BDN 6.30.2014 10-Q (Q2-2014)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
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(Mark One)
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þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended June 30, 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 157,090,635 Common Shares of Beneficial Interest, par value $0.01 per share of Brandywine Realty Trust, were outstanding as of July 23, 2014.
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended June 30, 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 June 30, 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) |
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
| (unaudited) | | |
ASSETS | | | |
Real estate investments: | | | |
Operating properties | $ | 4,689,892 |
| | $ | 4,669,289 |
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Accumulated depreciation | (1,045,016 | ) | | (983,808 | ) |
Operating real estate investments, net | 3,644,876 |
| | 3,685,481 |
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Construction-in-progress | 92,713 |
| | 74,174 |
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Land inventory | 90,266 |
| | 93,351 |
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Total real estate investments, net | 3,827,855 |
| | 3,853,006 |
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Cash and cash equivalents | 234,836 |
| | 263,207 |
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Accounts receivable, net | 21,622 |
| | 17,389 |
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Accrued rent receivable, net | 131,280 |
| | 126,295 |
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Investment in real estate ventures, at equity | 186,042 |
| | 180,512 |
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Deferred costs, net | 123,592 |
| | 122,954 |
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Intangible assets, net | 112,140 |
| | 132,329 |
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Other assets | 66,806 |
| | 69,403 |
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Total assets | $ | 4,704,173 |
| | $ | 4,765,095 |
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LIABILITIES AND BENEFICIARIES’ EQUITY | | | |
Mortgage notes payable | $ | 662,478 |
| | $ | 670,151 |
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Unsecured term loans | 450,000 |
| | 450,000 |
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Unsecured senior notes, net of discounts | 1,475,772 |
| | 1,475,230 |
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Accounts payable and accrued expenses | 83,114 |
| | 83,693 |
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Distributions payable | 25,588 |
| | 25,584 |
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Deferred income, gains and rent | 70,519 |
| | 71,635 |
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Acquired lease intangibles, net | 29,116 |
| | 34,444 |
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Other liabilities | 37,144 |
| | 32,923 |
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Total liabilities | 2,833,731 |
| | 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 400,000,000; 157,090,983 and 156,731,993 issued and outstanding in 2014 and 2013, respectively | 1,571 |
| | 1,566 |
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Additional paid-in capital | 2,975,070 |
| | 2,971,596 |
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Deferred compensation payable in common shares | 6,303 |
| | 5,407 |
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Common shares in grantor trust, 387,088 in 2014 and 312,280 in 2013 | (6,303 | ) | | (5,407 | ) |
Cumulative earnings | 522,520 |
| | 522,528 |
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Accumulated other comprehensive loss | (6,105 | ) | | (2,995 | ) |
Cumulative distributions | (1,643,241 | ) | | (1,592,515 | ) |
Total Brandywine Realty Trust’s equity | 1,849,855 |
| | 1,900,220 |
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Non-controlling interests | 20,587 |
| | 21,215 |
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Total beneficiaries' equity | 1,870,442 |
| | 1,921,435 |
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Total liabilities and beneficiaries' equity | $ | 4,704,173 |
| | $ | 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 | | Six-month periods ended |
| June 30, | | June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenue: | | | | | | | |
Rents | $ | 121,622 |
| | $ | 116,064 |
| | $ | 243,293 |
| | $ | 230,672 |
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Tenant reimbursements | 20,502 |
| | 19,560 |
| | 43,962 |
| | 39,901 |
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Termination fees | 3,349 |
| | 410 |
| | 5,552 |
| | 906 |
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Third party management fees, labor reimbursement and leasing | 4,187 |
| | 3,153 |
| | 8,337 |
| | 6,389 |
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Other | 840 |
| | 1,457 |
| | 1,470 |
| | 2,330 |
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Total revenue | 150,500 |
| | 140,644 |
| | 302,614 |
| | 280,198 |
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Operating expenses: | | | | | | | |
Property operating expenses | 43,136 |
| | 39,433 |
| | 89,937 |
| | 78,782 |
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Real estate taxes | 12,841 |
| | 14,177 |
| | 26,298 |
| | 28,472 |
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Third party management expenses | 1,730 |
| | 1,363 |
| | 3,446 |
| | 2,788 |
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Depreciation and amortization | 52,587 |
| | 49,241 |
| | 105,157 |
| | 98,717 |
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General and administrative expenses | 6,005 |
| | 7,336 |
| | 14,186 |
| | 13,887 |
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Total operating expenses | 116,299 |
| | 111,550 |
| | 239,024 |
| | 222,646 |
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Operating income | 34,201 |
| | 29,094 |
| | 63,590 |
| | 57,552 |
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Other income (expense): | | | | | | | |
Interest income | 385 |
| | 122 |
| | 770 |
| | 180 |
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Interest expense | (31,512 | ) | | (30,437 | ) | | (63,356 | ) | | (61,351 | ) |
Amortization of deferred financing costs | (1,197 | ) | | (1,183 | ) | | (2,386 | ) | | (2,344 | ) |
Interest expense — financing obligation | (316 | ) | | (211 | ) | | (588 | ) | | (429 | ) |
Equity in income (loss) of real estate ventures | (489 | ) | | 1,508 |
| | (247 | ) | | 3,043 |
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Gain (loss) on sale of undepreciated real estate | (3 | ) | | — |
| | 1,184 |
| | — |
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Gain from remeasurement of investment in real estate ventures | 458 |
| | 7,847 |
| | 458 |
| | 7,847 |
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Gain (loss) on real estate venture transactions | (282 | ) | | 3,683 |
| | (417 | ) | | 3,683 |
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Loss on early extinguishment of debt | — |
| | (1,113 | ) | | — |
| | (1,116 | ) |
Income (loss) from continuing operations | 1,245 |
| | 9,310 |
| | (992 | ) | | 7,065 |
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Discontinued operations: | | | | | | | |
Income from discontinued operations | 26 |
| | 129 |
| | 18 |
| | 989 |
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Net gain (loss) on disposition of discontinued operations | 903 |
| | (2,259 | ) | | 903 |
| | 3,045 |
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Total discontinued operations | 929 |
| | (2,130 | ) | | 921 |
| | 4,034 |
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Net income (loss) | 2,174 |
| | 7,180 |
| | (71 | ) | | 11,099 |
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Net (income) loss from discontinued operations attributable to non-controlling interests — LP units | (10 | ) | | 25 |
| | (10 | ) | | (53 | ) |
Net loss attributable to non-controlling interest — partners' share of consolidated real estate ventures | 24 |
| | — |
| | 12 |
| | — |
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Net (income) loss attributable to non-controlling interests — LP units | 5 |
| | (87 | ) | | 49 |
| | (37 | ) |
Net (income) loss attributable to non-controlling interests | 19 |
| | (62 | ) | | 51 |
| | (90 | ) |
Net income (loss) attributable to Brandywine Realty Trust | 2,193 |
| | 7,118 |
| | (20 | ) | | 11,009 |
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Distribution to Preferred Shares | (1,725 | ) | | (1,725 | ) | | (3,450 | ) | | (3,450 | ) |
Nonforfeitable dividends allocated to unvested restricted shareholders | (83 | ) | | (85 | ) | | (186 | ) | | (193 | ) |
Net income (loss) attributable to Common Shareholders of Brandywine Realty Trust | $ | 385 |
| | $ | 5,308 |
| | $ | (3,656 | ) | | $ | 7,366 |
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Basic income (loss) per Common Share: | | | | | | | |
Continuing operations | $ | — |
| | $ | 0.05 |
| | $ | (0.03 | ) | | $ | 0.02 |
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Discontinued operations | — |
| | (0.02 | ) | | 0.01 |
| | 0.03 |
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| $ | — |
| | $ | 0.03 |
| | $ | (0.02 | ) | | $ | 0.05 |
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Diluted income (loss) per Common Share: | | | | | | | |
Continuing operations | $ | — |
| | $ | 0.05 |
| | $ | (0.03 | ) | | $ | 0.02 |
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Discontinued operations | — |
| | (0.02 | ) | | 0.01 |
| | 0.03 |
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| $ | — |
| | $ | 0.03 |
| | $ | (0.02 | ) | | $ | 0.05 |
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Basic weighted average shares outstanding | 157,037,348 |
| | 155,347,384 |
| | 156,916,356 |
| | 149,508,957 |
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Diluted weighted average shares outstanding | 157,037,348 |
| | 156,691,201 |
| | 156,916,356 |
| | 150,666,245 |
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Net income (loss) attributable to Brandywine Realty Trust | | | | | | | |
Total continuing operations | $ | 1,274 |
| | $ | 9,223 |
| | $ | (931 | ) | | $ | 7,028 |
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Total discontinued operations | 919 |
| | (2,105 | ) | | 911 |
| | 3,981 |
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Net income (loss) | $ | 2,193 |
| | $ | 7,118 |
| | $ | (20 | ) | | $ | 11,009 |
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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 | | Six-month periods ended |
| June 30, | | June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Net income (loss) | $ | 2,174 |
| | $ | 7,180 |
| | $ | (71 | ) | | $ | 11,099 |
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Other comprehensive income (loss): | | | | | | | |
Unrealized gain (loss) on derivative financial instruments | (2,285 | ) | | 9,491 |
| | (3,265 | ) | | 11,283 |
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Reclassification of realized losses on derivative financial instruments to operations, net (1) | 60 |
| | 66 |
| | 120 |
| | 168 |
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Other comprehensive income (loss) | (2,225 | ) | | 9,557 |
| | (3,145 | ) | | 11,451 |
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Comprehensive income (loss) | (51 | ) | | 16,737 |
| | (3,216 | ) | | 22,550 |
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Comprehensive (income) loss attributable to non-controlling interest | 44 |
| | (169 | ) | | 86 |
| | (221 | ) |
Comprehensive income (loss) attributable to Brandywine Realty Trust | $ | (7 | ) | | $ | 16,568 |
| | $ | (3,130 | ) | | $ | 22,329 |
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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 six-month period ended June 30, 2014
(unaudited, in thousands, except number of shares)
June 30, 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 |
| | 312,280 |
| | $ | 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 | | | | | | | | | | | | | | | | | (20 | ) | | | | | | (51 | ) | | (71 | ) |
Comprehensive loss | | | | | | | | | | | | | | | | | | | (3,110 | ) | | | | (35 | ) | | (3,145 | ) |
Equity issuance costs | | | | | | | | | | | (60 | ) | | | | | | | | | | | | | | (60 | ) |
Share-based compensation activity | | | | | 279,913 |
| | | | 5 |
| | 3,612 |
| | | | | | 12 |
| | | | | | | | 3,629 |
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Share issuance from/to Deferred Compensation Plan | | | | | 79,077 |
| | 74,808 |
| | | | (90 | ) | | 896 |
| | (896 | ) | | | | | | | | | | (90 | ) |
Adjustment to non-controlling interest | | | | | | | | | | | 12 |
| | | | | | | | | | | | (12 | ) | | — |
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Preferred Share distributions | | | | | | | | | | | | | | | | | | | | | (3,450 | ) | | | | (3,450 | ) |
Distributions declared ($0.30 per share) | | | | | | | | | | | | | | | | | | | | | (47,276 | ) | | (530 | ) | | (47,806 | ) |
BALANCE, June 30, 2014 | 4,000,000 |
| | $ | 40 |
| | 157,090,983 |
| | 387,088 |
| | $ | 1,571 |
| | $ | 2,975,070 |
| | $ | 6,303 |
| | $ | (6,303 | ) | | $ | 522,520 |
| | $ | (6,105 | ) | | $ | (1,643,241 | ) | | $ | 20,587 |
| | $ | 1,870,442 |
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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 six-month period ended June 30, 2013
(unaudited, in thousands, except number of shares)
June 30, 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 | | | | | | | | | | | | | | | | | 11,011 |
| | | | | | 88 |
| | 11,099 |
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Comprehensive income | | | | | | | | | | | | | | | | | | | 11,317 |
| | | | 134 |
| | 11,451 |
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Issuance of Common Shares of Beneficial Interest | | | | | 12,650,000 |
| | | | 127 |
| | 181,907 |
| | | | | | | | | | | | | | 182,034 |
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Equity issuance costs | | | | | | | | | | | (380 | ) | | | | | | | | | | | | | | (380 | ) |
Conversion of LP Units to Common Shares | | | | | 81,998 |
| | | | 1 |
| | 1,240 |
| | | | | | | | | | | | (1,241 | ) | | — |
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Bonus share issuance | | | | | 27,918 |
| | | | | | 361 |
| | | | | | | | | | | | | | 361 |
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Share-based compensation activity | | | | | 341,591 |
| | 7,050 |
| | 3 |
| | 5,207 |
| | | | | | 9 |
| | | | | | | | 5,219 |
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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 | | | | | | | | | | | (739 | ) | | | | | | | | | | | | 739 |
| | — |
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Preferred Share distributions | | | | | | | | | | | | | | | | | | | | | (3,450 | ) | | | | (3,450 | ) |
Distributions declared ($0.30 per share) | | | | | | | | | | | | | | | | | | | | | (45,240 | ) | | (541 | ) | | (45,781 | ) |
BALANCE, June 30, 2013 | 4,000,000 |
| | $ | 40 |
| | 156,662,644 |
| | 315,753 |
| | $ | 1,565 |
| | $ | 2,967,790 |
| | $ | 5,516 |
| | $ | (5,516 | ) | | $ | 490,754 |
| | $ | (4,601 | ) | | $ | (1,541,896 | ) | | $ | 20,417 |
| | $ | 1,934,069 |
|
The accompanying notes are an integral part of these consolidated financial statements.
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
| | | | | | | |
| Six-month periods ended |
| June 30, |
| 2014 | | 2013 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (71 | ) | | $ | 11,099 |
|
Adjustments to reconcile net income (loss) to net cash from operating activities: | | | |
Depreciation and amortization | 105,157 |
| | 100,459 |
|
Amortization of deferred financing costs | 2,386 |
| | 2,344 |
|
Amortization of debt discount/(premium), net | (324 | ) | | 748 |
|
Amortization of stock compensation costs | 3,752 |
| | 4,048 |
|
Shares used for employee taxes upon vesting of share awards | (1,266 | ) | | (1,061 | ) |
Straight-line rent income | (7,183 | ) | | (11,250 | ) |
Amortization of acquired above (below) market leases, net | (3,698 | ) | | (3,556 | ) |
Straight-line ground rent expense | 44 |
| | 894 |
|
Provision for doubtful accounts | 1,272 |
| | 997 |
|
(Gain) Loss on real estate venture transactions | 417 |
| | (3,683 | ) |
Net gain on sale of interests in real estate | (2,087 | ) | | (3,044 | ) |
Gain from remeasurement of investment in a real estate venture | (458 | ) | | (7,847 | ) |
Loss on early extinguishment of debt | — |
| | 1,116 |
|
Real estate venture income in excess of distributions | 558 |
| | (2,031 | ) |
Deferred financing obligation | (590 | ) | | (896 | ) |
Changes in assets and liabilities: | | | |
Accounts receivable | (6,328 | ) | | 2,035 |
|
Other assets | 1,462 |
| | 6,031 |
|
Accounts payable and accrued expenses | (2,815 | ) | | (1,252 | ) |
Deferred income, gains and rent | (116 | ) | | 608 |
|
Other liabilities | 129 |
| | 474 |
|
Net cash from operating activities | 90,241 |
| | 96,233 |
|
Cash flows from investing activities: | | | |
Acquisition of properties | (12,405 | ) | | (20,758 | ) |
Sales of properties, net | 40,149 |
| | 145,931 |
|
Distribution of sales proceeds from real estate ventures | — |
| | 16,963 |
|
Proceeds from repayment of mortgage notes receivable | 2,800 |
| | 200 |
|
Capital expenditures for tenant improvements | (58,035 | ) | | (46,828 | ) |
Capital expenditures for redevelopments | (4,773 | ) | | (4,676 | ) |
Capital expenditures for developments | (19,270 | ) | | (72 | ) |
Reimbursement from real estate venture for pre-formation development costs | — |
| | 1,976 |
|
Advances for purchase of tenant assets, net of repayments | 16 |
| | (693 | ) |
Investment in unconsolidated Real Estate Ventures | (3,095 | ) | | (12,568 | ) |
Escrowed cash | 1,758 |
| | 558 |
|
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income | 5,329 |
| | 3,445 |
|
Leasing costs | (13,862 | ) | | (14,313 | ) |
Net cash from (used in) investing activities | (61,388 | ) | | 69,165 |
|
Cash flows from financing activities: | | | |
Proceeds from Credit Facility borrowings | — |
| | 186,000 |
|
Repayments of Credit Facility borrowings | — |
| | (255,000 | ) |
Repayments of mortgage notes payable | (6,647 | ) | | (5,537 | ) |
Deferred financing obligation interest expense | — |
| | 466 |
|
Net proceeds from issuance of common shares | — |
| | 181,527 |
|
Repayments of unsecured notes | — |
| | (12,912 | ) |
Debt financing costs | (35 | ) | | (6 | ) |
Exercise of stock options | 709 |
| | 1,762 |
|
Distributions paid to shareholders | (50,710 | ) | | (46,745 | ) |
Distributions to noncontrolling interest | (541 | ) | | (554 | ) |
Net cash from (used in) financing activities | (57,224 | ) | | 49,001 |
|
Increase (Decrease) in cash and cash equivalents | (28,371 | ) | | 214,399 |
|
|
| | | | | | | |
Cash and cash equivalents at beginning of period | 263,207 |
| | 1,549 |
|
Cash and cash equivalents at end of period | $ | 234,836 |
| | $ | 215,948 |
|
| | | |
Supplemental disclosure: | | | |
Cash paid for interest, net of capitalized interest during the six months ended June 30, 2014 and 2013 of $2,726 and $1,305, respectively | $ | 66,869 |
| | $ | 67,844 |
|
Supplemental disclosure of non-cash activity: | |
| | |
|
Change in operating real estate related to a non-cash acquisition of an operating property | — |
| | (21,649 | ) |
Change in intangible assets, net related to non-cash acquisition of an operating property | — |
| | (3,517 | ) |
Change in acquired lease intangibles, net related to non-cash acquisition of an operating property | — |
| | 462 |
|
Change in investments in joint venture related to non-cash disposition of property | (5,897 | ) | | — |
|
Change in investments in joint venture related to non-cash acquisition of property | — |
| | 13,040 |
|
Change in operating real estate related to non-cash adjustment to land | — |
| | (4,386 | ) |
Change in receivable from settlement of acquisitions | 619 |
| | — |
|
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 | (639 | ) | | (1,227 | ) |
Change in capital expenditures financed through retention payable at period end | 1,188 |
| | (348 | ) |
Change in unfunded tenant allowance | (193 | ) | | (244 | ) |
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)
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
| (unaudited) | | |
ASSETS | | | |
Real estate investments: | | | |
Operating properties | $ | 4,689,892 |
| | $ | 4,669,289 |
|
Accumulated depreciation | (1,045,016 | ) | | (983,808 | ) |
Operating real estate investments, net | 3,644,876 |
| | 3,685,481 |
|
Construction-in-progress | 92,713 |
| | 74,174 |
|
Land inventory | 90,266 |
| | 93,351 |
|
Total real estate investments, net | 3,827,855 |
| | 3,853,006 |
|
Cash and cash equivalents | 234,836 |
| | 263,207 |
|
Accounts receivable, net | 21,622 |
| | 17,389 |
|
Accrued rent receivable, net | 131,280 |
| | 126,295 |
|
Investment in real estate ventures, at equity | 186,042 |
| | 180,512 |
|
Deferred costs, net | 123,592 |
| | 122,954 |
|
Intangible assets, net | 112,140 |
| | 132,329 |
|
Other assets | 66,806 |
| | 69,403 |
|
Total assets | $ | 4,704,173 |
| | $ | 4,765,095 |
|
LIABILITIES AND PARTNERS' EQUITY | | | |
Mortgage notes payable | $ | 662,478 |
| | $ | 670,151 |
|
Unsecured term loans | 450,000 |
| | 450,000 |
|
Unsecured senior notes, net of discounts | 1,475,772 |
| | 1,475,230 |
|
Accounts payable and accrued expenses | 83,114 |
| | 83,693 |
|
Distributions payable | 25,588 |
| | 25,584 |
|
Deferred income, gains and rent | 70,519 |
| | 71,635 |
|
Acquired lease intangibles, net | 29,116 |
| | 34,444 |
|
Other liabilities | 37,144 |
| | 32,923 |
|
Total liabilities | 2,833,731 |
| | 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 | 27,211 |
| | 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, 157,090,983 and 156,731,993 units issued and outstanding in 2014 and 2013, respectively | 1,751,968 |
| | 1,800,530 |
|
Accumulated other comprehensive loss | (6,522 | ) | | (3,377 | ) |
Total Brandywine Operating Partnership, L.P.’s equity | 1,842,296 |
| | 1,894,003 |
|
Non-controlling interest - consolidated real estate ventures | 935 |
| | 946 |
|
Total partners’ equity | 1,843,231 |
| | 1,894,949 |
|
| | | |
Total liabilities and partners’ equity | $ | 4,704,173 |
| | $ | 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 | | Six-month periods ended |
| June 30, | | June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenue: | | | | | | | |
Rents | $ | 121,622 |
| | $ | 116,064 |
| | $ | 243,293 |
| | $ | 230,672 |
|
Tenant reimbursements | 20,502 |
| | 19,560 |
| | 43,962 |
| | 39,901 |
|
Termination fees | 3,349 |
| | 410 |
| | 5,552 |
| | 906 |
|
Third party management fees, labor reimbursement and leasing | 4,187 |
| | 3,153 |
| | 8,337 |
| | 6,389 |
|
Other | 840 |
| | 1,457 |
| | 1,470 |
| | 2,330 |
|
Total revenue | 150,500 |
| | 140,644 |
| | 302,614 |
| | 280,198 |
|
Operating expenses: | | | | | | | |
Property operating expenses | 43,136 |
| | 39,433 |
| | 89,937 |
| | 78,782 |
|
Real estate taxes | 12,841 |
| | 14,177 |
| | 26,298 |
| | 28,472 |
|
Third party management expenses | 1,730 |
| | 1,363 |
| | 3,446 |
| | 2,788 |
|
Depreciation and amortization | 52,587 |
| | 49,241 |
| | 105,157 |
| | 98,717 |
|
General & administrative expenses | 6,005 |
| | 7,336 |
| | 14,186 |
| | 13,887 |
|
Total operating expenses | 116,299 |
| | 111,550 |
| | 239,024 |
| | 222,646 |
|
Operating income | 34,201 |
| | 29,094 |
| | 63,590 |
| | 57,552 |
|
Other income (expense): | | | | | | | |
Interest income | 385 |
| | 122 |
| | 770 |
| | 180 |
|
Interest expense | (31,512 | ) | | (30,437 | ) | | (63,356 | ) | | (61,351 | ) |
Amortization of deferred financing costs | (1,197 | ) | | (1,183 | ) | | (2,386 | ) | | (2,344 | ) |
Interest expense — financing obligation | (316 | ) | | (211 | ) | | (588 | ) | | (429 | ) |
Equity in income (loss) of real estate ventures | (489 | ) | | 1,508 |
| | (247 | ) | | 3,043 |
|
Gain (loss) on sale of undepreciated real estate | (3 | ) | | — |
| | 1,184 |
| | — |
|
Gain from remeasurement of investment in a real estate venture | 458 |
| | 7,847 |
| | 458 |
| | 7,847 |
|
Loss on real estate venture transactions | (282 | ) | | 3,683 |
| | (417 | ) | | 3,683 |
|
Loss on early extinguishment of debt | — |
| | (1,113 | ) | | — |
| | (1,116 | ) |
Loss from continuing operations | 1,245 |
| | 9,310 |
| | (992 | ) | | 7,065 |
|
Discontinued operations: | | | | | | | |
Income from discontinued operations | 26 |
| | 129 |
| | 18 |
| | 989 |
|
Net gain on disposition of discontinued operations | 903 |
| | (2,259 | ) | | 903 |
| | 3,045 |
|
Total discontinued operations | 929 |
| | (2,130 | ) | | 921 |
| | 4,034 |
|
Net income (loss) | 2,174 |
| | 7,180 |
| | (71 | ) | | 11,099 |
|
Net loss attributable to non-controlling interests | 24 |
| | — |
| | 12 |
| | — |
|
Net income (loss) attributable to Brandywine Operating Partnership | 2,198 |
| | 7,180 |
| | (59 | ) | | 11,099 |
|
Distribution to Preferred Units | (1,725 | ) | | (1,725 | ) | | (3,450 | ) | | (3,450 | ) |
Amount allocated to unvested restricted unitholders | (83 | ) | | (85 | ) | | (186 | ) | | (193 | ) |
Net income (loss) attributable to Common Partnership Unitholders of Brandywine Operating Partnership, L.P. | $ | 390 |
| | $ | 5,370 |
| | $ | (3,695 | ) | | $ | 7,456 |
|
Basic income (loss) per Common Partnership Unit: | | | | | | | |
Continuing operations | $ | — |
| | $ | 0.05 |
| | $ | (0.03 | ) | | $ | 0.02 |
|
Discontinued operations | — |
| | (0.02 | ) | | 0.01 |
| | 0.03 |
|
| $ | — |
| | $ | 0.03 |
| | $ | (0.02 | ) | | $ | 0.05 |
|
Diluted income (loss) per Common Partnership Unit: | | | | | | | |
Continuing operations | $ | — |
| | $ | 0.05 |
| | $ | (0.03 | ) | | $ | 0.02 |
|
Discontinued operations | — |
| | (0.02 | ) | | 0.01 |
| | 0.03 |
|
| $ | — |
| | $ | 0.03 |
| | $ | (0.02 | ) | | $ | 0.05 |
|
Basic weighted average common partnership units outstanding | 158,801,087 |
| | 157,131,697 |
| | 158,680,095 |
| | 151,323,813 |
|
Diluted weighted average common partnership units outstanding | 158,801,087 |
| | 158,475,514 |
| | 158,680,095 |
| | 152,481,101 |
|
Net income (loss) attributable to Brandywine Operating Partnership, L.P. | | | | | | | |
Total continuing operations | $ | 1,269 |
| | $ | 9,310 |
| | $ | (980 | ) | | $ | 7,065 |
|
Total discontinued operations | 929 |
| | (2,130 | ) | | 921 |
| | 4,034 |
|
Net income (loss) | $ | 2,198 |
| | $ | 7,180 |
| | $ | (59 | ) | | $ | 11,099 |
|
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 | | Six-month periods ended |
| June 30, | | June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Net income (loss) | $ | 2,174 |
| | $ | 7,180 |
| | $ | (71 | ) | | $ | 11,099 |
|
Other comprehensive income (loss): | | | | | | | |
Unrealized gain (loss) on derivative financial instruments | (2,285 | ) | | 9,491 |
| | (3,265 | ) | | 11,283 |
|
Reclassification of realized losses on derivative financial instruments to operations, net (1) | 60 |
| | 66 |
| | 120 |
| | 168 |
|
Other comprehensive income (loss) | (2,225 | ) | | 9,557 |
| | (3,145 | ) | | 11,451 |
|
Comprehensive income (loss) attributable to Brandywine Operating Partnership, L.P. | $ | (51 | ) | | $ | 16,737 |
| | $ | (3,216 | ) | | $ | 22,550 |
|
(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)
|
| | | | | | | |
| Six-month periods ended |
| June 30, |
| 2014 | | 2013 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (71 | ) | | $ | 11,099 |
|
Adjustments to reconcile net income (loss) to net cash from operating activities: | | | |
Depreciation and amortization | 105,157 |
| | 100,459 |
|
Amortization of deferred financing costs | 2,386 |
| | 2,344 |
|
Amortization of debt discount/(premium), net | (324 | ) | | 748 |
|
Amortization of stock compensation costs | 3,752 |
| | 4,048 |
|
Shares used for employee taxes upon vesting of share awards | (1,266 | ) | | (1,061 | ) |
Straight-line rent income | (7,183 | ) | | (11,250 | ) |
Amortization of acquired above (below) market leases, net | (3,698 | ) | | (3,556 | ) |
Straight-line ground rent expense | 44 |
| | 894 |
|
Provision for doubtful accounts | 1,272 |
| | 997 |
|
Loss on early extinguishment of debt | — |
| | 1,116 |
|
Net gain on sale of interests in real estate | (2,087 | ) | | (3,044 | ) |
(Gain) Loss on real estate venture transactions | 417 |
| | (3,683 | ) |
Gain on remeasurement of investment in a real estate venture | (458 | ) | | (7,847 | ) |
Real estate venture income in excess of distributions | 558 |
| | (2,031 | ) |
Deferred financing obligation | (590 | ) | | (896 | ) |
Changes in assets and liabilities: | | | |
Accounts receivable | (6,328 | ) | | 2,035 |
|
Other assets | 1,462 |
| | 6,031 |
|
Accounts payable and accrued expenses | (2,815 | ) | | (1,252 | ) |
Deferred income, gains and rent | (116 | ) | | 608 |
|
Other liabilities | 129 |
| | 474 |
|
Net cash from operating activities | 90,241 |
| | 96,233 |
|
Cash flows from investing activities: | | | |
Acquisition of properties | (12,405 | ) | | (20,758 | ) |
Sales of properties, net | 40,149 |
| | 145,931 |
|
Distribution of sales proceeds from real estate venture | — |
| | 16,963 |
|
Proceeds from repayment of mortgage notes receivable | 2,800 |
| | 200 |
|
Capital expenditures for tenant improvements | (58,035 | ) | | (46,828 | ) |
Capital expenditures for redevelopments | (4,773 | ) | | (4,676 | ) |
Capital expenditures for developments | (19,270 | ) | | (72 | ) |
Reimbursement from real estate venture for pre-formation development costs | — |
| | 1,976 |
|
Advances for purchase of tenant assets, net of repayments | 16 |
| | (693 | ) |
Investment in unconsolidated Real Estate Ventures | (3,095 | ) | | (12,568 | ) |
Escrowed cash | 1,758 |
| | 558 |
|
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income | 5,329 |
| | 3,445 |
|
Leasing costs | (13,862 | ) | | (14,313 | ) |
Net cash from (used in) investing activities | (61,388 | ) | | 69,165 |
|
Cash flows from financing activities: | | | |
Proceeds from Credit Facility borrowings | — |
| | 186,000 |
|
Repayments of Credit Facility borrowings | — |
| | (255,000 | ) |
Repayments of mortgage notes payable | (6,647 | ) | | (5,537 | ) |
Deferred financing obligation interest expense | — |
| | 466 |
|
Net proceeds from issuance of common units | — |
| | 181,527 |
|
Repayments of unsecured notes | — |
| | (12,912 | ) |
Debt financing costs | (35 | ) | | (6 | ) |
Exercise of stock options | 709 |
| | 1,762 |
|
Distributions paid to preferred and common partnership unitholders | (51,251 | ) | | (47,299 | ) |
Net cash from (used in) financing activities | (57,224 | ) | | 49,001 |
|
Increase (Decrease) in cash and cash equivalents | (28,371 | ) | | 214,399 |
|
|
| | | | | | | |
Cash and cash equivalents at beginning of period | 263,207 |
| | 1,549 |
|
Cash and cash equivalents at end of period | $ | 234,836 |
| | $ | 215,948 |
|
| | | |
Supplemental disclosure: | | | |
Cash paid for interest, net of capitalized interest during the six months ended June 30, 2014 and 2013 of $2,726 and $1,305, respectively | $ | 66,869 |
| | $ | 67,844 |
|
Supplemental disclosure of non-cash activity: | | | |
Change in operating real estate related to a non-cash acquisition of an operating property | — |
| | (21,649 | ) |
Change in intangible assets, net related to a non-cash acquisition of an operating property | — |
| | (3,517 | ) |
Change in acquired lease intangibles, net related to a non-cash acquisition of an operating property | — |
| | 462 |
|
Change in investments in joint venture related non-cash disposition of property | (5,897 | ) | | — |
|
Change in investments in joint venture related to non-cash acquisition of property | — |
| | 13,040 |
|
Change in operating real estate related to non-cash adjustment to land | — |
| | (4,386 | ) |
Change in receivable from settlement of acquisitions | 619 |
| | — |
|
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 | (639 | ) | | (1,227 | ) |
Change in capital expenditures financed through retention payable at period end | 1,188 |
| | (348 | ) |
Change in unfunded tenant allowance | (193 | ) | | (244 | ) |
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
JUNE 30, 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, retail 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 June 30, 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 June 30, 2014, the Company owned 205 properties, consisting of 175 office properties, 20 industrial facilities, five mixed-use properties, one retail property (201 core properties), two development properties, one redevelopment property and one re-entitlement property (collectively, the “Properties”) containing an aggregate of approximately 25.4 million net rentable square feet. In addition, as of June 30, 2014, the Company owned economic interests in 17 unconsolidated real estate ventures that own properties containing an aggregate of approximately 5.9 million net rentable square feet (collectively, the “Real Estate Ventures”). As of June 30, 2014, the Company also owned 419 acres of undeveloped land, and held options to purchase approximately 50 additional acres of undeveloped land. As of June 30, 2014, these land parcels could support, under current zoning and entitlements, approximately 5.9 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 June 30, 2014, the management company subsidiaries were managing properties containing an aggregate of approximately 33.5 million net rentable square feet, of which approximately 25.4 million net rentable square feet related to Properties owned by the Company and approximately 8.1 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 June 30, 2014, the results of its operations for the three and six-month periods ended June 30, 2014 and 2013 and its cash flows for the six-month periods ended June 30, 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 within the balance sheets and the reclassification of changes in escrow balances from operating cash flows to investing cash flows in the statements of cash flows. All other reclassifications are related to the treatment of sold properties as discontinued operations on the statement of operations for all periods presented. See Recent Accounting Pronouncements below for revisions to the accounting guidance for discontinued operations.
Recent Accounting Pronouncements
In May 2014 the Financial Accounting Standards Board (FASB) issued guidance requiring revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for those goods and services. The guidance requires the disclosure of sufficient quantitative and qualitative information for financial statement users to understand the nature, amount, timing and uncertainty of revenue and associated cash flows arising from contracts with customers. The guidance is effective for
annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption precluded. The Company has not yet determined the impact, if any, that the adoption of this guidance will have on its 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. The Company has elected to early adopt this standard as of January 1, 2014. All properties sold or determined held for sale prior to January 1, 2014 are classified as discontinued operations for all periods presented.
3. REAL ESTATE INVESTMENTS
As of June 30, 2014 and December 31, 2013, the gross carrying value of the Company’s Properties was as follows (in thousands):
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Land | $ | 688,775 |
| | $ | 680,513 |
|
Building and improvements | 3,479,850 |
| | 3,504,060 |
|
Tenant improvements | 521,267 |
| | 484,716 |
|
| $ | 4,689,892 |
| | $ | 4,669,289 |
|
Acquisitions
As of June 30, 2014, a $0.5 million gain on remeasurement of the Company's investment in partnerships with Parkway Properties, Inc. was recorded. On December 19, 2013, the Company increased its equity ownership interest from 25% to 99% in each of the two partnerships that own One and Two Commerce Square, two 41-story trophy-class office towers in Philadelphia, Pennsylvania. As of December 31, 2013, the Company had recorded a $1.6 million net receivable balance from its former partner which represented the former partner's portion of the net current assets (liabilities) pursuant to the terms of the Commerce Square Redemption Agreement. Pursuant to the Redemption Agreement, the Company and Parkway used an agreed upon settlement period to finalize the purchase accounting related to facts and circumstances that existed at the date of the acquisition but were not fully known at such time. During the quarter ended June 30, 2014, $2.1 million of consideration was received from the former partner in full settlement of the aforementioned provision and a measurement period adjustment was made to adjust the fair value of the Company's previously held equity investment, resulting in a gain on remeasurement of the Company's investment in the partnerships of $0.5 million. For additional information related to this transaction, see the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
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.
As of June 30, 2014, both of the office buildings at Encino Trace are currently in development with $18.7 million, inclusive of the $14.0 million acquisition cost, funded through June 30, 2014. During the second quarter of 2014, the Company reclassified the $4.6 million remaining in land inventory to construction in progress in connection with commencing development of the second building. Additional project costs will be funded over the remaining construction period, which is scheduled to be completed during the second quarter of 2015.
Dispositions
On April 16, 2014, the Company sold a 5.3 acre parcel of land located in Dallas, Texas for a sales price of $1.6 million resulting in a nominal gain on sale after closing and other transaction related costs. The land parcel was undeveloped as of the date of sale.
On April 7, 2014, the Company received $0.9 million from an escrow account that was established in connection with the sale of eight office properties containing 800,546 square feet in Lawrenceville, New Jersey, known as "Princeton Pike Corporate Center." The sale of Princeton Pike Corporate Center was completed on February 25, 2013 for an aggregate sales price of $121.0 million and resulted in a $5.3 million gain on sale after closing and other transaction related costs. The escrow account was funded with $2.0 million at closing and was established for use by the buyer to fund certain tenant improvement projects with any unused portion to be returned to the Company. The unused amount received from the escrow account was recognized as a gain on sale during the period ended June 30, 2014. The aforementioned gain was recognized within discontinued operations which is consistent with the accounting classification of the assets that were disposed of on February 25, 2013.
On April 3, 2014, the Company contributed two 3-story, Class A office buildings, containing an aggregate of approximately 192,396 net rentable square feet known as Four Points Centre in Austin, Texas to an existing real estate venture (the "Austin Venture") that the Company formed in 2013 with G&I VII Austin Office LLC, an investment vehicle advised by DRA Advisors LLC ("DRA"). The Company contributed the properties to the Austin Venture at an agreed upon value of $41.5 million. In conjunction with the contribution: (i) the Austin Venture obtained a $29.0 million mortgage loan; (ii) the DRA member contributed $5.9 million in net cash to the capital of the Austin Venture; and (iii) the Austin Venture distributed $34.4 million to the Company and credited the Company with a $5.9 million capital contribution to the Austin Venture. The Company incurred a $0.2 million loss on the contribution, driven primarily by closing costs. The disposal of Four Points Centre does not represent a strategic shift that has a major effect on the Company's operations and financial results. Accordingly, the property remains classified within continuing operations.
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. The land parcel was undeveloped as of the date of sale.
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of June 30, 2014, the Company held ownership interests in 17 unconsolidated Real Estate Ventures, of which $186.0 million is included in assets and $1.2 million is included in other liabilities relating to the negative investment balance of one real estate venture. 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 June 30, 2014, 11 of the Real Estate Ventures owned 56 office buildings that contain an aggregate of approximately 5.9 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 June 30, 2014 and December 31, 2013 (in thousands):
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| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Net property | $ | 1,081,064 |
| | $ | 965,475 |
|
Other assets | 153,348 |
| | 164,152 |
|
Other liabilities | 68,031 |
| | 49,442 |
|
Debt | 792,919 |
| | 699,860 |
|
Equity | 373,462 |
| | 380,325 |
|
| | | |
Company’s share of equity (Company’s basis) (a) | 186,042 |
| (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 June 30, 2014, which is included in other liabilities.
The Company held interests in 17 Real Estate Ventures containing an aggregate of approximately 5.9 million net rentable square feet as of the three and six-month periods ended June 30, 2014 and 17 Real Estate Ventures containing an aggregate of approximately 6.2 million net rentable square feet as of the three and six-month periods ended June 30, 2013. 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 June 30, | | Six-month periods ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenue | $ | 35,074 |
| | $ | 36,927 |
| | $ | 69,459 |
| | $ | 77,816 |
|
Operating expenses | 14,842 |
| | 17,205 |
| | 28,824 |
| | 35,472 |
|
Interest expense, net | 8,889 |
| | 9,173 |
| | 16,989 |
| | 18,944 |
|
Depreciation and amortization | 13,273 |
| | 10,979 |
| | 26,871 |
| | 23,885 |
|
Net loss | (1,930 | ) | | (430 | ) | | (3,225 | ) | | (485 | ) |
Company’s share of income (loss) (Company’s basis) | (489 | ) | | 1,508 |
| | (247 | ) | | 3,043 |
|
Austin Venture - Four Points Centre
On April 3, 2014, the Company contributed two 3-story, Class A office buildings, containing an aggregate of approximately 192,396 net rentable square feet, known as Four Points Centre in Austin, Texas to the Austin Venture. See Note 3 for further information on the contribution.
Guarantees
As of June 30, 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 June 30, 2014 and December 31, 2013, the Company’s deferred costs were comprised of the following (in thousands):
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| | | | | | | | | | | |
| June 30, 2014 |
| Total Cost | | Accumulated Amortization | | Deferred Costs, net |
Leasing Costs | $ | 161,800 |
| | $ | (61,694 | ) | | $ | 100,106 |
|
Financing Costs | 40,315 |
| | (16,829 | ) | | 23,486 |
|
Total | $ | 202,115 |
| | $ | (78,523 | ) | | $ | 123,592 |
|