Edgar Filing: BRANDYWINE REALTY TRUST

bdn-10q_20190331.htm

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 March 31, 2019

☐	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)

MARYLAND (Brandywine Realty Trust)		23-2413352
DELAWARE (Brandywine Operating Partnership L.P.)		23-2862640
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2929 Walnut Street Suite 1700
Philadelphia, Pennsylvania		19104
(Address of principal executive offices)		(Zip Code)

Registrant’s 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.

Brandywine Realty Trust		Yes ☒ No ☐
Brandywine Operating Partnership, L.P.		Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Brandywine Realty Trust		Yes ☒ No ☐
Brandywine Operating Partnership, L.P.		Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Brandywine Realty Trust:

Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐
Smaller reporting company ☐	Emerging growth company ☐

Brandywine Operating Partnership, L.P.:

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☒
Smaller reporting company ☐	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Brandywine Realty Trust		Yes ☐ No ☒
Brandywine Operating Partnership, L.P.		Yes ☐ No ☒

A total of 176,137,761 Common Shares of Beneficial Interest, par value $0.01 per share of Brandywine Realty Trust, were outstanding as of April 26, 2019.

Securities registered pursuant to section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Shares of Beneficial Interest		BDN		NYSE

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2019 of Brandywine Realty Trust (the “Parent Company”) and Brandywine Operating Partnership L.P. (the “Operating Partnership”). The Parent Company is a Maryland real estate investment trust, or REIT, that owns its assets and conducts its operations through the Operating Partnership, a Delaware limited partnership, and subsidiaries of the Operating Partnership. The Parent Company, the Operating Partnership and their consolidated subsidiaries are collectively referred to in this report as the “Company”. In addition, as used in this report, terms such as “we”, “us”, and “our” may refer to the Company, the Parent Company, or the Operating Partnership.

The Parent Company is the sole general partner of the Operating Partnership and, as of March 31, 2019, owned a 99.4% interest in the Operating Partnership. The remaining 0.6% interest consists of common units of limited partnership interest issued by the Operating Partnership to third parties in exchange for contributions of properties to the Operating Partnership. As the sole general partner of the Operating Partnership, the Parent Company has full and complete authority over the Operating Partnership’s day-to-day operations and management.

Management operates the Parent Company and the Operating Partnership as one enterprise. The management of the Parent Company consists of the same members as the management of the Operating Partnership.

As general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the Parent Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Parent Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company's operations on a consolidated basis and how management operates the Company.

The Company believes that combining the quarterly reports on Form 10-Q of the Parent Company and the Operating Partnership into a single report will result in the following benefits:

•

facilitate a better understanding by the investors of the Parent Company and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business;

•

remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both the Parent Company and the Operating Partnership; and

•

create time and cost efficiencies through the preparation of one combined report instead of two separate reports.

There are few differences between the Parent Company and the Operating Partnership, which are reflected in the footnote disclosures in this report. The Company believes it is important to understand the differences between the Parent Company and the Operating Partnership in the context of how these entities operate as an interrelated consolidated company. The Parent Company is a REIT, whose only material asset is its ownership of partnership interests of the Operating Partnership. As a result, the Parent Company does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing the debt obligations of the Operating Partnership. The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s Real Estate Ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness (directly and through subsidiaries) and through the issuance of partnership units of the Operating Partnership or equity interests in subsidiaries of the Operating Partnership.

The equity and non-controlling interests in the Parent Company and the Operating Partnership’s equity are the main areas of difference between the consolidated financial statements of the Parent Company and the Operating Partnership. The common units of limited partnership interest in the Operating Partnership are accounted for as partners’ equity in the Operating Partnership’s financial statements while the common units of limited partnership interests held by parties other than the Parent Company are presented as non-controlling interests in the Parent Company’s financial statements. The differences between the Parent Company and the Operating Partnership’s equity relate to the differences in the equity issued at the Parent Company and Operating Partnership levels.

To help investors understand the significant differences between the Parent Company and the Operating Partnership, this report presents the following as separate notes or sections for each of the Parent Company and the Operating Partnership:

•

Consolidated Financial Statements; and

•

Notes to the Parent Company’s and Operating Partnership’s Equity.

This report also includes separate Item 4. (Controls and Procedures) disclosures and separate Exhibit 31 and 32 certifications for each of the Parent Company and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Parent Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.

In order to highlight the differences between the Parent Company and the Operating Partnership, the separate sections in this report for the Parent Company and the Operating Partnership specifically refer to the Parent Company and the Operating Partnership. In the sections that combine disclosures of the Parent Company and the Operating Partnership, this report refers to such disclosures as those of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and real estate ventures and holds assets and incurs debt, reference to the Company is appropriate because the business is one enterprise and the Parent Company operates the business through the Operating Partnership.

TABLE OF CONTENTS

		Page

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Brandywine Realty Trust

Financial Statements of Brandywine Realty Trust		5

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018		5

Consolidated Statements of Operations for the three-month periods ended March 31, 2019 and 2018		6

Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2019 and 2018		7

Consolidated Statements of Beneficiaries’ Equity for the three-month periods ended March 31, 2019 and 2018		8

Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2019 and 2018		10

Brandywine Operating Partnership, L.P.

Financial Statements of Brandywine Operating Partnership, L.P.		12

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018		12

Consolidated Statements of Operations for the three-month periods ended March 31, 2019 and 2018		13

Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2019 and 2018		14

Consolidated Statements of Partners’ Equity for the three-month periods ended March 31, 2019 and 2018		15

Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2019 and 2018		17

Notes to Unaudited Consolidated Financial Statements		19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		39

Item 3. Quantitative and Qualitative Disclosures about Market Risk		54

Item 4. Controls and Procedures		55

PART II — OTHER INFORMATION		56

Item 1. Legal Proceedings		56

Item 1A. Risk Factors		56

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		56

Item 3. Defaults Upon Senior Securities		56

Item 4. Mine Safety Disclosures		56

Item 5. Other Information		56

Item 6. Exhibits		57

Signatures		59

Filing Format

This combined Form 10-Q is being filed separately by Brandywine Realty Trust and Brandywine Operating Partnership, L.P.

PART I - FINANCIAL INFORMATION

Item 1. — Financial Statements

BRANDYWINE REALTY TRUST

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share information)

	March 31,			December 31,
	2019			2018
	(unaudited)
ASSETS
Real estate investments:
Operating properties	$	4,015,879		$	3,953,319
Right of use asset - operating leases		22,175			-
Accumulated depreciation		(891,125	)		(865,462	)
Operating real estate investments, net		3,146,929			3,087,857
Construction-in-progress		112,176			150,263
Land held for development		88,047			86,401
Prepaid leasehold interests in land held for development, net		39,897			39,999
Total real estate investments, net		3,387,049			3,364,520
Assets held for sale, net		7,345			11,599
Cash and cash equivalents		14,449			22,842
Accounts receivable, net of allowance of $284 and $1,653 as of March 31, 2019 and December 31, 2018, respectively		21,780			16,394
Accrued rent receivable, net of allowance of $11,018 and $11,266 as of March 31, 2019 and December 31, 2018, respectively		168,781			165,243
Investment in Real Estate Ventures, equity method		161,568			169,100
Deferred costs, net		95,293			91,075
Intangible assets, net		119,903			131,348
Other assets		139,761			126,400
Total assets	$	4,115,929		$	4,098,521
LIABILITIES AND BENEFICIARIES' EQUITY
Mortgage notes payable, net	$	319,132		$	320,869
Unsecured credit facility		160,500			92,500
Unsecured term loan, net		248,168			248,042
Unsecured senior notes, net		1,366,997			1,366,635
Accounts payable and accrued expenses		112,375			125,696
Distributions payable		34,107			33,632
Deferred income, gains and rent		24,749			28,293
Acquired lease intangibles, net		29,813			31,783
Lease liability - operating leases		22,402			-
Other liabilities		16,194			18,498
Total liabilities	$	2,334,437		$	2,265,948
Commitments and contingencies (See Note 14)
Brandywine Realty Trust's Equity:
Common Shares of Brandywine Realty Trust's beneficial interest, $0.01 par value; shares authorized 400,000,000; 176,001,580 and 176,873,324 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively		1,761			1,770
Additional paid-in-capital		3,187,312			3,200,850
Deferred compensation payable in common shares		14,640			14,021
Common shares in grantor trust, 1,012,542 and 977,120 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively		(14,640	)		(14,021	)
Cumulative earnings		795,186			796,513
Accumulated other comprehensive income		2,560			5,029
Cumulative distributions		(2,217,469	)		(2,183,909	)
Total Brandywine Realty Trust's equity		1,769,350			1,820,253
Noncontrolling interests		12,142			12,320
Total beneficiaries' equity	$	1,781,492		$	1,832,573
Total liabilities and beneficiaries' equity	$	4,115,929		$	4,098,521

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)

	Three-month periods ended
	March 31,
	2019			2018
Revenue
Rents	$	138,098		$	126,759
Third party management fees, labor reimbursement and leasing		3,955			7,674
Other		1,843			1,925
Total revenue		143,896			136,358
Operating expenses
Property operating expenses		39,481			39,332
Real estate taxes		15,783			12,422
Third party management expenses		2,117			4,750
Depreciation and amortization		51,980			43,291
General and administrative expenses		9,844			8,723
Total operating expenses		119,205			108,518
Gain on sale of real estate
Net gain on sale of undepreciated real estate		1,001			22
Total gain on sale of real estate		1,001			22
Operating income		25,692			27,862
Other income (expense):
Interest income		525			703
Interest expense		(20,357	)		(19,533	)
Interest expense - amortization of deferred financing costs		(666	)		(627	)
Equity in loss of Real Estate Ventures		(1,358	)		(825	)
Net gain on real estate venture transactions		259			37,263
Net income before income taxes		4,095			44,843
Income tax provision		(29	)		(138	)
Net income		4,066			44,705
Net income attributable to noncontrolling interests		(57	)		(376	)
Net income attributable to Brandywine Realty Trust		4,009			44,329
Nonforfeitable dividends allocated to unvested restricted shareholders		(119	)		(114	)
Net income attributable to Common Shareholders of Brandywine Realty Trust	$	3,890		$	44,215

Basic income per Common Share	$	0.02		$	0.25

Diluted income per Common Share	$	0.02		$	0.25

Basic weighted average shares outstanding		175,857,358			178,395,525
Diluted weighted average shares outstanding		176,464,218			179,788,311

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

BRANDYWINE REALTY TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

	Three-month periods ended
	March 31,
	2019			2018
Net income	$	4,066		$	44,705
Comprehensive income (loss):
Unrealized gain (loss) on derivative financial instruments		(2,689	)		4,696
Amortization of interest rate contracts (1)		206			312
Comprehensive income (loss):		(2,483	)		5,008
Comprehensive income		1,583			49,713
Comprehensive income attributable to noncontrolling interest		(43	)		(418	)
Comprehensive income attributable to Brandywine Realty Trust	$	1,540		$	49,295

(1)	Amounts reclassified from comprehensive income to interest expense within the Consolidated Statements of Operations.

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

BRANDYWINE REALTY TRUST

CONSOLIDATED STATEMENTS OF BENEFICIARIES’ EQUITY

For the three-month period ended March 31, 2019

(unaudited, in thousands, except number of shares)

	Number of Common Shares			Number of Rabbi Trust/Deferred Compensation Shares			Common Shares of Brandywine Realty Trust's beneficial interest			Additional Paid-in Capital			Deferred Compensation Payable in Common Shares		Common Shares in Grantor Trust			Cumulative Earnings			Accumulated Other Comprehensive Income (Loss)			Cumulative Distributions			Noncontrolling Interests			Total
BALANCE, December 31, 2018		176,873,324			977,120		$	1,770		$	3,200,850		$	14,021	$	(14,021	)	$	796,513		$	5,029		$	(2,183,909	)	$	12,320		$	1,832,573
Cumulative effect of accounting change																			(5,336	)											(5,336	)
Net income																			4,009									57			4,066
Other comprehensive income																						(2,469	)					(14	)		(2,483	)
Repurchase and retirement of Common Shares of Beneficial Interest		(1,337,169	)					(13	)		(17,268	)																			(17,281	)
Issuance of partnership interest in consolidated real estate ventures																												23			23
Share-based compensation activity		465,883			41,342			4			3,673																				3,677
Share Issuance from/(to) Deferred Compensation Plan		(458	)		(5,920	)								619		(619	)														-
Reallocation of Noncontrolling interest											57																	(57	)		-
Distributions declared (0.19 per share)																									(33,560	)		(187	)		(33,747	)
BALANCE, March 31, 2019		176,001,580			1,012,542		$	1,761		$	3,187,312		$	14,640	$	(14,640	)	$	795,186		$	2,560		$	(2,217,469	)	$	12,142		$	1,781,492

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

BRANDYWINE REALTY TRUST

CONSOLIDATED STATEMENT OF BENEFICIARIES’ EQUITY

For the three-month period ended March 31, 2018

(unaudited, in thousands, except number of shares)

	Number of Common Shares		Number of Rabbi Trust/Deferred Compensation Shares		Common Shares of Brandywine Realty Trust's beneficial interest		Additional Paid-in Capital		Deferred Compensation Payable in Common Shares		Common Shares in Grantor Trust			Cumulative Earnings		Accumulated Other Comprehensive Income		Cumulative Distributions			Noncontrolling Interests		Total
BALANCE, December 31, 2017		178,285,236		894,736	$	1,784	$	3,218,564	$	12,445	$	(12,445	)	$	660,174	$	2,399	$	(2,053,741	)	$	17,420	$	1,846,600
Net income															44,329							376		44,705
Other comprehensive income																	4,966					42		5,008
Issuance of Common Shares of Beneficial Interest		23,311						416																416
Issuance of partnership interest in consolidated real estate ventures																						15		15