BDN 3.31.2015 10-Q (Q1-2015)


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
_________________________
(Mark One)
þ
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2015
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                      to                     
Commission file number
001-9106 (Brandywine Realty Trust)
000-24407 (Brandywine Operating Partnership, L.P.)
_________________________
Brandywine Realty Trust
Brandywine Operating Partnership, L.P.
(Exact name of registrant as specified in its charter)
_________________________

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


1



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Brandywine Realty Trust
 
Yes þ No o
Brandywine Operating Partnership, L.P.
 
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Brandywine Realty Trust:
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
Brandywine Operating Partnership, L.P.:
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer þ
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Brandywine Realty Trust
 
Yes o No þ
Brandywine Operating Partnership, L.P.
 
Yes o No þ
A total of 179,868,365 Common Shares of Beneficial Interest, par value $0.01 per share of Brandywine Realty Trust, were outstanding as of April 24, 2015.



2



EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2015 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, 2015, owned a 99.1% interest in the Operating Partnership. The remaining 0.9% interest consists of common units of limited partnership interest issued by the Operating Partnership to third parties in exchange for contributions of properties to the Operating Partnership. As the sole general partner of the Operating Partnership, the Parent Company has full and complete authority over the Operating Partnership’s day-to-day operations and management.
Management operates the Parent Company and the Operating Partnership as one enterprise. The management of the Parent Company consists of the same members as the management of the Operating Partnership.
As general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the Parent Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Parent Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company's operations on a consolidated basis and how management operates the Company.
The Company believes that combining the quarterly reports on Form 10-Q of the Parent Company and the Operating Partnership into a single report will result in the following benefits:
•
facilitate a better understanding by the investors of the Parent Company and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business;
•
remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both the Parent Company and the Operating Partnership; and
•
create time and cost efficiencies through the preparation of one combined report instead of two separate reports.
There are few differences between the Parent Company and the Operating Partnership, which are reflected in the footnote disclosures in this report. The Company believes it is important to understand the differences between the Parent Company and the Operating Partnership in the context of how these entities operate as an interrelated consolidated company. The Parent Company is a REIT, whose only material asset is its ownership of partnership interests of the Operating Partnership. As a result, the Parent Company does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing the debt obligations of the Operating Partnership. The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s Real Estate Ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness (directly and through subsidiaries) and through the issuance of partnership units of the Operating Partnership or equity interests in subsidiaries of the Operating Partnership.
The equity and non-controlling interests in the Parent Company and the Operating Partnership’s equity are the main areas of difference between the consolidated financial statements of the Parent Company and the Operating Partnership. The common units of limited partnership interest in the Operating Partnership are accounted for as partners’ equity in the Operating Partnership’s financial statements while the common units of limited partnership interests held by parties other than the Parent Company are presented as non-controlling interests in the Parent Company’s financial statements. The differences between the Parent Company and the Operating Partnership’s equity relate to the differences in the equity issued at the Parent Company and Operating Partnership levels.


3



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


4



TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
Brandywine Realty Trust
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brandywine Operating Partnership, L.P.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Filing Format
This combined Form 10-Q is being filed separately by Brandywine Realty Trust and Brandywine Operating Partnership, L.P.


5



PART I - FINANCIAL INFORMATION


Item 1.
— Financial Statements
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
 
March 31,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Operating properties
$
4,477,857

 
$
4,603,692

Accumulated depreciation
(1,057,140
)
 
(1,067,829
)
Operating real estate investments, net
3,420,717

 
3,535,863

Construction-in-progress
231,224

 
201,360

Land inventory
90,945

 
90,603

Total real estate investments, net
3,742,886

 
3,827,826

Cash and cash equivalents
309,083

 
257,502

Accounts receivable, net
18,566

 
18,757

Accrued rent receivable, net
134,885

 
134,051

Assets held for sale, net
111,971

 
18,295

Investment in Real Estate Ventures, at equity
233,478

 
225,004

Deferred costs, net
123,482

 
125,224

Intangible assets, net
93,269

 
99,403

Mortgage note receivable
—

 
88,000

Other assets
78,036

 
65,111

Total assets
$
4,845,656

 
$
4,859,173

LIABILITIES AND BENEFICIARIES’ EQUITY
 
 
 
Mortgage notes payable
$
650,545

 
$
654,590

Unsecured term loans
200,000

 
200,000

Unsecured senior notes, net of discounts
1,596,992

 
1,596,718

Accounts payable and accrued expenses
109,865

 
96,046

Distributions payable
29,038

 
28,871

Deferred income, gains and rent
55,618

 
59,452

Acquired lease intangibles, net
24,513

 
26,010

Other liabilities
39,578

 
37,558

Liabilities related to assets held for sale
931

 
602

Total liabilities
2,707,080

 
2,699,847

Commitments and contingencies (Note 13)

 

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 2015 and 2014
40

 
40

Common Shares of Brandywine Realty Trust’s beneficial interest, $0.01 par value; shares authorized 400,000,000; 179,745,598 and 179,293,160 issued and outstanding in 2015 and 2014, respectively
1,798

 
1,793

Additional paid-in capital
3,317,137

 
3,314,693

Deferred compensation payable in common shares
11,194

 
6,219

Common shares in grantor trust, 694,691 in 2015 and 384,536 in 2014
(11,194
)
 
(6,219
)
Cumulative earnings
538,023

 
529,487

Accumulated other comprehensive loss
(7,190
)
 
(4,607
)
Cumulative distributions
(1,729,517
)
 
(1,700,579
)
Total Brandywine Realty Trust’s equity
2,120,291

 
2,140,827

Non-controlling interests
18,285

 
18,499

Total beneficiaries' equity
2,138,576

 
2,159,326

Total liabilities and beneficiaries' equity
$
4,845,656

 
$
4,859,173


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


6



BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share information)
 
Three-month periods ended
 
March 31,
 
2015
 
2014
Revenue:
 
 
 
Rents
$
120,410

 
$
121,671

Tenant reimbursements
22,654

 
23,460

Termination fees
636

 
2,203

Third party management fees, labor reimbursement and leasing
3,872

 
4,150

Other
2,834

 
630

Total revenue
150,406

 
152,114

Operating expenses:
 
 
 
Property operating expenses
46,577

 
46,801

Real estate taxes
12,545

 
13,457

Third party management expenses
1,576

 
1,716

Depreciation and amortization
51,111

 
52,570

General and administrative expenses
8,636

 
8,181

Total operating expenses
120,445

 
122,725

Operating income
29,961

 
29,389

Other income (expense):
 
 
 
Interest income
750

 
385

Interest expense
(28,176
)
 
(31,844
)
Interest expense — amortization of deferred financing costs
(1,079
)
 
(1,189
)
Interest expense — financing obligation
(286
)
 
(272
)
Equity in income of Real Estate Ventures
131

 
242

Net gain on disposition of real estate
9,019

 
—

Gain on sale of undepreciated real estate
—

 
1,187

Loss on real estate venture transactions
—

 
(135
)
Provision for impairment on assets held for sale
(1,726
)
 
—

Income (Loss) from continuing operations
8,594

 
(2,237
)
Discontinued operations:
 
 
 
Loss from discontinued operations
—

 
(8
)
Total discontinued operations
—

 
(8
)
Net income (loss)
8,594

 
(2,245
)
Net loss attributable to non-controlling interest — partners' share of consolidated real estate ventures
—

 
(12
)
Net (income) loss attributable to non-controlling interests — LP units
(58
)
 
44

Net (income) loss attributable to non-controlling interests
(58
)
 
32

Net income (loss) attributable to Brandywine Realty Trust
8,536

 
(2,213
)
Distribution to Preferred Shares
(1,725
)
 
(1,725
)
Nonforfeitable dividends allocated to unvested restricted shareholders
(101
)
 
(103
)
Net income (loss) attributable to Common Shareholders of Brandywine Realty Trust
$
6,710

 
$
(4,041
)
Basic income (loss) per Common Share:
 
 
 
Continuing operations
$
0.04

 
$
(0.03
)
Discontinued operations
—

 
—

 
$
0.04

 
$
(0.03
)
Diluted income (loss) per Common Share:
 
 
 
Continuing operations
$
0.04

 
$
(0.03
)
Discontinued operations
—

 
—

 
$
0.04

 
$
(0.03
)
 
 
 
 
Basic weighted average shares outstanding
179,562,930

 
156,794,019

Diluted weighted average shares outstanding
180,655,272

 
156,794,019

Net income attributable to Brandywine Realty Trust
 
 
 
Total continuing operations
$
8,536

 
$
(2,205
)
Total discontinued operations
—

 
(8
)
Net income (loss)
$
8,536

 
$
(2,213
)

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


7



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

 
Three-month periods ended
 
March 31,
 
2015
 
2014
Net income (loss)
$
8,594

 
$
(2,245
)
Other comprehensive income (loss):
 
 
 
Unrealized (loss) on derivative financial instruments
(2,663
)
 
(980
)
Reclassification of realized losses on derivative financial instruments to operations, net (1)
58

 
60

     Total other comprehensive loss
(2,605
)
 
(920
)
Comprehensive income (loss)
5,989

 
(3,165
)
Comprehensive (income) loss attributable to non-controlling interest
(36
)
 
42

Comprehensive income (loss) attributable to Brandywine Realty Trust
$
5,953

 
$
(3,123
)
(1) Amounts reclassified from comprehensive income to interest expense within the Consolidated Statements of Operations.
The accompanying notes are an integral part of these consolidated financial statements.




8



BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF BENEFICIARIES’ EQUITY
For the three-month period ended March 31, 2015
(unaudited, in thousands, except number of shares)

 
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, 2014
4,000,000

 
$
40

 
179,293,160

 
384,536

 
$
1,793

 
$
3,314,693

 
$
6,219

 
$
(6,219
)
 
$
529,487

 
$
(4,607
)
 
$
(1,700,579
)
 
$
18,499

 
$
2,159,326

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,536

 
 
 
 
 
58

 
8,594

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,583
)
 
 
 
(22
)
 
(2,605
)
Bonus share issuance
 
 
 
 
8,447

 
 
 
 
 
125

 
 
 
 
 
 
 
 
 
 
 
 
 
125

Equity issuance costs
 
 
 
 
 
 
 
 
 
 
(48
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(48
)
Share-based compensation activity
 
 
 
 
410,506

 
280,011

 
5

 
2,347

 
 
 
 
 
 
 
 
 
 
 
 
 
2,352

Share issuance from/to Deferred Compensation Plan
 
 
 
 
33,485

 
30,144

 
 
 


 
4,975

 
(4,975
)
 
 
 
 
 
 
 
 
 
—

Adjustment to non-controlling interest
 
 
 
 
 
 
 
 
 
 
20

 
 
 
 
 
 
 
 
 
 
 
(20
)
 
—

Preferred Share distributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,725
)
 
 
 
(1,725
)
Distributions declared ($0.15 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(27,213
)
 
(230
)
 
(27,443
)
BALANCE,
March 31, 2015
4,000,000

 
$
40

 
179,745,598

 
694,691

 
$
1,798

 
$
3,317,137

 
$
11,194

 
$
(11,194
)
 
$
538,023

 
$
(7,190
)
 
$
(1,729,517
)
 
$
18,285

 
$
2,138,576


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


9




BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENT OF BENEFICIARIES’ EQUITY
For the three-month period ended March 31, 2014
(unaudited, in thousands, except number of shares)

 
Number of
Preferred Shares
 
Par Value of
Preferred
Shares
 
Number of Common
Shares
 
Number of Rabbi
Trust/Deferred
Compensation
Shares
 
Common Shares of
Brandywine Realty
Trust’s beneficial
interest
 
Additional Paid-in
Capital
 
Deferred
Compensation
Payable in
Common Shares
 
Common Shares in
Grantor Trust
 
Cumulative
Earnings
 
Accumulated Other
Comprehensive
Income (Loss)
 
Cumulative
Distributions
 
Non-Controlling
Interests
 
Total
BALANCE, December 31, 2013
4,000,000

 
$
40

 
156,731,993

 
312,279

 
$
1,566

 
$
2,971,596

 
$
5,407

 
$
(5,407
)
 
$
522,528

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

 
$
1,921,435

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

 


 
1

 
2,643

 
 
 
 
 
7

 
 
 
 
 
 
 
2,651

Share issuance from/to Deferred Compensation Plan
 
 
 
 
76,561

 
72,292

 
 
 
(89
)
 
860

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

 
—

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

 
$
40

 
156,916,901

 
384,571

 
$
1,567

 
$
2,974,094

 
$
6,267

 
$
(6,267
)
 
$
520,322

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

 
$
1,895,152


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


10



BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Three-month periods ended
 
March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
8,594

 
$
(2,245
)
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
Depreciation and amortization
51,111

 
52,570

Amortization of deferred financing costs
1,079

 
1,189

Amortization of debt discount/(premium), net
(158
)
 
(162
)
Amortization of stock compensation costs
2,756

 
3,048

Shares used for employee taxes upon vesting of share awards
(1,359
)
 
(531
)
Straight-line rent income
(6,339
)
 
(3,592
)
Amortization of acquired above (below) market leases, net
(1,290
)
 
(1,957
)
Straight-line ground rent expense
22

 
22

Provision for doubtful accounts
380

 
897

Loss on real estate venture transactions
—

 
135

Net gain on sale of interests in real estate
(9,019
)
 
(1,187
)
Provision for impairment on assets held for sale

1,726

 
—

Real Estate Venture (income) loss and cash distributions
163

 
(123
)
Deferred financing obligation
(287
)
 
(272
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(170
)
 
(5,759
)
Other assets
(9,322
)
 
(7,508
)
Accounts payable and accrued expenses
11,131

 
14,400

Deferred income, gains and rent
(3,267
)
 
1,714

Other liabilities
(140
)
 
(199
)
Net cash from operating activities
45,611

 
50,440

Cash flows from investing activities:
 
 
 
Acquisition of properties
—

 
(13,972
)
Sales of properties, net
26,778

 
3,350

Proceeds from repayment of mortgage notes receivable
88,000

 
1,200

Capital expenditures for tenant improvements
(14,515
)
 
(36,222
)
Capital expenditures for redevelopments
(5,984
)
 
(1,031
)
Capital expenditures for developments
(37,867
)
 
(1,851
)
Advances for purchase of tenant assets, net of repayments
(138
)
 
94

Investment in unconsolidated Real Estate Ventures
(11,028
)
 
(808
)
Deposits for real estate
(5,995
)
 
—

Escrowed cash
2,868

 
1,636

Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income
2,563

 
2,828

Leasing costs
(6,371
)
 
(3,589
)
Net cash from (used in) investing activities
38,311

 
(48,365
)
Cash flows from financing activities:
 
 
 
Repayments of mortgage notes payable
(3,546
)
 
(3,349
)
Debt financing costs
—

 
(35
)
Exercise of stock options
127

 
—

Distributions paid to shareholders
(28,692
)
 
(25,330
)
Distributions to noncontrolling interest
(230
)
 
(277
)
Net cash used in financing activities
(32,341
)
 
(28,991
)
Increase (Decrease) in cash and cash equivalents
51,581

 
(26,916
)
Cash and cash equivalents at beginning of period
257,502

 
263,207

Cash and cash equivalents at end of period
$
309,083

 
$
236,291

 
 
 
 
Supplemental disclosure:
 
 
 
Cash paid for interest, net of capitalized interest during the three months ended March 31, 2015 and 2014 of $2,703 and $1,230, respectively
$
18,080

 
$
19,213

Supplemental disclosure of non-cash activity:
 

 
 

Change in capital expenditures financed through accounts payable at period end
(440
)
 
8,228

Change in capital expenditures financed through retention payable at period end
2,200

 
538

Change in unfunded tenant allowance
—

 
(43
)
The accompanying notes are an integral part of these consolidated financial statements.


11




BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit and per unit information)
 
March 31,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Real estate investments:
 
 
 
Operating properties
$
4,477,857

 
$
4,603,692

Accumulated depreciation
(1,057,140
)
 
(1,067,829
)
Operating real estate investments, net
3,420,717

 
3,535,863

Construction-in-progress
231,224

 
201,360

Land inventory
90,945

 
90,603

Total real estate investments, net
3,742,886

 
3,827,826

Cash and cash equivalents
309,083

 
257,502

Accounts receivable, net
18,566

 
18,757

Accrued rent receivable, net
134,885

 
134,051

Assets held for sale
111,971

 
18,295

Investment in Real Estate Ventures, at equity
233,478

 
225,004

Deferred costs, net
123,482

 
125,224

Intangible assets, net
93,269

 
99,403

Mortgage note receivable
—

 
88,000

Other assets
78,036

 
65,111

Total assets
$
4,845,656

 
$
4,859,173

LIABILITIES AND PARTNERS' EQUITY
 
 
 
Mortgage notes payable
$
650,545

 
$
654,590

Unsecured term loans
200,000

 
200,000

Unsecured senior notes, net of discounts
1,596,992

 
1,596,718

Accounts payable and accrued expenses
109,865

 
96,046

Distributions payable
29,038

 
28,871

Deferred income, gains and rent
55,618

 
59,452

Acquired lease intangibles, net
24,513

 
26,010

Other liabilities
39,578

 
37,558

Liabilities related to assets held for sale
931

 
602

Total liabilities
2,707,080

 
2,699,847

Commitments and contingencies (Note 13)

 

Redeemable limited partnership units at redemption value; 1,535,102 issued and outstanding in 2015 and 2014
24,574

 
24,571

Brandywine Operating Partnership, L.P.’s equity:
 
 
 
6.90% Series E-Linked Preferred Mirror Units; issued and outstanding- 4,000,000 in 2015 and 2014
96,850

 
96,850

General Partnership Capital, 179,745,598 and 179,293,160 units issued and outstanding in 2015 and 2014, respectively
2,023,754

 
2,041,902

Accumulated other comprehensive loss
(7,612
)
 
(5,007
)
Total Brandywine Operating Partnership, L.P.’s equity
2,112,992

 
2,133,745

Non-controlling interest - consolidated real estate ventures
1,010

 
1,010

Total partners’ equity
2,114,002

 
2,134,755

 
 
 
 
Total liabilities and partners’ equity
$
4,845,656

 
$
4,859,173

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




12



BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit information)
 
Three-month periods ended
 
March 31,
 
2015
 
2014
Revenue:
 
 
 
Rents
$
120,410

 
$
121,671

Tenant reimbursements
22,654

 
23,460

Termination fees
636

 
2,203

Third party management fees, labor reimbursement and leasing
3,872

 
4,150

Other
2,834

 
630

Total revenue
150,406

 
152,114

Operating expenses:
 
 
 
Property operating expenses
46,577

 
46,801

Real estate taxes
12,545

 
13,457

Third party management expenses
1,576

 
1,716

Depreciation and amortization
51,111

 
52,570

General & administrative expenses
8,636

 
8,181

Total operating expenses
120,445

 
122,725

Operating income
29,961

 
29,389

Other income (expense):
 
 
 
Interest income
750

 
385

Interest expense
(28,176
)
 
(31,844
)
Interest expense — amortization of deferred financing costs
(1,079
)
 
(1,189
)
Interest expense — financing obligation
(286
)
 
(272
)
Equity in income of Real Estate Ventures
131

 
242

Net gain on disposition of real estate
9,019

 
—

Net gain on sale of undepreciated real estate
—

 
1,187

Loss on real estate venture transactions
—

 
(135
)
Provision for impairment on assets held for sale
(1,726
)
 
—

Income (Loss) from continuing operations
8,594

 
(2,237
)
Discontinued operations:
 
 
 
Loss from discontinued operations
—

 
(8
)
Total discontinued operations
—

 
(8
)
Net income (loss)
8,594

 
(2,245
)
Net loss attributable to non-controlling interests
—

 
(12
)
Net income (loss) attributable to Brandywine Operating Partnership
8,594

 
(2,257
)
Distribution to Preferred Units
(1,725
)
 
(1,725
)
Amount allocated to unvested restricted unitholders
(101
)
 
(103
)
Net income (loss) attributable to Common Partnership Unitholders of Brandywine Operating Partnership, L.P.
$
6,768

 
$
(4,085
)
Basic income (loss) per Common Partnership Unit:
 
 
 
Continuing operations
$
0.04

 
$
(0.03
)
Discontinued operations
—

 
—

 
$
0.04

 
$
(0.03
)
Diluted income (loss) per Common Partnership Unit:
 
 
 
Continuing operations
$
0.04

 
$
(0.03
)
Discontinued operations
—

 
—

 
$
0.04

 
$
(0.03
)
Basic weighted average common partnership units outstanding
181,098,032

 
158,557,758

Diluted weighted average common partnership units outstanding
182,190,374

 
158,557,758

Net income (loss) attributable to Brandywine Operating Partnership, L.P.
 
 
 
Total continuing operations
$
8,594

 
$
(2,249
)
Total discontinued operations
—

 
(8
)
Net income (loss)
$
8,594

 
$
(2,257
)
The accompanying notes are an integral part of these consolidated financial statements.


13



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

 
Three-month periods ended
 
March 31,
 
2015
 
2014
Net income (loss)
$
8,594

 
$
(2,245
)
Other comprehensive income (loss):
 
 
 
Unrealized (loss) on derivative financial instruments
(2,663
)
 
(980
)
Reclassification of realized losses on derivative financial instruments to operations, net (1)
58

 
60

Total other comprehensive (loss)
(2,605
)
 
(920
)
Comprehensive income (loss) attributable to Brandywine Operating Partnership, L.P.
$
5,989

 
$
(3,165
)
(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.




14



BRANDYWINE OPERATING PARTNERSHIP L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Three-month periods ended
 
March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
8,594

 
$
(2,245
)
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
Depreciation and amortization
51,111

 
52,570

Amortization of deferred financing costs
1,079

 
1,189

Amortization of debt discount/(premium), net
(158
)
 
(162
)
Amortization of stock compensation costs
2,756

 
3,048

Shares used for employee taxes upon vesting of share awards
(1,359
)
 
(531
)
Straight-line rent income
(6,339
)
 
(3,592
)
Amortization of acquired above (below) market leases, net
(1,290
)
 
(1,957
)
Straight-line ground rent expense
22

 
22

Provision for doubtful accounts
380

 
897

Loss on real estate venture transactions
—

 
135

Net gain on sale of interests in real estate
(9,019
)
 
(1,187
)
Provision for impairment on assets held for sale
1,726

 
—

Real Estate Venture (income) loss and cash distributions
163

 
(123
)
Deferred financing obligation
(287
)
 
(272
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(170
)
 
(5,759
)
Other assets
(9,322
)
 
(7,508
)
Accounts payable and accrued expenses
11,131

 
14,400

Deferred income, gains and rent
(3,267
)
 
1,714

Other liabilities
(140
)
 
(199
)
Net cash from operating activities
45,611

 
50,440

Cash flows from investing activities:
 
 
 
Acquisition of properties
—

 
(13,972
)
Sales of properties, net
26,778

 
3,350

Proceeds from repayment of mortgage notes receivable
88,000

 
1,200

Capital expenditures for tenant improvements
(14,515
)
 
(36,222
)
Capital expenditures for redevelopments
(5,984
)
 
(1,031
)
Capital expenditures for developments
(37,867
)
 
(1,851
)
Advances for purchase of tenant assets, net of repayments
(138
)
 
94

Investment in unconsolidated Real Estate Ventures
(11,028
)
 
(808
)
Deposits for real estate
(5,995
)
 
—

Escrowed cash
2,868

 
1,636

Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income
2,563

 
2,828

Leasing costs
(6,371
)
 
(3,589
)
Net cash from (used in) investing activities
38,311

 
(48,365
)
Cash flows from financing activities:
 
 
 
Repayments of mortgage notes payable
(3,546
)
 
(3,349
)
Debt financing costs
—

 
(35
)
Exercise of stock options
127

 
—

Distributions paid to preferred and common partnership unitholders
(28,922
)
 
(25,607
)
Net cash used in financing activities
(32,341
)
 
(28,991
)
Increase (Decrease) in cash and cash equivalents
51,581

 
(26,916
)
Cash and cash equivalents at beginning of period
257,502

 
263,207

Cash and cash equivalents at end of period
$
309,083

 
$
236,291

 
 
 
 
Supplemental disclosure:
 
 
 
Cash paid for interest, net of capitalized interest during the three months ended March 31, 2015 and 2014 of $2,703 and $1,230, respectively
$
18,080

 
$
19,213

Supplemental disclosure of non-cash activity:
 
 
 
Change in capital expenditures financed through accounts payable at period end
(440
)
 
8,228

Change in capital expenditures financed through retention payable at period end
2,200

 
538

Change in unfunded tenant allowance
—

 
(43
)

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


15



BRANDYWINE REALTY TRUST AND BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
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 March 31, 2015, owned a 99.1% 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, 2015, the Company owned 198 properties, consisting of 161 office properties, 20 industrial facilities, five mixed-use properties, one retail property (187 core properties), six properties classified as held for sale, three development properties, one redevelopment property 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, 2015, the Company owned economic interests in 17 unconsolidated real estate ventures that own properties containing an aggregate of approximately 6.7 million net rentable square feet (collectively, the “Real Estate Ventures”). As of March 31, 2015, the Company also owned 415 acres of undeveloped land, and held options to purchase approximately 63 additional acres of undeveloped land. As of March 31, 2015, the total potential development that these land parcels could support, under current zoning, entitlements or combination thereof, amounted to an estimated 6.0 million square feet of development, inclusive of options to purchase approximately 63 additional acres of undeveloped land. 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, 2015, the management company subsidiaries were managing properties containing an aggregate of approximately 33.7 million net rentable square feet, of which approximately 24.8 million net rentable square feet related to Properties owned by the Company and approximately 8.9 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. BASIS OF PRESENTATION
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, 2015, the results of its operations for the three-month periods ended March 31, 2015 and 2014 and its cash flows for the three-month periods ended March 31, 2015 and 2014 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 2014 Annual Report on Form 10-K filed with the SEC on February 19, 2015.
The Company's Annual Report on Form 10-K for the year ended December 31, 2014 contains a discussion of our significant accounting policies under Note 2, "Summary of Significant Accounting Policies". There have been no significant changes in our significant accounting policies since December 31, 2014. Management discusses our significant accounting policies and management’s judgments and estimates with the Company's Audit Committee.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued guidance simplifying the presentation of debt issuance costs. The guidance requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. The amortization of these costs will remain under the interest method and will continue to be reported as interest expense. The guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued.


16



The new guidance will be applied on a retrospective basis. The Company has not yet determined the impact, if any, that the adoption of this guidance will have on its consolidated financial statements.
In February 2015, the FASB issued guidance modifying the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The guidance does not change the general order in which the consolidation models are applied. A reporting entity that holds an economic interest in, or is otherwise involved with, another legal entity first determines if the variable interest entity model applies, and if so, whether it holds a controlling financial interest under that model. If the entity being evaluated for consolidation is not a variable interest entity, then the voting model should be applied to determine whether the entity should be consolidated by the reporting entity. Key changes to the guidance include, though are not limited to; (i.) limiting the extent to which related party interests are included in the other economic interest criterion to the decision maker’s effective interest holding, (ii.) requiring limited partners of a limited partnership, or the members of a limited liability company that is similar to a limited partnership, to have, at minimum, kick-out or participating rights to demonstrate that the partnership is a voting entity, (iii.) changing the evaluation of whether the equity holders at risk lack decision making rights when decision making is outsourced and (iv.) changing how the economics test is performed. The guidance does not amend the existing disclosure requirements for variable interest entities or voting model entities. The guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company has not yet determined the impact, if any, that the adoption of this guidance will have on its consolidated financial statements.
3. REAL ESTATE INVESTMENTS
As of March 31, 2015 and December 31, 2014, the gross carrying value of the Company’s Properties was as follows (in thousands):
 
March 31,
2015
 
December 31,
2014
Land
$
646,132

 
$
669,635

Building and improvements
3,313,807

 
3,409,303

Tenant improvements
517,918

 
524,754

 
4,477,857

 
4,603,692

Assets held for sale - real estate investments (a)
136,802

 
27,436

Total
$
4,614,659

 
$
4,631,128

(a)
Real estate investments related to assets held for sale above represents gross real estate assets and does not include accumulated depreciation or other assets on the balance sheets of the properties held for sale.
Dispositions
On January 8, 2015, the Company sold two office properties known as Atrium I, which includes 99,668 square feet of rentable space located in Mt. Laurel, New Jersey, and Libertyview, which includes 121,737 square feet of rentable space located in Cherry Hill, New Jersey, for a total sales price of $28.3 million resulting in a gain on sale of $9.0 million after closing and other transaction related costs.
Held for Sale
On April 9, 2015, the Company sold the Lake Merritt Tower, consisting of 204,336 rentable square feet, located in Oakland, California for a sale price of $65.0 million. See Note 14, "Subsequent Events," for further information regarding this disposition. As of March 31, 2015, the Company categorized this property as held for sale in accordance with applicable accounting standards for long lived assets. At such date, the carrying value of the property exceeds the fair value less the costs of sale. As a result, the Company recognized an impairment loss totaling approximately $1.7 million, which approximates the cost of sale, during the three months ended March 31, 2015.
As of March 31, 2015, the Company classified two properties totaling 200,275 rentable square feet known as Delaware Corporate Center I and II in Wilmington, Delaware and three properties totaling 284,907 rentable square feet known as Christiana Corporate Center in Newark, Delaware as held for sale in accordance with applicable accounting standards for long lived assets.
The disposal of the properties referenced above do not represent a strategic shift that has a major effect on the Company's operations and financial results. Accordingly, the impairment loss on the Lake Merritt Tower and operating results of these properties remain classified within continuing operations for all periods presented.
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of March 31, 2015, the Company held ownership interests in 17 unconsolidated Real Estate Ventures for an aggregate investment balance of $232.3 million, of which $233.5 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 March 31, 2015, 11 of the real estate ventures owned 65 office buildings that contain an aggregate of approximately 6.7 million net rentable square feet; one real estate venture owned three acres of undeveloped parcels of land; three real estate ventures owned 22.6 acres of land under development; one real estate venture owned a residential tower that contains 345 apartment units 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 a Real Estate Venture 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, 2015 and December 31, 2014 (in thousands):
 
March 31,
2015
 
December 31,
2014
Net property
$
1,294,503

 
$
1,281,282

Other assets
180,803

 
195,121

Other liabilities
59,829

 
68,481

Debt
969,322

 
965,077

Equity
446,155

 
442,845

 
 
 
 
Company’s share of equity (Company’s basis) (a) (b)
233,478

 
225,004

(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, 2015 and December 31, 2014, respectively, which is included in other liabilities.


17



The Company held interests in 17 Real Estate Ventures containing an aggregate of approximately 6.7 million net rentable square feet as of the three-month periods ended March 31, 2015 and 17 Real Estate Ventures containing an aggregate of approximately 5.7 million net rentable square feet as of the three-month period ended March 31, 2014. 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,
 
2015
 
2014
Revenue
$
46,109

 
$
34,385

Operating expenses
(18,533
)
 
(13,982
)
Interest expense, net
(9,846
)
 
(8,100
)
Depreciation and amortization
(19,124
)
 
(13,598
)
Net loss
$
(1,394
)
 
$
(1,295
)
 
 
 
 
Company’s share of income (Company’s basis)
$
131

 
$
242

DRA - PA Venture
On December 19, 2007, the Company formed G&I Interchange Office LLC, a real estate venture (the “Venture”) with G&I VI Investment Interchange Office LLC (“G&I VI”), an investment vehicle advised by DRA Advisors LLC. The Venture included interests in 29 office properties which were located in various counties in Pennsylvania, containing an aggregate of 1,611,961 net rentable square feet. In connection with the formation, the Company retained a 20.0% ownership interest in the Venture and transferred an 80.0% interest in the Venture to G&I IV.
On February 27, 2015, the Venture entered into a forbearance agreement with an unaffiliated third party lender because it will not repay the $174.2 million outstanding nonrecourse mortgage balance that matured on January 1, 2015. The forbearance agreement extended the maturity date of the mortgage loan to July 31, 2015 and contains, at the lender’s option, a 60-day extension option. The lender has the exclusive right to sell the properties to a third-party purchaser during the forbearance period. The net proceeds received from the sale of the properties will be provided to the lender. If the properties are not sold during the forbearance period the Venture’s assets will be foreclosed on by the lender.
As of the date of the forbearance agreement, the Company does not have an investment basis in the venture because of a basis adjustment recorded at formation. The Company is not obligated to fund any of the losses incurred by the Venture and, as a result, has not recognized losses in excess of its invested capital balance.
Austin Venture
On January 30, 2015, the Austin Venture closed on a mortgage loan with a non-affiliated institutional lender, and the proceeds of this loan were applied to repay in full the Company's $88.0 million short-term loan related to the acquisition of River Place. For further information regarding this acquisition, see Note 4, "Investment In Unconsolidated Ventures," included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
Guarantees
As of March 31, 2015, the Company had provided guarantees on behalf of certain real estate ventures, consisting of (i) a $24.7 million payment guarantee 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 ventures, 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 Note 4, "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, 2014.


18



5. INTANGIBLE ASSETS AND LIABILITIES
As of March 31, 2015 and December 31, 2014, the Company’s intangible assets/liabilities were comprised of the following (in thousands):
 
March 31, 2015
 
Total Cost
 
Accumulated
Amortization
 
Intangible assets/liabilities, net
Intangible assets, net:
 
 
 
 
 
   In-place lease value
$
126,573

 
$
(43,942
)
 
$
82,631

   Tenant relationship value
31,390

 
(24,777
)
 
6,613

   Above market leases acquired
5,641

 
(1,616
)
 
4,025

   Total intangible assets, net
$
163,604

 
$
(70,335
)
 
$
93,269

 
 
 
 
 
 
Acquired lease intangibles, net:
 
 
 
 
 
   Below market leases acquired
$
52,414

 
$
(27,901
)
 
$
24,513


 
December 31, 2014
 
Total Cost
 
Accumulated
Amortization
 
Intangible assets/liabilities, net
Intangible assets, net:
 
 
 
 
 
   In-place lease value
$
129,411

 
$
(42,068
)
 
$
87,343

   Tenant relationship value
34,172

 
(26,344
)
 
7,828

   Above market leases acquired
5,641

 
(1,409
)
 
4,232

   Total intangible assets, net
$
169,224

 
$
(69,821
)
 
$
99,403

 
 
 
 
 
 
Acquired lease intangibles, net:
 
 
 
 
 
   Below market leases acquired
$
53,049

 
$
(27,039
)
 
$
26,010

As of March 31, 2015, the Company’s annual amortization for its intangible assets/liabilities were as follows (in thousands, and assuming no prospective early lease terminations):
 
Assets
 
Liabilities
2015 (nine months remaining)
$
15,681

 
$
3,822

2016
16,800

 
3,230

2017
15,030

 
2,641

2018
11,303

 
2,217

2019
9,990

 
1,885

Thereafter
24,465

 
10,718

Total
$
93,269

 
$
24,513


6. DEBT OBLIGATIONS

During the three months ended March 31, 2015, the Company repaid $3.6 million of principal payments on its mortgage debt in the ordinary course of business and there were no changes to our outstanding unsecured debt.

The Credit Facility and term loan contain financial and operating covenants and restrictions. For further information on these obligations, see the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014. As of March 31, 2015, the Company was in compliance with all such restrictions and financial covenants. 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


19



7. 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, 2015 and December 31, 2014, 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, 2015 and December 31, 2014 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, 2015
 
December 31, 2014
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Unsecured notes payable
$
1,518,382

 
$
1,584,451

 
$
1,518,108

 
$
1,593,212

Variable rate debt
$
278,610

 
$
257,512

 
$
278,610

 
$
257,188

Mortgage notes payable
$
650,545

 
$
695,228

 
$
654,590

 
$
707,241

Mortgage note receivable (a)
$
—

 
$
—

 
$
88,000

 
$
87,692

(a)
On January 30, 2015 the mortgage note was repaid. For further information regarding the mortgage note, see Note 2, "Summary of Significant Accounting Policies," included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
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). This is because the Company valued these instruments using quoted market prices as of March 31, 2015 and December 31, 2014. For the fair value of the Company's unsecured notes, the Company uses a discount rate based on the indicative new issue pricing provided by lenders.
The fair value of the Company's mortgage notes payable, variable rate debt and mortgage note receivable are all categorized at a Level 3 basis (as provided by the accounting standard for Fair Value Measurements and Disclosures). 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 loans with similar terms, maturities and loan-to-value. The fair value of the mortgage note receivable was determined by 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. These financial instruments have been categorized as Level 3 because the Company considers the rates used in the valuation techniques to be unobservable inputs.
For the Company's mortgage loans, the Company uses an estimate based on its knowledge of the mortgage market. The weighted average discount rate for the combined variable rate debt and mortgage loans used to calculate fair value as of March 31, 2015 was 4.7%. An increase in the discount rate used in the discounted cash flow model would result in a decrease to the fair value of the Company's long-term debt. Conversely, a decrease in the discount rate used in the discounted cash flow model would result in an increase to the fair value of the Company's long-term debt.
Disclosure about the fair value of financial instruments is based upon pertinent information available to management as of March 31, 2015 and December 31, 2014. 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, 2015, and current estimates of fair value may differ from the amounts presented herein.
8. LIMITED PARTNERS' NON-CONTROLLING INTERESTS IN THE PARENT COMPANY
Non-controlling interests in the Parent Company’s financial statements relate to redeemable common limited partnership interests in the Operating Partnership held by parties other than the Parent Company and properties which are consolidated but not wholly owned.
Operating Partnership
The aggregate book value of the non-controlling interests associated with the redeemable common limited partnership interests in the accompanying consolidated balance sheet of the Parent Company as of March 31, 2015 and December 31, 2014 was $17.3 million and $17.5 million, respectively. Under the applicable accounting guidance, the redemption value of limited partnership units are carried at, on a limited partner basis, the greater of historical cost adjusted for the allocation of income and distributions or fair value. The Parent Company believes that the aggregate settlement value of these interests (based on the number of units outstanding and the closing price of the common shares on the balance sheet dates) was approximately $24.5 million as of March 31, 2015 and December 31, 2014.
9. BENEFICIARIES’ EQUITY OF THE PARENT COMPANY
Earnings per Share (EPS)
The following tables detail the number of shares and net income used to calculate basic and diluted earnings per share (in thousands, except share and per share amounts; results may not add due to rounding):
 
Three-month periods ended March 31,
 
2015
 
2014
 
Basic
 
Diluted
 
Basic
 
Diluted
Numerator
 
 
 
 
 
 
 
Income (Loss) from continuing operations
$
8,594

 
$
8,594

 
$
(2,237
)
 
$
(2,237
)
Net (income) loss from continuing operations attributable to non-controlling interests - LP units
(58
)
 
(58
)
 
44

 
44

Net loss attributable to non-controlling interest — partners' share of consolidated real estate ventures
—

 
—

 
(12
)
 
(12
)
Nonforfeitable dividends allocated to unvested restricted shareholders
(101
)
 
(101
)
 
(103
)
 
(103
)
Preferred share dividends
(1,725
)
 
(1,725
)
 
(1,725
)
 
(1,725
)
Income (Loss) from continuing operations available to common shareholders
6,710

 
6,710

 
(4,033
)
 
(4,033
)
Loss from discontinued operations
—

 
—

 
(8
)
 
(8
)
Discontinued operations attributable to common shareholders
—

 
—

 
(8
)
 
(8
)
Net income (loss) attributable to common shareholders
$
6,710

 
$
6,710

 
$
(4,041
)
 
$
(4,041
)
Denominator
 
 
 
 
 
 
 
Weighted-average shares outstanding
179,562,930

 
179,562,930

 
156,794,019

 
156,794,019

Contingent securities/Share based compensation
—

 
1,092,342

 
—

 
—

Weighted-average shares outstanding
179,562,930

 
180,655,272

 
156,794,019

 
156,794,019

Earnings per Common Share:
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common shareholders
$
0.04

 
$
0.04

 
$
(0.03
)
 
$
(0.03
)
Discontinued operations attributable to common shareholders
—

 
—

 
—

 
—

Net income (loss) attributable to common shareholders
$
0.04

 
$
0.04

 
$
(0.03
)
 
$
(0.03
)
 
 
 
 
 
 
 
 
Redeemable common limited partnership units totaling 1,535,102 and 1,763,739 as of March 31, 2015 and 2014, respectively, were excluded from the diluted earnings per share computations because they are not dilutive.
Unvested restricted shares are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per share. For the three-month periods ended March 31, 2015 and 2014, earnings representing nonforfeitable dividends as noted in the table above were allocated to the unvested restricted shares issued to the Company’s executives and other employees under the Company's shareholder-approved long-term incentive plan.


20



Common and Preferred Shares
On March 11, 2015, the Parent Company declared a distribution of $0.15 per common share, totaling $27.3 million, which was paid on April 20, 2015 to shareholders of record as of April 6, 2015. In addition, the Parent Company declared distributions on its Series E Preferred Shares to holders of record as of March 30, 2015. These shares are entitled to a preferential return of 6.90% per annum on the $25.00 per share liquidation preference. Distributions paid on April 15, 2015 to holders of Series E Preferred Shares totaled $1.7 million.
On November 5, 2013, the Parent Company commenced a continuous equity offering program (the “Offering Program”), under which it may sell, in at-the-market offerings, up to an aggregate amount of 16,000,000 common shares until November 5, 2016. The Parent Company may sell common shares in amounts and at times to be determined by the Parent Company. Actual sales will depend on a variety of factors to be determined by the Parent Company, including, among others, market conditions, the trading price of the Company’s common shares and determinations by the Parent Company of the appropriate sources of funding. Sales agents engaged by the Parent Company under the Offering Program are entitled to receive, as compensation and in aggregate, up to 2% of the gross sales price per share sold under the Offering Program. From inception of the Offering Program through March 31, 2015, the Parent Company had not sold any shares under the program, leaving 16,000,000 remaining shares available for sale.


21



10. PARTNERS’ EQUITY OF THE OPERATING PARTNERSHIP
Earnings per Common Partnership Unit
The following tables detail the number of units and net income used to calculate basic and diluted earnings per common partnership unit (in thousands, except unit and per unit amounts; results may not add due to rounding):
 
Three-month periods ended March 31,
 
2015
 
2014
 
Basic
 
Diluted
 
Basic
 
Diluted
Numerator
 
 
 
 
 
 
 
Income (Loss) from continuing operations
$
8,594

 
$
8,594

 
$
(2,237
)
 
$
(2,237
)
Nonforfeitable dividends allocated to unvested restricted unitholders
(101
)
 
(101
)
 
(103
)
 
(103
)
Preferred unit dividends
(1,725
)
 
(1,725
)
 
(1,725
)
 
(1,725
)
Net income attributable to non-controlling interests
—

 
—

 
(12
)
 
(12
)
Income (Loss) from continuing operations available to common unitholders
6,768

 
6,768

 
(4,077
)
 
(4,077
)
Discontinued operations attributable to common unitholders
—

 
—

 
(8
)
 
(8
)
Net income (loss) attributable to common unitholders
$
6,768

 
$
6,768

 
$
(4,085
)
 
$
(4,085
)
Denominator
 
 
 
 
 
 
 
Weighted-average units outstanding
181,098,032

 
181,098,032

 
158,557,758

 
158,557,758

Contingent securities/Share based compensation
—

 
1,092,342

 
—

 
—

Total weighted-average units outstanding
181,098,032

 
182,190,374

 
158,557,758

 
158,557,758

Earnings per Common Partnership Unit:
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common unitholders
$
0.04

 
$
0.04

 
$
(0.03
)
 
$
(0.03
)
Discontinued operations attributable to common unitholders
—

 
—

 
—

 
—

Net income (loss) attributable to common unitholders
$
0.04

 
$
0.04

 
$
(0.03
)
 
$
(0.03
)
 
 
 
 
 
 
 
 
Unvested restricted units are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per share. For the three-month periods ended March 31, 2015 and 2014, earnings representing nonforfeitable dividends as noted in the table above were allocated to the unvested restricted units issued to the Parent Company’s executives and other employees under the Parent Company's shareholder-approved long-term incentive plan.
Common Partnership Units and Preferred Mirror Units
On March 11, 2015, the Operating Partnership declared a distribution of $0.15 per common partnership unit, totaling $27.3 million, which was paid on April 20, 2015 to unitholders of record as of April 6, 2015. On March 11, 2015, the Operating Partnership declared distributions on its Series E-Linked Preferred Mirror Units to holders of record as of April 6, 2015. These units are entitled to a preferential return of 6.90% per annum on the $25.00 per unit liquidation preference. Distributions paid on April 15, 2015 to holders of Series E-Linked Preferred Mirror Units totaled $1.7 million.


22



11. SHARE BASED COMPENSATION
Restricted Share Awards
As of March 31, 2015, 670,912 restricted shares were outstanding under the Parent Company's shareholder approved equity incentive plan and vest over three years from the initial grant dates. The remaining compensation expense to be recognized at March 31, 2015 was approximately $3.5 million, and is expected to be recognized over a weighted average remaining vesting period of 1.8 years. During the three-month periods ended March 31, 2015 and 2014, the Company recognized compensation expense related to outstanding restricted shares of $1.3 million and $1.4 million, respectively, of which $0.3 million and $0.2 million, respectively, were capitalized as part of the Company’s review of employee salaries eligible for capitalization.
The following table summarizes the Company’s restricted share activity for the three months ended March 31, 2015:
 
Shares
 
Weighted
Average Grant
Date Fair value
Non-vested at January 1, 2015
540,066

 
$
12.21

Granted
152,785

 
15.95

Vested
(21,939
)
 
13.30

Non-vested at March 31, 2015
670,912

 
$
13.65

On February 23, 2015 and March 10, 2015, the Compensation Committee of the Parent Company’s Board of Trustees awarded restricted shares, of which 119,136 cliff vest after three years from the grant date and 33,649 vest ratably over two years. Restricted shares that cliff vest are subject to acceleration upon a change in control or if the recipient of the award were to die, become disabled or, in certain cases, retire in a qualifying retirement. Qualifying retirement generally means the recipient’s voluntary termination of employment after reaching at least age 57 and accumulating at least 15 years of service with the Company. In accordance with the accounting standard for stock-based compensation, the Company amortizes stock-based compensation costs through the qualifying retirement dates for those executives who meet the conditions for qualifying retirement during the scheduled vesting period.
Restricted Performance Share Units Plan
The Compensation Committee of the Parent Company’s Board of Trustees has granted performance share-based awards (referred to as Restricted Performance Share Units, or RPSUs) to officers of the Parent Company. The RPSUs are settled in common shares, with the number of common shares issuable at settlement determined based on the Company’s total shareholder return over specified measurement periods compared to total shareholder returns of comparative groups over the measurement periods. The table below presents certain information as to RPSU awards.
 
RPSU Grant
 
 
2/25/2013

 
3/11/2014

 
3/12/2014

 
2/23/2015
 
Total
 
 
 
 
 
 
 
 
 
 
 
(Amounts below in shares, unless otherwise noted)
 
 
 
 
 
 
 
 
Non-vested at January 1, 2015
 
199,577

 
130,717

 
61,720

 
—

 
392,014

   Units Granted
 
—

 
—

 
—

 
186,395

 
186,395

   Units Accelerated for Qualifying Retirement
 
(8,255
)
 
(7,562
)
 
—

 
(7,003
)
 
(22,820
)
Non-vested at March 31, 2015
 
191,322

 
123,155