options as part of the Prentiss acquisition (see Note 3)	496,037			22.00	2.41	4,841
Exercised	(360,459	)		21.87	0.61	3,565
Forfeited	—			—	—	—

Outstanding at June 30, 2006	1,412,300		$	26.39	2.20	7,580

Vested at June 30, 2006	1,412,300		$	26.39	2.20	7,580
Exercisable at June 30, 2006	1,412,300		$	26.39	2.20	7,580

There were no option awards granted to employees during the three-and six-month periods ended June 30, 2006 and 2005.

The Company has the ability and intent to issue shares upon stock option exercises. Historically, the Company has issued new common shares to satisfy such exercises.

Accounting for Derivative Instruments and Hedging Activities

The Company accounts for its derivative instruments and hedging activities under SFAS No. 133 (“SFAS 133”), Accounting for Derivative Instruments and Hedging Activities, and its corresponding amendments under SFAS No. 138, Accounting for Certain Derivative Instruments and Hedging Activities – An Amendment of SFAS 133. SFAS 133 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. 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. Changes in fair value of derivative instruments and ineffective portions of hedges are recognized in earnings in the current period. For the three- and six-month periods ended June 30, 2006 and 2005, the Company was not party to any derivative contract designated as a fair value hedge.

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.

Income Taxes

The Company and a subsidiary REIT elect to be taxed as real estate investment trusts under Sections 856-860 of the Internal Revenue Code. In order to maintain its qualification as a REIT, the Company is required, among other things, to distribute at least 90% of its REIT taxable income to its shareholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Company is not subject to federal income tax with respect to that portion of its income which meets certain criteria and is distributed annually to the shareholders. Accordingly, no provision for federal income taxes is included in the accompanying consolidated financial statements. The Company plans to continue to operate so that it meets the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. If the Company were to fail to meet these requirements, the Company would be subject to federal income tax. The Company is subject to certain state and local taxes. Provision for such taxes has been included in general and administrative expenses in the Company’s consolidated statements of operations.

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

Recent Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 becomes effective on January 1, 2007. The Company is currently evaluating the impact of adopting FIN 48 but does not expect it to have a material impact on the consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an Amendment of SFAS No. 140. SFAS No. 156 requires separate recognition of a servicing asset and a servicing liability each time an entity undertakes an obligation to service a financial asset by entering into a service contract. This statement also requires that servicing assets and liabilities be initially recorded at fair value and subsequently adjusted to the fair value at the end of each reporting period. This statement is effective in fiscal years beginning after September 15, 2006. The Company does not expect the adoption of this standard on January 1, 2007 to have a material effect on the consolidated financial statements.

In February 2006, the FASB issued SFAS No.155, Accounting for Certain Hybrid Financial Instruments – An Amendment of FASB No. 133 and 140. The purpose of SFAS No.155 is to simplify the accounting for certain hybrid financial instruments by permitting fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No. 155 also eliminates the restriction on passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year beginning after September 15, 2006. The Company does not expect the adoption of this standard on January 1, 2007 to have a material effect on the consolidated financial statements.

In October 2005, the FASB issued Staff Position No. 13-1 “Accounting for Rental Costs Incurred during a Construction Period” (“FSP FAS 13-1”). FSP FAS 13-1 addresses the accounting for rental costs associated with operating leases that are incurred during the construction period. FSP FAS 13-1 makes no distinction between the right to use a leased asset during the construction period and the right to use that asset after the construction period. Therefore, rental costs associated with ground or building operating leases that are incurred during a construction period shall be recognized as rental expense, allocated over the lease term in accordance with SFAS No. 13 and Technical Bulletin 85-3. The terms of FSP FAS 13-1 are not applicable to lessees that account for the sale or rental of real estate projects in accordance with SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” FSP FAS 13-1 was effective for the first reporting period beginning after December 15, 2005. Retrospective application in accordance with SFAS 154 is permitted but not required. The adoption of FSP FAS 13-1 did not have a material effect on the consolidated financial statements of the Company.

In June 2005, the Emerging Issues Task Force issued EITF 04-05, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-05”). The scope of EITF 04-05 is limited to limited partnerships or similar entities that are not variable interest entities under FIN 46R. The Task Force reached a consensus that the general partners in a limited partnership (or similar entity) are presumed to control the entity regardless of the level of their ownership and, accordingly, may be required to consolidate the entity. This presumption may be overcome if the agreements provide the limited partners with either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. If it is deemed that the limited partners’ rights overcome the presumption of control by a general partner of the limited partnership, the general partner shall account for its investment in the limited partnership using the equity method of accounting. EITF 04-05 was effective immediately for all arrangements created or modified after June 29, 2005. For all other arrangements, application of EITF 04-05 is required effective for the first reporting period in fiscal years beginning after December 15, 2005 (i.e., effective January 1, 2006 for the Company) using either a cumulative-effect-type adjustment or using a retrospective application. The adoption of EITF 04-05 did not have an effect on the Company’s consolidated financial statements.

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces APB No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” and establishes retrospective application as the required method for reporting a change in accounting principle. SFAS 154 provides guidance for determining whether a retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted SFAS 154 on January 1, 2006 and this adoption had no effect on the Company’s financial position and results of operations.

In March 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143, Asset Retirement Obligations. FIN 47 provides clarification of the term “conditional asset retirement obligation” as used in SFAS 143, defined as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the company. Under this standard, a company must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. FIN 47 became effective in the Company’s fiscal quarter ended December 31, 2005. The Company adopted FIN 47 as required effective December 31, 2005 and the initial application of FIN 47 did not have a material effect on the consolidated financial statements of the Company.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) is an amendment of SFAS 123 and requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements. The cost is required to be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) also contains additional minimum disclosures requirements including, but not limited to, the valuation method and assumptions used, amounts of compensation capitalized and modifications made. The effective date of SFAS 123(R) was subsequently amended by the SEC to be as of the beginning of the first interim or annual reporting period of the first fiscal year that begins on or after December 15, 2005, and allows several different methods of transition. The Company adopted SFAS 123(R) using the prospective method on January 1, 2006. This adoption did not have a material effect on our consolidated financial statements.

3. REAL ESTATE INVESTMENTS

As of June 30, 2006 and December 31, 2005, the carrying value of the Company’s operating properties was as follows (amounts in thousands):

	June 30, 2006			December 31, 2005

Land	$	744,027		$	456,736
Building and improvements		3,642,178			1,951,252
Tenant improvements		302,355			152,073

		4,688,560			2,560,061
Less: accumulated depreciation		(467,969	)		(390,333	)

Operating real estate investments, net	$	4,220,591		$	2,169,728

Acquisitions and Dispositions

The Company’s acquisitions are accounted for by the purchase method. The results of each acquired property are included in the Company’s results of operations from their respective purchase dates.

2006

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

On January 5, 2006, the Company acquired Prentiss Properties Trust (“Prentiss”) under an Agreement and Plan of Merger (the “Merger Agreement”) that the Company entered into with Prentiss on October 3, 2005. In conjunction with the Company’s acquisition of Prentiss, designees of The Prudential Insurance Company of America (“Prudential”) acquired certain of Prentiss’ properties that contain an aggregate of approximately 4.32 million net rentable square feet for a total consideration of approximately $747.7 million. Through its acquisition of Prentiss (and after giving effect to the Prudential acquisition of certain of Prentiss’ properties), the Company acquired a portfolio of 79 office properties (includes 13 properties that are owned by consolidated joint ventures and 7 properties that are owned by an unconsolidated joint venture) that contain an aggregate of 14.0 million net rentable square feet. The results of the operations of Prentiss have been included in the Company’s condensed consolidated financial statements since January 5, 2006.

Subsequent to its acquisition of Prentiss and the related sale of certain properties to Prudential, the Company sold nine of these acquired properties that contain an aggregate of 1.7 million net rentable square feet. Two additional properties acquired in the acquisition of Prentiss are classified as held for sale at June 30, 2006.

The Company funded the approximately $1.05 billion cash portion of the merger consideration, related transaction costs and prepayments of approximately $543.3 million in Prentiss mortgage debt at the closing of the merger through (i) a $750 million unsecured term loan that matures on January 4, 2007; (ii) approximately $676.5 million of cash from Prudential’s acquisition of certain of the Prentiss properties; and (iii) approximately $195.0 million through borrowing under a revolving credit facility.

The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

	At January 5, 2006

Real estate investments
Land - operating	$	282,584
Building and improvements		1,942,728
Tenant improvements		120,610
Construction in progress and land inventory		57,329

Total real estate investments acquired		2,403,251
Rent receivables		6,031
Other assets acquired:
Intangible assets:
In-place leases		187,907
Relationship values		98,382
Above-market leases		26,352

Total intangible assets acquired		312,641
Investment in real estate ventures		66,921
Investment in marketable securities		193,089
Other assets		8,868

Total other assets		581,519

Total assets acquired		2,990,801
Liabilities assumed:
Mortgage notes payable		532,607
Unsecured notes		264,726
Security deposits and deferred rent		6,475
Other liabilities:
Below-market leases		78,911
Other liabilities		43,995

Total other liabilities assumed		122,906
Total liabilities assumed		926,714
Minority interest		104,658

Net assets acquired	$	1,959,429

In the acquisition of Prentiss, each then outstanding Prentiss common share was converted into the right to receive 0.69 of a Brandywine common share and $21.50 in cash (the “Per Share Merger Consideration”) except that 497,884 Prentiss common shares held in the Prentiss Deferred Compensation Plan converted solely into 720,737 Brandywine common shares. In addition, each then outstanding unit (each, a “Prentiss OP Unit”) of limited partnership interest in the Prentiss operating partnership subsidiary was, at the option of the holder, converted into Prentiss Common Shares with the right to receive the Per Share Merger Consideration or 1.3799 Class A Units of the Operating Partnership (“Brandywine Class A Units”). Accordingly, based on 49,375,723 Prentiss common shares outstanding and 139,000 Prentiss OP Units electing to receive merger consideration at closing of the acquisition, the Company issued 34,541,946 Brandywine common shares and paid an aggregate of approximately $1.05 billion in cash to the accounts of the former Prentiss shareholders. Based on 1,572,612 Prentiss OP Units outstanding at closing of the acquisition that did not elect to receive merger consideration, the Operating Partnership issued 2,170,047 Brandywine Class A Units. In addition, options issued by Prentiss that were exercisable for an aggregate of 342,662 Prentiss common shares were converted into options exercisable for an aggregate of 496,037 Brandywine common shares at a weighted average exercise price of $22.00 per share. Through the Company’s acquisition of Prentiss we also assumed approximately $611.2 million in aggregate principal amount of Prentiss debt.

Each Brandywine Class A Unit that was issued in the merger is subject to redemption at the option of the holder. The Operating Partnership may, at its option, satisfy the redemption either for an amount, per unit, of cash equal to the then market price of one Brandywine common share (based on the prior ten-day trading average) or for one Brandywine common share.

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

For purposes of computing the total purchase price reflected in the financial statements, the common shares, operating units, restricted shares and options that were issued in the Prentiss transaction were valued based on the average trading price per Brandywine common share of $29.54. The average trading price was based on the average of the high and low trading prices for each of the two trading days before, the day of and the two trading days after the merger was announced (i.e., September 29, September 30, October 3, October 4 and October 5).

The Company considered the provisions of FIN 47 for these acquisitions and where necessary, recorded a conditional asset retirement obligation as part of the purchase price. The aggregate asset retirement recorded in connection with the Prentiss acquisition was approximately $2.7 million.

Pro forma information relating to the acquisition of Prentiss is presented below as if Prentiss was acquired and the related financing transactions occurred on January 1, 2005. These pro forma results are not necessarily indicative of the results which actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods (in thousands, except per share amounts):

	Three-month periods ended June 30,						Six-month periods ended June 30,

	2006			2005			2006			2005

	(unaudited)						(unaudited)
Pro forma revenue	$	170,971		$	170,949		$	337,731		$	341,272
Pro forma loss from continuing operations		(11,489	)		(40	)		(17,034	)		(666	)
Pro forma loss allocated to common shares		(13,554	)		(2,038	)		(15,847	)		(4,662	)
Earnings per common share from continuing operations
Basic — as reported	$	(0.15	)	$	0.13		$	(0.24	)	$	0.26

Basic — as pro forma	$	(0.15	)	$	(0.02	)	$	(0.21	)	$	(0.05	)

Diluted - as reported	$	(0.15	)	$	0.13		$	(0.24	)	$	0.26

Diluted - as pro forma	$	(0.15	)	$	(0.02	)	$	(0.21	)	$	(0.05	)

Earnings per common share
Basic — as reported	$	(0.15	)	$	0.12		$	(0.20	)	$	0.26

Basic — as pro forma	$	(0.15	)	$	(0.02	)	$	(0.18	)	$	(0.05	)

Diluted - as reported	$	(0.15	)	$	0.12		$	(0.20	)	$	0.26

Diluted - as pro forma	$	(0.15	)	$	(0.02	)	$	(0.18	)	$	(0.05	)

During the six-month period ended June 30, 2006, the Company also acquired two office properties containing 238,107 net rentable square feet and 76.6 acres of developable land for an aggregate purchase price of $47.4 million. The Company sold two parcels of land containing 6.8 acres for an aggregate $4.9 million, realizing net gains totaling $2.6 million.

During the three-month period ended June 30, 2006, the Company acquired one office property containing 145,127 net rentable square feet for $24.0 million and 76.6 acres of developable land for an aggregate purchase price of $47.4 million. The Company sold two parcels of land containing 6.8 acres for an aggregate $4.9 million, realizing net gains totaling $2.6 million.

2005

During the six-month period ended June 30, 2005, the Company acquired one industrial property containing 385,884 net rentable square feet and 28.4 acres of developable land for an aggregate purchase price of $41.8 million.

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

During the three-month period ended June 30, 2005, the Company acquired one industrial property containing 385,884 net rentable square feet and 21.5 acres of developable land for an aggregate purchase price of $30.3 million.

4. INVESTMENT IN UNCONSOLIDATED VENTURES

As of June 30, 2006, the Company had an aggregate investment of approximately $76.1 million in eleven unconsolidated Real Estate Ventures (net of returns of investment). The Company or Prentiss formed these ventures with unaffiliated third parties to develop office properties or to acquire land in anticipation of possible development of office properties. Nine of the Real Estate Ventures own 15 office buildings that contain an aggregate of approximately 2.7 million net rentable square feet, one Real Estate Venture developed a hotel property that contains 137 rooms and one Real Estate Venture is developing an office property located in Albemarle County, VA.

The Company also has investments in four real estate ventures that are variable interest entities under FIN No. 46R and of which the Company is the primary beneficiary.

The Company accounts for its non-consolidating interests in its Real Estate Ventures using the equity method. Non-consolidating ownership interests range from 6% to 50%, subject to specified priority allocations in certain of the Real Estate Ventures. The Company’s investments, initially recorded at cost, are subsequently adjusted for the Company’s share of the Real Estate Ventures’ income or loss and cash contributions and distributions.

The amounts reflected below (except for Company’s 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 acquisition, 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 Company’s relative share of assets and liabilities with an adjustment to recognize equity in earnings for the appropriate additional depreciation/amortization).

The following is a summary of the financial position of the Real Estate Ventures as of June 30, 2006 and December 31, 2005 (in thousands):

	June 30, 2006		December 31, 2005

Operating property, net of accumulated depreciation	$	355,511	$	286,601
Other assets		50,888		32,267
Liabilities		25,691		24,855
Debt		331,170		205,018
Equity		49,538		88,995
Company’s investment in real estate ventures		76,113		13,331

In addition to its $76.1 million investment in the eleven unconsolidated Real Estate Ventures, the Company also has an investment of $2.3 million in Prentiss Properties Capital Trust I and Prentiss Properties Capital Trust II that is accounted for using the cost method of accounting. This investment, which is included in investment in unconsolidated ventures at June 30, 2006, was acquired by the Company as part of the Prentiss acquisition on January 5, 2006.

The following is a summary of results of operations of the Real Estate Ventures for the three- and six-month periods ended June 30, 2006 and 2005 (in thousands):

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

	Three-month periods ended June 30,				Six-month periods ended June 30,

	2006		2005		2006		2005

Revenue	$	32,391	$	21,018	$	52,115	$	32,138
Operating expenses		13,453		12,520		21,447		17,450
Interest expense, net		8,190		2,821		13,184		5,606
Depreciation and amortization		7,870		2,224		12,743		4,442
Net income		2,878		3,453		4,741		4,640
Company’s share of income (Company basis)		463		993		1,428		1,551

As of June 30, 2006, the Company had guaranteed repayment of approximately $0.6 million of loans for the 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 the Real Estate Ventures.

5. INTANGIBLE ASSETS

As of June 30, 2006 and December 31, 2005, the Company’s intangible assets were comprised of the following (in thousands):

	June 30, 2006

	Total Cost		Accumulated Amortization			Deferred Costs, net

In-place lease value	$	228,645	$	(37,683	)	$	190,962
Tenant relationship value		132,051		(12,891	)		119,160
Above market leases acquired		39,014		(10,599	)		28,415

Total	$	399,710	$	(61,173	)	$	338,537

	December 31, 2005

	Total Cost		Accumulated Amortization			Deferred Costs, net

In-place lease value	$	47,965	$	(12,575	)	$	35,390
Tenant relationship value		37,845		(5,606	)		32,239
Above market leases acquired		14,404		(3,936	)		10,468

Total	$	100,214	$	(22,117	)	$	78,097

6. MORTGAGE NOTES PAYABLE

The following table sets forth information regarding the Company’s mortgage indebtedness outstanding at June 30, 2006 and December 31, 2005 (in thousands):

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

Property / Location	June 30, 2006		December 31, 2005		Effective Interest Rate			Maturity Date

111 Arrandale Blvd	$	1,012	$	1,043	8.65%			Aug-06
429 Creamery Way		2,842		2,927	8.30%			Sep-06
Interstate Center		662		766	6.19%	(b	)	Mar-07
440 & 442 Creamery Way		5,503		5,581	8.55%			Jul-07
Norriton Office Center		5,149		5,191	8.50%			Oct-07
481 John Young Way		2,328		2,360	8.40%			Nov-07
400 Commerce Drive		11,897		11,989	7.12%			Jun-08
Two Logan Square		71,919		72,468	5.78%	(a	)	Jul-09
The Bluffs		10,700		—	6.00%	(a	)	Jul-09
Pacific Ridge		14,500		—	6.00%	(a	)	Aug-09
Pacific View/Camino		26,000		—	6.00%	(a	)	Aug-09
Computer Associates Building		31,000		—	6.00%	(a	)	Aug-09
200 Commerce Drive		5,876		5,911	7.12%	(a	)	Jan-10
Presidents Plaza		30,900		—	6.00%			May-10
1333 Broadway		24,752		—	5.18%			May-10
The Ordway		46,524		—	7.95%			Aug-10
World Savings Center		27,701		—	7.91%			Nov-10
Plymouth Meeting Exec.		44,401		44,687	7.00%	(a	)	Dec-10
Four Tower Bridge		10,695		10,763	6.62%			Feb-11
Arboretum I, II, III & V		22,999		23,238	7.59%			Jul-11
Midlantic Drive/Lenox Drive/DCC I		63,199		63,803	8.05%			Oct-11
Research Office Center		42,526		—	7.64%	(a	)	Oct-11
Concord Airport Plaza		38,878		—	7.20%	(a	)	Jan-12
Six Tower Bridge		14,916		15,083	7.79%			Aug-12
Newtown Square/Berwyn Park/Libertyview		63,894		64,429	7.25%			May-13
Southpoint III		5,194		5,431	7.75%			Apr-14
Tysons Corner		100,000		—	4.84%	(a	)	Aug-15
Grande A		60,116		61,092	7.48%			Jul-27
Grande A		—		11,456	7.91%	(b	)	Jul-27
Grande A		—		1,551	8.08%	(b	)	Jul-27
Grande B		78,291		79,036	7.48%			Jul-27
Coppell Associates		16,600		—	5.75%			Mar-16
Coppell Associates		3,845		—	6.89%			Dec-13

Principal balance outstanding		884,819		488,805
Plus: unamortized fixed-rate debt premiums		16,245		5,972

Total mortgage indebtedness	$	901,064	$	494,777

(a)

Loans were assumed upon acquisition of the related property. Interest rates presented above reflect the market rate at the time of acquisition.

(b)

For loans that bear interest at a variable rate, the rates in effect at June 30, 2006 have been presented.

The mortgage note payable balance of $13,500 for Corporate Lakes III, not included in the table above, is included in Mortgage notes payable and other liabilities held for sale on the balance sheet.

During the three-month periods ended June 30, 2006 and 2005, the Company’s weighted-average interest rate on its mortgage notes payable was 6.1% and 7.1%, respectively.

7. UNSECURED NOTES

On March 28, 2006, the Operating Partnership consummated the public offering of (1) $300,000,000 aggregate principal amount of its unsecured floating rate notes due 2009 (the “2009 Notes”), (2) $300,000,000 aggregate principal amount of its 5.75% notes due 2012 (the “2012 Notes”) and (3) $250,000,000 aggregate principal amount of its 6.00% notes due 2016 (the “2016 Notes”). The Company guaranteed the payment of principal and interest on the 2009 Notes, the 2012 Notes and the 2016 Notes.

BRANDYWINE REALTY TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

The following table sets forth information regarding the Company’s unsecured notes outstanding (in thousands):

Year of Maturity	June 30, 2006			December 31, 2005			Maturity	Stated Interest Rate				Effective Interest Rate

2008		113,000			113,000		Dec-08	4.34	%	(a	)	4.34%
2009		300,000			—		Apr-09	Libor + 0.45	%	(a	)	5.60%
2009		275,000			275,000		Nov-09	4.50	%	(a	)	4.62%
2010		300,000			300,000		Dec-10	5.625	%	(a	)	5.61%
2012		300,000			—		Apr-12	5.75	%	(a	)	5.77%
2014		250,000			250,000		Nov-14	5.40	%	(a	)	5.53%
2016		250,000			—		Apr-16	6.00	%	(a	)	5.95%
2035		27,062			—		Mar-35	Libor + 1.25	%	(b	)	6.40%
2035		25,774			—		Apr-35	Libor + 1.25	%	(b	)	6.40%
2035		25,774			—		Jul-35	Libor + 1.25	%	(b	)	6.40%

Total face amount	$	1,866,610		$	938,000
Less: unamortized discounts		(3,548	)		(1,393	)

Total unsecured notes	$	1,863,062		$	936,607

(a) Rates include the effect of amortization related to discounts and costs related to settlement of treasury lock agreements.

(b) Loans were assumed as part of the acquisition of Prentiss. Interest rates presented above reflect the market rate at time of acquisition.

The indenture relating to the $300 million 2009, $275 million 2009, $300 million 2010, $300 million 2012, $250 million 2014 and $250 million 2016 unsecured notes contains various financial restrictions and requirements, 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. In addition, the note purchase agreement relating to the 2008 unsecured notes contains covenants that are similar to the above covenants.

8. SECURED NOTE PAYABLE

As the result of a voluntary defeasance that was completed in the fourth quarter of 2005 by Prentiss, the Company has a secured note payable with a maturity date of February 2007. As of June 30, 2006, the outstanding balance on the secured note payable is $183.2 million. On October 7, 2005, Prentiss exercised the right to complete a voluntary defeasance of its $180.1 million PPREFI portfolio loan collateralized by certain properties acquired by the Company. Pursuant to the defeasance, Prentiss transferred the mortgage loan to an unrelated successor entity along with the proceeds necessary to acquire U.S. Treasury Securities sufficient to cover debt service including both interest and principal payments from the defeasance date through maturity of the loan. The U.S. Treasury Securities are included in investment in marketable securities on the balance sheet. The loan may be repaid at par beginning in November 2006. The Company intends to elect to prepay the loan at par when allowed to do so, at which point the Company expects to receive a portion of the proceeds of the sales of the securities in excess of the loan balance.

9. UNSECURED CREDIT FACILITY

The Company utilizes credit facility borrowings for general business purposes, including the acquisition, development and redevelopment of properties and the repayment of other debt. In December 2005, the Company replaced its then existing credit facility with a $600.0 million unsecured credit facility (the “Credit Facility”) that matures in December 2009, subject to a one-year extension option. Borrowings under the Credit Facility generally bear interest at LIBOR plus a spread over LIBOR ranging from 0.55% to 1.10% based on the Company’s unsecured senior debt rating. The Company has the option to increase the Credit Facility to $800.0 million subject to the absence of any defaults and the

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

Company’s ability to acquire additional commitments from its existing lenders or new lenders. As of June 30, 2006, the Company had $195.0 million of borrowings and $23.4 million of letters of credit outstanding under the Credit Facility, leaving $381.6 million of unused availability. For the six-month periods ended June 30, 2006 and 2005, the weighted-average interest rate on the Company’s unsecured credit facilities, including the effect of interest rate hedges, was 5.48% during 2006 and 4.06% during 2005.

The Credit Facility requires the maintenance of certain ratios related to minimum net worth, debt-to-total capitalization and fixed charge coverage and various non-financial covenants.

10. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

Risk Management

In the normal 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 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.

Use of Derivative Financial Instruments

The Company’s 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 Company’s 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.

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.

Concentration of Credit Risk

Concentrations of credit risk arise when a number of tenants related to the Company’s 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 Company’s rents during the three- and six-month periods ended June 30, 2006 or 2005.

11. DISCONTINUED OPERATIONS

For the three- and six-month periods ended June 30, 2006, income from discontinued operations relates to nine properties that the Company sold during 2006 and two properties designated as held-for-sale as of June 30, 2006. These properties were acquired by the Company as part of its acquisition of Prentiss. The following table summarizes the balance sheet information for the two properties identified as held for sale at June 30, 2006 (in thousands):

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

Real Estate Investments:
Operating Properties	$	74,564
Construction-in-progress		213
Accumulated depreciation		(2,238	)

		72,539
Other assets		13,589

Total Assets Held for Sale	$	86,128

Mortgage note payable and other liabilities	$	15,411

The following table summarizes the revenue and expense information for properties classified as discontinued operations for the three- and six-month periods ended June 30, 2006 (in thousands):

	Three-month period ended June 30, 2006			Six-month period ended June 30, 2006

Revenue:
Rents	$	2,418		$	9,115
Tenant reimbursements		487			1,698
Other		15			221

Total revenue		2,920			11,034
Expenses:
Property operating expenses		1,151			3,343
Real estate taxes		404			1,552
Depreciation & amortization		1,052			2,056

Total operating expenses		2,607			6,951
Operating income		313			4,083
Interest income		12			12
Interest expense		(191	)		(367	)

Income from discontinued operations before gain on sale of interests in real estate and minority interest		134			3,728
Minority interest - partners’ share of consolidated real estate venture		(195	)		(382	)
Minority interest attributable to discontinued operations - LP units		(6	)		(161	)

Income (loss) from discontinued operations	$	(67	)	$	3,185

For the three- and six-month periods ended June 30, 2005, income from discontinued operations relates to one property that the Company sold during 2005. The following table summarizes the revenue and expense information for the property classified as discontinued operations for the three- and six-month periods ended June 30, 2005 (in thousands):

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

	Three-month period ended June 30, 2005			Six-month period ended June 30, 2005

Revenue:
Rents	$	132		$	132
Tenant reimbursements		41			41
Other		6			6

Total revenue		179			179
Expenses:
Property operating expenses		106			106
Real estate taxes		85			85
Depreciation & amortization		128			128

Total operating expenses		319			319
Operating income		(140	)		(140	)
Interest income		—			—
Interest expense		—			—

Income from discontinued operations before gain on sale of interests in real estate and minority interest		(140	)		(140	)
Minority interest attributable to discontinued operations - LP units		5			5

Loss from discontinued operations	$	(135	)	$	(135	)

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.

12. MINORITY INTEREST

On June 15, 2006, the Operating Partnership declared a $0.44 per unit cash distribution to holders of Class A Units totaling $1.8 million.

13. BENEFICIARIES’ EQUITY

On June 15, 2006, the Company declared a distribution of $0.44 per Common Share, totaling $39.8 million, which was paid on July 17, 2006 to shareholders of record as of July 6, 2006. On June 15, 2006, the Company declared distributions on its Series C Preferred Shares and Series D Preferred Shares to holders of record as of June 30, 2006. These shares are entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions paid on July 17, 2006 to holders of Series C Preferred Shares and Series D Preferred Shares totaled $0.9 million and $1.1 million, respectively.

14. EARNINGS PER COMMON SHARE

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):

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

	Three-month periods ended June 30,

	2006						2005

	Basic			Diluted			Basic			Diluted

Income (loss) from continuing operations	$	(11,489	)	$	(11,489	)	$	9,065		$	9,065
Income (loss) from discontinued operations		(67	)		(67	)		(135	)		(135	)
Income allocated to Preferred Shares		(1,998	)		(1,998	)		(1,998	)		(1,998	)

Net income available to common shareholders	$	(13,554	)	$	(13,554	)	$	6,932		$	6,932

Weighted-average shares outstanding		90,540,237			90,540,237			55,681,668			55,681,668
Options		—			275,782			—			162,571

Total weighted-average shares outstanding		90,540,237			90,816,019			55,681,668			55,844,239

Earnings per Common Share:
Continuing operations	$	(0.15	)	$	(0.15	)	$	0.13		$	0.13
Discontinued operations		—			—			—			—

	$	(0.15	)	$	(0.15	)	$	0.12		$	0.12

	Six-month periods ended June 30,

	2006						2005

	Basic			Diluted			Basic			Diluted

Income (loss) from continuing operations	$	(17,383	)	$	(17,383	)	$	18,480		$	18,480
Income (loss) from discontinued operations		3,185			3,185			(135	)		(135	)
Income allocated to Preferred Shares		(3,996	)		(3,996	)		(3,996	)		(3,996	)

Net income available to common shareholders	$	(18,194	)	$	(18,194	)	$	14,349		$	14,349

Weighted-average shares outstanding		89,923,528			89,923,528			55,562,384			55,562,384
Options		—			279,326			—			223,686

Total weighted-average shares outstanding		89,923,528			90,202,854			55,562,384			55,786,070

Earnings per Common Share:
Continuing operations	$	(0.24	)	$	(0.24	)	$	0.26		$	0.26
Discontinued operations		0.04			0.04			—			—

	$	(0.20	)	$	(0.20	)	$	0.26		$	0.26

Securities (including Class A Units of the Operating Partnership) totaling 4,105,314 and 2,052,959 as of June 30, 2006 and 2005, respectively, were excluded from the earnings per share computations because their effect would have been antidilutive.

15. SEGMENT INFORMATION

The Company currently manages its portfolio within nine segments: (1) Pennsylvania—West, (2) Pennsylvania—North, (3) New Jersey, (4) Urban, (5) Virginia, (6) California—North, (7) California—South, (8) Mid-Atlantic and (9) Southwest. The Pennsylvania—West segment includes properties in Chester, Delaware and Montgomery counties in the Philadelphia suburbs of Pennsylvania. The Pennsylvania—North segment includes properties north of Philadelphia in Berks, Bucks, Cumberland, Dauphin, Lehigh and Montgomery counties. The New Jersey segment includes properties in counties in the southern part of New Jersey including Burlington, Camden and Mercer counties and in Bucks County, Pennsylvania. The Urban segment includes properties in the City of Philadelphia, Pennsylvania and the state of Delaware. The Virginia segment includes properties primarily in Albemarle, Chesterfield and Henrico

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

counties, the City of Richmond and Durham, North Carolina. The California—North segment includes properties in the City of Oakland and Concord. The California—South segment includes properties in the City of Carlsbad and San Diego. The Mid-Atlantic segment includes properties in Northern Virginia and the City of Bethesda and Rockville, Maryland. The Southwest segment includes properties in Dallas and Travis counties of Texas. Corporate is responsible for cash and investment management, development of certain real estate properties during the construction period, and certain other general support functions.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

Segment information as of and for the three-month periods ended June 30, 2006 and 2005 is as follows (in thousands):

Pennsylvania
—
West

Pennsylvania
—
North

New Jersey

Urban

Virginia

California
—
North

California
—
South

Mid-Atlantic

Southwest

Corporate

Total

As of June 30, 2006:

Real estate investments, at cost: