BDN 3.31.2014 10-Q (Q1-2014)


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
_________________________
(Mark One)
þ
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2014
or
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.)
_________________________
Brandywine Realty Trust
Brandywine Operating Partnership, L.P.
(Exact name of registrant as specified in its charter)
_________________________

MARYLAND (Brandywine Realty Trust)
 
23-2413352
DELAWARE (Brandywine Operating Partnership L.P.)
 
23-2862640
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
555 East Lancaster Avenue
 
 
Radnor, Pennsylvania
 
19087
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (610) 325-5600
_________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Brandywine Realty Trust
 
Yes þ No o
Brandywine Operating Partnership, L.P.
 
Yes þ No o


1



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).

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:
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
Brandywine Operating Partnership, L.P.:
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).
Brandywine Realty Trust
 
Yes o No þ
Brandywine Operating Partnership, L.P.
 
Yes o No þ
A total of 157,037,189 Common Shares of Beneficial Interest, par value $0.01 per share of Brandywine Realty Trust, were outstanding as of April 30, 2014.



2



EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2014 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, 2014, owned a 98.9% interest in the Operating Partnership. The remaining 1.1% interest consists of common units of limited partnership interest issued by the Operating Partnership to third parties in exchange for contributions of properties to the Operating Partnership. As the sole general partner of the Operating Partnership, the Parent Company has full and complete authority over the Operating Partnership’s day-to-day operations and management.
Management operates the Parent Company and the Operating Partnership as one enterprise. The management of the Parent Company consists of the same members as the management of the Operating Partnership.
As general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the Parent Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Parent Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company's operations on a consolidated basis and how management operates the Company.
The Company believes that combining the quarterly reports on Form 10-Q of the Parent Company and the Operating Partnership into a single report will result in the following benefits:
•
facilitate a better understanding by the investors of the Parent Company and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business;
•
remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both the Parent Company and the Operating Partnership; and
•
create time and cost efficiencies through the preparation of one combined report instead of two separate reports.
There are few differences between the Parent Company and the Operating Partnership, which are reflected in the footnote disclosures in this report. The Company believes it is important to understand the differences between the Parent Company and the Operating Partnership in the context of how these entities operate as an interrelated consolidated company. The Parent Company is a REIT, whose only material asset is its ownership of partnership interests of the Operating Partnership. As a result, the Parent Company does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing the debt obligations of the Operating Partnership. The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness (directly and through subsidiaries) and through the issuance of partnership units of the Operating Partnership or equity interests in subsidiaries of the Operating Partnership.
The equity and non-controlling interests in the Parent Company and the Operating Partnership’s equity are the main areas of difference between the consolidated financial statements of the Parent Company and the Operating Partnership. The common units of limited partnership interest in the Operating Partnership are accounted for as partners’ equity in the Operating Partnership’s financial statements while the common units of limited partnership interests held by parties other than the Parent Company are presented as non-controlling interests in the Parent Company’s financial statements. The differences between the Parent Company and the Operating Partnership’s equity relate to the differences in the equity issued at the Parent Company and Operating Partnership levels.


3



To help investors understand the significant differences between the Parent Company and the Operating Partnership, this report presents the following as separate notes or sections for each of the Parent Company and the Operating Partnership:
•
Consolidated Financial Statements; and
•
Parent Company’s and Operating Partnership’s Equity.
This report also includes separate Item 4. (Controls and Procedures) disclosures and separate Exhibit 31 and 32 certifications for each of the Parent Company and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Parent Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.
In order to highlight the differences between the Parent Company and the Operating Partnership, the separate sections in this report for the Parent Company and the Operating Partnership specifically refer to the Parent Company and the Operating Partnership. In the sections that combine disclosures of the Parent Company and the Operating Partnership, this report refers to such disclosures as those of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and real estate ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Parent Company operates the business through the Operating Partnership.


4



TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
Brandywine Realty Trust
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brandywine Operating Partnership, L.P.
 
 
 
 
 
 
Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Filing Format
This combined Form 10-Q is being filed separately by Brandywine Realty Trust and Brandywine Operating Partnership, L.P.


5



PART I - FINANCIAL INFORMATION


Item 1.
— Financial Statements
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share information)
 
March 31,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Operating properties
$
4,701,289

 
$
4,669,289

Accumulated depreciation
(1,019,306
)
 
(983,808
)
Operating real estate investments, net
3,681,983

 
3,685,481

Construction-in-progress
90,140

 
74,174

Land inventory
96,427

 
93,351

Total real estate investments, net
3,868,550

 
3,853,006

Cash and cash equivalents
236,291

 
263,207

Accounts receivable, net
23,123

 
17,389

Accrued rent receivable, net
128,331

 
126,295

Investment in real estate ventures, at equity
180,237

 
180,512

Deferred costs, net
123,216

 
122,954

Intangible assets, net
125,162

 
132,329

Other assets
75,138

 
69,403

Total assets
$
4,760,048

 
$
4,765,095

LIABILITIES AND BENEFICIARIES’ EQUITY
 
 
 
Mortgage notes payable
$
666,305

 
$
670,151

Unsecured term loans
450,000

 
450,000

Unsecured senior notes, net of discounts
1,475,501

 
1,475,230

Accounts payable and accrued expenses
106,963

 
83,693

Distributions payable
25,604

 
25,584

Deferred income, gains and rent
72,937

 
71,635

Acquired lease intangibles, net
32,229

 
34,444

Other liabilities
35,357

 
32,923

Total liabilities
2,864,896

 
2,843,660

Commitments and contingencies (Note 16)

 

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 2014 and 2013
40

 
40

Common Shares of Brandywine Realty Trust’s beneficial interest, $0.01 par value; shares authorized 200,000,000; 156,916,901 and 156,731,993 issued and outstanding in 2014 and 2013, respectively
1,567

 
1,566

Additional paid-in capital
2,974,094

 
2,971,596

Deferred compensation payable in common shares
6,267

 
5,407

Common shares in grantor trust, 384,571 in 2014 and 312,279 in 2013
(6,267
)
 
(5,407
)
Cumulative earnings
520,322

 
522,528

Accumulated other comprehensive loss
(3,905
)
 
(2,995
)
Cumulative distributions
(1,617,878
)
 
(1,592,515
)
Total Brandywine Realty Trust’s equity
1,874,240

 
1,900,220

Non-controlling interests
20,912

 
21,215

Total beneficiaries' equity
1,895,152

 
1,921,435

Total liabilities and beneficiaries' equity
$
4,760,048

 
$
4,765,095


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


6



BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share information)
 
Three-month periods ended
 
 
March 31,
 
 
2014
 
2013
 
Revenue:
 
 
 
 
Rents
$
121,671

 
$
114,608

 
Tenant reimbursements
23,460

 
20,341

 
Termination fees
2,203

 
496

 
Third party management fees, labor reimbursement and leasing
4,150

 
3,236

 
Other
630

 
873

 
Total revenue
152,114

 
139,554

 
Operating expenses:
 
 
 
 
Property operating expenses
46,801

 
39,349

 
Real estate taxes
13,457

 
14,295

 
Third party management expenses
1,716

 
1,425

 
Depreciation and amortization
52,570

 
49,476

 
General and administrative expenses
8,181

 
6,551

 
Total operating expenses
122,725

 
111,096

 
Operating income
29,389

 
28,458

 
Other income (expense):
 
 
 
 
Interest income
385

 
58

 
Interest expense
(31,844
)
 
(30,914
)
 
Interest expense — amortization of deferred financing costs
(1,189
)
 
(1,161
)
 
Interest expense — financing obligation
(272
)
 
(218
)
 
Equity in income of real estate ventures
242

 
1,535

 
Loss on real estate venture transactions
(135
)
 
—

 
Gain on sale of undepreciated real estate
1,187

 
—

 
Loss on early extinguishment of debt
—

 
(3
)
 
Loss from continuing operations
(2,237
)
 
(2,245
)
 
Discontinued operations:
 
 
 
 
Income (Loss) from discontinued operations
(8
)
 
860

 
Net gain on disposition of discontinued operations
—

 
5,304

 
Total discontinued operations
(8
)
 
6,164

 
Net income (loss)
(2,245
)
 
3,919

 
Net income from discontinued operations attributable to non-controlling interests — LP units
—

 
(78
)
 
Net income attributable to non-controlling interest — partners' share of consolidated real estate ventures
(12
)
 
—

 
Net loss attributable to non-controlling interests — LP units
44

 
50

 
Net (income) loss attributable to non-controlling interests
32

 
(28
)
 
Net income (loss) attributable to Brandywine Realty Trust
(2,213
)
 
3,891

 
Distribution to Preferred Shares
(1,725
)
 
(1,725
)
 
Nonforfeitable dividends allocated to unvested restricted shareholders
(103
)
 
(108
)
 
Net income (loss) attributable to Common Shareholders of Brandywine Realty Trust
$
(4,041
)
 
$
2,058

 
Basic income (loss) per Common Share:
 
 
 
 
Continuing operations
$
(0.03
)
 
$
(0.03
)
 
Discontinued operations
—

 
0.04

 
 
$
(0.03
)
 
$
0.01

 
Diluted income (loss) per Common Share:
 
 
 
 
Continuing operations
$
(0.03
)
 
$
(0.03
)
 
Discontinued operations
—

 
0.04

 
 
$
(0.03
)
 
$
0.01

 
 
 
 
 
 
Basic weighted average shares outstanding
156,794,019

 
143,605,659

 
Diluted weighted average shares outstanding
156,794,019

 
143,605,659

 
Net income (loss) attributable to Brandywine Realty Trust
 
 
 
 
Total continuing operations
$
(2,205
)
 
$
(2,195
)
 
Total discontinued operations
(8
)
 
6,086

 
Net income (loss)
$
(2,213
)
 
$
3,891

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


7



BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)

 
Three-month periods ended
 
 
March 31,
 
 
2014
 
2013
 
Net income (loss)
$
(2,245
)
 
$
3,919

 
Comprehensive income (loss):
 
 
 
 
Unrealized gain (loss) on derivative financial instruments
(980
)
 
1,845

 
Reclassification of realized losses on derivative financial instruments to operations, net (1)
60

 
48

 
Total comprehensive income (loss)
(920
)
 
1,893

 
Comprehensive income (loss)
(3,165
)
 
5,812

 
Comprehensive (income) loss attributable to non-controlling interest
42

 
(52
)
 
Comprehensive income (loss) attributable to Brandywine Realty Trust
$
(3,123
)
 
$
5,760

 
(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.




8



BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF BENEFICIARIES’ EQUITY
For the three-months period ended March 31, 2014
(unaudited, in thousands, except number of shares)
March 31, 2014
 
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, 2013
4,000,000

 
$
40

 
156,731,993

 
312,279

 
$
1,566

 
$
2,971,596

 
$
5,407

 
$
(5,407
)
 
$
522,528

 
$
(2,995
)
 
$
(1,592,515
)
 
$
21,215

 
$
1,921,435

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,213
)
 
 
 
 
 
(32
)
 
(2,245
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(910
)
 
 
 
(10
)
 
(920
)
Equity issuance costs
 
 
 
 
 
 
 
 
 
 
(52
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(52
)
Share-based compensation activity
 
 
 
 
108,347

 
 
 
1

 
2,643

 
 
 
 
 
7

 
 
 
 
 
 
 
2,651

Share issuance from/to Deferred Compensation Plan
 
 
 
 
76,561

 
72,292

 
 
 
(89
)
 
860

 
(860
)
 
 
 
 
 
 
 
 
 
(89
)
Adjustment to non-controlling interest
 
 
 
 
 
 
 
 
 
 
(4
)
 
 
 
 
 
 
 
 
 
 
 
4

 
—

Preferred Share distributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,725
)
 
 
 
(1,725
)
Distributions declared ($0.15 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(23,638
)
 
(265
)
 
(23,903
)
BALANCE,
March 31, 2014
4,000,000

 
$
40

 
156,916,901

 
384,571

 
$
1,567

 
$
2,974,094

 
$
6,267

 
$
(6,267
)
 
$
520,322

 
$
(3,905
)
 
$
(1,617,878
)
 
$
20,912

 
$
1,895,152


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


9




BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENT OF BENEFICIARIES’ EQUITY
For the three-months period ended March 31, 2013
(unaudited, in thousands, except number of shares)
March 31, 2013
 
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

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,891

 
 
 
 
 
28

 
3,919

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,870

 
 
 
23

 
1,893

Equity issuance costs
 
 
 
 
 
 
 
 
 
 
(61
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(61
)
Bonus share issuance
 
 
 
 
27,918

 
 
 
 
 
361

 
 
 
 
 
 
 
 
 
 
 
 
 
361

Share-based compensation activity
 
 
 
 
123,523

 
7,050

 
1

 
2,655

 
 
 
 
 
10

 
 
 
 
 
 
 
2,666

Share issuance from/to Deferred Compensation Plan
 
 
 
 
22,404

 
17,958

 
 
 
 
 
164

 
(164
)
 
 
 
 
 
 
 
 
 
—

Adjustment to non-controlling interest
 
 
 
 
 
 
 
 
 
 
(19
)
 
 
 
 
 
 
 
 
 
 
 
19

 
—

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


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


10



BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Three-month periods ended
 
March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(2,245
)
 
$
3,919

Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
Depreciation and amortization
52,570

 
50,304

Amortization of deferred financing costs
1,189

 
1,161

Amortization of debt discount/(premium), net
(162
)
 
366

Amortization of stock compensation costs
3,048

 
2,097

Shares used for employee taxes upon vesting of share awards
(531
)
 
(245
)
Straight-line rent income
(3,592
)
 
(5,514
)
Amortization of acquired above (below) market leases, net
(1,957
)
 
(1,771
)
Straight-line ground rent expense
22

 
474

Provision for doubtful accounts
897

 
505

Loss on real estate venture transactions
135

 
—

Net gain on sale of interests in real estate
(1,187
)
 
(5,304
)
Loss on early extinguishment of debt
—

 
3

Real estate venture income in excess of distributions
(123
)
 
(358
)
Deferred financing obligation
(272
)
 
(452
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(5,759
)
 
(1,321
)
Other assets
(7,508
)
 
(4,352
)
Accounts payable and accrued expenses
14,400

 
10,793

Deferred income, gains and rent
1,714

 
46

Other liabilities
(199
)
 
(88
)
Net cash from operating activities
50,440

 
50,263

Cash flows from investing activities:
 
 
 
Acquisition of properties
(13,972
)
 
—

Sales of properties, net
3,350

 
112,863

Distribution of sales proceeds from real estate ventures
—

 
16,963

Proceeds from repayment of mortgage notes receivable
1,200

 
200

Capital expenditures for tenant improvements
(36,222
)
 
(24,215
)
Capital expenditures for redevelopments
(1,031
)
 
(2,427
)
Capital expenditures for developments
(1,851
)
 
(82
)
Reimbursement from real estate venture for pre-formation development costs
—

 
1,976

Advances for purchase of tenant assets, net of repayments
94

 
(375
)
Investment in unconsolidated Real Estate Ventures
(808
)
 
(7,039
)
Escrowed cash
1,636

 
(420
)
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income
2,828

 
1,357

Leasing costs
(3,589
)
 
(8,250
)
Net cash from (used in) investing activities
(48,365
)
 
90,551

Cash flows from financing activities:
 
 
 
Proceeds from Credit Facility borrowings
—

 
186,000

Repayments of Credit Facility borrowings
—

 
(255,000
)
Repayments of mortgage notes payable
(3,349
)
 
(2,765
)
Deferred financing obligation interest expense
—

 
234

Debt financing costs
(35
)
 
—

Exercise of stock options
—

 
672

Distributions paid to shareholders
(25,330
)
 
(23,353
)
Distributions to noncontrolling interest
(277
)
 
(277
)
Net cash used in financing activities
(28,991
)
 
(94,489
)
Increase (Decrease) in cash and cash equivalents
(26,916
)
 
46,325

Cash and cash equivalents at beginning of period
263,207

 
1,549

Cash and cash equivalents at end of period
$
236,291

 
$
47,874



11



 
 
 
 
Supplemental disclosure:
 
 
 
Cash paid for interest, net of capitalized interest during the three months ended March 31, 2014 and 2013 of $1,230 and $625, respectively
$
19,213

 
$
11,367

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
8,228

 
(1,701
)
Change in capital expenditures financed through retention payable at period end
538

 
(697
)
Change in unfunded tenant allowance
(43
)
 
(64
)
The accompanying notes are an integral part of these consolidated financial statements.


12




BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except unit and per unit information)
 
March 31,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Operating properties
$
4,701,289

 
$
4,669,289

Accumulated depreciation
(1,019,306
)
 
(983,808
)
Operating real estate investments, net
3,681,983

 
3,685,481

Construction-in-progress
90,140

 
74,174

Land inventory
96,427

 
93,351

Total real estate investments, net
3,868,550

 
3,853,006

Cash and cash equivalents
236,291

 
263,207

Accounts receivable, net
23,123

 
17,389

Accrued rent receivable, net
128,331

 
126,295

Investment in real estate ventures, at equity
180,237

 
180,512

Deferred costs, net
123,216

 
122,954

Intangible assets, net
125,162

 
132,329

Other assets
75,138

 
69,403

Total assets
$
4,760,048

 
$
4,765,095

LIABILITIES AND PARTNERS' EQUITY
 
 
 
Mortgage notes payable
$
666,305

 
$
670,151

Unsecured term loans
450,000

 
450,000

Unsecured senior notes, net of discounts
1,475,501

 
1,475,230

Accounts payable and accrued expenses
106,963

 
83,693

Distributions payable
25,604

 
25,584

Deferred income, gains and rent
72,937

 
71,635

Acquired lease intangibles, net
32,229

 
34,444

Other liabilities
35,357

 
32,923

Total liabilities
2,864,896

 
2,843,660

Commitments and contingencies (Note 16)

 

Redeemable limited partnership units at redemption value; 1,763,739 issued and outstanding in 2014 and 2013, respectively
26,691

 
26,486

Brandywine Operating Partnership, L.P.’s equity:
 
 
 
6.90% Series E-Linked Preferred Mirror Units; issued and outstanding- 4,000,000 in 2014 and 2013
96,850

 
96,850

General Partnership Capital, 156,916,901 and 156,731,993 units issued and outstanding in 2014 and 2013, respectively
1,774,950

 
1,800,530

Accumulated other comprehensive loss
(4,297
)
 
(3,377
)
Total Brandywine Operating Partnership, L.P.’s equity
1,867,503

 
1,894,003

Non-controlling interest - consolidated real estate ventures
958

 
946

Total partners’ equity
1,868,461

 
1,894,949

 
 
 
 
Total liabilities and partners’ equity
$
4,760,048

 
$
4,765,095

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




13



BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit information)
 
Three-month periods ended
 
March 31,
 
2014
 
2013
Revenue:
 
 
 
Rents
$
121,671

 
$
114,608

Tenant reimbursements
23,460

 
20,341

Termination fees
2,203

 
496

Third party management fees, labor reimbursement and leasing
4,150

 
3,236

Other
630

 
873

Total revenue
152,114

 
139,554

Operating expenses:
 
 
 
Property operating expenses
46,801

 
39,349

Real estate taxes
13,457

 
14,295

Third party management expenses
1,716

 
1,425

Depreciation and amortization
52,570

 
49,476

General & administrative expenses
8,181

 
6,551

Total operating expenses
122,725

 
111,096

Operating income
29,389

 
28,458

Other income (expense):
 
 
 
Interest income
385

 
58

Interest expense
(31,844
)
 
(30,914
)
Interest expense — amortization of deferred financing costs
(1,189
)
 
(1,161
)
Interest expense — financing obligation
(272
)
 
(218
)
Equity in income of real estate ventures
242

 
1,535

Loss on real estate venture transactions
(135
)
 
—

Gain on sale of undepreciated real estate
1,187

 
—

Loss on early extinguishment of debt
—

 
(3
)
Loss from continuing operations
(2,237
)
 
(2,245
)
Discontinued operations:
 
 
 
Income (Loss) from discontinued operations
(8
)
 
860

Net gain on disposition of discontinued operations
—

 
5,304

Total discontinued operations
(8
)
 
6,164

Net income (loss)
(2,245
)
 
3,919

Net income attributable to non-controlling interests
(12
)
 
—

Net income (loss) attributable to Brandywine Operating Partnership
(2,257
)
 
3,919

Distribution to Preferred Units
(1,725
)
 
(1,725
)
Amount allocated to unvested restricted unitholders
(103
)
 
(108
)
Net income (loss) attributable to Common Partnership Unitholders of Brandywine Operating Partnership, L.P.
$
(4,085
)
 
$
2,086

Basic income (loss) per Common Partnership Unit:
 
 
 
Continuing operations
$
(0.03
)
 
$
(0.03
)
Discontinued operations
—

 
0.04

 
$
(0.03
)
 
$
0.01

Diluted income (loss) per Common Partnership Unit:
 
 
 
Continuing operations
$
(0.03
)
 
$
(0.03
)
Discontinued operations
—

 
0.04

 
$
(0.03
)
 
$
0.01

Basic weighted average common partnership units outstanding
158,557,758

 
145,451,396

Diluted weighted average common partnership units outstanding
158,557,758

 
145,451,396

Net income (loss) attributable to Brandywine Operating Partnership, L.P.
 
 
 
Total continuing operations
$
(2,249
)
 
$
(2,245
)
Total discontinued operations
(8
)
 
6,164

Net income (loss)
$
(2,257
)
 
$
3,919

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


14



BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)

 
Three-month periods ended
 
March 31,
 
2014
 
2013
Net income (loss)
$
(2,245
)
 
$
3,919

Comprehensive income (loss):
 
 
 
Unrealized gain (loss) on derivative financial instruments
(980
)
 
1,845

Reclassification of realized losses on derivative financial instruments to operations, net (1)
60

 
48

Total comprehensive income (loss)
(920
)
 
1,893

Comprehensive income (loss) attributable to Brandywine Operating Partnership, L.P.
$
(3,165
)
 
$
5,812

(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.




15



BRANDYWINE OPERATING PARTNERSHIP L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Three-month periods ended
 
March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(2,245
)
 
$
3,919

Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
Depreciation and amortization
52,570

 
50,304

Amortization of deferred financing costs
1,189

 
1,161

Amortization of debt discount/(premium), net
(162
)
 
366

Amortization of stock compensation costs
3,048

 
2,097

Shares used for employee taxes upon vesting of share awards
(531
)
 
(245
)
Straight-line rent income
(3,592
)
 
(5,514
)
Amortization of acquired above (below) market leases, net
(1,957
)
 
(1,771
)
Straight-line ground rent expense
22

 
474

Provision for doubtful accounts
897

 
505

Loss on early extinguishment of debt
—

 
3

Net gain on sale of interests in real estate
(1,187
)
 
(5,304
)
Loss on real estate venture transactions
135

 
—

Real estate venture income in excess of distributions
(123
)
 
(358
)
Deferred financing obligation
(272
)
 
(452
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(5,759
)
 
(1,321
)
Other assets
(7,508
)
 
(4,352
)
Accounts payable and accrued expenses
14,400

 
10,793

Deferred income, gains and rent
1,714

 
46

Other liabilities
(199
)
 
(88
)
Net cash from operating activities
50,440

 
50,263

Cash flows from investing activities:
 
 
 
Acquisition of properties
(13,972
)
 
—

Sales of properties, net
3,350

 
112,863

Distribution of sales proceeds from real estate venture
—

 
16,963

Proceeds from repayment of mortgage notes receivable
1,200

 
200

Capital expenditures for tenant improvements
(36,222
)
 
(24,215
)
Capital expenditures for redevelopments
(1,031
)
 
(2,427
)
Capital expenditures for developments
(1,851
)
 
(82
)
Reimbursement from real estate venture for pre-formation development costs
—

 
1,976

Advances for purchase of tenant assets, net of repayments
94

 
(375
)
Investment in unconsolidated Real Estate Ventures
(808
)
 
(7,039
)
Escrowed cash
1,636

 
(420
)
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income
2,828

 
1,357

Leasing costs
(3,589
)
 
(8,250
)
Net cash from (used in) investing activities
(48,365
)
 
90,551

Cash flows from financing activities:
 
 
 
Proceeds from Credit Facility borrowings
—

 
186,000

Repayments of Credit Facility borrowings
—

 
(255,000
)
Repayments of mortgage notes payable
(3,349
)
 
(2,765
)
Deferred financing obligation interest expense
—

 
234

Debt financing costs
(35
)
 
—

Exercise of stock options
—

 
672

Distributions paid to preferred and common partnership unitholders
(25,607
)
 
(23,630
)
Net cash used in financing activities
(28,991
)
 
(94,489
)
Increase (Decrease) in cash and cash equivalents
(26,916
)
 
46,325

Cash and cash equivalents at beginning of period
263,207

 
1,549

Cash and cash equivalents at end of period
$
236,291

 
$
47,874

 
 
 
 


16



Supplemental disclosure:
 
 
 
Cash paid for interest, net of capitalized interest during the three months ended March 31, 2014 and 2013 of $1,230 and $625, respectively
$
19,213

 
$
11,367

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
8,228

 
(1,701
)
Change in capital expenditures financed through retention payable at period end
538

 
(697
)
Change in unfunded tenant allowance
(43
)
 
(64
)

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


17



BRANDYWINE REALTY TRUST AND BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
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, industrial and mixed-use 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, 2014, owned a 98.9% 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, 2014, the Company owned 205 properties, consisting of 175 office properties, 20 industrial facilities, five mixed-use properties (200 core properties), two development properties, two redevelopment properties and one re-entitlement property (collectively, the “Properties”) containing an aggregate of approximately 24.9 million net rentable square feet. In addition, as of March 31, 2014, the Company owned economic interests in 17 unconsolidated real estate ventures that own properties containing an aggregate of approximately 5.7 million net rentable square feet (collectively, the “Real Estate Ventures”). As of March 31, 2014, the Company also owned 450 acres of undeveloped land, and held options to purchase approximately 50 additional acres of undeveloped land. As of March 31, 2014, these land parcels could support, under current zoning and entitlements, approximately 6.2 million square feet of development. 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, and Carlsbad, California.
The Company conducts its third-party real estate management services business primarily through wholly-owned management company subsidiaries. As of March 31, 2014, the management company subsidiaries were managing properties containing an aggregate of approximately 32.8 million net rentable square feet, of which approximately 24.9 million net rentable square feet related to Properties owned by the Company and approximately 7.9 million net rentable square feet related to properties owned by third parties and Real Estate Ventures.
Unless otherwise indicated, all references in this Form 10-Q to square feet represent net rentable area.
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, 2014, the results of its operations for the three-month periods ended March 31, 2014 and 2013 and its cash flows for the three-month periods ended March 31, 2014 and 2013 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 2013 Annual Report on Form 10-K filed with the SEC on February 25, 2014.
Reclassifications
Certain amounts have been reclassified in prior years to conform to the current year presentation, including the reclassification of notes receivable to other assets. All other reclassifications are related to the treatment of sold properties as discontinued operations on the statement of operations for all periods presented.


18



Recent Accounting Pronouncements
In March 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard update communicating technical corrections and improvements related to glossary terms within the codification. The update provides further clarification for certain of the terms currently codified and removed certain other terms used, though not otherwise defined. The update had no impact on our accounting policies, consolidated financial position or results of operations.
In April 2014 the FASB issued revised guidance on discontinued operations and disclosures of disposals of components of an entity. The update revises the definition to include only disposals involving a strategic shift that has a major effect on the entity’s operations and financial results when the disposal asset or group meets the existing criterion for treatment as held for sale. Examples of a strategic shift include the withdrawal from a major geographic area, line of business, equity method investment or any other major parts of a business, as applicable. A component of the entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. In addition, the revised standard no longer precludes presentation as a discontinued operation if there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations, or if there is significant continuing involvement with a component after its disposal.
The amendments require additional disclosures about discontinued operations including; the major classes of net income or loss where net income is otherwise presented, the operating and investing cash flows of discontinued operations where net income is otherwise presented, depreciation, amortization, capital expenditures and significant operating and investing non-cash items of the discontinued operation for the periods in which net income is otherwise presented and, if there is a non-controlling interest, the related allocation to the parent company.
Application is prospective, and required for periods beginning on or after December 15, 2014. This update should not be applied to assets classified as held for sale before the effective date even if the component of an entity is disposed of after the effective date. Early adoption is permitted for disposals or assets held for sale that have not been reported in the financial statements previously issued or available for issuance. As there were no dispositions for the quarter ended March 31, 2014 and guidance is applied prospectively, there was no impact to the Company’s statements of income or financial position.
3. REAL ESTATE INVESTMENTS
As of March 31, 2014 and December 31, 2013, the gross carrying value of the Company’s Properties was as follows (in thousands):
 
March 31,
2014
 
December 31,
2013
Land
$
680,695

 
$
680,513

Building and improvements
3,508,570

 
3,504,060

Tenant improvements
512,024

 
484,716

 
$
4,701,289

 
$
4,669,289

Acquisition
On February 19, 2014, the Company acquired 54.1 acres of undeveloped land known as Encino Trace in Austin, Texas for $14.0 million. The land is fully entitled with a site plan and building permits in place allowing for the development of two four-story office buildings containing approximately 320,000 net rentable square feet. The purchase price included an in-place lease, which was placed into construction in progress. As such, the Company has treated this transaction as a business combination and allocated the purchase price to the tangible and intangible assets. The Company capitalized $8.4 million in construction in progress, recorded $4.6 million in land inventory and recorded a deposit for a portion of the future development fee held in escrow for $1.0 million. The net assets were purchased using available corporate funds.
One of the two potential office buildings at Encino Trace is currently in development with with $14.6 million funded through March 31, 2014. Project costs on the first building will be funded over the remaining construction period, which is scheduled to be completed during the second quarter of 2015.
Disposition
On March 27, 2014, the Company sold a 16.8-acre undeveloped parcel of land located in Austin, Texas for a sales price of $3.5 million resulting in a $1.2 million gain on sale of undepreciated real estate after closing and other transaction related costs.


19



4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of March 31, 2014, the Company had an aggregate investment of approximately $180.2 million in 17 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, 2014, 11 of the Real Estate Ventures owned 55 office buildings that contain an aggregate of approximately 5.7 million net rentable square feet; two Real Estate Ventures owned 3.8 acres of undeveloped parcels of land; three Real Estate Venture owned 22.5-acres of land under active development and one Real Estate Venture owned 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, 2014 and December 31, 2013 (in thousands):
 
March 31,
2014
 
December 31,
2013
Net property
$
988,378

 
$
965,475

Other assets
144,871

 
164,152

Other liabilities
45,126

 
49,442

Debt
720,609

 
699,860

Equity
367,514

 
380,325

 
 
 
 
Company’s share of equity (Company’s basis) (a)
180,237

(b)
180,512

 
 
 
 
(a) This amount includes the effect of the basis difference between the Company's historical cost basis and the basis recorded at the real estate venture level, which is typically amortized over the life of the related assets and liabilities. Basis differentials occur from the impairment of investments, purchases of third party interests in existing Real Estate Ventures and upon the transfer of assets that were previously owned by the Company into a Real Estate Venture. In addition, certain acquisition, transaction and other costs may not be reflected in the net assets at the Real Estate Venture level.
(b) Does not include the negative investment balance of one real estate venture totaling $1.2 million as of March 31, 2014, which was included in other liabilities.
The Company held interests in 17 Real Estate Ventures containing an aggregate of approximately 5.7 million net rentable square feet and 19 Real Estate Ventures containing an aggregate of approximately 6.4 million net rentable square feet as of the three-month periods ended March 31, 2014 and 2013, respectively. The following is a summary of results of operations of the Real Estate Ventures in which the Company had interests during these periods (in thousands):
 
Three month periods ended March 31,
 
2014
 
2013
Revenue
$
34,385

 
$
40,889

Operating expenses
13,982

 
18,266

Interest expense, net
8,100

 
9,772

Depreciation and amortization
13,598

 
12,906

Net loss
(1,295
)
 
(55
)
Company’s share of income (Company’s basis)
242

 
1,535



20



Guarantees
As of March 31, 2014, the Company had provided guarantees on behalf of certain real estate ventures, consisting of (i) a $24.7 million payment guaranty on the construction loan for the project being undertaken by evo at Cira; (ii) a $3.2 million payment guarantee on the construction loan for the development project being undertaken by TB-BDN Plymouth Apartments; and (iii) a $0.5 million payment guarantee on a loan provided to PJP VII. In addition, during construction undertaken by Real Estate Ventures, the Company has provided and expects to continue to provide cost overrun and completion guarantees, with rights of contribution among partners in the real estate venture, as well as customary environmental indemnities and guarantees of customary exceptions to nonrecourse provisions in loan agreements. For additional information regarding these real estate ventures, see "Investments in Unconsolidated Ventures" in notes to the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
5. DEFERRED COSTS
As of March 31, 2014 and December 31, 2013, the Company’s deferred costs were comprised of the following (in thousands):
 
March 31, 2014
 
Total Cost
 
Accumulated
Amortization
 
Deferred Costs,
net
Leasing Costs
$
159,517

 
$
(60,985
)
 
$
98,532

Financing Costs
40,315

 
(15,631
)
 
24,684

Total
$
199,832

 
$
(76,616
)
 
$
123,216

 
December 31, 2013
 
Total Cost
 
Accumulated
Amortization
 
Deferred Costs,
net
Leasing Costs
$
155,885

 
$
(58,805
)
 
$
97,080

Financing Costs
40,317

 
(14,443
)
 
25,874

Total
$
196,202

 
$
(73,248
)
 
$
122,954

During each of the three-month periods ended March 31, 2014 and 2013, the Company capitalized internal direct leasing costs of $2.1 million, in accordance with the accounting standard for the capitalization of leasing costs.
6. INTANGIBLE ASSETS AND LIABILITIES
As of March 31, 2014 and December 31, 2013, the Company’s intangible assets/liabilities were comprised of the following (in thousands):
 
March 31, 2014
 
Total Cost
 
Accumulated
Amortization
 
Intangible assets/liabilities, net
Intangible assets, net:
 
 
 
 
 
   In-place lease value
$
147,606

 
$
(38,327
)
 
$
109,279

   Tenant relationship value
37,671

 
(26,858
)
 
10,813

   Above market leases acquired
6,661

 
(1,591
)
 
5,070

   Total intangible assets, net
$
191,938

 
$
(66,776
)
 
$
125,162

 
 
 
 
 
 
Acquired lease intangibles, net:
 
 
 
 
 
   Below market leases acquired
$
81,847

 
$
(49,618
)
 
$
32,229




21



 
December 31, 2013
 
Total Cost
 
Accumulated
Amortization
 
Intangible assets/liabilities, net
Intangible assets, net:
 
 
 
 
 
   In-place lease value
$
150,782

 
$
(35,607
)
 
$
115,175

   Tenant relationship value
38,692

 
(26,868
)
 
11,824

   Above market leases acquired
6,673

 
(1,343
)
 
5,330

   Total intangible assets, net
$
196,147

 
$
(63,818
)
 
$
132,329

 
 
 
 
 
 
Acquired lease intangibles, net:
 
 
 
 
 
   Below market leases acquired
$
81,991

 
$
(47,547
)
 
$
34,444

As of March 31, 2014, the Company’s annual amortization for its intangible assets/liabilities were as follows (in thousands, and assuming no early lease terminations):
 
Assets
 
Liabilities
2014 (nine months remaining)
$
19,879

 
$
5,401

2015
23,314

 
5,455

2016
18,573

 
3,486

2017
16,573

 
2,890

2018
12,161

 
2,353

Thereafter
34,662

 
12,644

Total
$
125,162

 
$
32,229




22



7. DEBT OBLIGATIONS
The following table sets forth information regarding the Company’s consolidated debt obligations at March 31, 2014 and December 31, 2013 (in thousands):
Property / Location
March 31, 2014
 
December 31, 2013
 
Effective
Interest
Rate
 
 
 
Maturity
Date
MORTGAGE DEBT:
 
 
 
 
 
 
 
 
 
Tysons Corner
$
90,918

 
$
91,395

 
5.36
%
 
(a)
 
Aug-15
One Commerce Square
124,604

 
125,089

 
3.68
%
 
(a)
 
Jan-16
Two Logan Square
88,362

 
88,583

 
7.57
%
 
 
 
Apr-16
Fairview Eleven Tower
21,566

 
21,630

 
4.25
%
 
(b)
 
Jan-17
Two Commerce Square
112,000

 
112,000

 
4.51
%
 
(a)
 
Apr-23
Cira Square (GSA Philadelphia Campus)
189,370

 
190,964

 
7.00
%
 
 
 
Sep-30
Cira Centre South Garage
39,530

 
40,101

 
7.12
%
 
 
 
Sep-30
Principal balance outstanding
666,350

 
669,762

 
 

 
 
 
 
Plus: fair market value premiums (discounts), net
(45
)
 
389

 
 

 
 
 
 
Total mortgage indebtedness
$
666,305

 
$
670,151

 
 

 
 
 
 
UNSECURED DEBT:
 
 
 
 
 

 
 
 
 
Three-Year Term Loan - Swapped to fixed
$
150,000

 
$
150,000

 
2.60
%
 
 
 
Feb-15
Four-Year Term Loan
100,000

 
100,000

 
LIBOR + 1.75%

 
(c)
 
Feb-16
Seven-Year Term Loan - Swapped to fixed
200,000

 
200,000

 
3.62
%
 
 
 
Feb-19
$250.0M 5.400% Guaranteed Notes due 2014
218,549

 
218,549

 
5.53
%
 
 
 
Nov-14
$250.0M 7.500% Guaranteed Notes due 2015
157,625

 
157,625

 
7.76
%
 
 
 
May-15
$250.0M 6.000% Guaranteed Notes due 2016
149,919

 
149,919

 
5.95
%
 
 
 
Apr-16
$300.0M 5.700% Guaranteed Notes due 2017
300,000

 
300,000

 
5.68
%
 
 
 
May-17
$325.0M 4.950% Guaranteed Notes due 2018
325,000

 
325,000

 
5.13
%
 
 
 
Apr-18
$250.0M 3.950% Guaranteed Notes due 2023
250,000

 
250,000

 
4.02
%
 
 
 
Feb-23
Indenture IA (Preferred Trust I)
27,062

 
27,062

 
2.75
%
 
 
 
Mar-35
Indenture IB (Preferred Trust I)
25,774

 
25,774

 
3.30
%
 
 
 
Apr-35
Indenture II (Preferred Trust II)
25,774

 
25,774

 
3.09
%
 
 
 
Jul-35
Principal balance outstanding
1,929,703

 
1,929,703

 
 

 
 
 
 
Plus: original issue premiums (discounts), net
(4,202
)
 
(4,473
)
 
 

 
 
 
 
Total unsecured indebtedness
$
1,925,501

 
$
1,925,230

 
 

 
 
 
 
Total Debt Obligations
$
2,591,806

 
$
2,595,381

 
 

 
 
 
 
(a)
These loans were assumed upon acquisition of the related properties. The interest rate reflects the market rate at the time of acquisition.
(b)
Represents the full debt amount secured by a property owned by a consolidated joint venture in which the Company holds a 50% interest.
(c)
London Interbank Offered Rate (“LIBOR”).
During the three-month periods ended March 31, 2014 and 2013, the Company’s weighted-average effective interest rate on its mortgage notes payable was 5.73% and 6.65%, respectively.
 
 
 
 
 
 
 
 
The Parent Company unconditionally guarantees the unsecured debt obligations of the Operating Partnership (or is a co-borrower with the Operating Partnership) but does not by itself incur unsecured indebtedness. The Parent Company has no material assets other than its investment in the Operating Partnership.

The Company utilizes its unsecured revolving credit facility (the "Credit Facility") for general business purposes, including funding costs of acquisitions, developments and redevelopments and repayment of other debt. The scheduled maturity date of the Credit Facility in place at March 31, 2014 is February 1, 2016. The per annum variable interest rate on balances outstanding under the Credit Facility is LIBOR plus 1.50%. The interest rate and facility fee are subject to adjustment upon a change in the Company’s


23



unsecured debt ratings. As of March 31, 2014, the Company did not have any outstanding borrowings on its Credit Facility, with $1.7 million in letters of credit outstanding, leaving $598.3 million of unused availability under the Credit Facility. During each of the three-month periods ended March 31, 2014 and 2013, there were no weighted-average interest rates associated with the Credit Facility because there were no borrowings outstanding under the Credit Facility during either period.

The Company has the option to increase the amounts available to be advanced under the Credit Facility, the $150.0 million three-year term loan, and the $100.0 million four-year term loan by an aggregate of $200.0 million, subject to customary conditions and limitations, by obtaining additional commitments from the current lenders and other financial institutions. The Company also has the option to extend the maturity dates of each of the Credit Facility, the $150.0 million three-year term loan and the $100.0 million four-year term loan by one year, subject to payment of an extension fee and other customary conditions and limitations. The Company may repay the $150.0 million three-year term loan and the $100.0 million four-year term loan at any time without penalty. The $200.0 million seven-year term loan is subject to a prepayment penalty of 1.00% through February 1, 2015 with no penalty thereafter.

The spread to LIBOR for LIBOR-based loans under the Credit Facility and term loans depends on the Company's unsecured senior debt credit rating. Based on the Company's current credit rating, the spread for such loans will be 150 basis points under the Credit Facility, 175 basis points under both the $150.0 million three-year term loan and the $100.0 million four-year term loan and 190 basis points under the $200.0 million seven-year term loan. At the Company's option, advances under the Credit Facility and term loans may also bear interest at a per annum floating rate equal to the higher of the prime rate or the federal funds rate plus 0.50% per annum. The Credit Facility contains a competitive bid option that allows banks that are part of the lender consortium to bid to make loans to the Company at a reduced rate.

The Company executed hedging transactions that fix the rate on the $200.0 million seven-year term loan at a 3.623% average rate for its full term, and the rate on the $150.0 million three-year term loan at a 2.596% average rate for periods of three to four years. All hedges commenced on February 1, 2012 and the rates are inclusive of the LIBOR spread based on the Company's current investment grade rating. See Note 9 for details of the interest rate swaps entered into as of March 31, 2014.

The Credit Facility and term loans contain financial and operating covenants and restrictions. The Company was in compliance with all such restrictions and financial covenants as of March 31, 2014. In the event of a default related to the financing and operating covenants, the Company's dividend distributions are limited to the greater of 95% of funds from operations or the minimum amount necessary for the Company to maintain its status as a REIT.

As of March 31, 2014, the Company’s aggregate scheduled principal payments on debt obligations, excluding amortization of discounts and premiums, were as follows (in thousands):

2014 (nine months remaining)
$
228,964

2015
409,655

2016
467,703

2017
330,323

2018
336,954

Thereafter
822,454

Total principal payments
2,596,053

Net unamortized premiums/(discounts)
(4,247
)
Outstanding indebtedness
$
2,591,806

8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company determined the fair values disclosed below using available market information and discounted cash flow analyses as of March 31, 2014 and December 31, 2013, respectively. The discount rate used in calculating fair value is the sum of the current risk free rate and the risk premium on the date of measurement of the instruments or obligations. Considerable judgment is necessary to interpret market data and to develop the related estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company could realize upon disposition. The use of different estimates and valuation methodologies may have a material effect on the fair value amounts shown. The Company believes that the carrying amounts reflected in the consolidated balance sheets at March 31, 2014 and December 31, 2013 approximate the fair values for cash and cash equivalents, accounts receivable, other assets, accounts payable and accrued expenses.


24



The following are financial instruments for which the Company’s estimates of fair value differ from the carrying amounts (in thousands):
 
March 31, 2014
 
December 31, 2013
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Mortgage notes payable
$
666,305

 
$
705,244

 
$
670,151

 
$
715,244

Unsecured notes payable
$
1,396,891

 
$
1,477,304

 
$
1,396,620

 
$
1,471,041

Variable rate debt
$
528,610

 
$
526,693

 
$
528,610

 
$
526,693

Notes receivable
$
5,826

 
$
6,795

 
$
7,026

 
$
7,759

The fair value of the Company's unsecured notes payable are categorized as Level 2 (as provided by the accounting standard for Fair Value Measurements and Disclosures), as these instruments are valued using quoted market prices as of March 31, 2014 and December 31, 2013.
The fair value of the variable rate debt was estimated using a discounted cash flow analysis valuation on the borrowing rates currently available to the Company for loans with similar terms and maturities, as applicable. The fair value of the mortgage debt was determined by discounting the future contractual interest and principal payments by a blended market rate for fully secured loans with similar terms and maturities. The weighted average discount rate for the combined variable rate debt and mortgage loans as of March 31, 2014 was 3.514%. The fair value of the notes receivable was estimated using the expected cash flows of the notes receivable, and discounting those cash flows using the market rate of interest for mortgage notes with a comparable level of risk. The Company used a discount rate of 14.63% for the notes receivable as of March 31, 2014. The Company applies its knowledge of the debt markets to determine appropriate discount rates to utilize in the discounted cash flow models. As these inputs are unobservable, the Company has categorized the valuation of mortgage notes payable, variable rate debt and notes receivable as Level 3 (as provided by the accounting standard for Fair Value Measurements and Disclosures).
Disclosure about the fair value of financial instruments is based upon pertinent information available to management as of March 31, 2014 and December 31, 2013. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since March 31, 2014, and current estimates of fair value may differ from the amounts presented herein.


25



9. FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
The following table summarizes the terms and fair values of the Company's derivative financial instruments as of March 31, 2014 and December 31, 2013. The notional amounts provide an indication of the extent of the Company's involvement in these instruments at that time, but do not represent exposure to credit, interest rate or market risks (amounts presented in thousands and included in other liabilities on the Company's consolidated balance sheets).
Hedge Product
 
Hedge Type
 
Designation
 
Notional Amount
 
Strike
 
Trade Date
 
Maturity Date
 
Fair value
 
 
 
 
 
 
03/31/2014

 
12/31/2013

 
 
 
 
 
 
 
03/31/2014
 
12/31/2013
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swap
 
Interest Rate
 
Cash Flow
(a)
$
25,774

 
$
25,774