BDN 3.31.2014 10-Q (Q1-2014)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2014 |
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 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.
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:
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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. |
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; and |
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• | 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.
TABLE OF CONTENTS
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Brandywine Realty Trust | |
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Brandywine Operating Partnership, L.P. | |
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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) |
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| March 31, 2014 | | December 31, 2013 |
| (unaudited) | | |
ASSETS | | | |
Real estate investments: | | | |
Operating properties | $ | 4,701,289 |
| | $ | 4,669,289 |
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Accumulated depreciation | (1,019,306 | ) | | (983,808 | ) |
Operating real estate investments, net | 3,681,983 |
| | 3,685,481 |
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Construction-in-progress | 90,140 |
| | 74,174 |
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Land inventory | 96,427 |
| | 93,351 |
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Total real estate investments, net | 3,868,550 |
| | 3,853,006 |
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Cash and cash equivalents | 236,291 |
| | 263,207 |
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Accounts receivable, net | 23,123 |
| | 17,389 |
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Accrued rent receivable, net | 128,331 |
| | 126,295 |
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Investment in real estate ventures, at equity | 180,237 |
| | 180,512 |
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Deferred costs, net | 123,216 |
| | 122,954 |
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Intangible assets, net | 125,162 |
| | 132,329 |
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Other assets | 75,138 |
| | 69,403 |
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Total assets | $ | 4,760,048 |
| | $ | 4,765,095 |
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LIABILITIES AND BENEFICIARIES’ EQUITY | | | |
Mortgage notes payable | $ | 666,305 |
| | $ | 670,151 |
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Unsecured term loans | 450,000 |
| | 450,000 |
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Unsecured senior notes, net of discounts | 1,475,501 |
| | 1,475,230 |
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Accounts payable and accrued expenses | 106,963 |
| | 83,693 |
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Distributions payable | 25,604 |
| | 25,584 |
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Deferred income, gains and rent | 72,937 |
| | 71,635 |
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Acquired lease intangibles, net | 32,229 |
| | 34,444 |
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Other liabilities | 35,357 |
| | 32,923 |
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Total liabilities | 2,864,896 |
| | 2,843,660 |
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Commitments and contingencies (Note 16) |
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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 2014 and 2013 | 40 |
| | 40 |
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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 |
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Additional paid-in capital | 2,974,094 |
| | 2,971,596 |
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Deferred compensation payable in common shares | 6,267 |
| | 5,407 |
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Common shares in grantor trust, 384,571 in 2014 and 312,279 in 2013 | (6,267 | ) | | (5,407 | ) |
Cumulative earnings | 520,322 |
| | 522,528 |
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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 |
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Non-controlling interests | 20,912 |
| | 21,215 |
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Total beneficiaries' equity | 1,895,152 |
| | 1,921,435 |
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Total liabilities and beneficiaries' equity | $ | 4,760,048 |
| | $ | 4,765,095 |
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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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| Three-month periods ended | |
| March 31, | |
| 2014 | | 2013 | |
Revenue: | | | | |
Rents | $ | 121,671 |
| | $ | 114,608 |
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Tenant reimbursements | 23,460 |
| | 20,341 |
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Termination fees | 2,203 |
| | 496 |
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Third party management fees, labor reimbursement and leasing | 4,150 |
| | 3,236 |
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Other | 630 |
| | 873 |
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Total revenue | 152,114 |
| | 139,554 |
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Operating expenses: | | | | |
Property operating expenses | 46,801 |
| | 39,349 |
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Real estate taxes | 13,457 |
| | 14,295 |
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Third party management expenses | 1,716 |
| | 1,425 |
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Depreciation and amortization | 52,570 |
| | 49,476 |
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General and administrative expenses | 8,181 |
| | 6,551 |
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Total operating expenses | 122,725 |
| | 111,096 |
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Operating income | 29,389 |
| | 28,458 |
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Other income (expense): | | | | |
Interest income | 385 |
| | 58 |
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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 |
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Loss on real estate venture transactions | (135 | ) | | — |
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Gain on sale of undepreciated real estate | 1,187 |
| | — |
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Loss on early extinguishment of debt | — |
| | (3 | ) | |
Loss from continuing operations | (2,237 | ) | | (2,245 | ) | |
Discontinued operations: | | | | |
Income (Loss) from discontinued operations | (8 | ) | | 860 |
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Net gain on disposition of discontinued operations | — |
| | 5,304 |
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Total discontinued operations | (8 | ) | | 6,164 |
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Net income (loss) | (2,245 | ) | | 3,919 |
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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 | ) | | — |
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Net loss attributable to non-controlling interests — LP units | 44 |
| | 50 |
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Net (income) loss attributable to non-controlling interests | 32 |
| | (28 | ) | |
Net income (loss) attributable to Brandywine Realty Trust | (2,213 | ) | | 3,891 |
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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 |
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Basic income (loss) per Common Share: | | | | |
Continuing operations | $ | (0.03 | ) | | $ | (0.03 | ) | |
Discontinued operations | — |
| | 0.04 |
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| $ | (0.03 | ) | | $ | 0.01 |
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Diluted income (loss) per Common Share: | | | | |
Continuing operations | $ | (0.03 | ) | | $ | (0.03 | ) | |
Discontinued operations | — |
| | 0.04 |
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| $ | (0.03 | ) | | $ | 0.01 |
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Basic weighted average shares outstanding | 156,794,019 |
| | 143,605,659 |
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Diluted weighted average shares outstanding | 156,794,019 |
| | 143,605,659 |
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Net income (loss) attributable to Brandywine Realty Trust | | | | |
Total continuing operations | $ | (2,205 | ) | | $ | (2,195 | ) | |
Total discontinued operations | (8 | ) | | 6,086 |
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Net income (loss) | $ | (2,213 | ) | | $ | 3,891 |
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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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| Three-month periods ended | |
| March 31, | |
| 2014 | | 2013 | |
Net income (loss) | $ | (2,245 | ) | | $ | 3,919 |
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Comprehensive income (loss): | | | | |
Unrealized gain (loss) on derivative financial instruments | (980 | ) | | 1,845 |
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Reclassification of realized losses on derivative financial instruments to operations, net (1) | 60 |
| | 48 |
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Total comprehensive income (loss) | (920 | ) | | 1,893 |
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Comprehensive income (loss) | (3,165 | ) | | 5,812 |
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Comprehensive (income) loss attributable to non-controlling interest | 42 |
| | (52 | ) | |
Comprehensive income (loss) attributable to Brandywine Realty Trust | $ | (3,123 | ) | | $ | 5,760 |
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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-months period ended March 31, 2014
(unaudited, in thousands, except number of shares)
March 31, 2014 |
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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, 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 |
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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 |
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Share issuance from/to Deferred Compensation Plan | | | | | 76,561 |
| | 72,292 |
| | | | (89 | ) | | 860 |
| | (860 | ) | | | | | | | | | | (89 | ) |
Adjustment to non-controlling interest | | | | | | | | | | | (4 | ) | | | | | | | | | | | | 4 |
| | — |
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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 |
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The accompanying notes are an integral part of these consolidated financial statements.
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
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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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Share-based compensation activity | | | | | 123,523 |
| | 7,050 |
| | 1 |
| | 2,655 |
| | | | | | 10 |
| | | | | | | | 2,666 |
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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.
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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| Three-month periods ended |
| March 31, |
| 2014 | | 2013 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (2,245 | ) | | $ | 3,919 |
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Adjustments to reconcile net income (loss) to net cash from operating activities: | | | |
Depreciation and amortization | 52,570 |
| | 50,304 |
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Amortization of deferred financing costs | 1,189 |
| | 1,161 |
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Amortization of debt discount/(premium), net | (162 | ) | | 366 |
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Amortization of stock compensation costs | 3,048 |
| | 2,097 |
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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 |
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Provision for doubtful accounts | 897 |
| | 505 |
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Loss on real estate venture transactions | 135 |
| | — |
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Net gain on sale of interests in real estate | (1,187 | ) | | (5,304 | ) |
Loss on early extinguishment of debt | — |
| | 3 |
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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 |
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Deferred income, gains and rent | 1,714 |
| | 46 |
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Other liabilities | (199 | ) | | (88 | ) |
Net cash from operating activities | 50,440 |
| | 50,263 |
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Cash flows from investing activities: | | | |
Acquisition of properties | (13,972 | ) | | — |
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Sales of properties, net | 3,350 |
| | 112,863 |
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Distribution of sales proceeds from real estate ventures | — |
| | 16,963 |
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Proceeds from repayment of mortgage notes receivable | 1,200 |
| | 200 |
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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 |
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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 |
|
|
| | | | | | | |
| | | |
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.
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.
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.
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.
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 |
|
| | | |
|
| | | | | | | |
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.
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.
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.
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 |
|
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 |
|
|
| | | | | | | | | | | |
| 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 |
|
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
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.
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.
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 |
| | |