BDN 3.31.2013 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
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(Mark One)
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þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended March 31, 2013 |
or
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o | 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.)
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Brandywine Realty Trust
Brandywine Operating Partnership, L.P.
(Exact name of registrant as specified in its charter)
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MARYLAND (Brandywine Realty Trust) | | 23-2413352 |
DELAWARE (Brandywine Operating Partnership L.P.) | | 23-2862640 |
(State or other jurisdiction of | | (I.R.S. Employer |
Incorporation or organization) | | Identification No.) |
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555 East Lancaster Avenue | | |
Radnor, Pennsylvania | | 19087 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code (610) 325-5600
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Brandywine Realty Trust | | Yes þ No o |
Brandywine Operating Partnership, L.P. | | Yes þ No o |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Brandywine Realty Trust | | Yes þ No o |
Brandywine Operating Partnership, L.P. | | Yes þ No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Brandywine Realty Trust:
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Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
Brandywine Operating Partnership, L.P.:
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Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer þ | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Brandywine Realty Trust | | Yes o No þ |
Brandywine Operating Partnership, L.P. | | Yes o No þ |
A total of 156,560,738 Common Shares of Beneficial Interest, par value $0.01 per share of Brandywine Realty Trust, were outstanding as of April 30, 2013.
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2013 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, 2013, owned a 98.7% interest in the Operating Partnership. The remaining 1.3% 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.
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:
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• | 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; |
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• | 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 |
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• | create time and cost efficiencies through the preparation of one combined report instead of two separate reports. |
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.
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:
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• | Consolidated Financial Statements; |
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• | Parent Company’s and Operating Partnership’s Equity; and |
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• | Liquidity and Capital Resources in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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 debt, reference to the Company is appropriate because the business is one enterprise and the Parent Company operates the business through 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.
TABLE OF CONTENTS
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Item 1. Financial Statements | |
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Brandywine Realty Trust | |
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Brandywine Operating Partnership, L.P. | |
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Financial Statements of Brandywine Operating Partnership, L.P. (unaudited) | |
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Exhibit 10.1 |
Exhibit 10.2 |
Exhibit 10.3 |
Exhibit 31.1 |
Exhibit 31.2 |
Exhibit 31.3 |
Exhibit 31.4 |
Exhibit 32.1 |
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Exhibit 32.2 |
Exhibit 32.3 |
Exhibit 32.4 |
EX-101 INSTANCE DOCUMENT |
EX-101 SCHEMA DOCUMENT |
EX-101 CALCULATION LINKBASE DOCUMENT |
EX-101 LABELS LINKBASE DOCUMENT |
EX-101 PRESENTATION LINKBASE DOCUMENT |
EX-101 DEFINITION LINKBASE DOCUMENT |
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
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Item 1. | — Financial Statements |
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share information) |
| | | | | | | |
| March 31,
2013 | | December 31,
2012 |
| (unaudited) |
ASSETS | | | |
Real estate investments: | | | |
Rental properties | $ | 4,607,890 |
| | $ | 4,726,169 |
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Accumulated depreciation | (951,934 | ) | | (954,665 | ) |
Operating real estate investments, net | 3,655,956 |
| | 3,771,504 |
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Construction-in-progress | 53,468 |
| | 48,950 |
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Land inventory | 92,776 |
| | 102,439 |
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Total real estate investments, net | 3,802,200 |
| | 3,922,893 |
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Cash and cash equivalents | 47,874 |
| | 1,549 |
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Accounts receivable, net | 15,072 |
| | 13,232 |
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Accrued rent receivable, net | 120,070 |
| | 122,066 |
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Investment in real estate ventures, at equity | 184,802 |
| | 193,555 |
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Deferred costs, net | 119,378 |
| | 122,243 |
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Intangible assets, net | 66,104 |
| | 70,620 |
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Notes receivable | 7,026 |
| | 7,226 |
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Other assets | 62,778 |
| | 53,325 |
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Total assets | $ | 4,425,304 |
| | $ | 4,506,709 |
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LIABILITIES AND BENEFICIARIES’ EQUITY | | | |
Mortgage notes payable | $ | 440,300 |
| | $ | 442,974 |
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Unsecured credit facility | — |
| | 69,000 |
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Unsecured term loans | 450,000 |
| | 450,000 |
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Unsecured senior notes, net of discounts | 1,503,632 |
| | 1,503,356 |
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Accounts payable and accrued expenses | 81,626 |
| | 71,579 |
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Distributions payable | 23,684 |
| | 23,652 |
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Deferred income, gains and rent | 81,976 |
| | 82,947 |
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Acquired lease intangibles, net | 31,902 |
| | 33,859 |
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Other liabilities | 53,551 |
| | 55,826 |
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Total liabilities | 2,666,671 |
| | 2,733,193 |
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Commitments and contingencies (Note 17) |
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Brandywine Realty Trust’s equity: | | | |
Preferred Shares (shares authorized-20,000,000): | | | |
6.90% Series E Preferred Shares, $0.01 par value; issued and outstanding- 4,000,000 in 2013 and 2012 | 40 |
| | 40 |
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Common Shares of Brandywine Realty Trust’s beneficial interest, $0.01 par value; shares authorized 200,000,000; 143,712,578 and 143,538,733 issued and outstanding in 2013 and 2012, respectively | 1,435 |
| | 1,434 |
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Additional paid-in capital | 2,783,130 |
| | 2,780,194 |
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Deferred compensation payable in common shares | 5,516 |
| | 5,352 |
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Common shares in grantor trust, 315,753 in 2013 and 290,745 in 2012 | (5,516 | ) | | (5,352 | ) |
Cumulative earnings | 483,635 |
| | 479,734 |
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Accumulated other comprehensive loss | (14,048 | ) | | (15,918 | ) |
Cumulative distributions | (1,516,591 | ) | | (1,493,206 | ) |
Total Brandywine Realty Trust’s equity | 1,737,601 |
| | 1,752,278 |
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Non-controlling interests | 21,032 |
| | 21,238 |
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Total equity | 1,758,633 |
| | 1,773,516 |
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Total liabilities and equity | $ | 4,425,304 |
| | $ | 4,506,709 |
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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)
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| For the three-month period ended |
| March 31, |
| 2013 | | 2012 |
Revenue: | | | |
Rents | $ | 115,552 |
| | $ | 109,699 |
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Tenant reimbursements | 20,357 |
| | 18,696 |
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Termination fees | 496 |
| | 1,490 |
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Third party management fees, labor reimbursement and leasing | 3,236 |
| | 3,142 |
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Other | 967 |
| | 1,512 |
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Total revenue | 140,608 |
| | 134,539 |
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Operating Expenses: | | | |
Property operating expenses | 39,641 |
| | 38,077 |
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Real estate taxes | 14,430 |
| | 13,567 |
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Third party management expenses | 1,425 |
| | 1,250 |
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Depreciation and amortization | 49,861 |
| | 48,096 |
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General and administrative expenses | 6,551 |
| | 6,050 |
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Total operating expenses | 111,908 |
| | 107,040 |
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Operating income | 28,700 |
| | 27,499 |
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Other Income (Expense): | | | |
Interest income | 58 |
| | 483 |
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Interest expense | (30,914 | ) | | (34,144 | ) |
Interest expense — amortization of deferred financing costs | (1,161 | ) | | (1,311 | ) |
Interest expense — financing obligation | (218 | ) | | (182 | ) |
Equity in income of real estate ventures | 1,535 |
| | 44 |
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Loss on early extinguishment of debt | (3 | ) | | (248 | ) |
Loss from continuing operations | (2,003 | ) | | (7,859 | ) |
Discontinued operations: | | | |
Income from discontinued operations | 618 |
| | 2,527 |
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Net gain on disposition of discontinued operations | 5,304 |
| | 14,668 |
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Total discontinued operations | 5,922 |
| | 17,195 |
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Net income | 3,919 |
| | 9,336 |
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Net (income) loss from discontinued operations attributable to non-controlling interests — LP units | (75 | ) | | (315 | ) |
Net (income) loss attributable to non-controlling interests — LP units | 47 |
| | 181 |
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Net (income) loss attributable to non-controlling interests | (28 | ) | | (134 | ) |
Net income attributable to Brandywine Realty Trust | 3,891 |
| | 9,202 |
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Distribution to Preferred Shares | (1,725 | ) | | (1,998 | ) |
Amount allocated to unvested restricted shareholders | (108 | ) | | (96 | ) |
Net income attributable to Common Shareholders of Brandywine Realty Trust | $ | 2,058 |
| | $ | 7,108 |
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Basic income (loss) per Common Share: | | | |
Continuing operations | $ | (0.03 | ) | | $ | (0.07 | ) |
Discontinued operations | 0.04 |
| | 0.12 |
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| $ | 0.01 |
| | $ | 0.05 |
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Diluted income (loss) per Common Share: | | | |
Continuing operations | $ | (0.03 | ) | | $ | (0.07 | ) |
Discontinued operations | 0.04 |
| | 0.12 |
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| $ | 0.01 |
| | $ | 0.05 |
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Basic weighted average shares outstanding | 143,605,659 |
| | 142,820,955 |
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Diluted weighted average shares outstanding | 143,605,659 |
| | 142,820,955 |
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Net income (loss) attributable to Brandywine Realty Trust | | | |
Loss from continuing operations | $ | (1,956 | ) | | $ | (7,678 | ) |
Income from discontinued operations | 5,847 |
| | 16,880 |
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Net income | $ | 3,891 |
| | $ | 9,202 |
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The accompanying notes are an integral part of these consolidated financial statements.
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
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| For the three-month period ended |
| March 31, |
| 2013 | | 2012 |
Net income | $ | 3,919 |
| | $ | 9,336 |
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Comprehensive income (loss): | | | |
Unrealized gain on derivative financial instruments | 1,845 |
| | 27 |
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Reclassification of realized (gains)/losses on derivative financial instruments to operations, net (1) | 48 |
| | 48 |
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Total comprehensive income | 1,893 |
| | 75 |
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Comprehensive income | 5,812 |
| | 9,411 |
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Comprehensive (income) loss attributable to non-controlling interest | (52 | ) | | (135 | ) |
Comprehensive income attributable to Brandywine Realty Trust | $ | 5,760 |
| | $ | 9,276 |
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(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 periods ended March 31, 2013 and 2012
(unaudited, in thousands, except number of shares)
March 31, 2013
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| Number of Preferred Shares | | Par Value of Preferred 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 | | Non-Controlling Interests | | Total |
BALANCE, December 31, 2012 | 4,000,000 |
| | $ | 40 |
| | 143,538,733 |
| | 290,745 |
| | $ | 1,434 |
| | $ | 2,780,194 |
| | $ | 5,352 |
| | $ | (5,352 | ) | | $ | 479,734 |
| | $ | (15,918 | ) | | $ | (1,493,206 | ) | | $ | 21,238 |
| | $ | 1,773,516 |
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Net income | | | | | | | | | | | | | | | | | 3,891 |
| | | | | | 28 |
| | 3,919 |
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Comprehensive income | | | | | | | | | | | | | | | | | | | 1,870 |
| | | | 23 |
| | 1,893 |
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Equity issuance costs | | | | | | | | | | | (61 | ) | | | | | | | | | | | | | | (61 | ) |
Bonus Share Issuance | | | | | 27,918 |
| | | | | | 361 |
| | | | | | | | | | | | | | 361 |
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Vesting of Restricted Shares | | | | | 21,116 |
| | 7,050 |
| | | | (84 | ) | | | | | | | | | | | | | | (84 | ) |
Restricted Share Amortization | | | | | | | | | | | 849 |
| | | | | | | | | | | | | | 849 |
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Vesting of Restricted Performance Units | | | | | 26,067 |
| | | | | | (161 | ) | | | | | | | | | | | | | | (161 | ) |
Restricted Performance Units Amortization | | | | | | | | | | | 1,119 |
| | | | | | | | | | | | | | 1,119 |
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Restricted Share Forfeitures | | | | | | | | | | | | | | | | | 10 |
| | | | | | | | 10 |
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Exercise of Stock Options | | | | | 76,340 |
| | | | 1 |
| | 671 |
| | | | | | | | | | | | | | 672 |
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Stock Option Amortization | | | | | | | | | | | 261 |
| | | | | | | | | | | | | | 261 |
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Share Issuance from/to Deferred Compensation Plan | | | | | 22,404 |
| | 17,958 |
| | | | | | 164 |
| | (164 | ) | | | | | | | | | | — |
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Adjustment to Non-controlling Interest | | | | | | | | | | | (19 | ) | | | | | | | | | | | | 19 |
| | — |
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Preferred Share distributions | | | | | | | | | | | | | | | | | | | | | (1,725 | ) | | | | (1,725 | ) |
Distributions declared ($0.15 per share) | | | | | | | | | | | | | | | | | | | | | (21,660 | ) | | (276 | ) | | (21,936 | ) |
BALANCE, March 31, 2013 | 4,000,000 |
| | $ | 40 |
| | 143,712,578 |
| | 315,753 |
| | $ | 1,435 |
| | $ | 2,783,130 |
| | $ | 5,516 |
| | $ | (5,516 | ) | | $ | 483,635 |
| | $ | (14,048 | ) | | $ | (1,516,591 | ) | | $ | 21,032 |
| | $ | 1,758,633 |
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The accompanying notes are an integral part of these consolidated financial statements.
March 31, 2012
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| Number of Preferred Shares | | Par Value of Preferred 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 | | Non-Controlling Interests | | Total |
BALANCE, December 31, 2011 | 4,300,000 |
| | $ | 43 |
| | 142,690,755 |
| | 292,646 |
| | $ | 1,424 |
| | $ | 2,776,197 |
| | $ | 5,631 |
| | $ | (5,631 | ) | | $ | 477,338 |
| | $ | (6,079 | ) | | $ | (1,392,332 | ) | | $ | 33,105 |
| | $ | 1,889,696 |
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Net income | | | | | | | | | | | | | | | | | 9,202 |
| | | | | | 134 |
| | 9,336 |
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Comprehensive income | | | | | | | | | | | | | | | | | | | 74 |
| | | | 1 |
| | 75 |
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Conversion of LP Units to Common Shares | | | | | 20,464 |
| | | | | | 149 |
| | | | | | (49 | ) | | | | | | (335 | ) | | (235 | ) |
Bonus Share Issuance | | | | | 35,703 |
| | | | | | 387 |
| | | | | | | | | | | | | | 387 |
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Vesting of Restricted Shares | | | | | 30,820 |
| | 9,036 |
| | 1 |
| | (90 | ) | | | | | | | | | | | | | | (89 | ) |
Restricted Share Amortization | | | | | | | | | | | 678 |
| | | | | | | | | | | | | | 678 |
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Vesting of Restricted Performance Units | | | | | 249,797 |
| | | | 3 |
| | (1,331 | ) | | | | | | | | | | | | | | (1,328 | ) |
Restricted Performance Units Amortization | | | | | | | | | | | 479 |
| | | | | | | | | | | | | | 479 |
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Stock Option Amortization | | | | | | | | | | | 376 |
| | | | | | | | | | | | | | 376 |
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Share Issuance from/to Deferred Compensation Plan | | | | | (5,389 | ) | | (8,560 | ) | | | | | | (195 | ) | | 195 |
| | | | | | | | | | — |
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Adjustment to Non-controlling Interest | | | | | | | | | | | 303 |
| | | | | | | | | | | | (290 | ) | | 13 |
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Preferred Share distributions | | | | | | | | | | | | | | | | | | | | | (1,998 | ) | | | | (1,998 | ) |
Distributions declared ($0.15 per share) | | | | | | | | | | | | | | | | | | | | | (21,586 | ) | | (362 | ) | | (21,948 | ) |
BALANCE, March 31, 2012 | 4,300,000 |
| | $ | 43 |
| | 143,022,150 |
| | 293,122 |
| | $ | 1,428 |
| | $ | 2,777,148 |
| | $ | 5,436 |
| | $ | (5,436 | ) | | $ | 486,491 |
| | $ | (6,005 | ) | | $ | (1,415,916 | ) | | $ | 32,253 |
| | $ | 1,875,442 |
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The accompanying notes are an integral part of these consolidated financial statements.
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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| Three-month periods ended |
| March 31, |
| 2013 | | 2012 |
Cash flows from operating activities: | | | |
Net income | $ | 3,919 |
| | $ | 9,336 |
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Adjustments to reconcile net income to net cash from operating activities: | | | |
Depreciation and amortization | 50,304 |
| | 51,453 |
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Amortization of deferred financing costs | 1,161 |
| | 1,311 |
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Amortization of debt discount/(premium), net | 366 |
| | 365 |
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Amortization of stock compensation costs | 2,097 |
| | 1,484 |
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Shares used for employee taxes upon vesting of share awards | (245 | ) | | (1,418 | ) |
Straight-line rent income | (5,514 | ) | | (6,908 | ) |
Amortization of acquired above (below) market leases to rental revenue, net | (1,771 | ) | | (1,419 | ) |
Straight-line ground rent expense | 474 |
| | 474 |
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Provision for doubtful accounts | 505 |
| | 781 |
|
Net gain on sale of interests in real estate | (5,304 | ) | | (14,666 | ) |
Loss on early extinguishment of debt | 3 |
| | 248 |
|
Real estate venture income in excess of distributions | (358 | ) | | 163 |
|
Deferred financing obligation | (452 | ) | | (405 | ) |
Changes in assets and liabilities: | | | |
Accounts receivable | (1,321 | ) | | 976 |
|
Other assets | (4,772 | ) | | (3,629 | ) |
Accounts payable and accrued expenses | 10,793 |
| | 5,674 |
|
Deferred income, gains and rent | 46 |
| | 916 |
|
Other liabilities | (88 | ) | | (514 | ) |
Net cash from operating activities | 49,843 |
| | 44,222 |
|
Cash flows from investing activities: | | | |
Acquisition of properties | — |
| | (9,226 | ) |
Investments in available-for-sale securities | — |
| | (50,694 | ) |
Sales of properties, net | 112,863 |
| | 92,401 |
|
Distribution of sales proceeds from real estate ventures | 16,963 |
| | — |
|
Proceeds from repayment of mortgage notes receivable | 200 |
| | — |
|
Capital expenditures for tenant improvements | (24,215 | ) | | (20,733 | ) |
Capital expenditures for redevelopments | (2,427 | ) | | (517 | ) |
Capital expenditures for developments | (82 | ) | | — |
|
Reimbursement from real estate venture for pre-formation development costs | 1,976 |
| | — |
|
Advances for purchase of tenant assets, net of repayments | (375 | ) | | 94 |
|
Investment in unconsolidated Real Estate Ventures | (7,039 | ) | | (12,512 | ) |
Cash distributions from unconsolidated real estate ventures | 1,357 |
| | 619 |
|
Leasing costs | (8,250 | ) | | (7,386 | ) |
Net cash from (used in) investing activities | 90,971 |
| | (7,954 | ) |
Cash flows from financing activities: | | | |
Proceeds from Unsecured Term Loans | — |
| | 600,000 |
|
Proceeds from Credit Facility | 186,000 |
| | 21,500 |
|
Repayments of Credit Facility borrowings | (255,000 | ) | | (297,000 | ) |
Repayments of mortgage notes payable | (2,765 | ) | | (2,941 | ) |
Deferred financing obligation non-cash interest expense | 234 |
| | 234 |
|
Repayments of unsecured notes | — |
| | (4,217 | ) |
Repayments of unsecured term loan | — |
| | (37,500 | ) |
Net settlement of hedge transactions | — |
| | (74 | ) |
Debt financing costs | — |
| | (8,426 | ) |
Exercise of stock options | 672 |
| | — |
|
Distributions paid to shareholders | (23,353 | ) | | (23,619 | ) |
Distributions to noncontrolling interest | (277 | ) | | (399 | ) |
Net cash from (used in) financing activities | (94,489 | ) | | 247,558 |
|
Increase (decrease) in cash and cash equivalents | 46,325 |
| | 283,826 |
|
Cash and cash equivalents at beginning of period | 1,549 |
| | 410 |
|
Cash and cash equivalents at end of period | $ | 47,874 |
| | $ | 284,236 |
|
Supplemental disclosure: | | | |
Cash paid for interest, net of capitalized interest during the three months ended March 31, 2013 and 2012 of $625 and $467, respectively | $ | 11,367 |
| | $ | 10,348 |
|
Supplemental disclosure of non-cash activity: | |
| | |
|
Change in investments in real estate ventures related to a contribution of land | (6,058 | ) | | — |
|
Change in capital expenditures financed through accounts payable at period end | (1,701 | ) | | (2,608 | ) |
Change in capital expenditures financed through retention payable at period end | (697 | ) | | (163 | ) |
Change in unfunded tenant allowance | (64 | ) | | (612 | ) |
The accompanying notes are an integral part of these consolidated financial statements
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except unit and per unit information)
|
| | | | | | | |
| March 31,
2013 | | December 31,
2012 |
| (unaudited) |
ASSETS | | | |
Real estate investments: | | | |
Operating properties | $ | 4,607,890 |
| | $ | 4,726,169 |
|
Accumulated depreciation | (951,934 | ) | | (954,665 | ) |
Operating real estate investments, net | 3,655,956 |
| | 3,771,504 |
|
Construction-in-progress | 53,468 |
| | 48,950 |
|
Land inventory | 92,776 |
| | 102,439 |
|
Total real estate investments, net | 3,802,200 |
| | 3,922,893 |
|
Cash and cash equivalents | 47,874 |
| | 1,549 |
|
Accounts receivable, net | 15,072 |
| | 13,232 |
|
Accrued rent receivable, net | 120,070 |
| | 122,066 |
|
Investment in real estate ventures, at equity | 184,802 |
| | 193,555 |
|
Deferred costs, net | 119,378 |
| | 122,243 |
|
Intangible assets, net | 66,104 |
| | 70,620 |
|
Notes receivable | 7,026 |
| | 7,226 |
|
Other assets | 62,778 |
| | 53,325 |
|
Total assets | $ | 4,425,304 |
| | $ | 4,506,709 |
|
LIABILITIES AND EQUITY | | | |
Mortgage notes payable | $ | 440,300 |
| | $ | 442,974 |
|
Unsecured credit facility | — |
| | 69,000 |
|
Unsecured term loans | 450,000 |
| | 450,000 |
|
Unsecured senior notes, net of discounts | 1,503,632 |
| | 1,503,356 |
|
Accounts payable and accrued expenses | 81,626 |
| | 71,579 |
|
Distributions payable | 23,684 |
| | 23,652 |
|
Deferred income, gains and rent | 81,976 |
| | 82,947 |
|
Acquired lease intangibles, net | 31,902 |
| | 33,859 |
|
Other liabilities | 53,551 |
| | 55,826 |
|
Total liabilities | 2,666,671 |
| | 2,733,193 |
|
Commitments and contingencies (Note 17) |
| |
|
Redeemable limited partnership units at redemption value; 1,845,737 issued and outstanding in 2013 and 2012 | 27,940 |
| | 26,777 |
|
Brandywine Operating Partnership, L.P.’s equity: | | | |
6.90% Series E-Linked Preferred Mirror Units; issued and outstanding- 4,000,000 in 2013 and 2012 | 96,850 |
| | 96,850 |
|
General Partnership Capital, 143,712,578 and 143,538,733 units issued and outstanding in 2013 and 2012, respectively | 1,648,167 |
| | 1,666,341 |
|
Accumulated other comprehensive loss | (14,324 | ) | | (16,452 | ) |
Total Brandywine Operating Partnership, L.P.’s equity | 1,730,693 |
| | 1,746,739 |
|
Total liabilities and partners’ equity | $ | 4,425,304 |
| | $ | 4,506,709 |
|
The accompanying notes are an integral part of these consolidated financial statements.
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit information)
|
| | | | | | | |
| For the three-month periods ended |
| March 31, |
| 2013 | | 2012 |
Revenue: | | | |
Rents | $ | 115,552 |
| | $ | 109,699 |
|
Tenant reimbursements | 20,357 |
| | 18,696 |
|
Termination fees | 496 |
| | 1,490 |
|
Third party management fees, labor reimbursement and leasing | 3,236 |
| | 3,142 |
|
Other | 967 |
| | 1,512 |
|
Total revenue | 140,608 |
| | 134,539 |
|
Operating Expenses: | | | |
Property operating expenses | 39,641 |
| | 38,077 |
|
Real estate taxes | 14,430 |
| | 13,567 |
|
Third party management expenses | 1,425 |
| | 1,250 |
|
Depreciation and amortization | 49,861 |
| | 48,096 |
|
General & administrative expenses | 6,551 |
| | 6,050 |
|
Total operating expenses | 111,908 |
| | 107,040 |
|
Operating income | 28,700 |
| | 27,499 |
|
Other Income (Expense): | | | |
Interest income | 58 |
| | 483 |
|
Interest expense | (30,914 | ) | | (34,144 | ) |
Interest expense — amortization of deferred financing costs | (1,161 | ) | | (1,311 | ) |
Interest expense — financing obligation | (218 | ) | | (182 | ) |
Equity in income of real estate ventures | 1,535 |
| | 44 |
|
Loss on early extinguishment of debt | (3 | ) | | (248 | ) |
Loss from continuing operations | (2,003 | ) | | (7,859 | ) |
Discontinued operations: | | | |
Income from discontinued operations | 618 |
| | 2,527 |
|
Net gain on disposition of discontinued operations | 5,304 |
| | 14,668 |
|
Total discontinued operations | 5,922 |
| | 17,195 |
|
Net income | 3,919 |
| | 9,336 |
|
Distribution to Preferred Units | (1,725 | ) | | (1,998 | ) |
Amount allocated to unvested restricted unitholders | (108 | ) | | (96 | ) |
Net income attributable to Common Partnership Unitholders of Brandywine Operating Partnership, L.P. | $ | 2,086 |
| | $ | 7,242 |
|
Basic income (loss) per Common Partnership Unit: | | | |
Continuing operations | $ | (0.03 | ) | | $ | (0.07 | ) |
Discontinued operations | 0.04 |
| | 0.12 |
|
| $ | 0.01 |
| | $ | 0.05 |
|
Diluted income (loss) per Common Partnership Unit: | | | |
Continuing operations | $ | (0.03 | ) | | $ | (0.07 | ) |
Discontinued operations | 0.04 |
| | 0.12 |
|
| $ | 0.01 |
| | $ | 0.05 |
|
Basic weighted average common partnership units outstanding | 145,451,396 |
| | 145,485,422 |
|
Diluted weighted average common partnership units outstanding | 145,451,396 |
| | 145,485,422 |
|
Net income (loss) attributable to Brandywine Operating Partnership, L.P. | | | |
Loss from continuing operations | $ | (2,003 | ) | | $ | (7,859 | ) |
Income from discontinued operations | 5,922 |
| | 17,195 |
|
Net income | $ | 3,919 |
| | $ | 9,336 |
|
The accompanying notes are an integral part of these consolidated financial statements.
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
|
| | | | | | | |
| For the three-month period ended |
| March 31, |
| 2013 | | 2012 |
Net income | $ | 3,919 |
| | $ | 9,336 |
|
Comprehensive income (loss): | | | |
Unrealized gain on derivative financial instruments | 1,845 |
| | 27 |
|
Reclassification of realized (gains)/losses on derivative financial instruments to operations, net (1) | 48 |
| | 48 |
|
Total comprehensive income | 1,893 |
| | 75 |
|
Comprehensive income attributable to Brandywine Operating Partnership, L.P. | $ | 5,812 |
| | $ | 9,411 |
|
(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 OPERATING PARTNERSHIP L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
| | | | | | | |
| Three-month periods ended |
| March 31, |
| 2013 | | 2012 |
Cash flows from operating activities: | | | |
Net income | $ | 3,919 |
| | $ | 9,336 |
|
Adjustments to reconcile net income to net cash from operating activities: | | | |
Depreciation and amortization | 50,304 |
| | 51,453 |
|
Amortization of deferred financing costs | 1,161 |
| | 1,311 |
|
Amortization of debt discount/(premium), net | 366 |
| | 365 |
|
Amortization of stock compensation costs | 2,097 |
| | 1,484 |
|
Shares used for employee taxes upon vesting of share awards | (245 | ) | | (1,418 | ) |
Straight-line rent income | (5,514 | ) | | (6,908 | ) |
Amortization of acquired above (below) market leases, net | (1,771 | ) | | (1,419 | ) |
Straight-line ground rent expense | 474 |
| | 474 |
|
Provision for doubtful accounts | 505 |
| | 781 |
|
Net gain on sale of interests in real estate | (5,304 | ) | | (14,666 | ) |
Loss on early extinguishment of debt | 3 |
| | 248 |
|
Real estate venture income in excess of distributions | (358 | ) | | 163 |
|
Deferred financing obligation | (452 | ) | | (405 | ) |
Changes in assets and liabilities: | | | |
Accounts receivable | (1,321 | ) | | 976 |
|
Other assets | (4,772 | ) | | (3,629 | ) |
Accounts payable and accrued expenses | 10,793 |
| | 5,674 |
|
Deferred income, gains and rent | 46 |
| | 916 |
|
Other liabilities | (88 | ) | | (514 | ) |
Net cash from operating activities | 49,843 |
| | 44,222 |
|
Cash flows from investing activities: | | | |
Acquisition of properties | — |
| | (9,226 | ) |
Investments in available-for-sale securities | — |
| | (50,694 | ) |
Sales of properties, net | 112,863 |
| | 92,401 |
|
Distribution of sales proceeds from real estate ventures | 16,963 |
| | — |
|
Proceeds from repayment of mortgage notes receivable | 200 |
| | — |
|
Capital expenditures for tenant improvements | (24,215 | ) | | (20,733 | ) |
Capital expenditures for redevelopments | (2,427 | ) | | (517 | ) |
Capital expenditures for developments | (82 | ) | | — |
|
Reimbursement from real estate venture for pre-formation development costs | 1,976 |
| | — |
|
Advances for purchase of tenant assets, net of repayments | (375 | ) | | 94 |
|
Investment in unconsolidated Real Estate Ventures | (7,039 | ) | | (12,512 | ) |
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income | 1,357 |
| | 619 |
|
Leasing costs | (8,250 | ) | | (7,386 | ) |
Net cash from (used in) investing activities | 90,971 |
| | (7,954 | ) |
Cash flows from financing activities: | | | |
Proceeds from Unsecured Term Loans | — |
| | 600,000 |
|
Proceeds from Credit Facility borrowings | 186,000 |
| | 21,500 |
|
Repayments of Credit Facility borrowings | (255,000 | ) | | (297,000 | ) |
Repayments of mortgage notes payable | (2,765 | ) | | (2,941 | ) |
Deferred financing obligation non-cash interest expense | 234 |
| | 234 |
|
Repayments of unsecured notes | — |
| | (4,217 | ) |
Repayments of unsecured term loan | — |
| | (37,500 | ) |
Net settlement of hedge transactions | — |
| | (74 | ) |
Debt financing costs | — |
| | (8,426 | ) |
Exercise of stock options | 672 |
| | — |
|
Distributions paid to preferred and common partnership unitholders | (23,630 | ) | | (24,018 | ) |
Net cash from (used in) financing activities | (94,489 | ) | | 247,558 |
|
Increase (decrease) in cash and cash equivalents | 46,325 |
| | 283,826 |
|
Cash and cash equivalents at beginning of period | 1,549 |
| | 410 |
|
Cash and cash equivalents at end of period | $ | 47,874 |
| | $ | 284,236 |
|
Supplemental disclosure: | | | |
Cash paid for interest, net of capitalized interest during the three months ended March 31, 2013 and 2012 of $625 and $467, respectively | $ | 11,367 |
| | $ | 10,348 |
|
Supplemental disclosure of non-cash activity: | | | |
Change in investments in real estate ventures related to a contribution of land | (6,058 | ) | | — |
|
Change in capital expenditures financed through accounts payable at period end | (1,701 | ) | | (2,608 | ) |
Change in capital expenditures financed through retention payable at period end | (697 | ) | | (163 | ) |
Change in unfunded tenant allowance | (64 | ) | | (612 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
BRANDYWINE REALTY TRUST AND BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
1. ORGANIZATION OF THE PARENT COMPANY AND THE OPERATING PARTNERSHIP
The Parent Company is a self-administered and self-managed real estate investment trust (“REIT”) that provides leasing, property management, development, redevelopment, acquisition and other tenant-related services for a portfolio of office and industrial properties. The Parent Company owns its assets and conducts its operations through the Operating Partnership and subsidiaries of the Operating Partnership. The Parent Company is the sole general partner of the Operating Partnership and, as of March 31, 2013, owned a 98.7% interest in the Operating Partnership. The Parent Company’s common shares of beneficial interest are publicly traded on the New York Stock Exchange under the ticker symbol “BDN”.
As of March 31, 2013, the Company owned 214 properties, consisting of 185 office properties, 19 industrial facilities, five mixed-use properties, one development property, two redevelopment properties and two re-entitlement properties (collectively, the “Properties”) containing an aggregate of approximately 24.3 million net rentable square feet. In addition, as of March 31, 2013, the Company owned economic interests in 19 unconsolidated real estate ventures that contain approximately 6.4 million net rentable square feet (collectively, the “Real Estate Ventures”). As of March 31, 2013, the Company also owned 431 acres of undeveloped land, and held options to purchase approximately 51 additional acres of undeveloped land. As of March 31, 2013, the total potential development that these land parcels could support, under current zoning, entitlements or combination thereof, amounted to 6.1 million square feet. The Properties and the properties owned by the Real Estate Ventures are located in or near Philadelphia, Pennsylvania; Metropolitan Washington, D.C.; Southern New Jersey; Richmond, Virginia; Wilmington, Delaware; Austin, Texas and Oakland, Concord, Carlsbad and Rancho Bernardo, California.
The Company conducts its third-party real estate management services business primarily through wholly-owned management company subsidiaries. As of March 31, 2013, the management company subsidiaries were managing properties containing an aggregate of approximately 31.1 million net rentable square feet, of which approximately 24.3 million net rentable square feet related to Properties owned by the Company and approximately 6.8 million net rentable square feet related to properties owned by third parties and Real Estate Ventures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial statements. 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 ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting solely of normal recurring matters) for a fair statement of the financial position of the Company as of March 31, 2013, the results of its operations for the three-month periods ended March 31, 2013 and 2012 and its cash flows for the three-month periods ended March 31, 2013 and 2012 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 Parent Company’s and the Operating Partnership’s consolidated financial statements and footnotes included in their combined 2012 Annual Report on Form 10-K filed with the SEC on February 26, 2013.
Reclassifications
Certain amounts have been reclassified in prior years to conform to the current year presentation. The reclassifications are primarily due to the treatment of sold properties as discontinued operations on the statement of operations for all periods presented.
Principles of Consolidation
When the Company obtains an economic interest in an entity, the Company evaluates the entity to determine if the entity is deemed a variable interest entity (“VIE”), and if the Company is deemed to be the primary beneficiary, in accordance with the accounting standard for the consolidation of variable interest entities. The accounting standard for the consolidation of VIEs requires the Company to qualitatively assess if the Company was the primary beneficiary of the VIEs based on whether the Company had (i) the power to direct those matters that most significantly impacted the activities of the VIE and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. For entities determined to be VIEs, but for which the Company is not the primary beneficiary, the Company's maximum exposure to loss is the carrying amount of its investments, as the Company has not provided any guarantees other than the guarantee of debt of the Real Estate Venture known as PJP VII which was approximately $0.6 million at March 31, 2013 (see Note 4), as well as a guarantee of the Company's
share of the debt and potential cost overruns associated with the Real Estate Venture known as "HSRE-Campus Crest IX, LLC" (referred to hereafter as the "Grove Venture").
When an entity is not deemed to be a VIE, the Company considers the provisions of the same accounting standard to determine whether a general partner, or the general partners as a group, controls a limited partnership or similar entity when the limited partners have certain rights. The Company consolidates (i) entities that are VIEs and of which the Company is deemed to be the primary beneficiary and (ii) entities that are non-VIEs and controlled by the Company and in which the limited partners neither have the ability to dissolve the entity or remove the Company without cause nor any substantive participating rights. Entities that the Company accounts for under the equity method (i.e., at cost, increased or decreased by the Company’s share of earnings or losses, plus contributions, less distributions) include (i) entities that are VIEs and of which the Company is not deemed to be the primary beneficiary, (ii) entities that are non-VIEs which the Company does not control, but over which the Company has the ability to exercise significant influence, and (iii) entities that are non-VIEs that the Company controls through its general partner status, but the limited partners in the entity have the substantive ability to dissolve the entity or remove the Company without cause or have substantive participating rights. The Company continuously assesses its determination of whether an entity is a VIE and who the primary beneficiary is, and whether or not the limited partners in an entity have substantive rights, more particularly if certain events occur that are likely to cause a change in the original determinations. The Company’s assessment includes a review of applicable documents such as, but not limited to, applicable partnership agreements, real estate venture agreements, LLC agreements, and management and leasing agreements to determine whether the Company has control to direct the business activities of the entities. The portion of the consolidated entities that is not owned by the Company is presented as non-controlling interest as of and during the periods consolidated. All intercompany accounts and transactions have been eliminated in consolidation.
On January 25, 2013, the Company formed the Grove Venture, a joint venture among the Company and two unaffiliated members. Based upon the facts and circumstances at formation of the Grove Venture, the Company determined that the Grove Venture is a VIE in accordance with the accounting standard for the consolidation of VIEs. As a result, the Company used the variable interest model under the accounting standard for consolidation in order to determine whether to consolidate the Grove Venture. Based upon each member's shared power over the Grove Venture activities under the operating agreement of the Grove Venture, and the Company's lack of exclusive control over the development and construction phases of the project, the Grove Venture is not consolidated by the Company and is accounted for under the equity method of accounting. For further information regarding the Grove Venture and its formation, please refer to Note 4.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding revenue, valuation of real estate and related intangible assets and liabilities, impairment of long-lived assets, allowance for doubtful accounts and deferred costs.
Operating Properties
Operating properties are carried at historical cost less accumulated depreciation and impairment losses. The cost of operating properties reflects their purchase price or development cost. Acquisition related costs are expensed as incurred. Costs incurred for the renovation and betterment of an operating property are capitalized to the 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.
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 (including the below market fixed renewal period, if applicable). Capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining non-cancelable terms of the respective leases, including any below market fixed-rate renewal periods.
Other intangible assets also include amounts representing the value of tenant relationships and in-place leases based on the Company’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. The Company generally 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 generally amortized to expense over the remaining term of the respective leases and any fixed-rate bargain renewal periods. Company estimates of value are made using methods similar to those used by independent appraisers or by using independent appraisals. Factors considered by the Company in this analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from three to twelve months. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. The Company also uses the information obtained as a result of its pre-acquisition due diligence as part of its consideration of the accounting standard governing asset retirement obligations, and, when necessary, will record a conditional asset retirement obligation as part of its purchase price.
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 generally 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 generally amortized over the remaining non-cancelable term of the respective leases and any fixed-rate renewal periods.
In the event that a tenant terminates its lease, the unamortized portion of each intangible, including in-place lease values and tenant relationship values, would be charged to expense and market rate adjustments (above or below) would be recorded to revenue.
Impairment or Disposal of Long-Lived Assets
The accounting standard for property, plant and equipment provides a single accounting model for long-lived assets classified as held-for-sale; defines the scope of businesses to be disposed of that qualify for reporting as discontinued operations; and affects the timing of recognizing losses on such operations.
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair-value of the property. The Company is required to make subjective assessments as to whether there are impairments in the values of the investments in long-lived assets. These assessments have a direct impact on its net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Although the Company’s strategy is generally to hold its properties over the long-term, the Company will selectively dispose of properties for strategic needs. If the Company’s strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce the property to the lower of the carrying amount or fair value less costs to sell, and such loss could be material. If the Company determines that impairment has occurred and the assets are classified as held and used, the affected assets must be reduced to their fair-value.
Where properties have been identified as having a potential for sale, additional judgments are required related to the determination as to the appropriate period over which the undiscounted cash flows should include the operating cash flows and the amount included as the estimated residual value. Management determines the amounts to be included based on a probability weighted cash flow. This requires significant judgment. In some cases, the results of whether an impairment is indicated are sensitive to changes in assumptions input into the estimates, including the hold period until expected sale.
The Company determined during its impairment review for the three-month periods ended March 31, 2013 and 2012, that no impairment charges were necessary.
The Company is a party to a development agreement and related ground leases covering two adjacent parcels of land. On January 25, 2013, the Company contributed its development rights in one of the land parcels to a newly formed joint venture (please refer to Note 4 for further information), and the venture commenced construction during the three months ended March 31, 2013. The Company has the right, on terms and conditions in the development agreement and ground lease, to commence development of
the other parcel by December 31, 2015. If the Company determines that it will not be able to commence development of the other parcel by December 31, 2015, or if the Company determines that development is not in its best economic interest and an additional extension of the development period cannot be negotiated, then the Company will be required to write off all costs that it has incurred in preparing this remaining land parcel for development, amounting to $5.9 million as of March 31, 2013.
Investments in Unconsolidated Real Estate Ventures
The Company accounts for its investments in unconsolidated Real Estate Ventures under the equity method of accounting as it is not the primary beneficiary (for VIEs) and the Company exercises significant influence, but does not control these entities under the provisions of the entities’ governing agreements pursuant to the accounting standard for the consolidation of VIEs. When the Company determines that its investment in an unconsolidated Real Estate Venture does not constitute a VIE, the Company utilizes the voting interest model under the accounting standard for consolidation to determine whether to consolidate the venture.
Under the equity method, investments in unconsolidated joint ventures are recorded initially at cost, as investments in Real Estate Ventures, and subsequently adjusted for equity in earnings, cash contributions, less distributions and impairments. On a periodic basis, management also assesses whether there are any indicators that the value of the Company’s investments in unconsolidated Real Estate Ventures may be other than temporarily impaired. An investment is impaired only if the value of the investment, as estimated by management, is less than the carrying value of the investment and the decline is other than temporary. To the extent that an impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the fair value of the investment, as estimated by management. The determination as to whether an impairment exists requires significant management judgment about the fair value of its ownership interest. Fair value is determined through various valuation techniques, including but not limited to, discounted cash flow models, quoted market values and third party appraisals.
When the Company acquires an interest in or contributes assets to a Real Estate Venture project, the difference between the Company’s cost basis in the investment and the value of the Real Estate Venture or asset contributed is amortized over the life of the related assets, intangibles and liabilities and such adjustment is included in the Company’s share of equity in income of unconsolidated Real Estate Ventures. For purposes of cash flow presentation, distributions from unconsolidated Real Estate Ventures are presented as part of operating activities when they are considered as return on investments. Distributions in excess of the Company’s share in the cumulative unconsolidated Real Estate Ventures’ earnings are considered as return of investments and are presented as part of investing activities in accordance with the accounting standard for cash flow presentation.
Revenue Recognition
Rental revenue is recognized on the straight-line basis, which averages minimum rents over the terms of the leases from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases. The straight-line rent adjustment increased revenue by approximately $4.9 million and $6.3 million for the three-month periods ended March 31, 2013 and 2012, respectively. Deferred rents on the balance sheet represent rental revenue received prior to their due dates and amounts paid by the tenant for certain improvements considered to be landlord assets that will remain as the Company’s property at the end of the tenant’s lease term. The amortization of the amounts paid by the tenant for such improvements is calculated on a straight-line basis over the term of the tenant’s lease and is a component of straight-line rental income and increased revenue by $0.6 million for each of the three-month periods ended March 31, 2013 and 2012. Lease incentives, which are included as reductions of rental revenue in the accompanying consolidated statements of operations, are recognized on a straight-line basis over the term of the lease. Lease incentives decreased revenue by $0.3 million and $0.4 million for the three-month periods ended March 31, 2013 and 2012, respectively.
Leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease or to the extent that the tenant has a lease on a triple net basis. For certain leases, significant assumptions and judgments are made by the Company in determining the lease term such as when termination options are provided to the tenant. The lease term impacts the period over which minimum rents are determined and recorded and also considers the period over which lease related costs are amortized. Termination fees received from tenants, bankruptcy settlement fees, third party management fees, labor reimbursement and leasing income are recorded when earned.
Stock-Based Compensation Plans
The Parent Company maintains a shareholder-approved equity-incentive plan known as the Amended and Restated 1997 Long-Term Incentive Plan (the “1997 Plan”). The 1997 Plan is administered by the Compensation Committee of the Parent Company’s Board of Trustees. Under the 1997 Plan, the Compensation Committee is authorized to award equity and equity-based awards, including incentive stock options, non-qualified stock options, restricted shares and performance-based shares. As of March 31,
2013, 5,197,094 common shares remained available for future awards under the 1997 Plan (including 3,166,998 shares available solely for options and share appreciation rights). Through March 31, 2013, all options awarded under the 1997 Plan had a one to ten-year term.
The Company incurred stock-based compensation expense of $2.3 million and $1.7 million during the three-month periods ended March 31, 2013 and 2012, of which $0.5 million and $0.4 million, respectively, were capitalized as part of the Company’s review of employee compensation costs eligible for capitalization. The expensed amounts are included in general and administrative expense on the Company’s consolidated income statement in the respective periods.
Accounting for Derivative Instruments and Hedging Activities
The Company accounts for its derivative instruments and hedging activities in accordance with the accounting standard for derivative and hedging activities. The accounting standard requires the Company to measure every derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record them in the balance sheet as either an asset or liability. See disclosures below related to the accounting standard for fair value measurements and disclosures.
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 while the ineffective portions are recognized in earnings.
The Company actively manages its ratio of fixed-to-floating rate debt. To manage its fixed and floating rate debt in a cost-effective manner, the Company, from time to time, enters into interest rate swap agreements as cash flow hedges, under which it agrees to exchange various combinations of fixed and/or variable interest rates based on agreed upon notional amounts.
Fair Value Measurements
The Company estimates the fair value of its derivatives and available-for-sale securities in accordance with the accounting standard for fair value measurements and disclosures. The accounting standard defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Financial assets and liabilities recorded on the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
| |
• | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access; |
| |
• | Level 2 inputs are inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals; and |
| |
• | Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity or information. |
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2013 (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at Reporting Date Using: |
| March 31, | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Unobservable Inputs |
Description | 2013 | | (Level 1) | | (Level 2) | | (Level 3) |
Recurring | | | | | | | |
Liabilities: | | | | | | | |
Interest Rate Swaps | $ | 12,383 |
| | $ | — |
| | $ | 12,383 |
| | $ | — |
|
The following table sets forth the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of December 31, 2012 (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at Reporting Date Using: |
| December 31, | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Unobservable Inputs |
Description | 2012 | | (Level 1) | | (Level 2) | | (Level 3) |
Recurring | | | | | | | |
Liabilities: | | | | | | | |
Interest Rate Swaps | $ | 14,210 |
| | $ | — |
| | $ | 14,210 |
| | $ | — |
|
We classify our interest rate swaps, shown above, within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
Non-financial assets and liabilities recorded at fair value on a non-recurring basis to which the Company would apply the accounting standard where a measurement was required under fair value would include:
| |
• | Non-financial assets and liabilities initially measured at fair value in an acquisition or business combination that are not remeasured at least quarterly at fair value, |
| |
• | Long-lived assets measured at fair value due to an impairment in accordance with the accounting standard for the impairment or disposal of long-lived assets, |
| |
• | Equity and cost method investments measured at fair value due to an impairment in accordance with the accounting standard for investments, |
| |
• | Notes receivable adjusted for any impairment in its value in accordance with the accounting standard for loan receivables, and |
| |
• | Asset retirement obligations initially measured at fair value under the accounting standard for asset retirement obligations. |
There were no items that were accounted for at fair value on a non-recurring basis for the three months ended March 31, 2013.
Notes Receivable
As of March 31, 2013 and December 31, 2012, notes receivable included a purchase money mortgage with a 20-year amortization period bearing interest at 8.5%, which was valued at $7.0 million and $7.2 million, respectively.
The Company periodically assesses the collectability of the notes receivable in accordance with the accounting standard for loan receivables. The Company's $7.0 million outstanding purchase money mortgage note mentioned above was extended to a buyer (the “Borrower”) of a parcel of land in Newtown, Pennsylvania who has since defaulted on the note. As a result, a forbearance agreement was entered into between the Company and the Borrower, outlining the repayment terms of the outstanding debt (including accrued interest), as well as the metrics for selling and settling on homes over an agreed period of time. The Company has determined that the loan modification represents a troubled debt restructuring due to the fact that the Borrower was considered to be in a financial difficulty when it defaulted on the two mortgage debts, and that a concession was granted in the form of the forbearance agreements. Recurring loan repayments to the Company are expected to begin during 2014, however, during the
three months ended March 31, 2013, the Company received a payment from the Borrower of $0.2 million, which the Company applied against the principal of the remaining loan balance. Based on actual current sales to date, as well as cash flow projections provided by the Borrower, the Company believes that the total note will be fully paid during 2015. Given the current circumstances, the Company performs, on an ongoing basis, a collectability assessment of the note using the expected cash flow information provided by the Borrower. The Company has obtained documentation to support the assumptions used by the Borrower. Based on the results of its probability weighted cash flow analysis, the Company has determined that, as of March 31, 2013, the present value of the expected cash flows of the note receivable exceeded the outstanding balance of the note and therefore the note is recoverable as of March 31, 2013. It is still possible, however, that if the housing market deteriorates, the Borrower will not meet its sales targets, and would fail to repay the note, thereby causing a loan loss for the Company which could be material to the Company's consolidated results of operations.
Income Taxes
Parent Company
The Parent Company has elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). In order to continue to qualify as a REIT, the Parent Company is required to, among other things, distribute at least 90% of its annual REIT taxable income to its shareholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Parent Company is not subject to federal and state income taxes with respect to the portion of its income that meets certain criteria and is distributed annually to its shareholders. Accordingly, no provision for federal and state income taxes is included in the accompanying consolidated financial statements with respect to the operations of the Parent Company. The Parent Company intends to continue to operate in a manner that allows it to meet the requirements for taxation as a REIT. If the Parent Company fails to qualify as a REIT in any taxable year, it will be subject to federal and state income taxes and may not be able to qualify as a REIT for the four subsequent tax years. The Parent Company is subject to certain local income taxes. Provision for such taxes has been included in general and administrative expenses in the Parent Company’s Consolidated Statements of Operations and Comprehensive Income.
The Parent Company has elected to treat several of its subsidiaries as taxable REIT subsidiaries (each a “TRS”). A TRS is subject to federal, state and local income tax. In general, a TRS may perform non-customary services for tenants, hold assets that the Parent Company, as a REIT, cannot hold directly and generally may engage in any real estate or non-real estate related business.
Operating Partnership
In general, the Operating Partnership is not subject to federal and state income taxes, and accordingly, no provision for income taxes has been made in the accompanying consolidated financial statements. The partners of the Operating Partnership are required to include their respective share of the Operating Partnership’s profits or losses in their respective tax returns. The Operating Partnership’s tax returns and the amount of allocable Partnership profits and losses are subject to examination by federal and state taxing authorities. If such examination results in changes to the Operating Partnership profits or losses, then the tax liability of the partners would be changed accordingly.
The Operating Partnership may elect to treat one or more of its subsidiaries as REITs under Sections 856 through 860 of the Code. Each subsidiary REIT has met the requirements for treatment as a REIT under Sections 856 through 860 of the Code, and, accordingly, no provision has been made for federal and state income taxes in the accompanying consolidated financial statements. If any subsidiary REIT fails to qualify as a REIT in any taxable year, that subsidiary REIT will be subject to federal and state income taxes and may not be able to qualify as a REIT for the four subsequent taxable years. Also, each subsidiary REIT may be subject to certain local income taxes.
The Operating Partnership has elected to treat several of its subsidiaries as taxable TRSs, which are subject to federal, state and local income tax.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued an amendment to the accounting standard for the presentation of comprehensive income. This amendment requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component, and represents the culmination of the FASB's redeliberation on the reporting of such reclassification adjustments. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide
additional detail about those amounts. This update is effective for fiscal years and interim periods beginning after December 15, 2012. The Company’s adoption of the accounting standard did not have a material impact on its consolidated financial position or results of operations as the update relates only to changes in financial statement presentation.
3. REAL ESTATE INVESTMENTS
As of March 31, 2013 and December 31, 2012, the gross carrying value of the Company’s Properties was as follows (in thousands):
|
| | | | | | | |
| March 31,
2013 | | December 31,
2012 |
Land | $ | 641,507 |
| | $ | 662,107 |
|
Building and improvements | 3,483,888 |
| | 3,576,065 |
|
Tenant improvements | 482,495 |
| | 487,997 |
|
| $ | 4,607,890 |
| | $ | 4,726,169 |
|
Acquisitions
The Company did not complete any acquisitions during the three-month period ended March 31, 2013.
Dispositions
On February 25, 2013, the Company sold a portfolio of eight office properties containing 800,546 square feet in Lawrenceville, New Jersey for an aggregate sales price of $121.0 million. These properties, collectively known as "Princeton Pike Corporate Center," were 86.9% occupied as of the date of sale.
The sale of the Princeton Pike Corporate Center is included in discontinued operations (see Note 10).
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of March 31, 2013, the Company had an aggregate investment of approximately $184.8 million in 19 unconsolidated Real Estate Ventures. The Company formed or acquired interests in these ventures with unaffiliated third parties to develop or manage office properties or to acquire land in anticipation of possible development of office or residential properties. As of March 31, 2013, 14 of the Real Estate Ventures owned 52 office buildings that contain an aggregate of approximately 6.4 million net rentable square feet; three Real Estate Ventures owned 24 acres of undeveloped parcels of land; one Real Estate Venture owned a one-acre parcel of land under active development and one Real Estate Venture developed a hotel property that contains 137 rooms in Conshohocken, PA.
The Company accounts for its unconsolidated interests in its Real Estate Ventures using the equity method. The Company’s unconsolidated interests range from 20% to 65%, subject to specified priority allocations of distributable cash in certain of the Real Estate Ventures.
The amounts reflected in the following tables (except for the Company’s share of equity and income) are based on the historical financial information of the individual Real Estate Ventures. The Company does not record operating losses of the Real Estate Ventures in excess of its investment balance unless the Company is liable for the obligations of the Real Estate Venture or is otherwise committed to provide financial support to the Real Estate Venture.
The following is a summary of the financial position of the Real Estate Ventures as of March 31, 2013 and December 31, 2012 (in thousands):
|
| | | | | | | |
| March 31,
2013 | | December 31,
2012 |
Net property | $ | 823,199 |
| | $ | 923,536 |
|
Other assets | 168,077 |
| | 174,677 |
|
Other liabilities | 31,209 |
| | 53,645 |
|
Debt | 726,507 |
| | 724,780 |
|
Equity | 233,560 |
| | 319,788 |
|
Company’s share of equity (Company’s basis) (a) | 184,802 |
| | 193,555 |
|
(a) Amounts reflect the effects of basis differences resulting from assets contributed to joint ventures, as well as certain costs at the venture level. Basis differences occur from the impairment of investments and upon the transfer of assets that were previously
owned by the Company into a joint venture. In addition, certain acquisition, transaction and other costs may not be reflected in the net assets at the joint venture level.
The following is a summary of results of operations of the Real Estate Ventures for the three-month periods ended March 31, 2013 and 2012 (in thousands):
|
| | | | | | | |
| Three-month periods ended March 31, |
| 2013 | | 2012 |
Revenue | $ | 40,889 |
| | $ | 38,593 |
|
Operating expenses | 18,266 |
| | 16,815 |
|
Interest expense, net | 9,772 |
| | 11,249 |
|
Depreciation and amortization | 12,906 |
| | 11,471 |
|
Net loss | (55 | ) | | (942 | ) |
Company’s share of income (Company’s basis) | 1,535 |
| | 44 |
|
Grove Venture
On January 25, 2013, the Company formed the Grove Venture, a joint venture among the Company and two unaffiliated parties: Campus Crest Properties, LLC ("Campus Crest") and HSRE-Campus Crest IXA, LLC ("HSRE"). The Grove Venture has commenced construction of a 33-story, 850-bed student housing tower located in the University City submarket of Philadelphia, Pennsylvania to be called The Grove at Cira Centre South (the "Grove"). Each of the Company and Campus Crest owns a 30% interest in the Grove Venture and HSRE owns a 40% interest. The Grove Venture is developing the project on a one-acre land parcel held under a long-term ground lease which, together with development rights, was contributed to the Grove Venture by the Company at an agreed-upon value of $8.5 million. The total estimated project costs are $158.5 million, which will be financed through partner capital contributions totaling $60.7 million, with the remaining $97.8 million being financed through a construction facility by PNC Bank, Capital One, and First Niagara Bank. Construction has already commenced, with a targeted project completion in 2014.
The Company's historical cost basis in the development rights that it contributed to the Grove Venture at formation was $6.0 million, thus creating an initial $2.5 million basis difference between the Company's initial outside investment basis compared to its $8.5 million initial equity basis in the Grove Venture. As this basis difference is not related to a physical land parcel, but rather to development rights to construct The Grove, the Company will accrete the basis difference as a reduction of depreciation expense over the life of the Grove Venture's assets.
Based upon the facts and circumstances at Grove Venture formation, the Company determined that the Grove Venture is a VIE in accordance with the accounting standard for the consolidation of VIEs. As a result, the Company used the variable interest model under the accounting standard for consolidation in order to determine whether to consolidate the Grove Venture. Based upon each member's shared power over the activities of the Grove Venture under the operating agreement of the Grove Venture, and the Company's lack of exclusive control over the development and construction phases of the project, the Grove Venture is not consolidated by the Company, and is accounted for under the equity method of accounting. Accordingly, the land parcel and associated development rights contributed by the Company to the Grove Venture were deconsolidated by the Company upon formation of the Grove Venture.
The Company, from time to time, also provides guarantees and indemnities, including environmental indemnities, in connection with construction and permanent financing both for its own account and on behalf of its Real Estate Ventures. As of March 31, 2013, the Company had guaranteed repayment of approximately $0.6 million of loans on behalf of a Real Estate Venture. In addition, in connection with the Company's development of the Grove project through the Grove Venture, each of the Company and Campus Crest has provided, in addition to customary non-recourse carve-out guarantees, a completion and cost overrun guaranty, as well as a payment guaranty, on the construction financing (with the Company's share of the payment guaranty being approximately $23.0 million).
On March 26, 2013, the Company sold its entire 20% ownership interest in an unconsolidated real estate venture known as BDN Beacon Venture LLC (the "Beacon Venture"). The carrying amount of the Company's investment in the Beacon Venture amounted to $17.0 million at the sale date, with the Company's proceeds effectively matching the carrying amount.
5. DEFERRED COSTS
As of March 31, 2013 and December 31, 2012, the Company’s deferred costs were comprised of the following (in thousands):
|
| | | | | | | | | | | |
| March 31, 2013 |
| Total Cost | | Accumulated Amortization | | Deferred Costs, net |
Leasing Costs | $ | 147,528 |
| | $ | (57,203 | ) | | $ | 90,325 |
|
Financing Costs | 40,205 |
| | (11,152 | ) | | 29,053 |
|
Total | $ | 187,733 |
| | $ | (68,355 | ) | | $ | 119,378 |
|
|
| | | | | | | | | | | |
| December 31, 2012 |
| Total Cost | | Accumulated Amortization | | Deferred Costs, net |
Leasing Costs | $ | 150,331 |
| | $ | (58,343 | ) | | $ | 91,988 |
|
Financing Costs | 40,246 |
| | (9,991 | ) | | 30,255 |
|
Total | $ | 190,577 |
| | $ | (68,334 | ) | | $ | 122,243 |
|
During the three-month periods ended March 31, 2013 and 2012, the Company capitalized internal direct leasing costs of $1.5 million and $1.3 million, respectively, in accordance with the accounting standard for the capitalization of leasing costs.
6. INTANGIBLE ASSETS
As of March 31, 2013 and December 31, 2012, the Company’s intangible assets were comprised of the following (in thousands):
|
| | | | | | | | | | | |
| March 31, 2013 |
| Total Cost | | Accumulated Amortization | | Intangible assets, net |
In-place lease value | $ | 83,905 |
| | $ | (41,743 | ) | | $ | 42,162 |
|
Tenant relationship value | 50,268 |
| | (33,019 | ) | | 17,249 |
|
Above market leases acquired | 8,565 |
| | (1,872 | ) | | 6,693 |
|
Total | $ | 142,738 |
| | $ | (76,634 | ) | | $ | 66,104 |
|
Below market leases acquired | $ | 76,892 |
| | $ | (44,990 | ) | | $ | 31,902 |
|
|
| | | | | | | | | | | |
| December 31, 2012 |
| Total Cost | | Accumulated Amortization | | Intangible assets, net |
In-place lease value | $ | 87,909 |
| | $ | (42,894 | ) | | $ | 45,015 |
|
Tenant relationship value | 56,137 |
| | (37,389 | ) | | 18,748 |
|
Above market leases acquired | 8,565 |
| | (1,708 | ) | | 6,857 |
|
Total | $ | 152,611 |
| | $ | (81,991 | ) | | $ | 70,620 |
|
Below market leases acquired | $ | 77,083 |
| | $ | (43,224 | ) | | $ | 33,859 |
|
As of March 31, 2013, the Company’s annual amortization for its intangible assets/liabilities were as follows (in thousands, and assuming no early lease terminations):
|
| | | | | | | |
| Assets | | Liabilities |
2013 | $ | 11,562 |
| | $ | 5,715 |
|
2014 | 12,871 |
| | 6,081 |
|
2015 | 10,494 |
| | 3,914 |
|
2016 | 6,166 |
| | 1,974 |
|
2017 | 4,894 |
| | 1,445 |
|
Thereafter | 20,117 |
| | 12,773 |
|
Total | $ | 66,104 |
| | $ | 31,902 |
|
7. DEBT OBLIGATIONS
The following table sets forth information regarding the Company’s consolidated debt obligations outstanding at March 31, 2013 and December 31, 2012 (in thousands):
|
| | | | | | | | | | | | | | |
Property / Location | March 31, 2013 | | December 31, 2012 | | Effective
Interest Rate | | | | Maturity Date |
MORTGAGE DEBT: | | | | | | | | | |
Tysons Corner | 92,732 |
| | 93,188 |
| | 5.36 | % | | (a) | | Aug-15 |
Two Logan Square | 89,133 |
| | 89,340 |
| | 7.57 | % | | | | Apr-16 |
Fairview Eleven Tower | 21,939 |
| | 22,000 |
| | 4.25 | % | | | | Jan-17 |
IRS Philadelphia Campus | 195,608 |
| | 197,111 |
| | 7.00 | % | | | | Sep-30 |
Cira South Garage | 41,765 |
| | 42,303 |
| | 7.12 | % | | | | Sep-30 |
Principal balance outstanding | 441,177 |
| | 443,942 |
| | |
| | | | |
Plus: fair market value premiums (discounts), net | (877 | ) | | (968 | ) | | |
| | | | |
Total mortgage indebtedness | $ | 440,300 |
| | $ | 442,974 |
| | |
| | | | |
UNSECURED DEBT: | | | | | |
| | | | |
Credit Facility | — |
| |