Edgar Filing: BRANDYWINE REALTY TRUST

BDN 6.30.2015 10-Q (Q2-2015)

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 June 30, 2015



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

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 179,898,005 Common Shares of Beneficial Interest, par value $0.01 per share of Brandywine Realty Trust, were outstanding as of July 24, 2015.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended June 30, 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 June 30, 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.

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.

TABLE OF CONTENTS



	Page

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Brandywine Realty Trust

Financial Statements of Brandywine Realty Trust (unaudited)

Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	6

Consolidated Statements of Operations for the three and six-month periods ended June 30, 2015 and 2014	7

Consolidated Statements of Comprehensive Income for the three and six-month periods ended June 30, 2015 and 2014	8

Consolidated Statements of Beneficiaries’ Equity for the six-month periods ended June 30, 2015 and 2014	9

Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2015 and 2014	11

Brandywine Operating Partnership, L.P.

Financial Statements of Brandywine Operating Partnership, L.P. (unaudited)

Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	13

Consolidated Statements of Operations for the three and six-month periods ended June 30, 2015 and 2014	14

Consolidated Statements of Comprehensive Income for the three and six-month periods ended June 30, 2015 and 2014	15

Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2015 and 2014	16

Notes to Unaudited Consolidated Financial Statements	18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3. Quantitative and Qualitative Disclosures about Market Risk	60

Item 4. Controls and Procedures	62

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	63

Item 1A. Risk Factors	63

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3. Defaults Upon Senior Securities	63

Item 4. Mine Safety Disclosures	63

Item 5. Other Information	63

Item 6. Exhibits	65

Signatures	66

Index to Exhibits	68

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


Item 1.	— Financial Statements

BRANDYWINE REALTY TRUST

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share information)



	June 30, 2015			December 31, 2014
	(unaudited)
ASSETS
Real estate investments:
Operating properties	$	4,700,839		$	4,603,692
Accumulated depreciation	(1,088,681		)	(1,067,829		)
Operating real estate investments, net	3,612,158			3,535,863
Construction-in-progress	263,772			201,360
Land inventory	119,995			90,603
Total real estate investments, net	3,995,925			3,827,826
Cash and cash equivalents	123,982			257,502
Accounts receivable, net	22,294			18,757
Accrued rent receivable, net	138,905			134,051
Assets held for sale, net	—			18,295
Investment in Real Estate Ventures, at equity	201,034			225,004
Deferred costs, net	126,567			125,224
Intangible assets, net	137,290			99,403
Mortgage note receivable	—			88,000
Other assets	68,313			65,111
Total assets	$	4,814,310		$	4,859,173
LIABILITIES AND BENEFICIARIES’ EQUITY
Mortgage notes payable	$	646,512		$	654,590
Unsecured term loans	200,000			200,000
Unsecured senior notes, net of discounts	1,597,267			1,596,718
Accounts payable and accrued expenses	98,897			96,046
Distributions payable	29,021			28,871
Deferred income, gains and rent	54,595			59,452
Acquired lease intangibles, net	31,565			26,010
Other liabilities	40,647			37,558
Liabilities related to assets held for sale	—			602
Total liabilities	2,698,504			2,699,847
Commitments and contingencies (Note 12)
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; 179,898,121 and 179,293,160 issued and outstanding in 2015 and 2014, respectively	1,799			1,793
Additional paid-in capital	3,317,751			3,314,693
Deferred compensation payable in common shares	11,996			6,219
Common shares in grantor trust, 748,045 in 2015 and 384,536 in 2014	(11,996		)	(6,219		)
Cumulative earnings	541,079			529,487
Accumulated other comprehensive loss	(5,651		)	(4,607		)
Cumulative distributions	(1,758,294		)	(1,700,579		)
Total Brandywine Realty Trust’s equity	2,096,724			2,140,827
Non-controlling interests	19,082			18,499
Total beneficiaries' equity	2,115,806			2,159,326
Total liabilities and beneficiaries' equity	$	4,814,310		$	4,859,173

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)



	Three-month periods ended						Six-month periods ended
	June 30,						June 30,
	2015			2014			2015			2014
Revenue:
Rents	$	119,127		$	121,622		$	239,537		$	243,293
Tenant reimbursements	19,799			20,502			42,453			43,962
Termination fees	828			3,349			1,464			5,552
Third party management fees, labor reimbursement and leasing	4,659			4,187			8,531			8,337
Other	1,235			840			4,069			1,470
Total revenue	145,648			150,500			296,054			302,614
Operating expenses:
Property operating expenses	42,704			43,136			89,281			89,937
Real estate taxes	11,968			12,841			24,513			26,298
Third party management expenses	1,677			1,730			3,253			3,446
Depreciation and amortization	50,930			52,587			102,041			105,157
General and administrative expenses	6,791			6,005			15,427			14,186
Total operating expenses	114,070			116,299			234,515			239,024
Operating income	31,578			34,201			61,539			63,590
Other income (expense):
Interest income	313			385			1,063			770
Interest expense	(27,895		)	(31,512		)	(56,071		)	(63,356		)
Interest expense — amortization of deferred financing costs	(1,288		)	(1,197		)	(2,367		)	(2,386		)
Interest expense — financing obligation	(324		)	(316		)	(610		)	(588		)
Equity in loss of Real Estate Ventures	(873		)	(489		)	(742		)	(247		)
Net gain on disposition of real estate	1,571			—			10,590			—
Gain (loss) on sale of undepreciated real estate	—			(3		)	—			1,184
Net gain from remeasurement of investments in real estate ventures	758			458			758			458
Loss on real estate venture transactions	—			(282		)	—			(417		)
Provision for impairment on assets held for sale/sold	(782		)	—			(2,508		)	—
Income (Loss) from continuing operations	3,058			1,245			11,652			(992		)
Discontinued operations:
Income from discontinued operations	—			26			—			18
Net gain on disposition of discontinued operations	—			903			—			903
Total discontinued operations	—			929			—			921
Net income (loss)	3,058			2,174			11,652			(71		)
Net loss from discontinued operations attributable to non-controlling interests — LP units	—			(10		)	—			(10		)
Net loss attributable to non-controlling interest — partners' share of consolidated real estate ventures	5			24			5			12
Net (income) loss attributable to non-controlling interests — LP units	(7		)	5			(65		)	49
Net (income) loss attributable to non-controlling interests	(2		)	19			(60		)	51
Net income (loss) attributable to Brandywine Realty Trust	3,056			2,193			11,592			(20		)
Distribution to Preferred Shares	(1,725		)	(1,725		)	(3,450		)	(3,450		)
Nonforfeitable dividends allocated to unvested restricted shareholders	(76		)	(83		)	(177		)	(186		)
Net income (loss) attributable to Common Shareholders of Brandywine Realty Trust	$	1,255		$	385		$	7,965		$	(3,656	)
Basic income (loss) per Common Share:
Continuing operations	$	0.01		$	—		$	0.04		$	(0.03	)
Discontinued operations	—			—			—			0.01
	$	0.01		$	—		$	0.04		$	(0.02	)
Diluted income (loss) per Common Share:
Continuing operations	$	0.01		$	—		$	0.04		$	(0.03	)
Discontinued operations	—			—			—			0.01
	$	0.01		$	—		$	0.04		$	(0.02	)

Basic weighted average shares outstanding	179,860,284			157,037,348			179,712,428			156,916,356
Diluted weighted average shares outstanding	180,538,887			157,037,348			180,599,265			156,916,356
Net income attributable to Brandywine Realty Trust
Total continuing operations	$	3,056		$	1,274		$	11,592		$	(931	)
Total discontinued operations	—			919			—			911
Net income (loss)	$	3,056		$	2,193		$	11,592		$	(20	)

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

BRANDYWINE REALTY TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)



	Three-month periods ended						Six-month periods ended
	June 30,						June 30,
	2015			2014			2015			2014
Net income (loss)	$	3,058		$	2,174		$	11,652		$	(71	)
Other comprehensive income (loss):
Unrealized gain (loss) on derivative financial instruments	1,494			(2,285		)	(1,169		)	(3,265		)
Reclassification of realized losses on derivative financial instruments to operations, net (1)	58			60			116			120
Total other comprehensive gain (loss)	1,552			(2,225		)	(1,053		)	(3,145		)
Comprehensive income (loss)	4,610			(51		)	10,599			(3,216		)
Comprehensive (income) loss attributable to non-controlling interest	(15		)	44			(51		)	86
Comprehensive income (loss) attributable to Brandywine Realty Trust	$	4,595		$	(7	)	$	10,548		$	(3,130	)

(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, 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 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																11,592								60			11,652
Other comprehensive loss																		(1,044		)				(9		)	(1,053		)
Issuance of partnership interest in joint venture																								1,025			1,025
Bonus share issuance				8,447				125																			125
Equity issuance costs								(48		)																	(48		)
Share-based compensation activity				509,675	280,011	6		2,949																			2,955
Share issuance from/to Deferred Compensation Plan				86,839	83,498						5,777		(5,777		)												—
Adjustment to non-controlling interest								32																(32		)	—
Preferred Share distributions																					(3,450		)				(3,450		)
Distributions declared ($0.30 per share)																					(54,265		)	(461		)	(54,726		)
BALANCE, June 30, 2015	4,000,000	$	40	179,898,121	748,045	$	1,799	$	3,317,751		$	11,996	$	(11,996	)	$	541,079	$	(5,651	)	$	(1,758,294	)	$	19,082		$	2,115,806

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, 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 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
Net loss																(20		)							(51		)	(71		)
Other comprehensive loss																			(3,110		)				(35		)	(3,145		)
Equity issuance costs								(60		)																		(60		)
Share-based compensation activity				279,913		5		3,612								12												3,629
Share issuance from/to Deferred Compensation Plan				79,077	74,808			(90		)	896		(896		)													(90		)
Adjustment to non-controlling interest								12																	(12		)	—
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

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,
	2015			2014
Cash flows from operating activities:
Net income (loss)	$	11,652		$	(71	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization	102,041			105,157
Amortization of deferred financing costs	2,367			2,386
Amortization of debt discount/(premium), net	(318		)	(324		)
Amortization of stock compensation costs	3,568			3,752
Shares used for employee taxes upon vesting of share awards	(2,056		)	(1,266		)
Straight-line rent income	(11,483		)	(7,183		)
Amortization of acquired above (below) market leases, net	(2,633		)	(3,698		)
Straight-line ground rent expense	44			44
Provision for doubtful accounts	704			1,272
Loss on real estate venture transactions	—			417
Net gain on sale of interests in real estate	(10,590		)	(2,087		)
Net gain from remeasurement of investment in a real estate venture	(758		)	(458		)
Provision for impairment on assets held for sale/sold	2,508			—
Real Estate Venture (income) loss and cash distributions	1,197			558
Deferred financing obligation	(612		)	(590		)
Changes in assets and liabilities:
Accounts receivable	(390		)	(6,328		)
Other assets	(1,313		)	1,462
Accounts payable and accrued expenses	(2,261		)	(2,815		)
Deferred income, gains and rent	(3,991		)	(116		)
Other liabilities	941			129
Net cash from operating activities	88,617			90,241
Cash flows from investing activities:
Acquisition of properties	(120,379		)	(12,405		)
Acquisition of property - 1031 exchange funds applied	(62,812		)	—
Sale of properties	80,268			40,149
Sale of property - 1031 exchange funds held in escrow	62,800			—
Proceeds from repayment of mortgage notes receivable	88,000			2,800
Capital expenditures for tenant improvements	(39,693		)	(58,035		)
Capital expenditures for redevelopments	(21,844		)	(4,773		)
Capital expenditures for developments	(83,628		)	(19,270		)
Advances for purchase of tenant assets, net of repayments	(3,003		)	16
Investment in unconsolidated Real Estate Ventures	(49,139		)	(3,095		)
Deposits for real estate	(2,935		)	—
Escrowed cash	2,113			1,758
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income	5,774			5,329
Leasing costs	(10,892		)	(13,862		)
Net cash used in investing activities	(155,370		)	(61,388		)
Cash flows from financing activities:
Repayments of mortgage notes payable	(7,046		)	(6,647		)
Debt financing costs paid	(2,941		)	(35		)
Proceeds from the exercise of stock options	127			709
Partner contribution to consolidated real estate venture	1,025			—
Distributions paid to shareholders	(57,471		)	(50,710		)
Distributions to noncontrolling interest	(461		)	(541		)
Net cash used in financing activities	(66,767		)	(57,224		)
Decrease in cash and cash equivalents	(133,520		)	(28,371		)
Cash and cash equivalents at beginning of period	257,502			263,207
Cash and cash equivalents at end of period	$	123,982		$	234,836

Supplemental disclosure:
Cash paid for interest, net of capitalized interest during the six months ended June 30, 2015 and 2014 of $5,623 and $2,726, respectively	$	63,239		$	66,869



Supplemental disclosure of non-cash activity:
Change in investments in joint venture related to non-cash disposition of property	—		(5,897	)
Change in real estate investments related to non-cash property acquisition	(67,261	)	—
Change in investments in joint venture related to non-cash property acquisition	67,261		—
Change in receivable from settlement of acquisitions	—		619
Change in other liabilities from contingent consideration related to a property acquisition	1,585		—
Change in operating real estate from contingent consideration related to a property acquisition	(1,585	)	—
Change in capital expenditures financed through accounts payable at period end	(4,142	)	(639	)
Change in capital expenditures financed through retention payable at period end	5,415		1,188
Change in unfunded tenant allowance	—		(193	)

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

BRANDYWINE OPERATING PARTNERSHIP, L.P.

CONSOLIDATED BALANCE SHEETS

(in thousands, except unit and per unit information)



	June 30, 2015			December 31, 2014
	(unaudited)
ASSETS
Real estate investments:
Operating properties	$	4,700,839		$	4,603,692
Accumulated depreciation	(1,088,681		)	(1,067,829		)
Operating real estate investments, net	3,612,158			3,535,863
Construction-in-progress	263,772			201,360
Land inventory	119,995			90,603
Total real estate investments, net	3,995,925			3,827,826
Cash and cash equivalents	123,982			257,502
Accounts receivable, net	22,294			18,757
Accrued rent receivable, net	138,905			134,051
Assets held for sale, net	—			18,295
Investment in Real Estate Ventures, at equity	201,034			225,004
Deferred costs, net	126,567			125,224
Intangible assets, net	137,290			99,403
Mortgage note receivable	—			88,000
Other assets	68,313			65,111
Total assets	$	4,814,310		$	4,859,173
LIABILITIES AND PARTNERS' EQUITY
Mortgage notes payable	$	646,512		$	654,590
Unsecured term loans	200,000			200,000
Unsecured senior notes, net of discounts	1,597,267			1,596,718
Accounts payable and accrued expenses	98,897			96,046
Distributions payable	29,021			28,871
Deferred income, gains and rent	54,595			59,452
Acquired lease intangibles, net	31,565			26,010
Other liabilities	40,647			37,558
Liabilities related to assets held for sale	—			602
Total liabilities	2,698,504			2,699,847
Commitments and contingencies (Note 12)
Redeemable limited partnership units at redemption value; 1,535,102 issued and outstanding in 2015 and 2014	22,727			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, 179,898,121 and 179,293,160 units issued and outstanding in 2015 and 2014, respectively	2,000,257			2,041,902
Accumulated other comprehensive loss	(6,058		)	(5,007		)
Total Brandywine Operating Partnership, L.P.’s equity	2,091,049			2,133,745
Non-controlling interest - consolidated real estate ventures	2,030			1,010
Total partners’ equity	2,093,079			2,134,755

Total liabilities and partners’ equity	$	4,814,310		$	4,859,173

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,
	2015			2014			2015			2014
Revenue:
Rents	$	119,127		$	121,622		$	239,537		$	243,293
Tenant reimbursements	19,799			20,502			42,453			43,962
Termination fees	828			3,349			1,464			5,552
Third party management fees, labor reimbursement and leasing	4,659			4,187			8,531			8,337
Other	1,235			840			4,069			1,470
Total revenue	145,648			150,500			296,054			302,614
Operating expenses:
Property operating expenses	42,704			43,136			89,281			89,937
Real estate taxes	11,968			12,841			24,513			26,298
Third party management expenses	1,677			1,730			3,253			3,446
Depreciation and amortization	50,930			52,587			102,041			105,157
General & administrative expenses	6,791			6,005			15,427			14,186
Total operating expenses	114,070			116,299			234,515			239,024
Operating income	31,578			34,201			61,539			63,590
Other income (expense):
Interest income	313			385			1,063			770
Interest expense	(27,895		)	(31,512		)	(56,071		)	(63,356		)
Interest expense — amortization of deferred financing costs	(1,288		)	(1,197		)	(2,367		)	(2,386		)
Interest expense — financing obligation	(324		)	(316		)	(610		)	(588		)
Equity in loss of Real Estate Ventures	(873		)	(489		)	(742		)	(247		)
Net gain on disposition of real estate	1,571			—			10,590			—
Net gain (loss) on sale of undepreciated real estate	—			(3		)	—			1,184
Net gain from remeasurement of investments in real estate ventures	758			458			758			458
Loss on real estate venture transactions	—			(282		)	—			(417		)
Provision for impairment on assets held for sale/sold	(782		)	—			(2,508		)	—
Income (Loss) from continuing operations	3,058			1,245			11,652			(992		)
Discontinued operations:
Income from discontinued operations	—			26			—			18
Net gain on disposition of discontinued operations	—			903			—			903
Total discontinued operations	—			929			—			921
Net income (loss)	3,058			2,174			11,652			(71		)
Net loss attributable to non-controlling interests	5			24			5			12
Net income (loss) attributable to Brandywine Operating Partnership	3,063			2,198			11,657			(59		)
Distribution to Preferred Units	(1,725		)	(1,725		)	(3,450		)	(3,450		)
Amount allocated to unvested restricted unitholders	(76		)	(83		)	(177		)	(186		)
Net income (loss) attributable to Common Partnership Unitholders of Brandywine Operating Partnership, L.P.	$	1,262		$	390		$	8,030		$	(3,695	)
Basic income (loss) per Common Partnership Unit:
Continuing operations	$	0.01		$	—		$	0.04		$	(0.03	)
Discontinued operations	—			—			—			0.01
	$	0.01		$	—		$	0.04		$	(0.02	)
Diluted income (loss) per Common Partnership Unit:
Continuing operations	$	0.01		$	—		$	0.04		$	(0.03	)
Discontinued operations	—			—			—			0.01
	$	0.01		$	—		$	0.04		$	(0.02	)
Basic weighted average common partnership units outstanding	181,395,386			158,801,087			181,247,530			158,680,095
Diluted weighted average common partnership units outstanding	182,073,989			158,801,087			182,134,367			158,680,095
Net income (loss) attributable to Brandywine Operating Partnership, L.P.
Total continuing operations	$	3,063		$	1,269		$	11,657		$	(980	)
Total discontinued operations	—			929			—			921
Net income (loss)	$	3,063		$	2,198		$	11,657		$	(59	)

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,
	2015		2014			2015			2014
Net income (loss)	$	3,058	$	2,174		$	11,652		$	(71	)
Other comprehensive income (loss):
Unrealized gain (loss) on derivative financial instruments	1,494		(2,285		)	(1,169		)	(3,265		)
Reclassification of realized losses on derivative financial instruments to operations, net (1)	58		60			116			120
Total other comprehensive income (loss)	1,552		(2,225		)	(1,053		)	(3,145		)
Comprehensive income (loss) attributable to Brandywine Operating Partnership, L.P.	$	4,610	$	(51	)	$	10,599		$	(3,216	)

(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,
	2015			2014
Cash flows from operating activities:
Net income (loss)	$	11,652		$	(71	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization	102,041			105,157
Amortization of deferred financing costs	2,367			2,386
Amortization of debt discount/(premium), net	(318		)	(324		)
Amortization of stock compensation costs	3,568			3,752
Shares used for employee taxes upon vesting of share awards	(2,056		)	(1,266		)
Straight-line rent income	(11,483		)	(7,183		)
Amortization of acquired above (below) market leases, net	(2,633		)	(3,698		)
Straight-line ground rent expense	44			44
Provision for doubtful accounts	704			1,272
Loss on real estate venture transactions	—			417
Net gain on sale of interests in real estate	(10,590		)	(2,087		)
Loss on real estate venture formation
Net gain on remeasurement of investment in a real estate venture	(758		)	(458		)
Provision for impairment on assets held for sale	2,508			—
Real Estate Venture (income) loss and cash distributions	1,197			558
Deferred financing obligation	(612		)	(590		)
Changes in assets and liabilities:
Accounts receivable	(390		)	(6,328		)
Other assets	(1,313		)	1,462
Accounts payable and accrued expenses	(2,261		)	(2,815		)
Deferred income, gains and rent	(3,991		)	(116		)
Other liabilities	941			129
Net cash from operating activities	88,617			90,241
Cash flows from investing activities:
Acquisition of properties	(120,379		)	(12,405		)
Acquisition of property - 1031 exchange funds applied	(62,812		)	—
Sale of properties	80,268			40,149
Sale of property - 1031 exchange funds held in escrow	62,800			—
Proceeds from repayment of mortgage notes receivable	88,000			2,800
Capital expenditures for tenant improvements	(39,693		)	(58,035		)
Capital expenditures for redevelopments	(21,844		)	(4,773		)
Capital expenditures for developments	(83,628		)	(19,270		)
Advances for purchase of tenant assets, net of repayments	(3,003		)	16
Investment in unconsolidated Real Estate Ventures	(49,139		)	(3,095		)
Deposits for real estate	(2,935		)	—
Escrowed cash	2,113			1,758
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income	5,774			5,329
Leasing costs	(10,892		)	(13,862		)
Net cash used in investing activities	(155,370		)	(61,388		)
Cash flows from financing activities:
Repayments of mortgage notes payable	(7,046		)	(6,647		)
Debt financing costs paid	(2,941		)	(35		)
Proceeds from the exercise of stock options	127			709
Partner contribution to consolidated real estate venture	1,025			—
Distributions paid to preferred and common partnership unitholders	(57,932		)	(51,251		)
Net cash used in financing activities	(66,767		)	(57,224		)
Decrease in cash and cash equivalents	(133,520		)	(28,371		)
Cash and cash equivalents at beginning of period	257,502			263,207
Cash and cash equivalents at end of period	$	123,982		$	234,836

Supplemental disclosure:
Cash paid for interest, net of capitalized interest during the six months ended June 30, 2015 and 2014 of $5,623 and $2,726, respectively	$	63,239		$	66,869



Supplemental disclosure of non-cash activity:
Change in investments in joint venture related non-cash disposition of property	—		(5,897	)
Change in real estate investments related to non-cash property acquisition	(67,261	)	—
Change in investments in joint venture related non-cash acquisition of property	67,261		—
Change in receivable from settlement of acquisitions	—		619
Change in other liabilities from contingent consideration related to a property acquisition	1,585		—
Change in operating real estate from contingent consideration related to a property acquisition	(1,585	)	—
Change in capital expenditures financed through accounts payable at period end	(4,142	)	(639	)
Change in capital expenditures financed through retention payable at period end	5,415		1,188
Change in unfunded tenant allowance	—		(193	)

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, 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 June 30, 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 June 30, 2015, the Company owned 199 properties, consisting of 167 office properties, 20 industrial facilities, five mixed-use properties, one retail property (193 core properties), four development properties, one redevelopment property and one re-entitlement property (collectively, the “Properties”) containing an aggregate of approximately 25.2 million net rentable square feet. In addition, as of June 30, 2015, the Company owned economic interests in 18 unconsolidated real estate ventures that own properties containing an aggregate of approximately 5.6 million net rentable square feet (collectively, the “Real Estate Ventures”). As of June 30, 2015, the Company also owned 430 acres of undeveloped land, and held options to purchase approximately 63 additional acres of undeveloped land. As of June 30, 2015, the total potential development that these land parcels could support, under current zoning, entitlements or combination thereof, amounted to an estimated 7.2 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 June 30, 2015, the management company subsidiaries were managing properties containing an aggregate of approximately 33.0 million net rentable square feet, of which approximately 25.2 million net rentable square feet related to Properties owned by the Company and approximately 7.8 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 June 30, 2015, the results of its operations for the three and six-month periods ended June 30, 2015 and 2014 and its cash flows for the six-month periods ended June 30, 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

On July 9, 2015, the Financial Accounting Standards Board ("FASB") elected to defer the effective date of the revenue recognition standard issued in May 2014 by one year. Reporting entities may choose to adopt the standard as of the original effective date or for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Calendar year-end public entities are therefore required to apply the new revenue guidance beginning in their 2018 interim and annual financial statements. The Company has not yet determined the impact, if any, that the adoption of this guidance will have on its consolidated financial

statements. 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 for the Company's initial disclosure of this standard.

In April 2015, the 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. 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 June 30, 2015 and December 31, 2014, the gross carrying value of the Company’s Properties was as follows (in thousands):



	June 30, 2015		December 31, 2014
Land	$	677,644	$	669,635
Building and improvements	3,476,667		3,409,303
Tenant improvements	546,528		524,754
	4,700,839		4,603,692
Assets held for sale - real estate investments (a)	—		27,436
Total	$	4,700,839	$	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.

Acquisitions

On June 22, 2015, through a series of transactions with International Business Machines ("IBM"), the Company acquired the remaining 50.0% interest in Broadmoor Austin Associates, consisting of seven office buildings and the 66.0 acre underlying land parcel located in Austin, Texas, for an aggregate purchase price of $211.4 million. The office buildings contain 1,112,236 net rentable square feet of office space and were 100.0% occupied as of June 30, 2015. The Company funded the cost of the acquisition with an aggregate cash payment of $143.8 million, consisting of $81.0 million from available corporate funds and $62.8 million previously held in escrow related to a Section 1031 like-kind exchange. Part of the cash payment was used at closing to repay, at no repayment penalty, the remaining $51.2 million of secured debt. The Company incurred $0.2 million of acquisition related costs that are classified within general and administrative expenses.

The Company previously accounted for its 50.0% non-controlling interest in Broadmoor Austin Associates under the equity method of accounting. As a result of acquiring IBM's remaining 50.0% common interest in Broadmoor Austin Associates, the Company obtained control of Broadmoor Austin Associates and the Company's existing investment balance was remeasured based on fair value of the underlying properties acquired and the existing distribution provisions under the relevant partnership agreement. As a result, the Company recorded a $0.8 million gain on remeasurement.

The Company has treated its acquisition of the 50.0% ownership interest in Broadmoor Austin Associates as a business combination and allocated the purchase price to the tangible and intangible assets and liabilities. The Company utilized a number of sources in making estimates of fair values for purposes of allocating the purchase price to tangible and intangibles assets acquired and intangible liabilities assumed. As of June 30, 2015, the purchase price is preliminary and subject to change. The purchase price has been allocated as follows:



	June 22, 2015
Building, land and improvements	$	161,252
Land inventory	8,064
Intangible assets acquired (a)	50,637
Below market lease liabilities assumed (b)	(8,600		)
	$	211,353

Return of existing equity method investment	(67,261		)
Net working capital assumed	(271		)
Total cash payment at settlement	$	143,821


(a)	Weighted average amortization period of 4.0 years.


(b)	Weighted average amortization period of 1.5 years.

The unaudited pro forma information below summarizes the Company’s combined results of operations for the three and six-month periods ended June 30, 2015 and 2014, respectively, as though the acquisition of Broadmoor Austin Associates was completed on January 1, 2014. The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transaction had been completed as set forth above, nor do they purport to represent the Company’s results of operations for future periods (in thousands except for per share amounts).



	Three-month periods ended				Six-month periods ended
	June 30,				June 30,
	2015		2014		2015		2014
Pro forma revenue	$	148,677	$	153,893	$	302,323	$	309,771
Pro forma income from continuing operations	5,210		3,767		16,277		4,391
Pro forma net income available to common shareholders	3,407		2,907		12,590		1,727

Earnings (loss) per common share from continuing operations:
Basic -- as reported	$	0.01	$	0.01	$	0.06	$	(0.01	)
Basic -- as pro forma	$	0.03	$	0.02	$	0.09	$	0.03

Diluted -- as reported	$	0.01	$	0.01	$	0.06	$	(0.01	)
Diluted -- as pro forma	$	0.03	$	0.02	$	0.09	$	0.03

Earnings (loss) per common share:
Basic -- as reported	$	—	$	—	$	0.04	$	(0.02	)
Basic -- as pro forma	$	0.02	$	0.02	$	0.07	$	0.01

Diluted -- as reported	$	—	$	—	$	0.04	$	(0.02	)
Diluted -- as pro forma	$	0.02	$	0.02	$	0.07