e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
For the quarterly period ended June 30, 2007
or
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
For the transition period from to
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Commission file number
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001-9106 (Brandywine Realty Trust) |
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000-24407 (Brandywine Operating Partnership, L.P.) |
Brandywine Realty Trust
Brandywine Operating Partnership, L.P.
(Exact name of registrant as specified in its charter)
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MARYLAND (Brandywine Realty Trust)
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23-2413352 |
DELAWARE (Brandywine Operating Partnership L.P.)
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23-2862640 |
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(State or other jurisdiction of |
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Incorporation or organization)
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(I.R.S. Employer Identification No.) |
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555 East Lancaster Avenue |
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Radnor, Pennsylvania
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19087 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants 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.
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Brandywine Realty Trust
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Yes þ No o |
Brandywine Operating Partnership, L.P.
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Yes þ No o |
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a
non-accelerated filer. See definitions of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act.
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Brandywine Realty Trust
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Large accelerated filer þ Accelerated filer o Non-accelerated filer o |
Brandywine Operating Partnership, L.P.
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Large accelerated filer o Accelerated filer þ Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
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Brandywine Realty Trust
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Yes o No þ |
Brandywine Operating Partnership, L.P.
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Yes o No þ |
A total of 86,843,035 Common Shares of Beneficial Interest, par value $0.01 per share, were
outstanding as of August 1, 2007.
TABLE OF CONTENTS
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Page |
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PART I FINANCIAL INFORMATION |
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Brandywine Realty Trust |
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Financial Statements (unaudited) |
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Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
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3 |
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Consolidated Statements of Operations for the three- and six-month periods ended
June 30, 2007 and 2006
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4 |
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Consolidated Statements of Other Comprehensive Income for the three- and six-month
periods ended June 30, 2007 and 2006
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5 |
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Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2007
and June 30, 2006
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6 |
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Notes to Unaudited Consolidated Financial Statements
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7 |
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Brandywine Operating Partnership, L.P. |
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Financial Statements (unaudited) |
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Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
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34 |
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Consolidated Statements of Operations for the three- and six-month periods ended
June 30, 2007 and 2006
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35 |
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Consolidated Statements of Other Comprehensive Income for the three- and six-month
periods ended June 30, 2007 and 2006
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36 |
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Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2007
and June 30, 2006
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37 |
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Notes to Unaudited Consolidated Financial Statements
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38 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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64 |
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Quantitative and Qualitative Disclosures about Market Risk
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83 |
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Controls and Procedures
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83 |
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PART II OTHER INFORMATION |
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Legal Proceedings
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84 |
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Risk Factors
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84 |
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Unregistered Sales of Equity Securities and Use of Proceeds
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84 |
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Defaults Upon Senior Securities
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84 |
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Submission of Matters to a Vote of Security Holders
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84 |
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Other Information
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84 |
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Exhibits
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85 |
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Signatures
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86 |
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COMPUTATION OF EARNINGS BRANDYWINE REALTY TRUST |
COMPUTATION OF EARNINGS BRANDYWINE OPERATING PARTNERSHIP |
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER |
CERTIFICATION OF VICE PRESIDENT AND CHIEF FINANCIAL OFFICER |
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICEER |
CERTIFICATION OF VICE PRESIDENT AND CHIEF FINANCIAL OFFICER |
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER -- SECTION 906 |
CERTIFICATION OF VICE PRESIDENT AND CHIEF FINANCIAL OFFICER -- SECTION 906 |
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER -- SECTION 906 |
CERTIFICATION OF VICE PRESIDENT AND CHIEF FINANCIAL OFFICER -- SECTION 906 |
Filing Format
This combined Form 10-Q is being filed separately by Brandywine Realty Trust and Brandywine
Operating Partnership, L.P.
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share information)
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June 30, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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Real estate investments: |
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Operating properties |
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$ |
4,862,726 |
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$ |
4,927,305 |
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Accumulated depreciation |
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(554,417 |
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(515,698 |
) |
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Operating real estate investments, net |
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4,308,309 |
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4,411,607 |
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Development land and construction-in-progress |
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373,497 |
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328,119 |
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Total real estate invesmtents, net |
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4,681,806 |
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4,739,726 |
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Cash and cash equivalents |
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28,522 |
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25,379 |
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Cash escrowed with qualified intermediary (Note 3) |
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36,590 |
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Accounts receivable, net (Note 2) |
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16,972 |
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19,957 |
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Accrued rent receivable, net |
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77,922 |
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71,589 |
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Asset held for sale, net |
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126,016 |
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Investment in real estate ventures, at equity (Note 4) |
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72,748 |
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74,574 |
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Deferred costs, net (Note 5) |
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81,823 |
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73,708 |
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Intangible assets, net (Note 6) |
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239,469 |
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281,251 |
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Other assets |
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92,221 |
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96,818 |
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Total assets |
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$ |
5,328,073 |
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$ |
5,509,018 |
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LIABILITIES AND BENEFICIARIES EQUITY |
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Mortgage notes payable (Note 7) |
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$ |
757,145 |
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$ |
883,920 |
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Unsecured notes, net of discounts (Note 7) |
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2,208,070 |
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2,208,310 |
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Unsecured credit facility (Note 7) |
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210,000 |
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60,000 |
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Accounts payable and accrued expenses |
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79,473 |
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108,400 |
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Distributions payable |
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42,131 |
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42,760 |
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Tenant security deposits and deferred rents |
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59,429 |
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55,697 |
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Acquired below market leases, net (Note 6) |
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72,259 |
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92,527 |
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Other liabilities |
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12,682 |
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14,661 |
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Mortgage notes payable and other liabilities held for sale |
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20,826 |
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Total liabilities |
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3,441,189 |
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3,487,101 |
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Minority interest partners share of consolidated real estate ventures (Note 10) |
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34,428 |
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Minority interest LP units (Note 10) |
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85,829 |
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89,563 |
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Commitments and contingencies (Note 14 ) |
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Beneficiaries equity (Note 11): |
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Preferred Shares (shares authorized-20,000,000): |
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7.50% Series C Preferred Shares, $0.01 par value; issued and outstanding-
2,000,000 in 2007 and 2006 |
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20 |
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20 |
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7.375% Series D Preferred Shares, $0.01 par value; issued and outstanding-
2,300,000 in 2007 and 2006 |
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23 |
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23 |
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Common Shares of beneficial interest, $0.01 par value; shares authorized
200,000,000; issued and outstanding- 87,049,237 in 2007 and 88,327,041 in 2006 |
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872 |
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883 |
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Additional paid-in capital |
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2,275,319 |
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2,311,541 |
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Cumulative earnings |
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444,340 |
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423,764 |
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Accumulated other comprehensive income |
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1,322 |
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1,576 |
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Cumulative distributions |
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(920,841 |
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(839,881 |
) |
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Total beneficiaries equity |
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1,801,055 |
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1,897,926 |
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Total liabilities, minority interest and beneficiaries equity |
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$ |
5,328,073 |
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$ |
5,509,018 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share information)
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For the three-month periods |
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For the six-month periods |
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ended June 30, |
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ended June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenue: |
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Rents |
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$ |
138,597 |
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$ |
130,467 |
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$ |
276,537 |
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$ |
253,536 |
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Tenant reimbursements |
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21,016 |
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15,496 |
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41,839 |
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32,130 |
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Other |
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4,691 |
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4,466 |
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9,029 |
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8,681 |
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Total revenue |
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164,304 |
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150,429 |
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327,405 |
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294,347 |
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Operating Expenses: |
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Property operating expenses |
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45,965 |
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41,504 |
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91,170 |
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82,478 |
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Real estate taxes |
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16,435 |
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14,388 |
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32,462 |
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28,595 |
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Depreciation and amortization |
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58,227 |
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64,145 |
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120,274 |
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115,357 |
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Administrative expenses |
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6,993 |
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7,724 |
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14,262 |
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16,214 |
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Total operating expenses |
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127,620 |
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127,761 |
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258,168 |
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242,644 |
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Operating income |
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36,684 |
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22,668 |
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69,237 |
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51,703 |
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Other Income (Expense): |
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Interest income |
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1,603 |
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2,573 |
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2,390 |
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5,223 |
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Interest expense |
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(40,803 |
) |
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(41,596 |
) |
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(81,161 |
) |
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(81,974 |
) |
Interest expense Deferred financing costs |
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(1,065 |
) |
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(794 |
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(2,323 |
) |
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(1,273 |
) |
Equity in income of real estate ventures |
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4,504 |
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463 |
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5,258 |
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1,428 |
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Net gain on sale of interests in real estate |
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2,608 |
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2,608 |
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Income (loss) before minority interest |
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923 |
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(14,078 |
) |
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(6,599 |
) |
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(22,285 |
) |
Minority interest partners share of consolidated real estate ventures |
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8 |
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(17 |
) |
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(108 |
) |
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281 |
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Minority interest attributable to continuing operations LP units |
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46 |
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|
707 |
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|
457 |
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1,142 |
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Income (loss) from continuing operations |
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977 |
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(13,388 |
) |
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(6,250 |
) |
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(20,862 |
) |
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Discontinued operations: |
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Income from discontinued operations |
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1,093 |
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2,119 |
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2,869 |
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7,365 |
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Net (loss) gain on disposition of discontinued operations |
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(856 |
) |
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25,153 |
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Minority interest partners share of consolidated real estate ventures |
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(195 |
) |
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(382 |
) |
Minority interest attributable to discontinued operations LP units |
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(10 |
) |
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|
(92 |
) |
|
|
(1,196 |
) |
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|
(319 |
) |
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Income from discontinued operations |
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|
227 |
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|
|
1,832 |
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26,826 |
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6,664 |
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Net income (loss) |
|
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1,204 |
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(11,556 |
) |
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20,576 |
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|
|
(14,198 |
) |
Income allocated to Preferred Shares |
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(1,998 |
) |
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|
(1,998 |
) |
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(3,996 |
) |
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(3,996 |
) |
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Income (loss) allocated to Common Shares |
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$ |
(794 |
) |
|
$ |
(13,554 |
) |
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$ |
16,580 |
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$ |
(18,194 |
) |
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Basic earnings (loss) per Common Share: |
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Continuing operations |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.28 |
) |
Discontinued operations |
|
|
0.00 |
|
|
|
0.02 |
|
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|
0.31 |
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|
|
0.07 |
|
|
|
|
|
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|
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|
|
$ |
(0.01 |
) |
|
$ |
(0.15 |
) |
|
$ |
0.19 |
|
|
$ |
(0.20 |
) |
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Diluted earnings (loss) per Common Share: |
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|
|
|
|
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|
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|
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Continuing operations |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.28 |
) |
Discontinued operations |
|
|
0.00 |
|
|
|
0.02 |
|
|
|
0.30 |
|
|
|
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.01 |
) |
|
$ |
(0.15 |
) |
|
$ |
0.19 |
|
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per Common Share |
|
$ |
0.44 |
|
|
$ |
0.44 |
|
|
$ |
0.88 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
87,080,785 |
|
|
|
90,540,237 |
|
|
|
87,680,773 |
|
|
|
89,923,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
87,080,785 |
|
|
|
90,540,237 |
|
|
|
88,298,521 |
|
|
|
89,923,528 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods |
|
|
For the six-month periods |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income (loss) |
|
$ |
1,204 |
|
|
$ |
(11,556 |
) |
|
$ |
20,576 |
|
|
$ |
(14,198 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative financial instruments |
|
|
(1,872 |
) |
|
|
605 |
|
|
|
(422 |
) |
|
|
2,363 |
|
Less: minority interest consolidated real estate venture partners share of
unrealized gain (loss) on derivative financial instruments |
|
|
|
|
|
|
(296 |
) |
|
|
|
|
|
|
(809 |
) |
Settlement of forward starting swaps |
|
|
1,148 |
|
|
|
|
|
|
|
1,148 |
|
|
|
3,266 |
|
Reclassification of realized (gains)/losses on derivative financial
instruments to operations, net |
|
|
(394 |
) |
|
|
9 |
|
|
|
(385 |
) |
|
|
105 |
|
Unrealized gain (loss) on available-for-sale securities |
|
|
13 |
|
|
|
(184 |
) |
|
|
(595 |
) |
|
|
(776 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(1,105 |
) |
|
|
134 |
|
|
|
(254 |
) |
|
|
4,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
99 |
|
|
$ |
(11,422 |
) |
|
$ |
20,322 |
|
|
$ |
(10,049 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six-month periods |
|
|
|
ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
20,576 |
|
|
$ |
(14,198 |
) |
Adjustments to reconcile net income (loss) to net cash from
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
90,405 |
|
|
|
95,051 |
|
Amortization: |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
2,323 |
|
|
|
1,274 |
|
Deferred leasing costs |
|
|
7,731 |
|
|
|
5,184 |
|
Acquired above (below) market leases, net |
|
|
(6,304 |
) |
|
|
(3,907 |
) |
Acquired lease intangibles |
|
|
26,700 |
|
|
|
33,700 |
|
Deferred compensation costs |
|
|
2,559 |
|
|
|
1,445 |
|
Straight-line rent |
|
|
(14,775 |
) |
|
|
(15,916 |
) |
Provision for doubtful accounts |
|
|
500 |
|
|
|
1,956 |
|
Real estate venture income in excess of distributions |
|
|
(104 |
) |
|
|
(267 |
) |
Net gain on sale of interests in real estate |
|
|
(25,153 |
) |
|
|
(2,608 |
) |
Minority interest (expense)/income |
|
|
847 |
|
|
|
(722 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
3,916 |
|
|
|
5,937 |
|
Other assets |
|
|
1,366 |
|
|
|
6,471 |
|
Accounts payable and accrued expenses |
|
|
(6,151 |
) |
|
|
7,451 |
|
Tenant security deposits and deferred rents |
|
|
5,665 |
|
|
|
9,976 |
|
Other liabilities |
|
|
(10,148 |
) |
|
|
(6,053 |
) |
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
99,953 |
|
|
|
124,774 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of Prentiss |
|
|
|
|
|
|
(935,856 |
) |
Acquisition of properties |
|
|
|
|
|
|
(50,114 |
) |
Acquisition of minority interest partners share of consolidated real estate venture |
|
|
(64,174 |
) |
|
|
|
|
Sales of properties, net |
|
|
222,592 |
|
|
|
144,006 |
|
Capital expenditures |
|
|
(133,264 |
) |
|
|
(102,851 |
) |
Investment in unconsolidated real estate ventures |
|
|
(523 |
) |
|
|
(502 |
) |
Cash distributions from unconsolidated real estate ventures
in excess of equity in income |
|
|
2,169 |
|
|
|
2,215 |
|
Leasing costs |
|
|
(11,499 |
) |
|
|
(12,114 |
) |
|
|
|
|
|
|
|
Net cash from investing activities |
|
|
15,301 |
|
|
|
(955,216 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
620,875 |
|
|
|
310,000 |
|
Repayments of Credit Facility borrowings |
|
|
(470,875 |
) |
|
|
(205,000 |
) |
Proceeds from mortgage notes payable |
|
|
|
|
|
|
20,520 |
|
Repayments of mortgage notes payable |
|
|
(126,780 |
) |
|
|
(21,198 |
) |
Proceeds from term loan |
|
|
|
|
|
|
750,000 |
|
Repayments of term loan |
|
|
|
|
|
|
(750,000 |
) |
Proceeds from unsecured notes |
|
|
299,644 |
|
|
|
847,818 |
|
Repayments of unsecured notes |
|
|
(299,866 |
) |
|
|
|
|
Proceeds from forward starting swap termination |
|
|
1,148 |
|
|
|
3,266 |
|
Repayments on employee stock loans |
|
|
|
|
|
|
35 |
|
Debt financing costs |
|
|
(3,776 |
) |
|
|
(6,987 |
) |
Exercise of stock options |
|
|
6,221 |
|
|
|
8,011 |
|
Repurchases of Common Shares |
|
|
(53,524 |
) |
|
|
(34,481 |
) |
Distributions paid to shareholders |
|
|
(81,716 |
) |
|
|
(68,306 |
) |
Distributions to minority interest holders |
|
|
(3,462 |
) |
|
|
(4,033 |
) |
|
|
|
|
|
|
|
Net cash from financing activities |
|
|
(112,111 |
) |
|
|
849,645 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
3,143 |
|
|
|
19,203 |
|
Cash and cash equivalents at beginning of period |
|
|
25,379 |
|
|
|
7,174 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
28,522 |
|
|
$ |
26,377 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest of $8,217 in 2007 and $4,916 in 2006 |
|
$ |
92,541 |
|
|
$ |
73,933 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
|
|
|
|
Common shares issued in the Prentiss acquisition |
|
|
|
|
|
|
1,022,173 |
|
Operating Partnership units issued in Prentiss acquisitions |
|
|
|
|
|
|
64,103 |
|
Operating Partnership units issued in property acquistions |
|
|
|
|
|
|
13,819 |
|
Cash escrowed with qualified intermediary (Note 3) |
|
|
109,102 |
|
|
|
|
|
Acquisition of property using cash escrowed with qualified intermediary |
|
|
(72,511 |
) |
|
|
|
|
Debt, minority interest and other liabilities, net, assumed in the Prentiss acquisition |
|
|
|
|
|
|
679,520 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
1. THE COMPANY
Brandywine Realty Trust, a Maryland real estate investment trust (REIT), is a self-administered
and self-managed real estate investment trust active in acquiring, developing, redeveloping,
leasing and managing office and industrial properties. Brandywine Realty Trust owns its assets and
conducts its operations through Brandywine Operating Partnership, L.P. a Delaware limited
partnership (the Operating Partnership) and subsidiaries of the Operating Partnership.
Brandywine Realty Trust, the Operating Partnership and their consolidated subsidiaries are
collectively referred to below as the Company. The Companys common shares of beneficial
interest are publicly traded on the New York Stock Exchange under the ticker symbol BDN.
As of June 30, 2007, the Company owned 238 office properties, 23 industrial facilities and one
mixed-use property (collectively, the Properties) containing an aggregate of approximately 25.7
million net rentable square feet. The Company also has six properties under development and 10
properties under redevelopment containing an aggregate 2.4 million net rentable square feet. As of
June 30, 2007, the Company consolidates three office properties owned by real estate ventures
containing 0.4 million net rentable square feet. Therefore, the Company consolidates 281
properties with an aggregate of 28.5 million net rentable square feet. As of June 30, 2007, the
Company owned economic interests in 12 unconsolidated real estate ventures that contain
approximately 2.8 million net rentable square feet (collectively, the Real Estate Ventures). The
Properties and the properties owned by the Real Estate Ventures are located in and surrounding
Philadelphia, PA, Wilmington, DE, Southern and Central New Jersey, Richmond, VA, Metropolitan
Washington, D.C., Austin, TX and Oakland and San Diego, CA.
Brandywine Realty Trust is the sole general partner of the Operating Partnership and, as of
June 30, 2007, owned a 95.7% interest in the Operating Partnership. The Company conducts its
third-party real estate management services business primarily through four management companies
(collectively, the Management Companies): Brandywine Realty Services Corporation (BRSCO), BTRS,
Inc. (BTRS), Brandywine Properties I Limited, Inc. (BPI) and Brandywine Properties Management,
L.P. (BPM). Each of BRSCO, BTRS and BPI is a taxable REIT subsidiary. The Operating Partnership
owns a 95% interest in BRSCO and the remaining 5% interest is owned by a partnership comprised of a
current executive and former executive of the Company, each of whom is a member of the Companys
Board of Trustees. The Operating Partnership owns, directly and indirectly, 100% of each of BTRS,
BPI and BPM.
As of June 30, 2007 the Management Companies were managing properties containing an aggregate of
approximately 42.1 million net rentable square feet, of which approximately 28.1 million net
rentable square feet related to Properties owned by the Partnership and approximately 14.0 million
net rentable square feet related to properties owned by third parties and certain Real Estate
Ventures. Unless otherwise indicated, all references to square feet represent net rentable area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared by the Company without audit except as to
the balance sheet as of December 31, 2006, which has been derived from audited data, pursuant to
the rules and regulations of the U.S. Securities and Exchange Commission. 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 have been condensed or
omitted pursuant to such rules and regulations, although the Company believes that the included
disclosures are adequate to make the information presented not misleading. 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, 2007, the results of its operations for the
three- and six-month periods ended June 30, 2007 and 2006 and its cash flows for the six-month
periods ended June 30, 2007 and 2006 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 Companys consolidated financial
statements and footnotes
7
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
included in the Companys 2006 Annual Report on Form 10-K. Certain prior period amounts have been
reclassified to conform to the current period presentation.
Principles of Consolidation
When the Company obtains an economic interest in an entity, the Company evaluates the entity to
determine if the entity is deemed a variable interest entity (VIE), and if the Company is deemed
to be the primary beneficiary, in accordance with FASB Interpretation No. 46R, Consolidation of
Variable Interest Entities (FIN 46R). When an entity is not deemed to be a VIE, the Company
considers the provisions of EITF 04-05, Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners
Have Certain Rights (EITF 04-05). The Company consolidates (i) entities that are VIEs and of
which the Company is deemed to be the primary beneficiary and (ii) entities that are non-VIEs which
the Company controls and the limited partners do not have the ability to dissolve the entity or
remove the Company without cause nor substantive participating rights. Entities that the Company
accounts for under the equity method (i.e. at cost, increased or decreased by the Companys share
of earnings or losses, less distributions) include (i) entities that are VIEs and of which the
Company is not deemed to be the primary beneficiary (ii) entities that are non-VIEs which the
Company does not control, but over which the Company has the ability to exercise significant
influence and (iii) entities that are non-VIEs that the Company controls through its general
partner status, but the limited partners in the entity have the substantive ability to dissolve the
entity or remove the Company without cause or have substantive participating rights. The Company
will reconsider its determination of whether an entity is a VIE and who the primary beneficiary is,
and whether or not the limited partners in an entity have substantive rights, if certain events
occur that are likely to cause a change in the original determinations. The portion of these
entities not owned by the Company is presented as minority interest as of and during the periods
consolidated. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Management makes significant
estimates regarding revenue, impairment of long-lived assets, allowance for doubtful accounts and
deferred costs.
Operating Properties
Operating properties are carried at historical cost less accumulated depreciation and impairment
losses when applicable. The cost of operating properties reflects their purchase price or
development cost. Costs incurred for the acquisition and renovation of an operating property are
capitalized to the Companys investment in that property. Ordinary repairs and maintenance are
expensed as incurred; major replacements and betterments, which improve or extend the life of the
asset, are capitalized and depreciated over their estimated useful lives. Fully-depreciated assets
are removed from the accounts.
Purchase Price Allocation
The Company allocates the purchase price of properties to net tangible and identified intangible
assets acquired based on fair values. Above-market and below-market in-place lease values for
acquired properties are recorded based on the present value (using an interest rate which reflects
the risks associated with the leases acquired) of the difference between (i) the contractual
amounts to be paid pursuant to the in-place leases and (ii) the Companys estimate of the fair
market lease rates for the corresponding in-place leases, measured over a period equal to the
remaining non-cancelable term of the lease. Capitalized above-market lease values are amortized as
a reduction of rental income over the remaining non-cancelable terms of the respective leases.
Capitalized below-market lease values are amortized as an
8
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
increase to rental income over the remaining non-cancelable terms of the respective leases,
including any fixed-rate renewal periods.
Other intangible assets also include amounts representing the value of tenant relationships and
in-place leases based on the Companys evaluation of the specific characteristics of each tenants
lease and the Companys overall relationship with the respective tenant. The Company estimates the
cost to execute leases with terms similar to the remaining lease terms of the in-place leases,
including leasing commissions, legal and other related expenses. This intangible asset is amortized
to expense over the remaining term of the respective leases. Company estimates of value are made
using methods similar to those used by independent appraisers or by using independent appraisals.
Factors considered by the Company in this analysis include an estimate of the carrying costs during
the expected lease-up periods considering current market conditions and costs to execute similar
leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other
operating expenses and estimates of lost rentals at market rates during the expected lease-up
periods, which primarily range from three to twelve months. The Company also considers information
obtained about each property as a result of its pre-acquisition due diligence, marketing and
leasing activities in estimating the fair value of the tangible and intangible assets acquired.
The Company also uses the information obtained as a result of its pre-acquisition due diligence as
part of its consideration of FIN 47, and when necessary, will record a conditional asset retirement
obligation as part of its purchase price.
Characteristics considered by the Company in allocating value to its tenant relationships include
the nature and extent of the Companys business relationship with the tenant, growth prospects for
developing new business with the tenant, the tenants credit quality and expectations of lease
renewals, among other factors. The value of tenant relationship intangibles is amortized over the
remaining initial lease term and expected renewals, but in no event longer than the remaining
depreciable life of the building. The value of in-place leases is amortized over the remaining
non-cancelable term of the respective leases and any fixed-rate renewal periods.
In the event that a tenant terminates its lease, the unamortized portion of each intangible
including in-place lease values and tenant relationship values would be charged to expense and
market rate adjustments would be recorded to revenue.
Revenue Recognition
Rental revenue is recognized on the straight-line basis from the later of the date of the
commencement of the lease or the date of acquisition of the property subject to existing leases,
which averages minimum rents over the terms of the leases. The cumulative difference between lease
revenue recognized under this method and contractual lease payment terms is recorded as accrued
rent receivable on the accompanying balance sheets. This straight-line rent adjustment increased
revenue by approximately $5.6 million and $12.6 million for the three- and six-month periods ended
June 30, 2007 and approximately $8.1 million and $15.9 million for the three- and six-month periods
ended June 30, 2006. Deferred rents on the balance sheet represent rental revenue received prior
to their due dates and tenant reimbursements of certain leasehold improvements that will remain the
Companys property at the end of the tenants lease term. The amortization of the leasehold
improvement reimbursement is calculated on a straight-line basis over the term of the tenants
lease and is a component of straight-line rental income and increased revenue by $0.5 million and
$2.1 million for the three- and six-month periods ended June 30, 2007 and approximately $0.1
million for the three- and six-month periods ended June 30, 2006. Leases also typically provide
for tenant reimbursement of a portion of common area maintenance and other operating expenses to
the extent that a tenants pro rata share of expenses exceeds a base year level set in the lease.
Tenant receivables and accrued rent receivables are carried net of the allowances for doubtful
accounts of $7.5 million as of June 30, 2007 and $9.3 million as of December 31, 2006. The
allowance is based on managements evaluation of the collectability of receivables, taking into
account tenant specific considerations as well as the overall credit of the tenant portfolio.
Other income is recorded when earned and is primarily comprised of third party leasing commissions,
third party management fees, termination fees received from tenants and bankruptcy settlement fees.
Other income includes termination fees of $0.5 million and $1.8 million for the three- and
six-month periods ended June 30, 2007 and $1.3 million and $1.9 million for the three- and
six-month periods ended June 30, 2006.
9
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Stock-Based Compensation Plans
The Company maintains shareholder-approved equity incentive plans. The Compensation Committee of
the Companys Board of Trustees authorizes awards under these plans. In May 2007, the Companys
shareholders approved an amendment to the Companys Amended and Restated 1997 Long-Term Incentive
Plan (the 1997 Plan). The amendment provided for the merger of the Prentiss Properties Trust 2005
Share Incentive Plan (the Prentiss 2005 Plan) with and into the 1997 Plan, thereby transferring
into the 1997 Plan all of the shares that remained available for award under the Prentiss 2005
Plan. The Company had previously assumed the Prentiss 2005 Plan, together with other Prentiss
incentive plans, as part of the Companys January 2006 acquisition of Prentiss. The 1997 Plan
reserves 500,000 common shares solely for awards under options and share appreciation rights that
have an exercise or strike price at least equal to the market price of the common shares on the
date of award and the remaining shares under the 1997 Plan are available for any type of award,
including restricted share and performance share awards and options. Incentive stock options may
not be granted with an exercise price that is lower than the market price of the common shares on
the grant date. All options awarded by the Company to date are non-qualified stock options that
generally had an initial vesting schedule that ranged from two to ten years. As of June 30, 2007,
approximately 4.1 million common shares remained available for future award under the 1997 Plan
(including the 500,000 shares that are limited to option awards as described above, and without
giving effect to any shares that would become available for awards if and to the extent that
outstanding awards lapse, expire or are forfeited).
On January 1, 2002, the Company began to expense the fair value of stock-based compensation awards
granted subsequent to January 1, 2002 over the applicable vesting period as a component of general
and administrative expenses in the Companys consolidated Statements of Operations. The Company
recognized stock-based compensation expense of $1.3 million and $2.6 million during the three- and
six-month periods ended June 30, 2007 and $0.7 million and $1.4 million during the three- and
six-month periods ended June 30, 2006, respectively.
Accounting for Derivative Instruments and Hedging Activities
The Company accounts for its derivative instruments and hedging activities under SFAS No. 133
(SFAS 133), Accounting for Derivative Instruments and Hedging Activities, and its corresponding
amendments under SFAS No. 138, Accounting for Certain Derivative Instruments and Hedging Activities
An Amendment of SFAS 133. SFAS 133 requires the Company to measure every derivative instrument
(including certain derivative instruments embedded in other contracts) at fair value and record
them in the balance sheet as either an asset or liability. For derivatives designated as fair
value hedges, the changes in fair value of both the derivative instrument and the hedged item are
recorded in earnings. For derivatives designated as cash flow hedges, the effective portions of
changes in the fair value of the derivative are reported in other comprehensive income. Changes in
fair value of derivative instruments and ineffective portions of hedges are recognized in earnings
in the current period. For the three-month and six-month periods ended June 30, 2007 and 2006, the
Company was not party to any derivative contract designated as a fair value hedge and there are no
ineffective portions of our cash flow hedges.
The Company actively manages its ratio of fixed-to-floating rate debt. To manage its fixed and
floating rate debt in a cost-effective manner, the Company, from time to time, may enter into
interest rate swap agreements as cash flow hedges, under which it agrees to exchange various
combinations of fixed and/or variable interest rates based on agreed upon notional amounts. As of
June 30, 2007, there were no agreements in place.
Income Taxes
Brandywine Realty Trust has elected to be treated as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the Code). In addition, Brandywine Realty Trust has
several subsidiary REITs. In order to maintain their qualification as REITs, Brandywine Realty
Trust and each of its REIT subsidiaries are required to, among other things, distribute at least
90% of their REIT taxable income to its stockholders and meet certain tests regarding the nature of
its income and assets. As REITs, Brandywine Realty Trust and its REIT subsidiaries are not
subject to federal income tax with respect to the portion of its income that meets certain criteria
and is distributed
10
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
annually to the stockholders. Accordingly, no provision for federal income taxes is included in
the accompanying consolidated financial statements with respect to the operations of these
operations. Brandywine Realty Trust and its REIT subsidiaries intend to continue to operate in a
manner that allows them to continue to meet the requirements for taxation as REITs. Many of these
requirements, however, are highly technical and complex. If Brandywine Realty Trust or one of its
REIT subsidiaries were to fail to meet these requirements, Brandywine Realty Trust would be subject
to federal income tax. Brandywine Realty Trust is subject to certain state and local taxes.
Provision for such taxes has been included in general and administrative expenses in Brandywine
Realty Trusts Consolidated Statements of Operations and Comprehensive Income.
Brandywine Realty Trust may elect to treat one or more of its subsidiaries as a taxable REIT
subsidiary (TRS). In general, a TRS of Brandywine Realty Trust may perform additional services
for tenants of Brandywine Realty Trust and generally may engage in any real estate or non-real
estate related business. A TRS is subject to corporate federal income tax. Brandywine Realty
Trust has elected to treat certain of its corporate subsidiaries as TRSs, these entities provide
third party property management services and certain services to tenants that could not otherwise
be provided.
New Pronouncements
In June 2007, the Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants (AICPA) issued Statement of Position 07-1, Clarification of the Scope of the
Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity
Method Investors for Investments in Investment Companies (SOP 07-1). SOP 07-1 addresses when the
accounting principles of the AICPA Audit and Accounting Guide Investment Companies must be
applied by an entity and whether investment company accounting must be retained by a parent company
in consolidation or by an investor in the application of the equity method of accounting. In
addition, SOP 07-1 includes certain disclosure requirements for parent companies and equity method
investors in investment companies that retain investment company accounting in the parent companys
consolidated financial statements or the financial statements of an equity method investor. SOP
07-1 is effective for the fiscal year beginning January 1, 2008. The Company has determined that it
is not an investment company under the provisions of SOP 07-1 and does not expect to retain
specialized investment company accounting for any of its consolidated or equity method investments
where the investment entity may be deemed an investment company. Accordingly, the Company does not
expect the adoption of SOP 07-1 to have a material impact on its financial position and results of
operations.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159), which gives entities the option to measure eligible
financial assets, financial liabilities and firm commitments at fair value on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value
under other accounting standards. The election to use the fair value option is available when an
entity first recognizes a financial asset or financial liability or upon entering into a firm
commitment. Subsequent changes (i.e., unrealized gains and losses) in fair value must be recorded
in earnings. Additionally, SFAS 159 allows for a one-time election for existing positions upon
adoption, with the transition adjustment recorded to beginning retained earnings. This Statement
is effective for fiscal years beginning after November 15, 2007. The Company is currently
assessing the potential impact that the adoption of SFAS 159 will have on its financial position
and results of operations.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS No.
157). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This
statement clarifies the principle that fair value should be based on the assumptions that market
participants would use when pricing the asset or liability. SFAS No. 157 establishes a fair value
hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority
to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities
to be measured at fair value. SFAS No. 157 also provides for certain disclosure requirements,
including, but not limited to, the valuation techniques used to measure fair value and a discussion
of changes in valuation techniques, if any, during the period. This statement is effective in
fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact and
believes that the adoption of this standard on January 1, 2008 will not have a material effect on
its financial position and results of operations.
11
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements and prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on description, classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Company adopted the provisions of FIN 48 on January 1, 2007. As a
result of the implementation of FIN 48, the Company recognized no material adjustments regarding
its tax accounting treatment. The Company expects to recognize interest and penalties, to the
extent incurred related to uncertain tax positions, if any, as income tax expense, which would be
included in general and administrative expense.
3. REAL ESTATE INVESTMENTS
As of June 30, 2007 and December 31, 2006, the gross carrying value of the Companys operating
properties was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
December 31, 2006 |
|
Land |
|
$ |
738,193 |
|
|
$ |
756,400 |
|
Building and improvements |
|
|
3,725,268 |
|
|
|
3,807,040 |
|
Tenant improvements |
|
|
399,265 |
|
|
|
363,865 |
|
|
|
|
|
|
|
|
|
|
$ |
4,862,726 |
|
|
$ |
4,927,305 |
|
|
|
|
|
|
|
|
Acquisitions and Dispositions
The Companys acquisitions are accounted for by the purchase method. The results of each acquired
property are included in the Companys results of operations from their respective purchase dates.
2007
On January 18, 2007, the Company sold Norriton Office Center, an office property located in
East Norriton, Pennsylvania containing 73,394 net rentable square feet, for a sales price of $7.8
million.
On January 19, 2007, the Company sold four office properties located in Dallas, Texas containing
1,091,186 net rentable square feet and a 4.7 acre land parcel, for an aggregate sales price of
$107.1 million.
On January 31, 2007, the Company sold George Kachel Farmhouse, an office property located in
Reading, Pennsylvania containing 1,664 net rentable square feet, for a sales price of $0.2 million.
On March 1, 2007, the Company acquired the remaining 49% interest in a consolidated real estate
venture previously owned by Stichting Pensioenfonds ABP containing ten office properties for a
purchase price of $63.7 million. The Company owned a 51% interest in this real estate venture
through the acquisition of Prentiss in January 5, 2006 and had already consolidated this venture.
This purchase was accounted for as a step acquisition and the difference between the purchase price
of the minority interest and the carrying value of the pro rata share of the assets of the real
estate venture was allocated to the real estate ventures assets and liabilities based on their
relative fair value.
On March 30, 2007, the Company sold 1007 Laurel Oak, an office property located in Voorhees, New
Jersey containing 78,205 net rentable square feet, for a sales price of $7.0 million.
On March 30, 2007, the Company sold 10 office properties located in Reading and Harrisburg,
Pennsylvania containing 940,486 net rentable square feet, for an aggregate sales price of $112.0.
The Company structured this transaction to qualify as a like-kind exchange under Section 1031 of
the Code and the cash from the sale was held by a qualified intermediary for purposes of
accomplishing the like-kind exchange.
12
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
On April 30, 2007, the Company sold Cityplace Center, an office property located Dallas, Texas
containing 1,295,832 net rentable square feet, for an aggregate sales price of $115.0 million.
On May 10, 2007, the Company acquired Lake Merritt Tower, an office property located in Oakland,
California containing 204,278 net rentable square feet for an aggregate contracted purchase price
of $72.0 million (not including closing costs of $0.5 million). A portion of the proceeds from the
sale of the 10 office properties located in Reading and Harrisburg, Pennsylvania in March 2007 was
used to fully fund this purchase.
2006
Prentiss Acquisition
On January 5, 2006, the Company acquired Prentiss pursuant to the Merger Agreement that the Company
entered into with Prentiss on October 3, 2005. In conjunction with the Companys acquisition of
Prentiss, designees of The Prudential Insurance Company of America (Prudential) acquired certain
of Prentiss properties that contain an aggregate of approximately 4.32 million net rentable square
feet for a total consideration of approximately $747.7 million. Through its acquisition of
Prentiss (and after giving effect to the Prudential acquisition of Prentiss properties), the
Company acquired a portfolio of 79 office properties (including 13 properties that were owned by
consolidated Real Estate Ventures and seven properties that were owned by an unconsolidated Real
Estate Venture) that contain an aggregate of 14.0 million net rentable square feet. The results of
the operations of Prentiss have been included in the Companys consolidated financial statements
since January 5, 2006.
The Company funded the approximately $1.05 billion cash portion of the merger consideration,
related transaction costs and prepayments of approximately $543.3 million in Prentiss mortgage debt
at the closing of the merger through (i) a $750 million unsecured term loan; (ii) approximately
$676.5 million of cash from Prudentials acquisition of the Prentiss properties; and (iii)
approximately $195.0 million through borrowing under a revolving credit facility.
The following table summarizes the fair value of the assets acquired and liabilities assumed at the
date of acquisition of Prentiss (in thousands):
13
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
|
|
|
|
|
|
|
At January 5, 2006 |
|
Real estate investments |
|
|
|
|
Land operating |
|
$ |
282,584 |
|
Building and improvements |
|
|
1,942,728 |
|
Tenant improvements |
|
|
120,610 |
|
Construction in progress and land inventory |
|
|
57,329 |
|
|
|
|
|
Total real estate investments acquired |
|
|
2,403,251 |
|
Rent receivables |
|
|
6,031 |
|
Other assets acquired: |
|
|
|
|
Intangible assets: |
|
|
|
|
In-place leases |
|
|
187,907 |
|
Relationship values |
|
|
98,382 |
|
Above-market leases |
|
|
26,352 |
|
|
|
|
|
Total intangible assets acquired |
|
|
312,641 |
|
Investment in real estate ventures |
|
|
66,921 |
|
Investment in marketable securities |
|
|
193,089 |
|
Other assets |
|
|
8,868 |
|
|
|
|
|
Total other assets |
|
|
581,519 |
|
|
|
|
|
Total assets acquired |
|
|
2,990,801 |
|
|
Liabilities assumed: |
|
|
|
|
Mortgage notes payable |
|
|
532,607 |
|
Unsecured notes |
|
|
78,610 |
|
Secured note payable |
|
|
186,116 |
|
Security deposits and deferred rent |
|
|
6,475 |
|
Other liabilities: |
|
|
|
|
Below-market leases |
|
|
78,911 |
|
Other liabilities |
|
|
43,995 |
|
|
|
|
|
Total other liabilities assumed |
|
|
122,906 |
|
Total liabilities assumed |
|
|
926,714 |
|
Minority interest |
|
|
104,658 |
|
|
|
|
|
Net assets acquired |
|
$ |
1,959,429 |
|
|
|
|
|
In the acquisition of Prentiss, each then outstanding Prentiss common share was converted into the
right to receive 0.69 of a Brandywine common share and $21.50 in cash (the Per Share Merger
Consideration) except that 497,884 Prentiss common shares held in the Prentiss Deferred
Compensation Plan converted solely into 720,737 Brandywine common shares. In addition, each then
outstanding unit (each, a Prentiss OP Unit) of limited partnership interest in the Prentiss
operating partnership subsidiary was, at the option of the holder, converted into Prentiss Common
Shares with the right to receive the Per Share Merger Consideration or 1.3799 Class A Units of the
Operating Partnership (Brandywine Class A Units). Accordingly, based on 49,375,723 Prentiss
common shares outstanding and 139,000 Prentiss OP Units electing to receive merger consideration at
closing of the acquisition, the Company issued 34,541,946 Brandywine common shares and paid an
aggregate of approximately $1.05 billion in cash to the accounts of the former Prentiss
shareholders. Based on 1,572,612 Prentiss OP Units outstanding at closing of the acquisition that
did not elect to receive merger consideration, the Operating Partnership issued 2,170,047
Brandywine Class A Units. In addition, options issued by Prentiss that were exercisable for an
aggregate of 342,662 Prentiss common shares were converted into options exercisable for an
aggregate of 496,037 Brandywine common shares at a weighted average exercise price of $22.00 per
share. Through its acquisition of Prentiss the Company also assumed approximately $611.2 million
in aggregate principal amount of Prentiss debt.
Each Brandywine Class A Unit that was issued in the merger is subject to redemption at the option
of the holder. The Operating Partnership may, at its option, satisfy the redemption either for an
amount, per unit, of cash equal to the then market price of one Brandywine common share (based on
the prior ten-day trading average) or for one Brandywine common share.
14
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
For purposes of computing the total purchase price reflected in the financial statements, the
Brandywine common shares (including restricted common shares), operating partnership units and
options that were issued in the Prentiss transaction were valued based on the average trading price
per Brandywine common share of $29.54. The average trading price was based on the average of the
high and low trading prices for each of the two trading days before, the day of and the two trading
days after the merger was announced (i.e., September 29, September 30, October 3, October 4 and
October 5).
The Company considered the provisions of FIN 47 for these acquisitions and, where necessary,
recorded a conditional asset retirement obligation as part of the purchase price. The aggregate
asset retirement recorded in connection with the Prentiss acquisition was approximately $2.7
million.
Pro forma information relating to the acquisition of Prentiss is presented below as if Prentiss was
acquired and the related financing transactions occurred on January 1, 2006. There are no pro
forma amounts presented for the three-month period ended June 30, 2006 as the pro forma adjustments
reflected represent activity for the first 4 days of 2006. These pro forma results are not
necessarily indicative of the results which actually would have occurred if the acquisition had
occurred on the first day of the period presented, nor does the pro forma financial information
purport to represent the results of operations for future periods (in thousands, except per share
amounts):
|
|
|
|
|
|
|
Six-month period |
|
|
|
ended June 30, 2006 |
|
Pro forma revenue |
|
$ |
296,765 |
|
|
|
|
|
|
Pro forma loss from continuing operations |
|
|
(21,119 |
) |
|
|
|
|
|
Pro forma loss allocated to common shares |
|
|
(17,901 |
) |
|
|
|
|
|
Earnings per common share from continuing operations |
|
|
|
|
Basic as reported |
|
$ |
(0.28 |
) |
|
|
|
|
Basic as pro forma |
|
$ |
(0.28 |
) |
|
|
|
|
Diluted as reported |
|
$ |
(0.28 |
) |
|
|
|
|
Diluted as pro forma |
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
|
|
|
Basic as reported |
|
$ |
(0.20 |
) |
|
|
|
|
Basic as pro forma |
|
$ |
(0.20 |
) |
|
|
|
|
Diluted as reported |
|
$ |
(0.20 |
) |
|
|
|
|
Diluted as pro forma |
|
$ |
(0.20 |
) |
|
|
|
|
Subsequent to its acquisition of Prentiss and the related sale of certain properties to
Prudential, the Company sold nine of the acquired properties that contained an aggregate of 1.7
million net rentable square feet during the six-month period ended June 30, 2006.
During the six-months ended June 30, 2007, the Company sold five of the acquired properties that
contained an aggregate of 2.4 million net rentable square feet and a 4.7 acre parcel of land.
Since January 5, 2006, the Company has sold a total of 22 of the acquired properties that contained
an aggregate of 5.3 million net rentable square feet and two parcels of land totaling 15.6 acres.
Other 2006 Acquisitions and Dispositions
In addition to the acquisition and disposition activity related to Prentiss, during the six-month
period ended June 30, 2006, the Company did the following:
15
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
On February 1, 2006, the Company acquired 101 Lenox Drive, an office property located in
Lawrenceville, New Jersey containing 92,980 net rentable square feet, for a purchase price of $10.2
million.
On April 4, 2006, the Company acquired One Paragon Place, an office property located in Richmond,
Virginia containing 145,127 net rentable square feet, for a purchase price of $24.0 million.
On April 17, 2006, the Company acquired a parcel of land located in Mount Laurel, New Jersey
containing 47.9 acres for a purchase price of $6.7 million.
On April 20, 2006, the Company sold a parcel of land located in Radnor, Pennsylvania containing 1.3
acres for a sales price of $4.5 million.
On April 21, 2006, the Company acquired a parcel of land located in Newtown, Pennsylvania
containing 5.5 acres for a purchased price of $1.9 million.
On June 21, 2006, the Company sold a parcel of land located in Westampton, New Jersey containing
5.5 acres for a sales price of $0.4 million.
On June 27, 2006, the Company acquired a parcel of land located in Goochland County, Virginia
containing 23.2 acres for a purchase price of $4.6 million.
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of June 30, 2007, the Company had an aggregate investment of approximately $72.7 million in 12
unconsolidated Real Estate Ventures (net of returns of investment). The Company formed these
ventures with unaffiliated third parties, or acquired them, to develop office properties or to
acquire land in anticipation of possible development of office properties. Ten of the Real Estate
Ventures own 15 office buildings that contain an aggregate of approximately 2.8 million net
rentable square feet, one Real Estate Venture developed a hotel property that contains 137 rooms
and one Real Estate Venture is developing an office property located in Albemarle County, VA.
The Company accounts for its unconsolidated interests in its Real Estate Ventures using the equity
method. Unconsolidated interests range from 6% to 50%, subject to specified priority allocations in
certain of the Real Estate Ventures.
The amounts reflected below (except for Companys share of equity and income) are based on the
historical financial information of the individual Real Estate Ventures. One of the Real Estate
Ventures, acquired in connection with the Prentiss acquisition, had a negative equity balance on a
historical cost basis as a result of historical depreciation and distributions of excess financing
proceeds. The Company reflected its acquisition of this Real Estate Venture interest at its
relative fair value as of the date of the purchase of Prentiss. The difference between allocated
cost and the underlying equity in the net assets of the investee is accounted for as if the entity
were consolidated (i.e., allocated to the Companys relative share of assets and liabilities with
an adjustment to recognize equity in earnings for the appropriate additional
depreciation/amortization).
The following is a summary of the financial position of the Real Estate Ventures as of June 30,
2007 and December 31, 2006 (in thousands):
16
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
Operating property, net of accumulated depreciation |
|
$ |
394,539 |
|
|
$ |
365,168 |
|
Other assets |
|
|
45,039 |
|
|
|
52,935 |
|
Liabilities |
|
|
32,111 |
|
|
|
28,764 |
|
Debt |
|
|
357,661 |
|
|
|
332,589 |
|
Equity |
|
|
49,805 |
|
|
|
56,888 |
|
Companys share of equity (Companys basis) |
|
|
72,748 |
|
|
|
74,574 |
|
The following is a summary of results of operations of the Real Estate Ventures for the three-
and six-month periods ended June 30, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
Six-month periods |
|
|
ended June 30, |
|
ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Revenue |
|
$ |
18,986 |
|
|
$ |
18,710 |
|
|
$ |
37,300 |
|
|
$ |
38,434 |
|
Operating expenses |
|
|
6,643 |
|
|
|
6,743 |
|
|
|
12,940 |
|
|
|
14,737 |
|
Interest expense, net |
|
|
5,410 |
|
|
|
5,080 |
|
|
|
10,648 |
|
|
|
10,074 |
|
Depreciation and amortization |
|
|
3,776 |
|
|
|
5,299 |
|
|
|
8,004 |
|
|
|
10,172 |
|
Net income |
|
|
3,156 |
|
|
|
1,589 |
|
|
|
5,707 |
|
|
|
3,451 |
|
Companys share of income
(Company basis) |
|
|
896 |
|
|
|
463 |
|
|
|
1,658 |
|
|
|
1,428 |
|
Equity in income of real estate ventures in the Companys consolidated statement of operations
for the three- and six- months ended June 30, 2007 includes a $3.8 million distribution of a
residual profits interest that is not included in the table above.
As of June 30, 2007, the Company had guaranteed repayment of approximately $0.6 million of loans
for the Real Estate Ventures. The Company also provides customary environmental indemnities and
completion guarantees in connection with construction and permanent financing both for its own
account and on behalf of the Real Estate Ventures.
5. DEFERRED COSTS
As of June 30, 2007 and December 31, 2006, the Companys deferred costs were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
91,984 |
|
|
$ |
(30,941 |
) |
|
$ |
61,043 |
|
Financing Costs |
|
|
26,898 |
|
|
|
(6,118 |
) |
|
|
20,780 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
118,882 |
|
|
$ |
(37,059 |
) |
|
$ |
81,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
83,629 |
|
|
$ |
(28,278 |
) |
|
$ |
55,351 |
|
Financing Costs |
|
|
24,648 |
|
|
|
(6,291 |
) |
|
|
18,357 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
108,277 |
|
|
$ |
(34,569 |
) |
|
$ |
73,708 |
|
|
|
|
|
|
|
|
|
|
|
17
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
6. INTANGIBLE ASSETS AND LIABILITIES
As of June 30, 2007 and December 31, 2006, the Companys intangible assets and liabilities were
comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
182,148 |
|
|
$ |
(55,584 |
) |
|
$ |
126,564 |
|
Tenant relationship value |
|
|
120,532 |
|
|
|
(26,309 |
) |
|
|
94,223 |
|
Above market leases acquired |
|
|
31,950 |
|
|
|
(13,268 |
) |
|
|
18,682 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
334,630 |
|
|
$ |
(95,161 |
) |
|
$ |
239,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Liability: |
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
102,754 |
|
|
$ |
(30,495 |
) |
|
$ |
72,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
207,513 |
|
|
$ |
(52,293 |
) |
|
$ |
155,220 |
|
Tenant relationship value |
|
|
124,605 |
|
|
|
(19,572 |
) |
|
|
105,033 |
|
Above market leases acquired |
|
|
32,667 |
|
|
|
(11,669 |
) |
|
|
20,998 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
364,785 |
|
|
$ |
(83,534 |
) |
|
$ |
281,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Liability: |
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
118,536 |
|
|
$ |
(26,009 |
) |
|
$ |
92,527 |
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007, the Companys annual amortization for its intangible assets/liabilities is
as follows (in thousands, and assuming no early lease terminations):
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
Liabilities |
|
2007 (remainder) |
|
$ |
28,702 |
|
|
$ |
8,813 |
|
2008 |
|
|
46,841 |
|
|
|
13,469 |
|
2009 |
|
|
40,923 |
|
|
|
11,444 |
|
2010 |
|
|
34,221 |
|
|
|
8,899 |
|
2011 |
|
|
26,808 |
|
|
|
7,435 |
|
Thereafter |
|
|
61,974 |
|
|
|
22,199 |
|
|
|
|
|
|
|
|
Total |
|
$ |
239,469 |
|
|
$ |
72,259 |
|
|
|
|
|
|
|
|
7. DEBT OBLIGATIONS
The following table sets forth information regarding the Companys debt obligations outstanding at
June 30, 2007 and December 31, 2006 (in thousands):
18
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
MORTGAGE DEBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Interest |
|
|
|
Maturity |
Property / Location |
|
2007 |
|
|
2006 |
|
|
Rate |
|
|
|
Date |
Interstate Center |
|
$ |
|
|
|
$ |
552 |
|
|
6.19% |
|
|
|
Mar-07 |
The Bluffs |
|
|
|
|
|
|
10,700 |
|
|
6.00% |
|
(a) |
|
Apr-07 |
Pacific Ridge |
|
|
|
|
|
|
14,500 |
|
|
6.00% |
|
(a) |
|
Apr-07 |
Pacific View/Camino |
|
|
|
|
|
|
26,000 |
|
|
6.00% |
|
(a) |
|
Apr-07 |
Computer Associates Building |
|
|
|
|
|
|
31,000 |
|
|
6.00% |
|
(a) |
|
Apr-07 |
Presidents Plaza |
|
|
|
|
|
|
30,900 |
|
|
6.00% |
|
(a) |
|
Apr-07 |
440 & 442 Creamery Way |
|
|
|
|
|
|
5,421 |
|
|
8.55% |
|
|
|
May-07 |
Grande A |
|
|
59,297 |
|
|
|
59,513 |
|
|
7.48% |
|
(b) |
|
Jul-07 |
Grande B |
|
|
76,731 |
|
|
|
77,535 |
|
|
7.48% |
|
(b) |
|
Jul-07 |
481 John Young Way |
|
|
2,259 |
|
|
|
2,294 |
|
|
8.40% |
|
|
|
Nov-07 |
400 Commerce Drive |
|
|
11,681 |
|
|
|
11,797 |
|
|
7.12% |
|
|
|
Jun-08 |
Two Logan Square |
|
|
70,745 |
|
|
|
71,348 |
|
|
5.78% |
|
(a) |
|
Jul-09 |
200 Commerce Drive |
|
|
5,802 |
|
|
|
5,841 |
|
|
7.12% |
|
(a) |
|
Jan-10 |
1333 Broadway |
|
|
24,209 |
|
|
|
24,418 |
|
|
5.18% |
|
(a) |
|
May-10 |
The Ordway |
|
|
45,861 |
|
|
|
46,199 |
|
|
7.95% |
|
(a) |
|
Aug-10 |
World Savings Center |
|
|
27,334 |
|
|
|
27,524 |
|
|
7.91% |
|
(a) |
|
Nov-10 |
Plymouth Meeting Exec. |
|
|
43,793 |
|
|
|
44,103 |
|
|
7.00% |
|
(a) |
|
Dec-10 |
Four Tower Bridge |
|
|
10,591 |
|
|
|
10,626 |
|
|
6.62% |
|
|
|
Feb-11 |
Arboretum I, II, III & V |
|
|
22,492 |
|
|
|
22,750 |
|
|
7.59% |
|
|
|
Jul-11 |
Midlantic Drive/Lenox Drive/DCC I |
|
|
61,958 |
|
|
|
62,678 |
|
|
8.05% |
|
|
|
Oct-11 |
Research Office Center |
|
|
41,872 |
|
|
|
42,205 |
|
|
7.64% |
|
(a) |
|
Oct-11 |
Concord Airport Plaza |
|
|
38,021 |
|
|
|
38,461 |
|
|
7.20% |
|
(a) |
|
Jan-12 |
Six Tower Bridge |
|
|
14,655 |
|
|
|
14,744 |
|
|
7.79% |
|
|
|
Aug-12 |
Newtown Square/Berwyn Park/Libertyview |
|
|
62,721 |
|
|
|
63,231 |
|
|
7.25% |
|
|
|
May-13 |
Coppell Associates |
|
|
3,626 |
|
|
|
3,737 |
|
|
6.89% |
|
|
|
Dec-13 |
Southpoint III |
|
|
4,692 |
|
|
|
4,949 |
|
|
7.75% |
|
|
|
Apr-14 |
Tysons Corner |
|
|
100,000 |
|
|
|
100,000 |
|
|
4.84% |
|
(a) |
|
Aug-15 |
Coppell Associates |
|
|
16,600 |
|
|
|
16,600 |
|
|
5.75% |
|
|
|
Mar-16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
744,940 |
|
|
|
869,626 |
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt premiums, net |
|
|
12,205 |
|
|
|
14,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
757,145 |
|
|
$ |
883,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNSECURED DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement Notes due 2008 |
|
|
113,000 |
|
|
|
113,000 |
|
|
4.34% |
|
|
|
Dec-08 |
2009 Three Year Notes |
|
|
|
|
|
|
300,000 |
|
|
Libor + 0.45% |
|
|
|
Apr-09 |
2009 Five Year Notes |
|
|
275,000 |
|
|
|
275,000 |
|
|
4.62% |
|
|
|
Nov-09 |
2010 Five Year Notes |
|
|
300,000 |
|
|
|
300,000 |
|
|
5.61% |
|
|
|
Dec-10 |
Line-of-Credit |
|
|
210,000 |
|
|
|
60,000 |
|
|
Libor + 0.725% |
|
|
|
Jun-11 |
3.875% Exchangeable Notes |
|
|
345,000 |
|
|
|
345,000 |
|
|
3.87% |
|
|
|
Oct-11 |
2012 Six Year Notes |
|
|
300,000 |
|
|
|
300,000 |
|
|
5.77% |
|
|
|
Apr-12 |
2014 Ten Year Notes |
|
|
250,000 |
|
|
|
250,000 |
|
|
5.53% |
|
|
|
Nov-14 |
2016 Ten Year Notes |
|
|
250,000 |
|
|
|
250,000 |
|
|
5.95% |
|
|
|
Apr-16 |
2017 Ten Year Notes |
|
|
300,000 |
|
|
|
|
|
|
5.72% |
|
|
|
May-17 |
Indenture IA (Preferred Trust I) |
|
|
27,062 |
|
|
|
27,062 |
|
|
Libor + 1.25% |
|
|
|
Mar-35 |
Indenture IB (Preferred Trust I) |
|
|
25,774 |
|
|
|
25,774 |
|
|
Libor + 1.25% |
|
|
|
Apr-35 |
Indenture II (Preferred Trust II) |
|
|
25,774 |
|
|
|
25,774 |
|
|
Libor + 1.25% |
|
|
|
Jul-35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
2,421,610 |
|
|
|
2,271,610 |
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt discounts, net |
|
|
(3,540 |
) |
|
|
(3,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
2,418,070 |
|
|
$ |
2,268,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Obligations |
|
$ |
3,175,215 |
|
|
$ |
3,152,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Loans were assumed upon acquisition of the related property. Interest rates presented
above reflect the market rate at the time of acquisition. |
|
(b) |
|
In May 2007, the Company elected to prepay the loan on the date indicated in the Maturity date
column (See Note 15) |
19
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
The mortgage note payable balance of $5.1 million for Norriton Office Center as of December
31, 2006, not included in the table above, is included in Mortgage notes payable and other
liabilities held for sale on the consolidated balance sheets.
As of June 30, 2007 and 2006, the Companys weighted-average effective interest rate on its
mortgage notes payable was 6.9% and 6.1%, respectively.
On April 30, 2007, the Operating Partnership completed an underwritten public offering of
$300,000,000 aggregate principal amount of unsecured notes due 2017 (the 2017 Notes). Brandywine
Realty Trust guaranteed the payment of principal and interest on the 2017 Notes. The Company used
proceeds from these notes to reduce borrowings under the Companys revolving credit facility.
On March 28, 2006, the Operating Partnership completed an underwritten public offering of (1)
$300,000,000 aggregate principal amount of unsecured floating rate notes due 2009 (the 2009
Notes), (2) $300,000,000 aggregate principal amount of 5.75% unsecured notes due 2012 (the 2012
Notes) and (3) $250,000,000 aggregate principal amount of 6.00% unsecured notes due 2016 (the
2016 Notes). Brandywine Realty Trust guaranteed the payment of principal and interest on the
2009 Notes, the 2012 Notes and the 2016 Notes. The Company used proceeds from these notes to repay
a term loan obtained to finance a portion of the consideration paid in the Prentiss merger and to
reduce borrowings under the Companys revolving credit facility.
On October 4, 2006, the Operating Partnership sold $300.0 million aggregate principal amount of
unsecured 3.875% Exchangeable Guaranteed Notes due 2026 in reliance upon an exemption from
registration rights under Rule 144A under the Securities Act of 1933 and sold an additional $45
million of 3.875% Exchangeable Guaranteed Notes due 2026 on October 16, 2006 to cover
over-allotments. The Operating Partnership has registered the resale of the exchangeable
notes. At certain times and upon certain events, the notes are exchangeable for cash up to their
principal amount and with respect to the remainder, if any, of the exchange value in excess of such
principal amount, cash or shares of the Companys common share. The initial exchange rate is
25.4065 shares per $1,000 principal amount of notes (which is equivalent to an initial exchange
price of $39.36 per share). The Operating Partnership may not redeem the notes prior to October
20, 2011 (except to preserve the Companys status as a REIT for U.S. federal income tax purposes),
but we may redeem the notes at any time thereafter, in whole or in part, at a redemption price
equal to the principal amount of the notes to be redeemed plus accrued and unpaid interest. In
addition, on October 20, 2011, October 15, 2016 and October 15, 2021 as well as upon the occurrence
of certain change in control transactions prior to October 20, 2011, holders of notes may require
the Company to repurchase all or a portion of the notes at a purchase price equal to the principal
amount plus accrued and unpaid interest. The Operating Partnership used net proceeds from the
notes to repurchase approximately $60.0 million of the Companys common stock at a price of $32.80
per share and for general corporate purposes, including the repayment of outstanding borrowings
under the Credit Facility.
On November 29, 2006, the Company gave notice of redemption of the 2009 Notes and redeemed the 2009
Notes on January 2, 2007.
The Operating Partnerships indenture relating to unsecured notes contains financial restrictions
and requirements, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage
ratio not to exceed 40%, (3) a debt service coverage ratio of greater than 1.5 to 1.0, and (4) an
unencumbered asset value of not less than 150% of unsecured debt. In addition, the note purchase
agreement relating to the Operating Partnerships $113 million principal unsecured notes due 2008
contains covenants that are similar to the covenants in the indenture.
The Company utilizes credit facility borrowings for general business purposes, including the
acquisition, development and redevelopment of properties and the repayment of other debt. On June
29, 2007, the Company amended its $600.0 million unsecured revolving credit facility (the Credit
Facility). The amendment extended the
maturity date of the Credit Facility from December 22, 2009 to June 29, 2011 (subject to an
extension of one year, at the Companys option, upon its payment of an extension fee equal to 15
basis points of the committed amount under the Credit Facility). The amendment also reduced the
per annum variable interest rate on outstanding balances from Eurodollar
20
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
plus 0.80% to Eurodollar
plus 0.725% per annum. In addition, the amendment reduced the quarterly facility fee from 20 basis
points to 17.5 basis points per annum. The interest rate and facility fee are subject to
adjustment upon a change in the Companys unsecured debt ratings. The amendment also lowered to
7.50% from 8.50% the capitalization rate used in the calculation of several of the financial
covenants; increased our swing loan availability from $50.0 million to $60.0 million; and increased
the number of competitive bid loan requests available to the Company from two to four in any 30 day
period. The competitive bid feature allows banks that are part of the lender consortium under the
Credit Facility to bid to make loans to the Company at a reduced Eurodollar rate. The Company has
the option to increase the Credit Facility to $800.0 million subject to the absence of any defaults
and the Companys ability to acquire additional commitments from its existing lenders or new
lenders. As of June 30, 2007, the Company had $210.0 million of borrowings and $22.5 million of
letters of credit outstanding under the Credit Facility, leaving $367.5 million of unused
availability. As of June 30, 2007 and 2006, the weighted-average interest rate on the Credit
Facility, including the effect of interest rate hedges, was 6.35% and 5.48%, respectively.
The Credit Facility requires the maintenance of ratios related to minimum net worth, debt-to-total
capitalization and fixed charge coverage and includes non-financial covenants.
In April 2007, the Company entered into a $20.0 million Sweep Agreement (the Sweep Agreement) to
be used for cash management purposes. Borrowings under the Sweep Agreement bear interest at
one-month LIBOR plus 0.75%. There were no outstanding borrowings on the Sweep Agreement at June
30, 2007.
As of June 30, 2007, the Companys aggregate scheduled principal payments of debt obligations,
excluding amortization of discounts and premiums, are as follows (in thousands):
|
|
|
|
|
2007 |
|
$ |
143,236 |
|
2008 |
|
|
135,148 |
|
2009 |
|
|
354,955 |
|
2010 |
|
|
450,189 |
|
2011 |
|
|
687,262 |
|
Thereafter |
|
|
1,395,760 |
|
|
|
|
|
Total indebtedness |
|
$ |
3,166,550 |
|
|
|
|
|
8. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
Risk Management
In the normal course of its on-going business operations, the Company encounters economic risk.
There are three main components of economic risk: interest rate risk, credit risk and market risk.
The Company is subject to interest rate risk on its interest-bearing liabilities. Credit risk is
the risk of inability or unwillingness of tenants to make contractually required payments. Market
risk is the risk of declines in the value of properties due to changes in rental rates, interest
rates or other market factors affecting the valuation of properties held by the Company.
Use of Derivative Financial Instruments
The Companys use of derivative instruments is limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposures and not for speculative
purposes. The principal objective of such arrangements is to minimize the risks and/or costs
associated with the Companys operating and financial structure, as well as to hedge specific
transactions. The counterparties to these arrangements are major financial institutions with which
the Company and its affiliates may also have other financial relationships. The Company is
potentially exposed to credit loss in the event of non-performance by these counterparties.
However, because of the high credit ratings of the counterparties, the Company does not anticipate
that any of the counterparties will fail to meet these obligations as they come due. The Company
does not hedge credit or property value market risks.
21
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
In March 2007, in anticipation of the offering of 2017 Notes, the Company entered into two treasury
lock agreements. The treasury lock agreements were designated as cash flow hedges on interest rate
risk and qualified for hedge accounting. Each of the treasury lock agreements were for notional
amounts of $75.0 million for an expiration of 10 years at all-in rates of 4.5585% and 4.498%. The
agreements were settled in April 2007 upon completion of the offering of the 2017 Notes at a total
benefit of $1.1 million. This benefit was recorded as a component of accumulated other
comprehensive income in the accompanying consolidated balance sheet and is being amortized over the
term of the 2017 Notes.
In March 2006, in anticipation of the offering of the 2009 Notes, the 2012 Notes and the 2016
Notes, the Company entered into forward starting swaps. The forward starting swaps were designated
as cash flow hedges of interest rate risk and qualified for hedge accounting. The forward starting
swaps were for notional amounts totaling $200.0 million at an all-in-rate of 5.2%. Two of the
forward starting swaps had a six year maturity date and one had a ten year maturity date. The
forward starting swaps were settled in March 2006 upon the completion of the offering of the 2009,
2012, and 2016 Notes at a total benefit of approximately $3.3 million. The benefit was recorded as
a component of accumulated other comprehensive income in the accompanying consolidated balance
sheet and is being amortized to interest expense over the term of the unsecured notes.
The Company entered into two interest rate swaps in January 2006 aggregating $90 million in
notional amount as part of its acquisition of Prentiss. The instruments were used to hedge the
risk of interest cash outflows on secured variable rate debt on properties that were included as
part of the real estate venture in which the Company purchased the remaining 49% of the minority
interest partners share in March 2007. One of the swaps with a notional amount of $20 million had
a maturity date of February 1, 2010 at an all-in rate of 4.675%. The other, with a notional amount
of $70 million, had a maturity date of August 1, 2008 at an all in rate of 4.675%. The agreements
were settled in April 2007 in connection with the repayment of five mortgage notes, at a total
benefit of $0.4 million.
The Company formally assesses, both at inception of the hedge and on an on-going basis, whether
each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If
management determines that a derivative is not highly-effective as a hedge or if a derivative
ceases to be a highly-effective hedge, the Company will discontinue hedge accounting prospectively.
Concentration of Credit Risk
Concentrations of credit risk arise when a number of tenants related to the Companys investments
or rental operations are engaged in similar business activities, or are located in the same
geographic region, or have similar economic features that would cause their inability to meet
contractual obligations, including those to the Company, to be similarly affected. The Company
regularly monitors its tenant base to assess potential concentrations of credit risk. Management
believes the current credit risk portfolio is reasonably well diversified and does not contain any
unusual concentration of credit risk. No tenant accounted for 5% or more of the Companys rents
during the three- and six-month periods ended June 30, 2007 or 2006.
9. DISCONTINUED OPERATIONS
For the three- and six-month periods ended June 30, 2007, income from discontinued operations
relates to 18 properties that the Company sold during 2007. The following table summarizes the
revenue and expense information for properties classified as discontinued operations as of June 30,
2007 for the three- and six-month periods ended June 30, 2007 (in thousands):
22
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Six-month period |
|
|
|
ended June 30, 2007 |
|
|
ended June 30, 2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
1,460 |
|
|
$ |
12,397 |
|
Tenant reimbursements |
|
|
562 |
|
|
|
1,246 |
|
Other |
|
|
145 |
|
|
|
214 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
2,167 |
|
|
|
13,857 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
833 |
|
|
|
4,845 |
|
Real estate taxes |
|
|
241 |
|
|
|
1,549 |
|
Depreciation and amortization |
|
|
|
|
|
|
4,594 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,074 |
|
|
|
10,988 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,093 |
|
|
|
2,869 |
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before (loss) gain
on sale of interests in real estate and minority interest |
|
|
1,093 |
|
|
|
2,869 |
|
Net (loss) gain on sale of interests in real estate |
|
|
(856 |
) |
|
|
25,153 |
|
Minority interest attributable to discontinued
operations LP units |
|
|
(10 |
) |
|
|
(1,196 |
) |
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
227 |
|
|
$ |
26,826 |
|
|
|
|
|
|
|
|
For the three- and six-month periods ended June 30, 2006, income from discontinued operations
relates to the 23 properties sold in 2006 and the 18 properties sold in 2007. The following table
summarizes the revenue and expense information for the properties classified as discontinued
operations as of June 30, 2007 for the three- and six-month periods ended June 30, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Six-month period |
|
|
|
ended June 30, 2006 |
|
|
ended June 30, 2006 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
21,505 |
|
|
$ |
46,218 |
|
Tenant reimbursements |
|
|
1,740 |
|
|
|
4,209 |
|
Other |
|
|
217 |
|
|
|
587 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
23,462 |
|
|
|
51,014 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
8,609 |
|
|
|
18,020 |
|
Real estate taxes |
|
|
2,700 |
|
|
|
6,187 |
|
Depreciation and amortization |
|
|
9,746 |
|
|
|
18,869 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
21,055 |
|
|
|
43,076 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,407 |
|
|
|
7,938 |
|
Interest income |
|
|
13 |
|
|
|
13 |
|
Interest expense (a) |
|
|
(301 |
) |
|
|
(586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before gain on
sale of interests in real estate and minority interest |
|
|
2,119 |
|
|
|
7,365 |
|
|
|
|
|
|
|
|
|
|
Minority interest partners share of consolidated
real estate venture |
|
|
(195 |
) |
|
|
(382 |
) |
Minority interest attributable to discontinued
operations LP units |
|
|
(92 |
) |
|
|
(319 |
) |
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
1,832 |
|
|
$ |
6,664 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Interest expense relate to a mortgage that was secured by one of the sold properties and
paid off at the time of sale. |
Discontinued operations have not been segregated in the consolidated statements of cash flows.
Therefore, amounts for certain captions will not agree with respective data in the consolidated
statements of operations.
23
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
10. MINORITY INTEREST IN OPERATING PARTNERSHIP AND REAL ESTATE VENTURES
The Company is the sole general partner of the Operating Partnership and, as of June 30, 2007,
owned a 95.7% interest in the Operating Partnership. On June 12, 2007, the Operating Partnership
declared a $0.44 per unit cash distribution to holders of Class A Units totaling $1.7 million.
As of June 30, 2007, the Company owned interests in three consolidated real estate ventures that
own three office properties containing approximately 0.4 million net rentable square feet.
Minority interest in consolidated real estate ventures represents the portion of these consolidated
real estate ventures not owned by the Company and as a result of losses allocated to these minority
interest partners there is no balance at June 30, 2007.
On March 1, 2007, the Company acquired the remaining 49% interest in a real estate venture
previously owned by Stichting Pensioenfonds ABP containing ten office properties for a purchase
price of $63.7 million. The Company owned a 51% interest in this real estate venture through the
acquisition of Prentiss on January 5, 2006.
11. BENEFICIARIES EQUITY
Earnings per Share (EPS)
The following table details 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 June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Income (loss) from continuing operations |
|
$ |
977 |
|
|
$ |
977 |
|
|
$ |
(13,388 |
) |
|
$ |
(13,388 |
) |
Income (loss) from discontinued operations |
|
|
227 |
|
|
|
227 |
|
|
|
1,832 |
|
|
|
1,832 |
|
Income allocated to Preferred Shares |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
(794 |
) |
|
$ |
(794 |
) |
|
$ |
(13,554 |
) |
|
$ |
(13,554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
87,080,785 |
|
|
|
87,080,785 |
|
|
|
90,540,237 |
|
|
|
90,540,237 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
87,080,785 |
|
|
|
87,080,785 |
|
|
|
90,540,237 |
|
|
|
90,540,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.17 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
0.02 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
24
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month periods ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Income (loss) from continuing operations |
|
$ |
(6,250 |
) |
|
$ |
(6,250 |
) |
|
$ |
(20,862 |
) |
|
$ |
(20,862 |
) |
Income (loss) from discontinued operations |
|
|
26,826 |
|
|
|
26,826 |
|
|
|
6,664 |
|
|
|
6,664 |
|
Income allocated to Preferred Shares |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
16,580 |
|
|
$ |
16,580 |
|
|
$ |
(18,194 |
) |
|
$ |
(18,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
87,680,773 |
|
|
|
87,680,773 |
|
|
|
89,923,528 |
|
|
|
89,923,528 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
617,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
87,680,773 |
|
|
|
88,298,521 |
|
|
|
89,923,528 |
|
|
|
89,923,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.12 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.28 |
) |
Discontinued operations |
|
|
0.31 |
|
|
|
0.30 |
|
|
|
0.07 |
|
|
|
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.19 |
|
|
$ |
0.19 |
|
|
$ |
(0.20 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The contingent securities/stock based compensation impact is calculated using the treasury stock
method and relates to employee awards settled in shares of the Company. The effect of these
securities is anti-dilutive for periods that the Company incurs a net loss available to common
shareholders and therefore is excluded from the dilutive earnings per share calculation in such
periods.
Common and Preferred Shares
On June 12, 2007, the Company declared a distribution of $0.44 per Common Share, totaling $38.5
million, which was paid on July 19, 2007 to shareholders of record as of July 5, 2007. On June 12,
2007, the Company declared distributions on its Series C Preferred Shares and Series D Preferred
Shares to holders of record as of July 5, 2007. These shares are entitled to a preferential return
of 7.50% and 7.375%, respectively. Distributions paid on July 16, 2007 to holders of Series C
Preferred Shares and Series D Preferred Shares totaled $0.9 million and $1.1 million, respectively.
In 2003, the Company issued 2,000,000 7.50% Series C Cumulative Redeemable Preferred Shares (the
Series C Preferred Shares) for net proceeds of $48.1 million. The Series C Preferred Shares are
perpetual. The Company may not redeem Series C Preferred Shares before December 30, 2008 except to
preserve its REIT status. On or after December 30, 2008, the Company, at its option, may redeem
the Series C Preferred Shares, in whole or in part, by paying $25.00 per share plus accrued but
unpaid dividends.
In 2004, the Company issued 2,300,000 7.375% Series D Cumulative Redeemable Preferred Shares (the
Series D Preferred Shares) for net proceeds of $55.5 million. The Series D Preferred Shares are
perpetual. The Company may not redeem Series D Preferred Shares before February 27, 2009 except to
preserve its REIT status. On or after February 27, 2009, the Company, at its option, may redeem the
Series D Preferred Shares, in whole or in part, by paying $25.00 per share plus accrued but unpaid
dividends.
Common Share Repurchases
The Company repurchased 1,566,000 shares during the six-month period ending June 30, 2007 for
aggregate consideration of $53.5 million under its share repurchase program. As of June 30, 2007,
the Company may purchase an additional 753,800 shares under the plan. Repurchases may be made from
time to time in the open market or in privately negotiated transactions, subject to market
conditions and compliance with legal requirements. The share repurchase program does not contain
any time limitation and does not obligate the Company to repurchase any shares. The Company may
discontinue the program at any time.
25
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
12. SHARE BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (SFAS 123(R)). SFAS
123(R) is an amendment of SFAS 123 and requires that the compensation cost relating to share-based
payment transactions be recognized in the financial statements. The cost is required to be
measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) also
contains additional minimum disclosures requirements including, but not limited to, the valuation
method and assumptions used, amounts of compensation capitalized and modifications made. The
Company adopted SFAS 123(R) using the prospective method on January 1, 2006. This adoption did not
have a material effect on our consolidated financial statements.
Stock Options
At June 30, 2007, the Company had 1,085,575 options outstanding under its shareholder approved
equity incentive plan. No options were unvested as of June 30, 2007 and therefore there is no
remaining unrecognized compensation expense associated with these options. Option activity as of
June 30, 2007 and changes during the six months ended June 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining Contractual |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Value (in 000s) |
|
Outstanding at January 1, 2007 |
|
|
1,286,070 |
|
|
$ |
26.45 |
|
|
|
1.50 |
|
|
$ |
8,739 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(198,495 |
) |
|
|
28.80 |
|
|
|
0.87 |
|
|
|
1,171 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
1,087,575 |
|
|
$ |
26.03 |
|
|
|
1.07 |
|
|
$ |
8,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at June 30, 2007 |
|
|
1,087,575 |
|
|
$ |
26.03 |
|
|
|
1.07 |
|
|
$ |
8,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007 |
|
|
1,087,575 |
|
|
$ |
26.03 |
|
|
|
1.07 |
|
|
$ |
8,029 |
|
There were no option awards granted to employees during the three- and six-month periods ended
June 30, 2007.
The Company has the ability and intent to issue shares upon stock option exercises. Historically,
the Company has issued new common shares to satisfy such exercises.
Restricted Stock Awards
The Companys primary form of share-based compensation has been restricted shares issued under a
shareholder approved equity incentive plan that authorizes various equity-based awards. As of June
30, 2007, 448,800 restricted shares were outstanding and vest over five to seven years from the
initial grant date. The remaining compensation expense to be recognized for the 448,800 restricted
shares outstanding at June 30, 2007 was approximately $14.1 million. That expense is expected to
be recognized over a weighted average remaining vesting period of 4.2 years.
For the six-month periods ended June 30, 2007 and 2006, the Company recognized $1.7 million and
$1.4 million of compensation expense in each period related to outstanding restricted shares. The
following table summarizes the Companys restricted share activity for the six-months ended June
30, 2007:
26
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair value |
|
Non-vested at January 1, 2007 |
|
|
338,860 |
|
|
$ |
28.23 |
|
Granted |
|
|
227,709 |
|
|
|
35.09 |
|
Vested |
|
|
(107,143 |
) |
|
|
26.45 |
|
Forfeited |
|
|
(10,626 |
) |
|
|
31.47 |
|
|
|
|
|
|
|
|
Non-vested at June 30, 2007 |
|
|
448,800 |
|
|
$ |
32.05 |
|
|
|
|
|
|
|
|
Outperformance Program
On August 28, 2006, the Compensation Committee of the Companys Board of Trustees adopted a
long-term incentive compensation program (the outperformance program). The Company will make
payments (in the form of common shares) to executive-participants under the outperformance program
only if total shareholder return exceeds percentage hurdles established under the outperformance
program. The dollar value of any payments will depend on the extent to which our performance
exceeds the hurdles. The Company established the outperformance program under the 1997 Plan.
If the total shareholder return (share price appreciation plus cash dividends) during a three-year
measurement period exceeds either of two hurdles (with one hurdle keyed to the greater of a fixed
percentage and an industry-based index, and the other hurdle keyed to a fixed percentage), then the
Company will fund an incentive compensation pool in accordance with a formula and make pay-outs
from the compensation pool in the form of vested and restricted common shares. The awards issued
are accounted for in accordance with SFAS 123(R). The fair value of the awards on the date of
grant, as adjusted for estimated forfeitures, was approximately $5.6 million and will be amortized
into expense over the five-year period beginning on the date of grant using a graded vesting
attribution model. The fair value of $5.6 million on the date of the initial grant represents
approximately 86.5% of the total that may be awarded; the remaining amount available will be valued
when the awards are granted to individuals. In January 2007, the Company awarded an additional
4.5% under the outperformance program. The fair value of the additional award is $0.3 million and
will be amortized over the remaining portion of the 5 year period. For the three- and six-month
period ended June 30, 2007, the Company recognized $0.4 million and $0.8 million of compensation
expenses related to the outperformance program.
Employee Share Purchase Plan
On May 9, 2007, the Companys shareholders approved the 2007 Non-Qualified Employee Share Purchase
Plan (the ESPP). The ESPP is intended to provide eligible employees with a convenient means to
purchase common shares of the Company through payroll deductions and voluntary cash purchases at an
amount equal to 85% of the average closing price per share for a specified period. The maximum
contribution by each participant for any plan year may not exceed $50,000 and the number of shares
reserved for issuance under the ESPP is 1,250,000.
13. SEGMENT INFORMATION
The Company currently manages its portfolio within nine segments: (1) PennsylvaniaWest, (2)
PennsylvaniaNorth, (3) New Jersey, (4) Urban, (5) Richmond, Virginia, (6) Northern California (7)
Southern California, (8) Metropolitan Washington, D.C. and (9) Southwest. The PennsylvaniaWest
segment includes properties in Chester, Delaware and Montgomery counties in the Philadelphia
suburbs of Pennsylvania. The PennsylvaniaNorth segment includes properties north of Philadelphia
in Bucks, Lehigh and Montgomery counties. The New Jersey segment includes properties in counties
in the southern part of New Jersey including Burlington, Camden and Mercer counties and in Bucks
County, Pennsylvania. The Urban segment includes properties in the City of Philadelphia,
Pennsylvania and the state of Delaware. The Richmond, Virginia segment includes properties
primarily in Albemarle, Chesterfield and Henrico counties, the City of Richmond and Durham, North
Carolina. The Northern California segment includes
27
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
properties in the City of Oakland and Concord. The Southern California segment includes properties
in San Diego County. The Metropolitan Washington, D.C. segment includes properties in Northern
Virginia and Suburban Maryland. The Southwest segment includes properties in Travis County of
Texas. Corporate is responsible for cash and investment management, development of certain real
estate properties during the construction period, and certain other general support functions.
28
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Segment information as of and for the three-month periods ended June 30, 2007 and 2006 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
Pennsylvania |
|
|
|
|
|
|
|
|
|
|
Richmond, |
|
|
Northern |
|
|
Southern |
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
West |
|
|
North |
|
|
New Jersey |
|
|
Urban |
|
|
Virginia |
|
|
California |
|
|
California |
|
|
Washington, D.C. |
|
|
Southwest |
|
|
Corporate |
|
|
Total |
|
As of June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
934,320 |
|
|
$ |
443,874 |
|
|
$ |
556,496 |
|
|
$ |
573,062 |
|
|
$ |
252,982 |
|
|
$ |
471,291 |
|
|
$ |
105,982 |
|
|
$ |
1,290,464 |
|
|
$ |
234,255 |
|
|
$ |
|
|
|
$ |
4,862,726 |
|
Development and
construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
373,497 |
|
|
|
373,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
922,347 |
|
|
$ |
530,436 |
|
|
$ |
570,009 |
|
|
$ |
568,008 |
|
|
$ |
244,519 |
|
|
$ |
396,927 |
|
|
$ |
95,942 |
|
|
$ |
1,255,940 |
|
|
$ |
343,177 |
|
|
$ |
|
|
|
$ |
4,927,305 |
|
Development and
construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328,119 |
|
|
|
328,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
31,604 |
|
|
$ |
15,355 |
|
|
$ |
24,792 |
|
|
$ |
24,024 |
|
|
$ |
8,168 |
|
|
$ |
16,817 |
|
|
$ |
3,012 |
|
|
$ |
32,919 |
|
|
$ |
9,714 |
|
|
$ |
(2,101 |
) |
|
$ |
164,304 |
|
Property operating expenses and
real estate taxes |
|
|
13,036 |
|
|
|
5,547 |
|
|
|
10,643 |
|
|
|
8,835 |
|
|
|
3,037 |
|
|
|
6,345 |
|
|
|
803 |
|
|
|
10,301 |
|
|
|
3,593 |
|
|
|
260 |
|
|
|
62,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
18,568 |
|
|
$ |
9,808 |
|
|
$ |
14,149 |
|
|
$ |
15,189 |
|
|
$ |
5,131 |
|
|
$ |
10,472 |
|
|
$ |
2,209 |
|
|
$ |
22,618 |
|
|
$ |
6,121 |
|
|
$ |
(2,361 |
) |
|
$ |
101,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
26,006 |
|
|
$ |
17,792 |
|
|
$ |
22,921 |
|
|
$ |
21,367 |
|
|
$ |
8,109 |
|
|
$ |
14,735 |
|
|
$ |
2,911 |
|
|
$ |
26,525 |
|
|
$ |
6,680 |
|
|
$ |
3,383 |
|
|
$ |
150,429 |
|
Property operating expenses and
real estate taxes |
|
|
7,566 |
|
|
|
9,650 |
|
|
|
9,650 |
|
|
|
8,153 |
|
|
|
3,125 |
|
|
|
5,573 |
|
|
|
889 |
|
|
|
8,268 |
|
|
|
3,049 |
|
|
|
(31 |
) |
|
|
55,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
18,440 |
|
|
$ |
8,142 |
|
|
$ |
13,271 |
|
|
$ |
13,214 |
|
|
$ |
4,984 |
|
|
$ |
9,162 |
|
|
$ |
2,022 |
|
|
$ |
18,257 |
|
|
$ |
3,631 |
|
|
$ |
3,414 |
|
|
$ |
94,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Segment information as of and for the six-month periods ended June 30, 2007 and 2006 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
Pennsylvania |
|
|
|
|
|
|
|
|
|
|
Richmond, |
|
|
Northern |
|
|
Southern |
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
West |
|
|
North |
|
|
New Jersey |
|
|
Urban |
|
|
Virginia |
|
|
California |
|
|
California |
|
|
Washington, D.C. |
|
|
Southwest |
|
|
Corporate |
|
|
Total |
|
For the six-months
ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
59,162 |
|
|
$ |
34,836 |
|
|
$ |
49,449 |
|
|
$ |
47,478 |
|
|
$ |
17,108 |
|
|
$ |
31,927 |
|
|
$ |
6,153 |
|
|
$ |
65,305 |
|
|
$ |
18,451 |
|
|
$ |
(2,464 |
) |
|
$ |
327,405 |
|
Property operating
expenses and real
estate taxes |
|
|
24,143 |
|
|
|
12,573 |
|
|
|
21,337 |
|
|
|
17,877 |
|
|
|
5,986 |
|
|
|
11,984 |
|
|
|
2,074 |
|
|
|
20,642 |
|
|
|
7,156 |
|
|
|
(140 |
) |
|
|
123,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
35,019 |
|
|
$ |
22,263 |
|
|
$ |
28,112 |
|
|
$ |
29,601 |
|
|
$ |
11,122 |
|
|
$ |
19,943 |
|
|
$ |
4,079 |
|
|
$ |
44,663 |
|
|
$ |
11,295 |
|
|
$ |
(2,324 |
) |
|
$ |
203,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-months
ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
50,827 |
|
|
$ |
35,785 |
|
|
$ |
46,237 |
|
|
$ |
40,640 |
|
|
$ |
15,501 |
|
|
$ |
28,244 |
|
|
$ |
5,558 |
|
|
$ |
52,391 |
|
|
$ |
15,720 |
|
|
$ |
3,444 |
|
|
$ |
294,347 |
|
Property operating
expenses and real
estate taxes |
|
|
15,793 |
|
|
|
19,627 |
|
|
|
19,683 |
|
|
|
16,819 |
|
|
|
6,023 |
|
|
|
10,448 |
|
|
|
1,529 |
|
|
|
15,837 |
|
|
|
6,568 |
|
|
|
(1,254 |
) |
|
|
111,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
35,034 |
|
|
$ |
16,158 |
|
|
$ |
26,554 |
|
|
$ |
23,821 |
|
|
$ |
9,478 |
|
|
$ |
17,796 |
|
|
$ |
4,029 |
|
|
$ |
36,554 |
|
|
$ |
9,152 |
|
|
$ |
4,698 |
|
|
$ |
183,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Net operating income is defined as total revenue less property operating expenses and real
estate taxes. Below is a reconciliation of consolidated net operating income to net income or loss
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
Six-month periods |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Consolidated net operating income (loss) |
|
$ |
101,904 |
|
|
$ |
94,537 |
|
|
$ |
203,773 |
|
|
$ |
183,274 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,603 |
|
|
|
2,573 |
|
|
|
2,390 |
|
|
|
5,223 |
|
Interest expense |
|
|
(40,803 |
) |
|
|
(41,596 |
) |
|
|
(81,161 |
) |
|
|
(81,974 |
) |
Deferred financing costs |
|
|
(1,065 |
) |
|
|
(794 |
) |
|
|
(2,323 |
) |
|
|
(1,273 |
) |
Depreciation and amortization |
|
|
(58,227 |
) |
|
|
(64,145 |
) |
|
|
(120,274 |
) |
|
|
(115,357 |
) |
Administrative expenses |
|
|
(6,993 |
) |
|
|
(7,724 |
) |
|
|
(14,262 |
) |
|
|
(16,214 |
) |
Minority interest partners share of consolidated
real estate ventures |
|
|
8 |
|
|
|
(17 |
) |
|
|
(108 |
) |
|
|
281 |
|
Minority interest attributable to continuing
operations LP units |
|
|
46 |
|
|
|
707 |
|
|
|
457 |
|
|
|
1,142 |
|
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of real estate ventures |
|
|
4,504 |
|
|
|
463 |
|
|
|
5,258 |
|
|
|
1,428 |
|
Net gain on disposition of undepreciated real estate |
|
|
|
|
|
|
2,608 |
|
|
|
|
|
|
|
2,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
977 |
|
|
|
(13,388 |
) |
|
|
(6,250 |
) |
|
|
(20,862 |
) |
Income (loss) from discontinued operations |
|
|
227 |
|
|
|
1,832 |
|
|
|
26,826 |
|
|
|
6,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,204 |
|
|
$ |
(11,556 |
) |
|
$ |
20,576 |
|
|
$ |
(14,198 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
14. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved from time to time in litigation on various matters, including disputes
with tenants and disputes arising out of agreements to purchase or sell properties. Given the
nature of the Companys business activities, these lawsuits are considered routine to the conduct
of its business. The result of any particular lawsuit cannot be predicted, because of the very
nature of litigation, the litigation process and its adversarial nature, and the jury system. The
Company does not expect that the liabilities, if any, that may ultimately result from such legal
actions will have a material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.
There have been lawsuits against owners and managers of multifamily and office properties
asserting claims of personal injury and property damage caused by the presence of mold in
residential units or office space. The Company has been named as a defendant in two lawsuits in
the State of New Jersey that allege personal injury as a result of the presence of mold. One
lawsuit was dismissed by way of summary judgment with prejudice. Unspecified damages are sought on
the remaining lawsuit. The Company has referred this lawsuit to its environmental insurance
carrier and, as of June 30, 2007, the insurance carrier is tendering a defense to this claim.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state,
and local governments. The Companys compliance with existing laws has not had a material adverse
effect on its financial condition and results of operations, and the Company does not believe it
will have a material adverse effect in the future. However, the Company cannot predict the impact
of unforeseen environmental contingencies or new or changed laws or regulations on its current
Properties or on properties that the Company may acquire.
Ground Rent
31
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Future minimum rental payments under the terms of all non-cancelable ground leases under which the
Company is the lessee are expensed on a straight-line basis regardless of when payments are due.
Minimum future rentals payments on non-cancelable leases at June 30, 2006 are as follows (in
thousands):
|
|
|
|
|
2007 |
|
$ |
868 |
|
2008 |
|
|
1,736 |
|
2009 |
|
|
1,818 |
|
2010 |
|
|
1,818 |
|
2011 |
|
|
1,818 |
|
Thereafter |
|
|
269,979 |
|
Other Commitments or Contingencies
As part of the Companys September 2004 acquisition of a portfolio of 14 properties (the TRC
Acquisition), the Operating Partnership agreed to issue to the sellers up to a maximum of $9.7
million of Class A Units of the Operating Partnership if certain of the acquired properties achieve
at least 95% occupancy prior to September 21, 2007. At June 30, 2007 the maximum amount payable
under this arrangement was $0.6 million.
As part of the TRC acquisition, the Company acquired an interest in Two Logan Square, a 696,477
square foot office building in Philadelphia, Pennsylvania, primarily through a second and third
mortgage collaterized by this property pursuant to which the Company receives substantially all
cash flows from the property. The Company currently does not expect to take fee title to Two Logan
Square until, at the earliest, September 2019. In the event that the Company takes title to Two
Logan Square upon a foreclosure of its mortgages, the Company has agreed to make a payment to an
unaffiliated third party with a residual interest as a fee owner of this property. The amount of
the payment would be $0.6 million if the Company must pay a state and local transfer tax upon
taking title, or $2.9 million if no transfer tax is payable upon the transfer.
As part of the Prentiss acquisition, TRC acquisition and several of our other acquisitions, the
Company has agreed not to sell certain of the acquired properties in transactions that would
trigger taxable income to the former owners . In the case of TRC, the Company agreed not to sell
certain of the acquired properties for periods ranging from three to 15 years from the acquisition
date as follows: 201 Radnor Financial Center, 555 Radnor Financial Center and 300 Delaware Avenue
(September 2007); One Rodney Square and 130/150/170 Radnor Financial Center (September 2014); and
One Logan Square, Two Logan Square and Radnor Corporate Center (September 2019). In the case of
the Prentiss acquisition, the Company assumed the obligation of Prentiss not to sell Concord
Airport Plaza before March 2018 and 6600 Rockledge before July 2008. The Company also owns 14
other properties that aggregate 1.0 million square feet and has agreed not to sell these properties
for periods that expire through 2008. These agreements generally provide that the Company may
dispose of the subject Properties only in transactions that qualify as tax-free exchanges under
Section 1031 of the Code or in other tax deferred transactions. In the event that the Company
sells any of the properties within the applicable restricted period in non-exempt transactions, the
Company has agreed to pay significant tax liabilities that would be incurred by the parties who
sold the applicable property.
The Company invests in its Properties and regularly incurs capital expenditures in the ordinary
course of business to maintain the Properties. The Company believes that such expenditures enhance
the competitiveness of the Properties. The Company also enters into construction, utility and
service contracts in the ordinary course of business which may extend beyond one year. These
contracts include terms that provide for cancellation with insignificant or no cancellation
penalties.
15. SUBSEQUENT EVENTS
On July 11, the Company repaid two mortgage notes totaling $136.0 million pursuant to notice which
was given in May 2007. The Company funded the repayments of these notes from borrowings under its
Credit Facility and there were no prepayment penalties associated with these prepayments.
On July 19, 2007, the Company acquired five buildings aggregating 508,607 square feet and a 5.6
acre land parcel in the Boulders office park in Richmond, VA for $96.5 million. The Company funded
a portion of the purchase price
32
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
using the remaining 1031 proceeds from the sale of the 10 office properties located in Reading and
Harrisburg, Pennsylvania in March 2007.
During July 2007, the Company repurchased 214,600 shares for $5.9 million under its share
repurchase program.
During July 2007, the Company entered into four treasury lock agreements designated as cash flow
hedges on interest rate risk relating to a forecasted debt issuance. The treasury lock agreements
were for notional amounts totaling $150.0 million for an
expiration of five years and have an average all-in rate of 4.9%.
33
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
Real estate investments: |
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
4,862,726 |
|
|
$ |
4,927,305 |
|
Accumulated depreciation |
|
|
(554,417 |
) |
|
|
(515,698 |
) |
|
|
|
|
|
|
|
Operating real estate investments, net |
|
|
4,308,309 |
|
|
|
4,411,607 |
|
Development land and construction-in-progress |
|
|
373,497 |
|
|
|
328,119 |
|
|
|
|
|
|
|
|
Total real estate invesmtents, net |
|
|
4,681,806 |
|
|
|
4,739,726 |
|
Cash and cash equivalents |
|
|
28,522 |
|
|
|
25,379 |
|
Cash escrowed with qualified intermediary (Note 3) |
|
|
36,590 |
|
|
|
|
|
Accounts receivable, net (Note 2) |
|
|
16,972 |
|
|
|
19,957 |
|
Accrued rent receivable, net (Note 2) |
|
|
77,922 |
|
|
|
71,589 |
|
Asset held for sale, net |
|
|
|
|
|
|
126,016 |
|
Investment in real estate ventures, at equity (Note 4) |
|
|
72,748 |
|
|
|
74,574 |
|
Deferred costs, net (Note 5) |
|
|
81,823 |
|
|
|
73,708 |
|
Intangible assets, net (Note 6) |
|
|
239,469 |
|
|
|
281,251 |
|
Other assets |
|
|
92,221 |
|
|
|
96,818 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,328,073 |
|
|
$ |
5,509,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS EQUITY |
|
|
|
|
|
|
|
|
Mortgage notes payable (Note 7) |
|
$ |
757,145 |
|
|
$ |
883,920 |
|
Unsecured notes, net of discounts (Note 7) |
|
|
2,208,070 |
|
|
|
2,208,310 |
|
Unsecured credit facility (Note 7) |
|
|
210,000 |
|
|
|
60,000 |
|
Accounts payable and accrued expenses |
|
|
79,473 |
|
|
|
108,400 |
|
Distributions payable |
|
|
42,131 |
|
|
|
42,760 |
|
Tenant security deposits and deferred rents |
|
|
59,429 |
|
|
|
55,697 |
|
Acquired below market leases, net (Note 6) |
|
|
72,259 |
|
|
|
92,527 |
|
Other liabilities |
|
|
12,682 |
|
|
|
14,661 |
|
Mortgage notes payable and other liabilities held for sale |
|
|
|
|
|
|
20,826 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,441,189 |
|
|
|
3,487,101 |
|
Minority interest partners share of consolidated real estate ventures (Note 10) |
|
|
|
|
|
|
34,436 |
|
Commitments and contingencies (Note 14)
Redeemable limited partnership units at redemption value;
3,939,284 and 3,961,235 issued and outstanding in 2007 and 2006, respectively |
|
|
112,585 |
|
|
|
131,711 |
|
Partners equity (Note 11): |
|
|
|
|
|
|
|
|
7.50% Series D Preferred Mirror Units; 2,000,000 issued and
outstanding in 2007
and 2006 |
|
|
47,912 |
|
|
|
47,912 |
|
7.375% Series E Preferred Mirror Units; 2,300,000 issued and
outstanding in 2007
and 2006 |
|
|
55,538 |
|
|
|
55,538 |
|
General Partnership Capital, 87,049,237 and 88,327,041 units
issued and outstanding
in 2007 and 2006, respectively |
|
|
1,669,527 |
|
|
|
1,750,745 |
|
Accumulated other comprehensive income |
|
|
1,322 |
|
|
|
1,575 |
|
|
|
|
|
|
|
|
Total partners equity |
|
|
1,774,299 |
|
|
|
1,855,770 |
|
|
|
|
|
|
|
|
Total liabilities, minority interest, and partners equity |
|
$ |
5,328,073 |
|
|
$ |
5,509,018 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
34
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods |
|
|
For the six-month periods |
|
|
|
ended June 30, |
|
|
ended June, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rents |
|
$ |
138,597 |
|
|
$ |
130,467 |
|
|
$ |
276,537 |
|
|
$ |
253,536 |
|
Tenant reimbursements |
|
|
21,016 |
|
|
|
15,496 |
|
|
|
41,839 |
|
|
|
32,130 |
|
Other |
|
|
4,691 |
|
|
|
4,466 |
|
|
|
9,029 |
|
|
|
8,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
164,304 |
|
|
|
150,429 |
|
|
|
327,405 |
|
|
|
294,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
45,965 |
|
|
|
41,504 |
|
|
|
91,170 |
|
|
|
82,478 |
|
Real estate taxes |
|
|
16,435 |
|
|
|
14,388 |
|
|
|
32,462 |
|
|
|
28,595 |
|
Depreciation and amortization |
|
|
58,227 |
|
|
|
64,145 |
|
|
|
120,274 |
|
|
|
115,357 |
|
Administrative expenses |
|
|
6,993 |
|
|
|
7,724 |
|
|
|
14,262 |
|
|
|
16,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
127,620 |
|
|
|
127,761 |
|
|
|
258,168 |
|
|
|
242,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
36,684 |
|
|
|
22,668 |
|
|
|
69,237 |
|
|
|
51,703 |
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,603 |
|
|
|
2,573 |
|
|
|
2,390 |
|
|
|
5,223 |
|
Interest expense |
|
|
(40,803 |
) |
|
|
(41,596 |
) |
|
|
(81,161 |
) |
|
|
(81,974 |
) |
Interest expense Deferred financing costs |
|
|
(1,065 |
) |
|
|
(794 |
) |
|
|
(2,323 |
) |
|
|
(1,273 |
) |
Equity in income of real estate ventures |
|
|
4,504 |
|
|
|
463 |
|
|
|
5,258 |
|
|
|
1,428 |
|
Net gain on disposition of undepreciated real estate |
|
|
|
|
|
|
2,608 |
|
|
|
|
|
|
|
2,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
923 |
|
|
|
(14,078 |
) |
|
|
(6,599 |
) |
|
|
(22,285 |
) |
Minority interest partners share of consolidated real estate ventures |
|
|
8 |
|
|
|
84 |
|
|
|
(108 |
) |
|
|
370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
931 |
|
|
|
(13,994 |
) |
|
|
(6,707 |
) |
|
|
(21,915 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
1,093 |
|
|
|
2,119 |
|
|
|
2,869 |
|
|
|
7,365 |
|
Net (loss) gain on disposition of discontinued operations |
|
|
(856 |
) |
|
|
|
|
|
|
25,153 |
|
|
|
|
|
Minority interest partners share of consolidated real estate ventures |
|
|
|
|
|
|
(195 |
) |
|
|
|
|
|
|
(382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
237 |
|
|
|
1,924 |
|
|
|
28,022 |
|
|
|
6,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
1,168 |
|
|
|
(12,070 |
) |
|
|
21,315 |
|
|
|
(14,932 |
) |
Income allocated to Preferred Units |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to Common Partnership Units |
|
$ |
(830 |
) |
|
$ |
(14,068 |
) |
|
$ |
17,319 |
|
|
$ |
(18,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.28 |
) |
Discontinued operations |
|
|
0.00 |
|
|
|
0.02 |
|
|
|
0.31 |
|
|
|
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.01 |
) |
|
$ |
(0.15 |
) |
|
$ |
0.19 |
|
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.28 |
) |
Discontinued operations |
|
|
0.00 |
|
|
|
0.02 |
|
|
|
0.30 |
|
|
|
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.01 |
) |
|
$ |
(0.15 |
) |
|
$ |
0.19 |
|
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average Common Partnership Unit |
|
|
91,020,069 |
|
|
|
94,653,573 |
|
|
|
91,620,218 |
|
|
|
93,989,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average Common Partnership Unit |
|
|
91,020,069 |
|
|
|
94,653,573 |
|
|
|
92,237,966 |
|
|
|
93,989,891 |
|
The accompanying notes are an integral part of these consolidated financial statements.
35
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month |
|
|
For the six-month |
|
|
|
periods ended June 30, |
|
|
periods ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income (loss) |
|
$ |
1,168 |
|
|
$ |
(12,070 |
) |
|
$ |
21,315 |
|
|
$ |
(14,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative financial instruments |
|
|
(1,872 |
) |
|
|
605 |
|
|
|
(422 |
) |
|
|
2,363 |
|
Less: minority interest consolidated real estate venture partners share of
unrealized gain (loss) on derivative financial instruments |
|
|
|
|
|
|
(296 |
) |
|
|
|
|
|
|
(809 |
) |
Settlement of forward starting swaps |
|
|
1,148 |
|
|
|
|
|
|
|
1,148 |
|
|
|
3,266 |
|
Reclassification of realized (gains)/losses on derivative financial
instruments to operations, net |
|
|
(394 |
) |
|
|
9 |
|
|
|
(385 |
) |
|
|
105 |
|
Unrealized gain (loss) on available-for-sale securities |
|
|
13 |
|
|
|
(184 |
) |
|
|
(595 |
) |
|
|
(776 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(1,105 |
) |
|
|
134 |
|
|
|
(254 |
) |
|
|
4,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
63 |
|
|
$ |
(11,936 |
) |
|
$ |
21,061 |
|
|
$ |
(10,783 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
36
BRANDYWINE OPERATING PARTNERSHIP L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six-month periods |
|
|
|
ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
21,315 |
|
|
$ |
(14,932 |
) |
Adjustments to reconcile net income (loss) to net cash from
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
90,405 |
|
|
|
95,051 |
|
Amortization: |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
2,323 |
|
|
|
1,274 |
|
Deferred leasing costs |
|
|
7,731 |
|
|
|
5,184 |
|
Acquired above (below) market leases, net |
|
|
(6,304 |
) |
|
|
(3,907 |
) |
Acquired lease intangibles |
|
|
26,700 |
|
|
|
33,700 |
|
Deferred compensation costs |
|
|
2,559 |
|
|
|
1,445 |
|
Straight-line rent |
|
|
(14,775 |
) |
|
|
(15,916 |
) |
Provision for doubtful accounts |
|
|
500 |
|
|
|
1,956 |
|
Real estate venture income in excess of distributions |
|
|
(104 |
) |
|
|
(267 |
) |
Net gain on sale of interests in real estate |
|
|
(25,153 |
) |
|
|
(2,608 |
) |
Minority interest (expense)/income |
|
|
108 |
|
|
|
12 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
3,916 |
|
|
|
5,937 |
|
Other assets |
|
|
1,366 |
|
|
|
6,471 |
|
Accounts payable and accrued expenses |
|
|
(6,151 |
) |
|
|
7,451 |
|
Tenant security deposits and deferred rents |
|
|
5,665 |
|
|
|
9,976 |
|
Other liabilities |
|
|
(10,148 |
) |
|
|
(6,053 |
) |
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
99,953 |
|
|
|
124,774 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of Prentiss |
|
|
|
|
|
|
(935,856 |
) |
Acquisition of properties |
|
|
|
|
|
|
(50,114 |
) |
Acquisition of minority interest partners share of consolidated real estate venture |
|
|
(64,174 |
) |
|
|
|
|
Sales of properties, net |
|
|
222,592 |
|
|
|
144,006 |
|
Capital expenditures |
|
|
(133,264 |
) |
|
|
(102,851 |
) |
Investment in unconsolidated real estate ventures |
|
|
(523 |
) |
|
|
(502 |
) |
Cash distributions from unconsolidated real estate ventures
in excess of equity in income |
|
|
2,169 |
|
|
|
2,215 |
|
Leasing costs |
|
|
(11,499 |
) |
|
|
(12,114 |
) |
|
|
|
|
|
|
|
Net cash from investing activities |
|
|
15,301 |
|
|
|
(955,216 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
620,875 |
|
|
|
310,000 |
|
Repayments of Credit Facility borrowings |
|
|
(470,875 |
) |
|
|
(205,000 |
) |
Proceeds from mortgage notes payable |
|
|
|
|
|
|
20,520 |
|
Repayments of mortgage notes payable |
|
|
(126,780 |
) |
|
|
(21,198 |
) |
Proceeds from term loan |
|
|
|
|
|
|
750,000 |
|
Repayments of term loan |
|
|
|
|
|
|
(750,000 |
) |
Proceeds from unsecured notes |
|
|
299,644 |
|
|
|
847,818 |
|
Repayments of unsecured notes |
|
|
(299,866 |
) |
|
|
|
|
Proceeds from forward starting swap termination |
|
|
1,148 |
|
|
|
3,266 |
|
Repayments on employee stock loans |
|
|
|
|
|
|
35 |
|
Debt financing costs |
|
|
(3,776 |
) |
|
|
(6,987 |
) |
Exercise of stock options |
|
|
6,221 |
|
|
|
8,011 |
|
Repurchases of Common Partnership Units |
|
|
(53,524 |
) |
|
|
(34,481 |
) |
Distributions paid to preferred and common partnership unitholders |
|
|
(85,178 |
) |
|
|
(72,339 |
) |
|
|
|
|
|
|
|
Net cash from financing activities |
|
|
(112,111 |
) |
|
|
849,645 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
3,143 |
|
|
|
19,203 |
|
Cash and cash equivalents at beginning of period |
|
|
25,379 |
|
|
|
7,174 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
28,522 |
|
|
$ |
26,377 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest of $8,217 in 2007 and $4,916 in 2006 |
|
$ |
92,541 |
|
|
$ |
73,933 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
|
|
|
|
Common shares issued in the Prentiss acquisition |
|
|
|
|
|
|
1,022,173 |
|
Operating Partnership units issued in Prentiss acquisitions |
|
|
|
|
|
|
64,103 |
|
Operating Partnership units issued in property acquistions |
|
|
|
|
|
|
13,819 |
|
Cash escrowed with qualified intermediary (Note 3) |
|
|
109,102 |
|
|
|
|
|
Acquisition of property using cash escrowed with qualified intermediary |
|
|
(72,511 |
) |
|
|
|
|
Debt, minority interest and other liabilities, net, assumed in the Prentiss acquisition |
|
|
|
|
|
|
679,520 |
|
The accompanying notes are an integral part of these consolidated financial statements.
37
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
1. ORGANIZATION AND NATURE OF OPERATIONS
Brandywine Operating Partnership, L.P. (the Partnership) is the entity through which Brandywine
Realty Trust, a Maryland real estate investment trust (the Company), a self-administered and
self-managed real estate investment trust, conducts its business and own its assets. The
Partnerships activities include acquiring, developing, redeveloping, leasing and managing office
and industrial properties. The Companys common shares of beneficial interest are publicly traded
on the New York Stock Exchange under the ticker symbol BDN. As of June 30, 2007, the Partnership
owned 238 office properties, 23 industrial facilities and one mixed-use property (collectively, the
Properties) containing an aggregate of approximately 25.7 million net rentable square feet. The
Partnership also has six properties under development and 10 properties under redevelopment
containing an aggregate 2.4 million net rentable square feet. As of June 30, 2007, the Partnership
consolidates three office properties owned by real estate ventures containing 0.4 million net
rentable square feet. Therefore, the Partnership consolidates 281 properties with an aggregate
28.5 million net rentable square feet. As of June 30, 2007, the Partnership owned economic
interests in 12 unconsolidated real estate ventures that contain approximately 2.8 million net
rentable square feet (collectively, the Real Estate Ventures). The Properties and the properties
owned by the Real Estate Ventures are located in and surrounding Philadelphia, PA, Wilmington, DE,
Southern and Central New Jersey, Richmond, VA, Metropolitan Washington, D.C., Austin, TX and
Oakland and San Diego, CA.
The Company is the sole general partner of the Partnership and, as of June 30, 2007 owned a 95.7 %
interest in the Partnership. The Company conducts its third-party real estate management services
business primarily through four management companies (collectively, the Management Companies),
Brandywine Realty Services Corporation (BRSCO), BTRS, Inc., Brandywine Properties I Limited, Inc.
(BPI), and Brandywine Properties Management, L.P. (BPM). BRSCO, BTRS, Inc. and BPI are taxable
REIT subsidiaries. The Partnership owns a 95% interest in BRSCO and the remaining 5% interest is
owned by a partnership comprised of a current executive and former executive of the Company, each
of whom is a member of the Companys Board of Trustees. The Partnership owns, directly and
indirectly, 100% of each of BTRS, Inc., BPI and BPM.
As of June 30, 2007 the Management Companies were managing properties containing an aggregate of
approximately 42.1 million net rentable square feet, of which approximately 28.1 million net
rentable square feet related to Properties owned by the Partnership and approximately 14.0 million
net rentable square feet related to properties owned by third parties and certain Real Estate
Ventures. Unless otherwise indicated, all references to square feet represent net rentable area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared by the Partnership without audit except as
to the balance sheet as of December 31, 2006, which has been derived from audited data, pursuant to
the rules and regulations of the U.S. Securities and Exchange Commission. 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 have been condensed or
omitted pursuant to such rules and regulations, although the Partnership believes that the included
disclosures are adequate to make the information presented not misleading. In the opinion of
management, all adjustments (consisting solely of normal recurring matters) for a fair statement of
the financial position of the Partnership as of June 30, 2007, the results of its operations for
the three- and six-month periods ended June 30, 2007 and 2006 and its cash flows for the six-month
periods ended June 30, 2007 and 2006 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 Partnerships consolidated financial
statements and footnotes included in the Partnerships 2006 Annual Report on Form 10-K. Certain
prior period amounts have been reclassified to conform to the current period presentation.
38
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Principles of Consolidation
When the Partnership obtains an economic interest in an entity, the Partnership evaluates the
entity to determine if the entity is deemed a variable interest entity (VIE), and if the
Partnership is deemed to be the primary beneficiary, in accordance with FASB Interpretation No.
46R, Consolidation of Variable Interest Entities (FIN 46R). When an entity is not deemed to be
a VIE, the Partnership considers the provisions of EITF 04-05, Determining Whether a General
Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When
the Limited Partners Have Certain Rights (EITF 04-05). The Partnership consolidates (i)
entities that are VIEs and of which the Partnership is deemed to be the primary beneficiary and
(ii) entities that are non-VIEs which the Partnership controls and the limited partners do not have
the ability to dissolve the entity or remove the Partnership without cause nor substantive
participating rights. Entities that the Partnership accounts for under the equity method (i.e. at
cost, increased or decreased by the Partnerships share of earnings or losses, less distributions)
include (i) entities that are VIEs and of which the Partnership is not deemed to be the primary
beneficiary (ii) entities that are non-VIEs which the Partnership does not control, but over which
the Partnership has the ability to exercise significant influence and (iii) entities that are
non-VIEs that the Partnership controls through its general partner status, but the limited
partners in the entity have the substantive ability to dissolve the entity or remove the
Partnership without cause or have substantive participating rights. The Partnership will
reconsider its determination of whether an entity is a VIE and who the primary beneficiary is, and
whether or not the limited partners in an entity have substantive rights, if certain events occur
that are likely to cause a change in the original determinations. The portion of these entities
not owned by the Partnership is presented as minority interest as of and during the periods
consolidated. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Management makes significant
estimates regarding revenue, impairment of long-lived assets, allowance for doubtful accounts and
deferred costs.
Operating Properties
Operating properties are carried at historical cost less accumulated depreciation and impairment
losses when applicable. The cost of operating properties reflects their purchase price or
development cost. Costs incurred for the acquisition and renovation of an operating property are
capitalized to the Partnerships investment in that property. Ordinary repairs and maintenance are
expensed as incurred; major replacements and betterments, which improve or extend the life of the
asset, are capitalized and depreciated over their estimated useful lives. Fully-depreciated assets
are removed from the accounts.
Purchase Price Allocation
The Partnership allocates the purchase price of properties to net tangible and identified
intangible assets acquired based on fair values. Above-market and below-market in-place lease
values for acquired properties are recorded based on the present value (using an interest rate
which reflects the risks associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases and (ii) the Partnerships estimate
of the fair market lease rates for the corresponding in-place leases, measured over a period equal
to the remaining non-cancelable term of the lease. Capitalized above-market lease values are
amortized as a reduction of rental income over the remaining non-cancelable terms of the respective
leases. Capitalized below-market lease values are amortized as an increase to rental income over
the remaining non-cancelable terms of the respective leases, including any fixed-rate renewal
periods.
39
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Other intangible assets also include amounts representing the value of tenant relationships and
in-place leases based on the Partnerships evaluation of the specific characteristics of each
tenants lease and the Partnerships overall relationship with the respective tenant. The
Partnership estimates the cost to execute leases with terms similar to the remaining lease terms of
the in-place leases, including leasing commissions, legal and other related expenses. This
intangible asset is amortized to expense over the remaining term of the respective leases.
Partnership estimates of value are made using methods similar to those used by independent appraisers or by using
independent appraisals. Factors considered by the Partnership in this analysis include an estimate
of the carrying costs during the expected lease-up periods considering current market conditions
and costs to execute similar leases. In estimating carrying costs, the Partnership includes real
estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates
during the expected lease-up periods, which primarily range from three to twelve months. The
Partnership also considers information obtained about each property as a result of its
pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the
tangible and intangible assets acquired. The Partnership also uses the information obtained as a
result of its pre-acquisition due diligence as part of its consideration of FIN 47, and when
necessary, will record a conditional asset retirement obligation as part of its purchase price.
Characteristics considered by the Partnership in allocating value to its tenant relationships
include the nature and extent of the Partnerships business relationship with the tenant, growth
prospects for developing new business with the tenant, the tenants credit quality and expectations
of lease renewals, among other factors. The value of tenant relationship intangibles is amortized
over the remaining initial lease term and expected renewals, but in no event longer than the
remaining depreciable life of the building. The value of in-place leases is amortized over the
remaining non-cancelable term of the respective leases and any fixed-rate renewal periods.
In the event that a tenant terminates its lease, the unamortized portion of each intangible
including in-place lease values and tenant relationship values would be charged to expense and
market rate adjustments would be recorded to revenue.
Revenue Recognition
Rental revenue is recognized on the straight-line basis from the later of the date of the
commencement of the lease or the date of acquisition of the property subject to existing leases,
which averages minimum rents over the terms of the leases. The cumulative difference between lease
revenue recognized under this method and contractual lease payment terms is recorded as accrued
rent receivable on the accompanying balance sheets. This straight-line rent adjustment increased
revenue by approximately $5.6 million and $12.6 million for the three- and six-month periods ended
June 30, 2007 and approximately $8.1 million and $15.9 million for the three- and six-month periods
ended June 30, 2006. Deferred rents on the balance sheet represent rental revenue received prior
to their due dates and tenant reimbursements of certain leasehold improvements that will remain the
Partnerships property at the end of the tenants lease term. The amortization of the leasehold
improvement reimbursement is calculated on a straight-line basis over the term of the tenants
lease and is a component of straight-line rental income and increased revenue by $0.5 million and
$2.1 million for the three- and six-month periods ended June 30, 2007 and approximately $0.1
million for the three- and six-month periods ended June 30, 2006. Leases also typically provide
for tenant reimbursement of a portion of common area maintenance and other operating expenses to
the extent that a tenants pro rata share of expenses exceeds a base year level set in the lease.
Tenant receivables and accrued rent receivables are carried net of the allowances for doubtful
accounts of $7.5 million as of June 30, 2007 and $9.3 million as of December 31, 2006. The
allowance is based on managements evaluation of the collectability of receivables, taking into
account tenant specific considerations as well as the overall credit of the tenant portfolio.
Other income is recorded when earned and is primarily comprised of third party leasing commissions,
third party management fees, termination fees received from tenants and bankruptcy settlement fees.
Other income includes termination fees of $0.5 million and $1.8 million for the three- and
six-month periods ended June 30, 2007 and $1.3 million and $1.9 million for the three- and
six-month periods ended June 30, 2006.
40
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Stock-Based Compensation Plans
The Partnership maintains shareholder-approved equity incentive plans. The Compensation Committee
of the Companys Board of Trustees authorizes awards under these plans. In May 2007, the Companys
shareholders approved an amendment to the Companys Amended and Restated 1997 Long-Term Incentive
Plan (the 1997 Plan). The amendment provided for the merger of the Prentiss Properties Trust 2005
Share Incentive Plan (the Prentiss 2005 Plan) with and into the 1997 Plan, thereby transferring
into the 1997 Plan all of the shares that remained available for award under the Prentiss 2005
Plan. The Company had previously assumed the Prentiss 2005 Plan,
together with other Prentiss incentive plans, as part of the Companys January 2006 acquisition of
Prentiss. The 1997 Plan reserves 500,000 common shares solely for awards under options and share
appreciation rights that have an exercise or strike price at least equal to the market price of the
common shares on the date of award and the remaining shares under the 1997 Plan are available for
any type of award, including restricted share and performance share awards and options. Incentive
stock options may not be granted with an exercise price that is lower than the market price of the
common shares on the grant date. All options awarded by the Company to date are non-qualified
stock options that generally had an initial vesting schedule that ranged from two to ten years. As
of June 30, 2007, approximately 4.1 million common shares remained available for future award under
the 1997 Plan (including the 500,000 shares that are limited to option awards as described above,
and without giving effect to any shares that would become available for awards if and to the extent
that outstanding awards lapse, expire or are forfeited).
On January 1, 2002, the Partnership began to expense the fair value of stock-based compensation
awards granted subsequent to January 1, 2002 over the applicable vesting period as a component of
general and administrative expenses in the Partnerships consolidated Statements of Operations.
The Partnership recognized stock-based compensation expense of $1.3 million and $2.6 million during
the three- and six-month periods ended June 30, 2007 and $0.7 million and $1.4 million during the
three- and six-month periods ended June 30, 2006, respectively.
Accounting for Derivative Instruments and Hedging Activities
The Partnership accounts for its derivative instruments and hedging activities under SFAS No. 133
(SFAS 133), Accounting for Derivative Instruments and Hedging Activities, and its corresponding
amendments under SFAS No. 138, Accounting for Certain Derivative Instruments and Hedging Activities
An Amendment of SFAS 133. SFAS 133 requires the Partnership to measure every derivative
instrument (including certain derivative instruments embedded in other contracts) at fair value and
record them in the balance sheet as either an asset or liability. For derivatives designated as
fair value hedges, the changes in fair value of both the derivative instrument and the hedged item
are recorded in earnings. For derivatives designated as cash flow hedges, the effective portions
of changes in the fair value of the derivative are reported in other comprehensive income. Changes
in fair value of derivative instruments and ineffective portions of hedges are recognized in
earnings in the current period. For the three-month periods ended June 30, 2007 and 2006, the
Partnership was not party to any derivative contract designated as a fair value hedge and there are
no ineffective portions of our cash flow hedges.
The Partnership actively manages its ratio of fixed-to-floating rate debt. To manage its fixed and
floating rate debt in a cost-effective manner, the Partnership, from time to time, may enter into
interest rate swap agreements as cash flow hedges, under which it agrees to exchange various
combinations of fixed and/or variable interest rates based on agreed upon notional amounts. As of
June 30, 2007, there were no such agreements in place.
Income Taxes
No federal or state income taxes are payable by the Partnership, and accordingly, no provision for
taxes has been made in the accompanying consolidated financial statements. The partners are to
include their respective share of the Partnerships profits or losses in their individual tax
returns. The Partnerships tax returns and the amount of allocable Partnership profits and losses
are subject to examination by federal and state taxing authorities. If such examination results in
changes to Partnership profits or losses, then the tax liability of the partners would be changed
accordingly.
The Partnership has several subsidiary real estate investment trusts (REITs) that have elected to
be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the Code). In order to maintain their qualification as a REIT, the REIT subsidiaries
are required to, among other things, distribute at least 90% of its
41
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
REIT taxable income to its stockholders and meet certain tests regarding the nature of its income and assets. The REIT
subsidiaries are not subject to federal income tax with respect to the portion of its income that
meets certain criteria and is distributed annually to the stockholders. Accordingly, no provision
for federal income taxes is included in the accompanying consolidated financial statements with
respect to the operations of these operations. The REIT subsidiaries intend to continue to operate
in a manner that allows them to continue to meet the requirements for taxation as REITs. Many of
these requirements, however, are highly technical and complex. If one of the REIT subsidiaries
were to fail to meet these requirements, the REIT subsidiaries would be subject to federal
income tax. The Partnership is subject to certain state and local taxes. Provision for such taxes
has been included in general and administrative expenses in the Partners Consolidated Statements
of Operations and Comprehensive Income.
The Partnership may elect to treat one or more of its subsidiaries as a taxable REIT subsidiary
(TRS). In general, a TRS of the Partnership may perform additional services for tenants of the
Partnership and generally may engage in any real estate or non-real estate related business. A TRS
is subject to corporate federal income tax. The Partnership has elected to treat certain of its
corporate subsidiaries as TRSs, these entities provide third party property management services and
certain services to tenants that could not otherwise be provided.
New Pronouncements
In June 2007, the Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants (AICPA) issued Statement of Position 07-1, Clarification of the Scope of the
Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity
Method Investors for Investments in Investment Companies (SOP 07-1). SOP 07-1 addresses when the
accounting principles of the AICPA Audit and Accounting Guide Investment Companies must be
applied by an entity and whether investment company accounting must be retained by a parent company
in consolidation or by an investor in the application of the equity method of accounting. In
addition, SOP 07-1 includes certain disclosure requirements for parent companies and equity method
investors in investment companies that retain investment company accounting in the parent companys
consolidated financial statements or the financial statements of an equity method investor. SOP
07-1 is effective for the fiscal year beginning January 1, 2008. The Partnership has determined
that it is not an investment company under the provisions of SOP 07-1 and does not expect to retain
specialized investment company accounting for any of its consolidated or equity method investments
where the investment entity may be deemed an investment company. Accordingly, the Partnership does
not expect the adoption of SOP 07-1 to have a material impact on its financial position and results
of operations.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159), which gives entities the option to measure eligible
financial assets, financial liabilities and firm commitments at fair value on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value
under other accounting standards. The election to use the fair value option is available when an
entity first recognizes a financial asset or financial liability or upon entering into a firm
commitment. Subsequent changes (i.e., unrealized gains and losses) in fair value must be recorded
in earnings. Additionally, SFAS 159 allows for a one-time election for existing positions upon
adoption, with the transition adjustment recorded to beginning retained earnings. This Statement
is effective for fiscal years beginning after November 15, 2007. The Partnership is currently
assessing the potential impact that the adoption of SFAS 159 will have on its financial position
and results of operations.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This
statement clarifies the principle that fair value should be based on the assumptions that market
participants would use when pricing the asset or liability. SFAS No. 157 establishes a fair value
hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority
to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities
to be measured at fair value. SFAS No. 157 also provides certain disclosure requirements,
including, but not limited to, the valuation techniques used to measure fair value and a discussion
of changes in valuation techniques, if any, during the period. This statement is effective in
fiscal years beginning after November 15, 2007. The Partnership is currently
42
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
evaluating the impact and believes that the adoption of this standard on January 1, 2008 will not have a material effect
on its financial position and results of operations.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a Partnerships financial statements and prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on description, classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Partnership adopted FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Partnership recognized no material adjustments regarding its tax accounting treatment.
The Partnership expects to recognize interest and penalties, to the extent incurred related to
uncertain tax positions, if any, as income tax expense, which would be included in general and
administrative expense.
3. REAL ESTATE INVESTMENTS
As of June 30, 2007 and December 31, 2006, the gross carrying value of the Partnerships operating
properties was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
December 31, 2006 |
|
Land |
|
$ |
738,193 |
|
|
$ |
756,400 |
|
Building and improvements |
|
|
3,725,268 |
|
|
|
3,807,040 |
|
Tenant improvements |
|
|
399,265 |
|
|
|
363,865 |
|
|
|
|
|
|
|
|
|
|
$ |
4,862,726 |
|
|
$ |
4,927,305 |
|
|
|
|
|
|
|
|
Acquisitions and Dispositions
The Partnerships acquisitions are accounted for by the purchase method. The results of each
acquired property are included in the Partnerships results of operations from their respective
purchase dates.
2007
On January 18, 2007, the Partnership sold Norriton Office Center, an office property located in
East Norriton, Pennsylvania containing 73,394 net rentable square feet, for a sales price of $7.8
million.
On January 19, 2007, the Partnership sold four office properties located in Dallas, Texas
containing 1,091,186 net rentable square feet and a 4.7 acre land parcel, for an aggregate sales
price of $107.1 million.
On January 31, 2007, the Partnership sold George Kachel Farmhouse, an office property located in
Reading, Pennsylvania containing 1,664 net rentable square feet, for a sales price of $0.2 million.
On March 1, 2007, the Partnership acquired the remaining 49% interest in a consolidated real estate
venture previously owned by Stichting Pensioenfonds ABP containing ten office properties for a
purchase price of $63.7 million. The Partnership owned a 51% interest in this real estate venture
through the acquisition of Prentiss in January 5, 2006 and had already consolidated this venture.
This purchase was accounted for as a step acquisition and the difference between the purchase price
of the minority interest and the carrying value of the pro rata share of the assets of the real
estate venture was allocated to the real estate ventures assets and liabilities based on their
relative fair value.
On March 30, 2007, the Partnership sold 1007 Laurel Oak, an office property located in Voorhees,
New Jersey containing 78,205 net rentable square feet, for a sales price of $7.0 million.
On March 30, 2007, the Partnership sold 10 office properties located in Reading and Harrisburg,
Pennsylvania containing 940,486 net rentable square feet, for an aggregate sales price of $112.0.
The Partnership structured this
43
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
transaction to qualify as a like-kind exchange under Section 1031
of the Code and the cash from the sale was held by a qualified intermediary for purposes of
accomplishing the like-kind exchange.
On April 30, 2007, the Partnership sold Cityplace Center, an office property located Dallas, Texas
containing 1,295,832 net rentable square feet, for an aggregate sales price of $115.0 million.
On May 10, 2007, the Partnership acquired Lake Merritt Tower, an office property located in
Oakland, California containing 204,278 net rentable square feet for an aggregate contracted
purchase price of $72.0 million (not including closing costs of $0.5 million). A portion of the
proceeds from the sale of the 10 office properties located in Reading and Harrisburg, Pennsylvania
in March 2007 was used to fully fund this purchase.
2006
Prentiss Acquisition
On January 5, 2006, the Partnership acquired Prentiss pursuant to the Merger Agreement that the
Partnership entered into with Prentiss on October 3, 2005. In conjunction with the Partnerships
acquisition of Prentiss, designees of The Prudential Insurance Company of America (Prudential)
acquired certain of Prentiss properties that contain an aggregate of approximately 4.32 million
net rentable square feet for a total consideration of approximately $747.7 million. Through its
acquisition of Prentiss (and after giving effect to the Prudential acquisition of Prentiss
properties), the Partnership acquired a portfolio of 79 office properties (including 13 properties
that were owned by consolidated Real Estate Ventures and seven properties that were owned by an
unconsolidated Real Estate Venture) that contain an aggregate of 14.0 million net rentable square
feet. The results of the operations of Prentiss have been included in the Partnerships
consolidated financial statements since January 5, 2006.
The Partnership funded the approximately $1.05 billion cash portion of the merger consideration,
related transaction costs and prepayments of approximately $543.3 million in Prentiss mortgage debt
at the closing of the merger through (i) a $750 million unsecured term loan (ii) approximately
$676.5 million of cash from Prudentials acquisition of Prentiss properties; and (iii)
approximately $195.0 million through borrowing under a revolving credit facility.
The following table summarizes the fair value of the assets acquired and liabilities assumed at the
date of acquisition of Prentiss (in thousands):
44
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
|
|
|
|
|
|
|
At January 5, 2006 |
|
Real estate investments |
|
|
|
|
Land operating |
|
$ |
282,584 |
|
Building and improvements |
|
|
1,942,728 |
|
Tenant improvements |
|
|
120,610 |
|
Construction in progress and land inventory |
|
|
57,329 |
|
|
|
|
|
Total real estate investments acquired |
|
|
2,403,251 |
|
|
|
|
|
|
Rent receivables |
|
|
6,031 |
|
Other assets acquired: |
|
|
|
|
Intangible assets: |
|
|
|
|
In-place leases |
|
|
187,907 |
|
Relationship values |
|
|
98,382 |
|
Above-market leases |
|
|
26,352 |
|
|
|
|
|
Total intangible assets acquired |
|
|
312,641 |
|
Investment in real estate ventures |
|
|
66,921 |
|
Investment in marketable securities |
|
|
193,089 |
|
Other assets |
|
|
8,868 |
|
|
|
|
|
Total other assets |
|
|
581,519 |
|
|
|
|
|
Total assets acquired |
|
|
2,990,801 |
|
|
|
|
|
|
Liabilities assumed: |
|
|
|
|
Mortgage notes payable |
|
|
532,607 |
|
Unsecured notes |
|
|
78,610 |
|
Secured note payable |
|
|
186,116 |
|
Security deposits and deferred rent |
|
|
6,475 |
|
Other liabilities: |
|
|
|
|
Below-market leases |
|
|
78,911 |
|
Other liabilities |
|
|
43,995 |
|
|
|
|
|
Total other liabilities assumed |
|
|
122,906 |
|
Total liabilities assumed |
|
|
926,714 |
|
Minority interest |
|
|
104,658 |
|
|
|
|
|
Net assets acquired |
|
$ |
1,959,429 |
|
|
|
|
|
In the acquisition of Prentiss, each then outstanding Prentiss common share was converted into
the right to receive 0.69 of a Brandywine common share and $21.50 in cash (the Per Share Merger
Consideration) except that 497,884 Prentiss common shares held in the Prentiss Deferred
Compensation Plan converted solely into 720,737 Brandywine common shares. In addition, each then
outstanding unit (each, a Prentiss OP Unit) of limited partnership interest in the Prentiss
operating partnership subsidiary was, at the option of the holder, converted into Prentiss Common
Shares with the right to receive the Per Share Merger Consideration or 1.3799 Class A Units of the
Operating Partnership (Brandywine Class A Units). Accordingly, based on 49,375,723 Prentiss
common shares outstanding and 139,000 Prentiss OP Units electing to receive merger consideration at
closing of the acquisition, the Company issued 34,541,946 Brandywine common shares and paid an
aggregate of approximately $1.05 billion in cash to the accounts of the former Prentiss
shareholders. Based on 1,572,612 Prentiss OP Units outstanding at closing of the acquisition that
did not elect to receive merger consideration, the Operating Partnership issued 2,170,047
Brandywine Class A Units. In addition, options issued by Prentiss that were exercisable for an
aggregate of 342,662 Prentiss common shares were converted into options exercisable for an
aggregate of 496,037 Brandywine common shares at a weighted average exercise price of $22.00 per
share. Through its acquisition of Prentiss the Company also assumed approximately $611.2 million
in aggregate principal amount of Prentiss debt.
Each Brandywine Class A Unit that was issued in the merger is subject to redemption at the option
of the holder. The Operating Partnership may, at its option, satisfy the redemption either for an
amount, per unit, of cash equal to the then market price of one Brandywine common share (based on
the prior ten-day trading average) or for one Brandywine common share.
45
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
For purposes of computing the total purchase price reflected in the financial statements, the
Brandywine common shares (including restricted common shares), Partnership units and options that
were issued in the Prentiss transaction were valued based on the average trading price per
Brandywine common share of $29.54. The average trading price was based on the average of the high
and low trading prices for each of the two trading days before, the day of and the two trading days
after the merger was announced (i.e., September 29, September 30, October 3, October 4 and October
5).
The Partnership considered the provisions of FIN 47 for these acquisitions and, where necessary,
recorded a conditional asset retirement obligation as part of the purchase price. The aggregate
asset retirement recorded in connection with the Prentiss acquisition was approximately $2.7
million.
Pro forma information relating to the acquisition of Prentiss is presented below as if Prentiss was
acquired and the related financing transactions occurred on January 1, 2006. There is no pro forma
adjustment necessary for the quarter-ended June 30, 2006 since the pro forma amounts represent
activity for the first 4 days of 2006. Therefore only the year-to-date pro forma amounts are
presented. These pro forma results are not necessarily indicative of the results which actually
would have occurred if the acquisition had occurred on the first day of the periods presented, nor
does the pro forma financial information purport to represent the results of operations for future
periods (in thousands, except per share amounts):
|
|
|
|
|
|
|
Six-month period |
|
|
|
ended June 30, 2006 |
|
|
|
(unaudited) |
|
Pro forma revenue |
|
$ |
296,765 |
|
|
|
|
|
|
Pro forma loss from continuing operations |
|
|
(22,157 |
) |
|
|
|
|
|
Pro forma loss allocated to common partnership units |
|
|
(18,594 |
) |
|
|
|
|
|
Earnings per common partnership unit from continuing operations |
|
|
|
|
Basic as reported |
|
$ |
(0.28 |
) |
|
|
|
|
Basic as pro forma |
|
$ |
(0.28 |
) |
|
|
|
|
Diluted as reported |
|
$ |
(0.28 |
) |
|
|
|
|
Diluted as pro forma |
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
|
|
Earnings per common partnership unit |
|
|
|
|
Basic as reported |
|
$ |
(0.20 |
) |
|
|
|
|
Basic as pro forma |
|
$ |
(0.20 |
) |
|
|
|
|
Diluted as reported |
|
$ |
(0.20 |
) |
|
|
|
|
Diluted as pro forma |
|
$ |
(0.20 |
) |
|
|
|
|
Subsequent to its acquisition of Prentiss and the related sale of certain properties to Prudential,
the Partnership sold nine of the acquired properties that contained an aggregate of 1.7 million net
rentable square during the six-month period ended June 30, 2006.
During the six-months ended June 30, 2007, the Partnership sold five of the acquired properties
that contained an aggregate of 2.4 million net rentable square feet and a 4.7 acres parcel of land.
Since January 5, 2006, the Partnership has sold a total of 22 of the acquired properties that
contained an aggregate of 5.3 million net rentable square feet and two parcels of land totaling
15.6 acres.
46
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Other Acquisitions and Dispositions
On February 1, 2006, the Partnership acquired 101 Lenox Drive, an office property located in
Lawrenceville, New Jersey containing 92,980 net rentable square feet, for a purchase price of $10.2
million.
On April 4, 2006, the Partnership acquired One Paragon Place, an office property located in
Richmond, Virginia containing 145,127 net rentable square feet, for a purchase price of $24.0
million.
On April 17, 2006, the Partnership acquired a parcel of land located in Mount Laurel, New Jersey
containing 47.9 acres for a purchase price of $6.7 million.
On April 20, 2006, the Partnership sold a parcel of land located in Radnor, Pennsylvania containing
1.3 acres for a sales price of $4.5 million.
On April 21, 2006, the Partnership acquired a parcel of land located in Newtown, Pennsylvania
containing 5.5 acres for a purchased price of $1.9 million.
On June 21, 2006, the Partnership sold a parcel of land located in Westampton, New Jersey
containing 5.5 acres for a sales price of $0.4 million.
On June 27, 2006, the Partnership acquired a parcel of land located in Goochland County, Virginia
containing 23.2 acres for a purchase price of $4.6 million.
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of June 30, 2007, the Partnership had an aggregate investment of approximately $72.7 million in
12 unconsolidated Real Estate Ventures (net of returns of investment). The Partnership formed
these ventures with unaffiliated third parties, or acquired them, to develop office properties or
to acquire land in anticipation of possible development of office properties. Ten of the Real
Estate Ventures own 15 office buildings that contain an aggregate of approximately 2.8 million net
rentable square feet, one Real Estate Venture developed a hotel property that contains 137 rooms
and one Real Estate Venture is developing an office property located in Albemarle County, VA.
The Partnership accounts for its unconsolidated interests in its Real Estate Ventures using the
equity method. Unconsolidated interests range from 6% to 50%, subject to specified priority
allocations in certain of the Real Estate Ventures.
The amounts reflected below (except for Partnerships share of equity and income) are based on the
historical financial information of the individual Real Estate Ventures. One of the Real Estate
Ventures, acquired in connection with the Prentiss acquisition, had a negative equity balance on a
historical cost basis as a result of historical depreciation and distributions of excess financing
proceeds. The Partnership reflected its acquisition of this Real Estate Venture interest at its
relative fair value as of the date of the purchase of Prentiss. The difference between allocated
cost and the underlying equity in the net assets of the investee is accounted for as if the entity
were consolidated (i.e., allocated to the Partnerships relative share of assets and liabilities
with an adjustment to recognize equity in earnings for the appropriate additional
depreciation/amortization).
The following is a summary of the financial position of the Real Estate Ventures as of June 30,
2007 and December 31, 2006 (in thousands):
47
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Operating property, net of accumulated depreciation |
|
$ |
394,539 |
|
|
$ |
365,168 |
|
Other assets |
|
|
45,039 |
|
|
|
52,935 |
|
Liabilities |
|
|
32,111 |
|
|
|
28,764 |
|
Debt |
|
|
357,661 |
|
|
|
332,589 |
|
Equity |
|
|
49,805 |
|
|
|
56,888 |
|
Partnerships share of equity (Partnerships basis) |
|
|
72,748 |
|
|
|
74,574 |
|
The following is a summary of results of operations of the Real Estate Ventures for the three-month
periods ended June 30, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
Six-month periods |
|
|
ended June 30, |
|
ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Revenue |
|
$ |
18,986 |
|
|
$ |
18,710 |
|
|
$ |
37,300 |
|
|
$ |
38,434 |
|
Operating expenses |
|
|
6,643 |
|
|
|
6,743 |
|
|
|
12,940 |
|
|
|
14,737 |
|
Interest expense, net |
|
|
5,410 |
|
|
|
5,080 |
|
|
|
10,648 |
|
|
|
10,074 |
|
Depreciation and amortization |
|
|
3,776 |
|
|
|
5,299 |
|
|
|
8,004 |
|
|
|
10,172 |
|
Net income |
|
|
3,156 |
|
|
|
1,589 |
|
|
|
5,707 |
|
|
|
3,451 |
|
Partnerships share of income (Partnership basis) |
|
|
896 |
|
|
|
463 |
|
|
|
1,658 |
|
|
|
1,428 |
|
Equity in income of real estate ventures in the Partnerships consolidated statement of operations
for the three- and six- months ended June 30, 2007 includes a $3.8 million distribution of a
residual profits interest that is not included in the table above.
As of June 30, 2007, the Partnership had guaranteed repayment of approximately $0.6 million of
loans for the Real Estate Ventures. The Partnership also provides customary environmental
indemnities and completion guarantees in connection with construction and permanent financing both
for its own account and on behalf of the Real Estate Ventures.
5. DEFERRED COSTS
As of June 30, 2007 and December 31, 2006, the Partnerships deferred costs were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
91,984 |
|
|
$ |
(30,941 |
) |
|
$ |
61,043 |
|
Financing Costs |
|
|
26,898 |
|
|
|
(6,118 |
) |
|
|
20,780 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
118,882 |
|
|
$ |
(37,059 |
) |
|
$ |
81,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
83,629 |
|
|
$ |
(28,278 |
) |
|
$ |
55,351 |
|
Financing Costs |
|
|
24,648 |
|
|
|
(6,291 |
) |
|
|
18,357 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
108,277 |
|
|
$ |
(34,569 |
) |
|
$ |
73,708 |
|
|
|
|
|
|
|
|
|
|
|
48
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
6. INTANGIBLE ASSETS AND LIABILITIES
As of June 30, 2007 and December 31, 2006, the Partnerships intangible assets were comprised of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Intangible
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
182,148 |
|
|
$ |
(55,584 |
) |
|
$ |
126,564 |
|
Tenant relationship value |
|
|
120,532 |
|
|
|
(26,309 |
) |
|
|
94,223 |
|
Above market leases acquired |
|
|
31,950 |
|
|
|
(13,268 |
) |
|
|
18,682 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
334,630 |
|
|
$ |
(95,161 |
) |
|
$ |
239,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Liability: |
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
102,754 |
|
|
$ |
(30,495 |
) |
|
$ |
72,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Total Cost |
|
|
Amortization |
|
|
Deferred Costs, net |
|
Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
207,513 |
|
|
$ |
(52,293 |
) |
|
$ |
155,220 |
|
Tenant relationship value |
|
|
124,605 |
|
|
|
(19,572 |
) |
|
|
105,033 |
|
Above market leases acquired |
|
|
32,667 |
|
|
|
(11,669 |
) |
|
|
20,998 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
364,785 |
|
|
$ |
(83,534 |
) |
|
$ |
281,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Liability: |
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
118,536 |
|
|
$ |
(26,009 |
) |
|
$ |
92,527 |
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007, the Partnerships annual amortization for its intangible assets/liabilities
are as follows (in thousands and assuming no early lease terminations):
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
Liabilities |
|
2007 (remainder) |
|
$ |
28,702 |
|
|
$ |
8,813 |
|
2008 |
|
|
46,841 |
|
|
|
13,469 |
|
2009 |
|
|
40,923 |
|
|
|
11,444 |
|
2010 |
|
|
34,221 |
|
|
|
8,899 |
|
2011 |
|
|
26,808 |
|
|
|
7,435 |
|
Thereafter |
|
|
61,974 |
|
|
|
22,199 |
|
|
|
|
|
|
|
|
Total |
|
$ |
239,469 |
|
|
$ |
72,259 |
|
|
|
|
|
|
|
|
7. DEBT OBLIGATIONS
The following table sets forth information regarding the Partnerships debt obligations outstanding
at June 30, 2007 and December 31, 2006 (in thousands):
49
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Interest |
|
|
Maturity |
|
Property / Location |
|
2007 |
|
|
2006 |
|
|
Rate |
|
|
Date |
|
MORTGAGE DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interstate Center |
|
$ |
|
|
|
$ |
552 |
|
|
6.19% |
|
|
Mar-07 |
The Bluffs |
|
|
|
|
|
|
10,700 |
|
|
6.00% |
(a) |
|
Apr-07 |
Pacific Ridge |
|
|
|
|
|
|
14,500 |
|
|
6.00% |
(a) |
|
Apr-07 |
Pacific View/Camino |
|
|
|
|
|
|
26,000 |
|
|
6.00 % |
(a) |
|
Apr-07 |
Computer Associates Building |
|
|
|
|
|
|
31,000 |
|
|
6.00 % |
(a) |
|
Apr-07 |
Presidents Plaza |
|
|
|
|
|
|
30,900 |
|
|
6.00 % |
(a) |
|
Apr-07 |
440 & 442 Creamery Way |
|
|
|
|
|
|
5,421 |
|
|
8.55% |
|
|
May-07 |
Grande A |
|
|
59,297 |
|
|
|
59,513 |
|
|
7.48 % |
(b) |
|
Jul-07 |
Grande B |
|
|
76,731 |
|
|
|
77,535 |
|
|
7.48 % |
(b) |
|
Jul-07 |
481 John Young Way |
|
|
2,259 |
|
|
|
2,294 |
|
|
8.40% |
|
|
Nov-07 |
400 Commerce Drive |
|
|
11,681 |
|
|
|
11,797 |
|
|
7.12% |
|
|
Jun-08 |
Two Logan Square |
|
|
70,745 |
|
|
|
71,348 |
|
|
5.78 % |
(a) |
|
Jul-09 |
200 Commerce Drive |
|
|
5,802 |
|
|
|
5,841 |
|
|
7.12 % |
(a) |
|
Jan-10 |
1333 Broadway |
|
|
24,209 |
|
|
|
24,418 |
|
|
5.18 % |
(a) |
|
May-10 |
The Ordway |
|
|
45,861 |
|
|
|
46,199 |
|
|
7.95 % |
(a) |
|
Aug-10 |
World Savings Center |
|
|
27,334 |
|
|
|
27,524 |
|
|
7.91 % |
(a) |
|
Nov-10 |
Plymouth Meeting Exec. |
|
|
43,793 |
|
|
|
44,103 |
|
|
7.00 % |
(a) |
|
Dec-10 |
Four Tower Bridge |
|
|
10,591 |
|
|
|
10,626 |
|
|
6.62% |
|
|
Feb-11 |
Arboretum I, II, III & V |
|
|
22,492 |
|
|
|
22,750 |
|
|
7.59% |
|
|
Jul-11 |
Midlantic Drive/Lenox Drive/DCC I |
|
|
61,958 |
|
|
|
62,678 |
|
|
8.05% |
|
|
Oct-11 |
Research Office Center |
|
|
41,872 |
|
|
|
42,205 |
|
|
7.64 % |
(a) |
|
Oct-11 |
Concord Airport Plaza |
|
|
38,021 |
|
|
|
38,461 |
|
|
7.20 % |
(a) |
|
Jan-12 |
Six Tower Bridge |
|
|
14,655 |
|
|
|
14,744 |
|
|
7.79% |
|
|
Aug-12 |
Newtown Square/Berwyn Park/Libertyview |
|
|
62,721 |
|
|
|
63,231 |
|
|
7.25% |
|
|
May-13 |
Coppell Associates |
|
|
3,626 |
|
|
|
3,737 |
|
|
6.89% |
|
|
Dec-13 |
Southpoint III |
|
|
4,692 |
|
|
|
4,949 |
|
|
7.75% |
|
|
Apr-14 |
Tysons Corner |
|
|
100,000 |
|
|
|
100,000 |
|
|
4.84 % |
(a) |
|
Aug-15 |
Coppell Associates |
|
|
16,600 |
|
|
|
16,600 |
|
|
5.75% |
|
|
Mar-16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
744,940 |
|
|
|
869,626 |
|
|
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt premiums, net |
|
|
12,205 |
|
|
|
14,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
757,145 |
|
|
$ |
883,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNSECURED DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement Notes due 2008 |
|
|
113,000 |
|
|
|
113,000 |
|
|
4.34% |
|
|
Dec-08 |
2009 Three Year Notes |
|
|
|
|
|
|
300,000 |
|
|
Libor + 0.45% |
|
|
Apr-09 |
2009 Five Year Notes |
|
|
275,000 |
|
|
|
275,000 |
|
|
4.62% |
|
|
Nov-09 |
2010 Five Year Notes |
|
|
300,000 |
|
|
|
300,000 |
|
|
5.61% |
|
|
Dec-10 |
Line-of-Credit |
|
|
210,000 |
|
|
|
60,000 |
|
|
Libor + 0.725% |
|
|
Jun-11 |
3.875% Exchangeable Notes |
|
|
345,000 |
|
|
|
345,000 |
|
|
3.87% |
|
|
Oct-11 |
2012 Six Year Notes |
|
|
300,000 |
|
|
|
300,000 |
|
|
5.77% |
|
|
Apr-12 |
2014 Ten Year Notes |
|
|
250,000 |
|
|
|
250,000 |
|
|
5.53% |
|
|
Nov-14 |
2016 Ten Year Notes |
|
|
250,000 |
|
|
|
250,000 |
|
|
5.95% |
|
|
Apr-16 |
2017 Ten Year Notes |
|
|
300,000 |
|
|
|
|
|
|
5.72% |
|
|
May-17 |
Indenture IA (Preferred Trust I) |
|
|
27,062 |
|
|
|
27,062 |
|
|
Libor + 1.25% |
|
|
Mar-35 |
Indenture IB (Preferred Trust I) |
|
|
25,774 |
|
|
|
25,774 |
|
|
Libor + 1.25% |
|
|
Apr-35 |
Indenture II (Preferred Trust II) |
|
|
25,774 |
|
|
|
25,774 |
|
|
Libor + 1.25% |
|
|
Jul-35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
2,421,610 |
|
|
|
2,271,610 |
|
|
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt discounts, net |
|
|
(3,540 |
) |
|
|
(3,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
2,418,070 |
|
|
$ |
2,268,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Obligations |
|
$ |
3,175,215 |
|
|
$ |
3,152,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Loans were assumed upon acquisition of the related property. Interest rates presented
above reflect the market rate at the time of acquisition. |
|
(b) |
|
In May 2007, the Company elected to prepay the loan on the date indicated in the Maturity date
column. (See Note 15) |
50
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
The mortgage note payable balance of $5.1 million for Norriton Office Center as of December
31, 2006, not included in the table above, is included in Mortgage notes payable and other
liabilities held for sale on the consolidated balance sheets.
As of June 30, 2007 and 2006, the Partnerships weighted-average effective interest rate on its
mortgage notes payable was 6.9% and 6.1%, respectively.
On April 30, 2007, the Operating Partnership completed an underwritten public offering of
$300,000,000 aggregate principal amount of unsecured notes due 2017 (the 2017 Notes). Brandywine
Realty Trust guaranteed the payment of principal and interest on the 2017 Notes. The Company used
proceeds from these notes to reduce borrowings under the Companys revolving credit facility.
On March 28, 2006, the Partnership completed an underwritten public offering of (1) $300,000,000
aggregate principal amount of unsecured floating rate notes due 2009 (the 2009 Notes), (2)
$300,000,000 aggregate principal amount of 5.75% unsecured notes due 2012 (the 2012 Notes) and
(3) $250,000,000 aggregate principal amount of 6.00% unsecured notes due 2016 (the 2016 Notes).
The Company guaranteed the payment of principal and interest on the 2009 Notes, the 2012 Notes and
the 2016 Notes. The Partnership used proceeds from these notes to repay a term loan obtained to
finance a portion of the consideration paid in the Prentiss merger and to reduce borrowings under
its revolving credit facility.
On October 4, 2006, the Partnership sold $300.0 million aggregate principal amount of unsecured
3.875% Exchangeable Guaranteed Notes due 2026 in reliance upon an exemption from registration
rights under Rule 144A under the Securities Act of 1933 and sold an additional $45 million of
3.875% Exchangeable Guaranteed Notes due 2026 on October 16, 2006 to cover over-allotments.
The Partnership has registered the resale of the exchangeable notes. At certain times and
upon certain events, the notes are exchangeable for cash up to their principal amount and with
respect to the remainder, if any, of the exchange value in excess of such principal amount, cash or
shares of the Companys common share. The initial exchange rate is 25.4065 shares per $1,000
principal amount of notes (which is equivalent to an initial exchange price of $39.36 per share).
The Partnership may not redeem the notes prior to October 20, 2011 (except to preserve the
Companys status as a REIT for U.S. federal income tax purposes), but we may redeem the notes at
any time thereafter, in whole or in part, at a redemption price equal to the principal amount of
the notes to be redeemed plus accrued and unpaid interest. In addition, on October 20, 2011,
October 15, 2016 and October 15, 2021 as well as upon the occurrence of certain change in control
transactions prior to October 20, 2011, holders of notes may require the Company to repurchase all
or a portion of the notes at a purchase price equal to the principal amount plus accrued and unpaid
interest. The Partnership used net proceeds from the notes to repurchase approximately $60.0
million of the Companys common stock at a price of $32.80 per share and for general corporate
purposes, including the repayment of outstanding borrowings under the Credit Facility.
On November 29, 2006, the Partnership gave notice of redemption of the 2009 Notes and redeemed the
2009 Notes on January 2, 2007.
The indenture relating to the unsecured notes contains financial restrictions and requirements,
including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed
40%, (3) a debt service coverage ratio of greater than 1.5 to 1.0, and (4) an unencumbered asset
value of not less than 150% of unsecured debt. In addition, the note purchase agreement relating
to the Partnerships $113 million unsecured notes due 2008 contains covenants that are similar to
the covenants in the indenture.
The Partnership utilizes credit facility borrowings for general business purposes, including the
acquisition, development and redevelopment of properties and the repayment of other debt. On June
29, 2007, the Partnership amended its $600.0 million unsecured revolving credit facility (the
Credit Facility). The amendment extended the maturity date of the Credit Facility from December
22, 2009 to June 29, 2011 (subject to an extension of one year, at the Partnerships option, upon
its payment of an extension fee equal to 15 basis points of the committed amount under the Credit
Facility). The amendment also reduced the per annum variable interest rate on outstanding balances
from Eurodollar plus 0.80% to Eurodollar plus 0.725% per annum. In addition, the amendment reduced
the quarterly
51
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
facility fee from 20 basis points to 17.5 basis points per annum. The interest rate and facility
fee are subject to adjustment upon a change in the Partnerships unsecured debt ratings. The
amendment also lowered to 7.50% from 8.50% the capitalization rate used in the calculation of
several of the financial covenants; increased our swing loan availability from $50.0 million to
$60.0 million; and increased the number of competitive bid loan requests available to the
Partnership from two to four in any 30 day period. The competitive bid feature allows banks that
are part of the lender consortium under the Credit Facility to bid to make loans to the Partnership
at a reduced Eurodollar rate. The Partnership has the option to increase the Credit Facility to
$800.0 million subject to the absence of any defaults and the Partnerships ability to acquire
additional commitments from its existing lenders or new lenders. As of June 30, 2007, the
Partnership had $210.0 million of borrowings and $22.5 million of letters of credit outstanding
under the Credit Facility, leaving $367.5 million of unused availability. As of June 30, 2007 and
2006, the weighted-average interest rate on the Credit Facility, including the effect of interest
rate hedges, was 6.35% and 5.48%, respectively.
The Credit Facility requires the maintenance of ratios related to minimum net worth, debt-to-total
capitalization and fixed charge coverage and includes non-financial covenants.
In April 2007, the Partnership entered into a $20.0 million Sweep Agreement (the Sweep Agreement)
to be used for cash management purposes. Borrowings under the Sweep Agreement bear interest at
one-month LIBOR plus 0.75%. There were no outstanding borrowings on the Sweep Agreement at June
30, 2007.
As of June 30, 2007, the Partnerships aggregate scheduled principal payments of debt obligations,
excluding amortization of discounts and premiums, are as follows (in thousands):
|
|
|
|
|
2007 |
|
$ |
143,236 |
|
2008 |
|
|
135,148 |
|
2009 |
|
|
354,955 |
|
2010 |
|
|
450,189 |
|
2011 |
|
|
687,262 |
|
Thereafter |
|
|
1,395,760 |
|
|
|
|
|
Total indebtedness |
|
$ |
3,166,550 |
|
|
|
|
|
8. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
Risk Management
In the normal course of its on-going business operations, the Partnership encounters economic risk.
There are three main components of economic risk: interest rate risk, credit risk and market risk.
The Partnership is subject to interest rate risk on its interest-bearing liabilities. Credit risk
is the risk of inability or unwillingness of tenants to make contractually required payments.
Market risk is the risk of declines in the value of properties due to changes in rental rates,
interest rates or other market factors affecting the valuation of properties held by the
Partnership.
Use of Derivative Financial Instruments
The Partnerships use of derivative instruments is limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposures and not for speculative
purposes. The principal objective of such arrangements is to minimize the risks and/or costs
associated with the Partnerships operating and financial structure, as well as to hedge specific
transactions. The counterparties to these arrangements are major financial institutions with which
the Partnership and its affiliates may also have other financial relationships. The Partnership is
potentially exposed to credit loss in the event of non-performance by these counterparties.
However, because of the high credit ratings of the counterparties, the Partnership does not
anticipate that any of the counterparties will fail to meet these obligations as they come due.
The Partnership does not hedge credit or property value market risks.
52
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
In March 2007, in anticipation of the offering of the 2017 Notes, the Partnership entered into two
treasury lock agreements. The treasury lock agreements were designated as cash flow hedges on
interest rate risk and qualified for hedge accounting. Each of the treasury lock agreements were
for notional amounts of $75.0 million for an expiration of 10 years at all-in rates of 4.5585% and
4.498% and had fair values of $0.7 million and $1.0 million, respectively at June 30, 2007. The
agreements were settled in April 2007 upon completion of the offering of the 2017 Notes at a total
benefit of $1.1 million. This benefit will be recorded as a component of accumulated other
comprehensive income in the accompanying consolidated balance sheet and being amortized over the
term of the 2017 Notes.
In March 2006, in anticipation of the offering of the 2009 Notes, the 2012 Notes and the 2016
Notes, the Partnership entered into forward starting swaps. The forward starting swaps were
designated as cash flow hedges of interest rate risk and qualified for hedge accounting. The
forward starting swaps were for notional amounts totaling $200.0 million at an all-in-rate of 5.2%.
Two of the forward starting swaps had a six year maturity date and one had a ten year maturity
date. The forward starting swaps were settled in March 2006 upon the completion of the offering of
the 2009, 2012, and 2016 Notes at a total benefit of approximately $3.3 million. The benefit was
recorded as a component of accumulated other comprehensive income in the accompanying consolidated
balance sheet and is being amortized to interest expense over the term of the unsecured notes.
The Partnership entered into two interest rate swaps in January 2006 aggregating $90 million in
notional amount as part of its acquisition of Prentiss. The instruments were used to hedge the
risk of interest cash outflows on secured variable rate debt on properties that were included as
part of the real estate venture in which the Partnership purchased the remaining 49% of the
minority interest partners share in March 2007. One of the swaps with a notional amount of $20
million had a maturity date of February 1, 2010 at an all-in rate of 4.675%. The other, with a
notional amount of $70 million, had a maturity date of August 1, 2008 at an all in rate of 4.675%.
The agreements were settled in April 2007 in connection with the repayment of five mortgage notes,
at a total benefit of $0.4 million.
The Partnership formally assesses, both at inception of the hedge and on an on-going basis, whether
each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If
management determines that a derivative is not highly-effective as a hedge or if a derivative
ceases to be a highly-effective hedge, the Partnership will discontinue hedge accounting
prospectively.
Concentration of Credit Risk
Concentrations of credit risk arise when a number of tenants related to the Partnerships
investments or rental operations are engaged in similar business activities, or are located in the
same geographic region, or have similar economic features that would cause their inability to meet
contractual obligations, including those to the Partnership, to be similarly affected. The
Partnership regularly monitors its tenant base to assess potential concentrations of credit risk.
Management believes the current credit risk portfolio is reasonably well diversified and does not
contain any unusual concentration of credit risk. No tenant accounted for 5% or more of the
Partnerships rents during the three- and six-month periods ended June 30, 2007 or 2006.
9. DISCONTINUED OPERATIONS
For the three-month periods ended June 30, 2007, income from discontinued operations relates to 18
properties that the Partnership sold during 2007. The following table summarizes the revenue and
expense information for properties classified as discontinued operations as of June 30, 2007 for
the three- and six-month periods ended June 30, 2007 (in thousands):
53
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
Six-month period |
|
|
|
ended June 30, 2007 |
|
|
ended June 30, 2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
1,460 |
|
|
$ |
12,397 |
|
Tenant reimbursements |
|
|
562 |
|
|
|
1,246 |
|
Other |
|
|
145 |
|
|
|
214 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
2,167 |
|
|
|
13,857 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
833 |
|
|
|
4,845 |
|
Real estate taxes |
|
|
241 |
|
|
|
1,549 |
|
Depreciation and amortization |
|
|
|
|
|
|
4,594 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,074 |
|
|
|
10,988 |
|
Income from discontinued operations before (loss) gain
on sale of interests in real estate and minority interest |
|
|
1,093 |
|
|
|
2,869 |
|
Net (loss) gain on sale of interests in real estate |
|
|
(856 |
) |
|
|
25,153 |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
237 |
|
|
$ |
28,022 |
|
|
|
|
|
|
|
|
For the three- and six-month periods ended June 30, 2006, income from discontinued operations
relates to the 23 properties sold in 2006 and the 18 properties sold in 2007. The following table
summarizes the revenue and expense information for the properties classified as discontinued
operations as of June 30, 2007, for the three- and six-month periods ended June 30, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
Six-month period |
|
|
|
ended June 30, 2006 |
|
|
ended June 30, 2006 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
21,505 |
|
|
$ |
46,218 |
|
Tenant reimbursements |
|
|
1,740 |
|
|
|
4,209 |
|
Other |
|
|
217 |
|
|
|
587 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
23,462 |
|
|
|
51,014 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
8,609 |
|
|
|
18,020 |
|
Real estate taxes |
|
|
2,700 |
|
|
|
6,187 |
|
Depreciation and amortization |
|
|
9,746 |
|
|
|
18,869 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
21,055 |
|
|
|
43,076 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,407 |
|
|
|
7,938 |
|
Interest income |
|
|
13 |
|
|
|
13 |
|
Interest expense (a) |
|
|
(301 |
) |
|
|
(586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before gain on
sale of interests in real estate and minority interest |
|
|
2,119 |
|
|
|
7,365 |
|
Minority interest partners share of consolidated
real estate venture |
|
|
(195 |
) |
|
|
(382 |
) |
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
1,924 |
|
|
$ |
6,983 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Interest expense relate to a mortgage that was secured by one of the sold properties and
paid off at the time of sale. |
Discontinued operations have not been segregated in the consolidated statements of cash flows.
Therefore, amounts for certain captions will not agree with respective data in the consolidated
statements of operations.
10. MINORITY INTEREST IN REAL ESTATE VENTURES
As of June 30, 2007, the Partnership owned interests in three consolidated real estate ventures
that own three office properties containing approximately 0.4 million net rentable square feet.
Minority interest in consolidated real estate ventures represents the portion of these consolidated
real estate ventures not owned by the Partnership and as a result of losses allocated to these
minority interest partners there is no balance at June 30, 2007.
54
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
On March 1, 2007, the Partnership acquired the remaining 49% interest in a real estate venture
previously owned by Stichting Pensioenfonds ABP containing ten office properties for a purchase
price of $63.7 million. The Partnership owned a 51% interest in this real estate venture through
the acquisition of Prentiss in January 5, 2006.
11. PARTNERS EQUITY
Earnings per Common Partnership Unit
The following table details 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 June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Income (loss) from continuing operations |
|
$ |
931 |
|
|
$ |
931 |
|
|
$ |
(13,994 |
) |
|
$ |
(13,994 |
) |
Income (loss) from discontinued operations |
|
|
237 |
|
|
|
237 |
|
|
|
1,924 |
|
|
|
1,924 |
|
Income allocated to Preferred Units |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common partnership unitholders |
|
$ |
(830 |
) |
|
$ |
(830 |
) |
|
$ |
(14,068 |
) |
|
$ |
(14,068 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common partnership units outstanding |
|
|
91,020,069 |
|
|
|
91,020,069 |
|
|
|
94,653,573 |
|
|
|
94,653,573 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
398,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average partnership units outstanding |
|
|
91,020,069 |
|
|
|
91,418,933 |
|
|
|
94,653,573 |
|
|
|
94,653,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.17 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
0.02 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month periods ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Income (loss) from continuing operations |
|
$ |
(6,707 |
) |
|
$ |
(6,707 |
) |
|
$ |
(21,915 |
) |
|
$ |
(21,915 |
) |
Income (loss) from discontinued operations |
|
|
28,022 |
|
|
|
28,022 |
|
|
|
6,983 |
|
|
|
6,983 |
|
Income allocated to Preferred Units |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common partnership unitholders |
|
$ |
17,319 |
|
|
$ |
17,319 |
|
|
$ |
(18,928 |
) |
|
$ |
(18,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common partnership units outstanding |
|
|
91,620,218 |
|
|
|
91,620,218 |
|
|
|
93,989,891 |
|
|
|
93,989,891 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average partnership units outstanding |
|
|
91,620,218 |
|
|
|
91,620,218 |
|
|
|
93,989,891 |
|
|
|
93,989,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.12 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.28 |
) |
Discontinued operations |
|
|
0.31 |
|
|
|
0.31 |
|
|
|
0.07 |
|
|
|
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.19 |
|
|
$ |
0.19 |
|
|
$ |
(0.20 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Partnership Unit and Preferred Mirror Units
On June 12, 2007, the Partnership declared a $0.44 per unit cash distribution to holders of Class A
Units totaling $1.7 million.
55
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
On June 12, 2007, the Partnership declared a distribution of $0.44 per Common Partnership Unit,
totaling $38.5 million, which was paid on July 19, 2007 to unitholders of record as of July 5,
2007. On July 12, 2007, the Partnership declared distributions on its Series D Preferred Mirror
Units and Series E Preferred Mirror Units to holders of record as of July 5, 2007. These units are
entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions paid on July
16, 2007 to holders of Series D Preferred Mirror Units and Series E Preferred Mirror Units totaled
$0.9 million and $1.1 million, respectively.
Common Share Repurchases
The Partnership repurchased 1,566,000 shares during the six-month period ending June 30, 2007 for
aggregate consideration of $53.5 million under its share repurchase program. As of June 30, 2007,
the Partnership may purchase an additional 753,800 shares under the plan. Repurchases may be made
from time to time in the open market or in privately negotiated transactions, subject to market
conditions and compliance with legal requirements. The share repurchase program does not contain
any time limitation and does not obligate the Partnership to repurchase any shares. The Partnership
may discontinue the program at any time.
12. SHARE BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (SFAS 123(R)). SFAS
123(R) is an amendment of SFAS 123 and requires that the compensation cost relating to share-based
payment transactions be recognized in the financial statements. The cost is required to be
measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) also
contains additional minimum disclosures requirements including, but not limited to, the valuation
method and assumptions used, amounts of compensation capitalized and modifications made. The
Partnership adopted SFAS 123(R) using the prospective method on January 1, 2006. This adoption did
not have a material effect on our consolidated financial statements.
Stock Options
At June 30, 2007, the Company had 1,085,575 options outstanding under its shareholder approved
equity incentive plan. No options were unvested as of June 30, 2007 and therefore there is no
remaining unrecognized compensation expense associated with these options. Option activity as of
June 30, 2007 and changes during the three months ended June 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining Contractual |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Value (in 000s) |
|
Outstanding at January 1, 2007 |
|
|
1,286,070 |
|
|
$ |
26.45 |
|
|
|
1.50 |
|
|
$ |
8,739 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(198,495 |
) |
|
|
28.80 |
|
|
|
0.87 |
|
|
|
1,171 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
1,087,575 |
|
|
$ |
26.03 |
|
|
|
1.07 |
|
|
$ |
8,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at June 30, 2007 |
|
|
1,087,575 |
|
|
$ |
26.03 |
|
|
|
1.07 |
|
|
$ |
8,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007 |
|
|
1,087,575 |
|
|
$ |
26.03 |
|
|
|
1.07 |
|
|
$ |
8,029 |
|
There were no option awards granted to employees during the three- and six-month period ended
June 30, 2007.
The Company has the ability and intent to issue shares upon stock option exercises. Historically,
the Company has issued new common shares to satisfy such exercises.
56
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Restricted Stock Awards
The Companys primary form of share-based compensation has been restricted shares issued under a
shareholder approved equity incentive plan that authorizes various equity-based awards. As of June
30, 2007, 448,800 restricted shares were outstanding and vest over five to seven years from the
initial grant date. The remaining compensation expense to be recognized for the 448,800 restricted
shares outstanding at June 30, 2007 was approximately $14.1 million. That expense is expected to
be recognized over a weighted average remaining vesting period of 4.2 years. For the six-month
periods ended June 30, 2007 and 2006, the Partnership recognized $1.7 million and $1.4 million,
respectively, of compensation expense in each period related to outstanding restricted shares. The
following table summarizes the Partnerships restricted share activity for the six-months ended
June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair value |
|
Non-vested at January 1, 2007 |
|
|
338,860 |
|
|
$ |
28.23 |
|
Granted |
|
|
227,709 |
|
|
|
35.09 |
|
Vested |
|
|
(107,143 |
) |
|
|
26.45 |
|
Forfeited |
|
|
(10,626 |
) |
|
|
31.47 |
|
|
|
|
|
|
|
|
Non-vested at June 30, 2007 |
|
|
448,800 |
|
|
$ |
32.05 |
|
|
|
|
|
|
|
|
Outperformance Program
On August 28, 2006, the Compensation Committee of the Companys Board of Trustees adopted a
long-term incentive compensation program (the outperformance program). The Company will make
payments (in the form of common shares) to executive-participants under the outperformance program
only if total shareholder return exceeds percentage hurdles established under the outperformance
program. The dollar value of any payments will depend on the extent to which our performance
exceeds the hurdles. The Company established the outperformance program under the 1997 Plan.
If the total shareholder return (share price appreciation plus cash dividends) during a three-year
measurement period exceeds either of two hurdles (with one hurdle keyed to the greater of a fixed
percentage and an industry-based index, and the other hurdle keyed to a fixed percentage), then the
Company will fund an incentive compensation pool in accordance with a formula and make pay-outs
from the compensation pool in the form of vested and restricted common shares. The awards issued
are accounted for in accordance with SFAS 123(R). The fair value of the awards on the date of
grant, as adjusted for estimated forfeitures, was approximately $5.6 million and will be amortized
into expense over the five-year period beginning on the date of grant using a graded vesting
attribution model. The fair value of $5.6 million on the date of the initial grant represents
approximately 86.5% of the total that may be awarded; the remaining amount available will be valued
when the awards are granted to individuals. In January 2007, the Company awarded an additional
4.5% under the outperformance program. The fair value of the additional award is $0.3 million and
will be amortized over the remaining portion of the 5 year period. For the three- and six-month
periods ended June 30, 2007, the Company recognized $0.4 million and $0.8 of compensation expenses
related to the outperformance program.
Employee Share Purchase Plan
On May 9, 2007, the Companys shareholders approved the 2007 Non-Qualified Employee Share Purchase
Plan (the ESPP). The ESPP is intended to provide eligible employees with a convenient means to
purchase common shares of the Company through payroll deductions and voluntary cash purchases at an
amount equal to 85% of the average closing price per share for a specified period. The maximum
contribution by each participant for any plan year may not exceed $50,000 and the number of shares
reserved for issuance under the ESPP is 1,250,000.
57
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
13. SEGMENT INFORMATION
The Partnership currently manages its portfolio within nine segments: (1) PennsylvaniaWest, (2)
PennsylvaniaNorth, (3) New Jersey, (4) Urban, (5) Richmond, Virginia, (6) Northern California (7)
Southern California, (8) Metropolitan Washington, D.C. and (9) Southwest. The PennsylvaniaWest
segment includes properties in Chester, Delaware and Montgomery counties in the Philadelphia
suburbs of Pennsylvania. The PennsylvaniaNorth segment includes properties north of Philadelphia
in Bucks, Lehigh and Montgomery counties. The New Jersey segment includes properties in counties
in the southern part of New Jersey including Burlington, Camden and Mercer counties and in Bucks
County, Pennsylvania. The Urban segment includes properties in the City of Philadelphia,
Pennsylvania and the state of Delaware. The Richmond, Virginia segment includes properties
primarily in Albemarle, Chesterfield and Henrico counties, the City of Richmond and Durham, North
Carolina. The Northern California segment includes properties in the City of Oakland and Concord.
The Southern California segment includes properties in San Diego County. The Metropolitan
Washington, D.C. segment includes properties in Northern Virginia and Suburban Maryland. The
Southwest segment includes properties in Travis County of Texas. Corporate is responsible for cash
and investment management, development of certain real estate properties during the construction
period, and certain other general support functions.
58
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Segment information as of and for the three-month periods ended June 30, 2007 and 2006 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
Pennsylvania |
|
|
|
|
|
|
|
|
|
|
Richmond, |
|
|
Northern |
|
|
Southern |
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
West |
|
|
North |
|
|
New Jersey |
|
|
Urban |
|
|
Virginia |
|
|
California |
|
|
California |
|
|
Washington, D.C. |
|
|
Southwest |
|
|
Corporate |
|
|
Total |
|
As of June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
934,320 |
|
|
$ |
443,874 |
|
|
$ |
556,496 |
|
|
$ |
573,062 |
|
|
$ |
252,982 |
|
|
$ |
471,291 |
|
|
$ |
105,982 |
|
|
$ |
1,290,464 |
|
|
$ |
234,255 |
|
|
$ |
|
|
|
$ |
4,862,726 |
|
Development and
construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
373,497 |
|
|
|
373,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
922,347 |
|
|
$ |
530,436 |
|
|
$ |
570,009 |
|
|
$ |
568,008 |
|
|
$ |
244,519 |
|
|
$ |
396,927 |
|
|
$ |
95,942 |
|
|
$ |
1,255,940 |
|
|
$ |
343,177 |
|
|
$ |
|
|
|
$ |
4,927,305 |
|
Development and
construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328,119 |
|
|
|
328,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
31,604 |
|
|
$ |
15,355 |
|
|
$ |
24,792 |
|
|
$ |
24,024 |
|
|
$ |
8,168 |
|
|
$ |
16,817 |
|
|
$ |
3,012 |
|
|
$ |
32,919 |
|
|
$ |
9,714 |
|
|
$ |
(2,101 |
) |
|
$ |
164,304 |
|
Property operating expenses and real estate taxes |
|
|
13,036 |
|
|
|
5,547 |
|
|
|
10,643 |
|
|
|
8,835 |
|
|
|
3,037 |
|
|
|
6,345 |
|
|
|
803 |
|
|
|
10,301 |
|
|
|
3,593 |
|
|
|
260 |
|
|
|
62,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
18,568 |
|
|
$ |
9,808 |
|
|
$ |
14,149 |
|
|
$ |
15,189 |
|
|
$ |
5,131 |
|
|
$ |
10,472 |
|
|
$ |
2,209 |
|
|
$ |
22,618 |
|
|
$ |
6,121 |
|
|
$ |
(2,361 |
) |
|
$ |
101,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
26,006 |
|
|
$ |
17,792 |
|
|
$ |
22,921 |
|
|
$ |
21,367 |
|
|
$ |
8,109 |
|
|
$ |
14,735 |
|
|
$ |
2,911 |
|
|
$ |
26,525 |
|
|
$ |
6,680 |
|
|
$ |
3,383 |
|
|
$ |
150,429 |
|
Property operating expenses and real estate taxes |
|
|
7,566 |
|
|
|
9,650 |
|
|
|
9,650 |
|
|
|
8,153 |
|
|
|
3,125 |
|
|
|
5,573 |
|
|
|
889 |
|
|
|
8,268 |
|
|
|
3,049 |
|
|
|
(31 |
) |
|
|
55,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
18,440 |
|
|
$ |
8,142 |
|
|
$ |
13,271 |
|
|
$ |
13,214 |
|
|
$ |
4,984 |
|
|
$ |
9,162 |
|
|
$ |
2,022 |
|
|
$ |
18,257 |
|
|
$ |
3,631 |
|
|
$ |
3,414 |
|
|
$ |
94,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Segment information as of and for the six-month periods ended June 30, 2007 and 2006 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
Pennsylvania |
|
|
|
|
|
|
|
|
|
|
Richmond, |
|
|
Northern |
|
|
Southern |
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
West |
|
|
North |
|
|
New Jersey |
|
|
Urban |
|
|
Virginia |
|
|
California |
|
|
California |
|
|
Washington, D.C. |
|
|
Southwest |
|
|
Corporate |
|
|
Total |
|
For the six-months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
59,162 |
|
|
$ |
34,836 |
|
|
$ |
49,449 |
|
|
$ |
47,478 |
|
|
$ |
17,108 |
|
|
$ |
31,927 |
|
|
$ |
6,153 |
|
|
$ |
65,305 |
|
|
$ |
18,451 |
|
|
$ |
(2,464 |
) |
|
$ |
327,405 |
|
Property operating expenses and real estate taxes |
|
|
24,143 |
|
|
|
12,573 |
|
|
|
21,337 |
|
|
|
17,877 |
|
|
|
5,986 |
|
|
|
11,984 |
|
|
|
2,074 |
|
|
|
20,642 |
|
|
|
7,156 |
|
|
|
(140 |
) |
|
|
123,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
35,019 |
|
|
$ |
22,263 |
|
|
$ |
28,112 |
|
|
$ |
29,601 |
|
|
$ |
11,122 |
|
|
$ |
19,943 |
|
|
$ |
4,079 |
|
|
$ |
44,663 |
|
|
$ |
11,295 |
|
|
$ |
(2,324 |
) |
|
$ |
203,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
50,827 |
|
|
$ |
35,785 |
|
|
$ |
46,237 |
|
|
$ |
40,640 |
|
|
$ |
15,501 |
|
|
$ |
28,244 |
|
|
$ |
5,558 |
|
|
$ |
52,391 |
|
|
$ |
15,720 |
|
|
$ |
3,444 |
|
|
$ |
294,347 |
|
Property operating expenses and real estate taxes |
|
|
15,793 |
|
|
|
19,627 |
|
|
|
19,683 |
|
|
|
16,819 |
|
|
|
6,023 |
|
|
|
10,448 |
|
|
|
1,529 |
|
|
|
15,837 |
|
|
|
6,568 |
|
|
|
(1,254 |
) |
|
|
111,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
35,034 |
|
|
$ |
16,158 |
|
|
$ |
26,554 |
|
|
$ |
23,821 |
|
|
$ |
9,478 |
|
|
$ |
17,796 |
|
|
$ |
4,029 |
|
|
$ |
36,554 |
|
|
$ |
9,152 |
|
|
$ |
4,698 |
|
|
$ |
183,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Net operating income is defined as total revenue less property operating expenses. Below is a
reconciliation of consolidated net operating income to net income or loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
Six-month periods |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Consolidated net operating income (loss) |
|
$ |
101,904 |
|
|
$ |
94,537 |
|
|
$ |
203,773 |
|
|
$ |
183,274 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,603 |
|
|
|
2,573 |
|
|
|
2,390 |
|
|
|
5,223 |
|
Interest expense |
|
|
(40,803 |
) |
|
|
(41,596 |
) |
|
|
(81,161 |
) |
|
|
(81,974 |
) |
Deferred financing costs |
|
|
(1,065 |
) |
|
|
(794 |
) |
|
|
(2,323 |
) |
|
|
(1,273 |
) |
Depreciation and amortization |
|
|
(58,227 |
) |
|
|
(64,145 |
) |
|
|
(120,274 |
) |
|
|
(115,357 |
) |
Administrative expenses |
|
|
(6,993 |
) |
|
|
(7,724 |
) |
|
|
(14,262 |
) |
|
|
(16,214 |
) |
Minority interest partners share of consolidated
real estate ventures |
|
|
8 |
|
|
|
84 |
|
|
|
(108 |
) |
|
|
370 |
|
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of real estate ventures |
|
|
4,504 |
|
|
|
463 |
|
|
|
5,258 |
|
|
|
1,428 |
|
Net gain on disposition of undepreciated real estate |
|
|
|
|
|
|
2,608 |
|
|
|
|
|
|
|
2,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
931 |
|
|
|
(13,994 |
) |
|
|
(6,707 |
) |
|
|
(21,915 |
) |
Income (loss) from discontinued operations |
|
|
237 |
|
|
|
1,924 |
|
|
|
28,022 |
|
|
|
6,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,168 |
|
|
$ |
(12,070 |
) |
|
$ |
21,315 |
|
|
$ |
(14,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
14. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Partnership is involved from time to time in litigation on various matters, including disputes
with tenants and disputes arising out of agreements to purchase or sell properties. Given the
nature of the Partnerships business activities, these lawsuits are considered routine to the
conduct of its business. The result of any particular lawsuit cannot be predicted, because of the
very nature of litigation, the litigation process and its adversarial nature, and the jury system.
The Partnership does not expect that the liabilities, if any, that may ultimately result from such
legal actions will have a material adverse effect on the consolidated financial position, results
of operations or cash flows of the Partnership.
There have been lawsuits against owners and managers of multifamily and office properties asserting
claims of personal injury and property damage caused by the presence of mold in residential units
or office space. The Partnership has been named as a defendant in two lawsuits in the State of New
Jersey that allege personal injury as a result of the presence of mold. One lawsuit was dismissed
by way of summary judgment with prejudice. Unspecified damages are sought on the remaining
lawsuit. The Partnership has referred this lawsuit to its environmental insurance carrier and, as
June 30, 2007, the insurance carrier is tendering a defense to this claim.
Environmental
As an owner of real estate, the Partnership is subject to various environmental laws of federal,
state, and local governments. The Partnerships compliance with existing laws has not had a
material adverse effect on its financial condition and results of operations, and the Partnership
does not believe it will have a material adverse effect in the future. However, the Partnership
cannot predict the impact of unforeseen environmental contingencies or new or changed laws or
regulations on its current Properties or on properties that the Partnership may acquire.
61
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Ground Rent
Future minimum rental payments under the terms of all non-cancelable ground leases under which the
Partnership is the lessee are expensed on a straight-line basis regardless of when payments are
due. Minimum future rentals payments on non-cancelable leases at June 30, 2006 are as follows (in
thousands):
|
|
|
|
|
2007 |
|
$ |
868 |
|
2008 |
|
|
1,736 |
|
2009 |
|
|
1,818 |
|
2010 |
|
|
1,818 |
|
2011 |
|
|
1,818 |
|
Thereafter |
|
|
269,979 |
|
Other Commitments or Contingencies
As part of the Partnerships September 2004 acquisition of a portfolio of 14 properties (the TRC
Acquisition), the Operating Partnership agreed to issue to the sellers up to a maximum of $9.7
million of Class A Units of the Operating Partnership if certain of the acquired properties achieve
at least 95% occupancy prior to September 21, 2007. At June 30, 2007 the maximum amount payable
under this arrangement was $0.6 million.
As part of the TRC acquisition, the Partnership acquired an interest in Two Logan Square, a 696,477
square foot office building in Philadelphia, Pennsylvania, primarily through a second and third
mortgage collaterized by this property pursuant to which the Partnership receives substantially all
cash flows from the property. The Partnership currently does not expect to take fee title to Two
Logan Square until, at the earliest, September 2019. In the event that the Partnership takes title
to Two Logan Square upon a foreclosure of its mortgages, the Partnership has agreed to make a
payment to an unaffiliated third party with a residual interest as a fee owner of this property.
The amount of the payment would be $0.6 million if the Partnership must pay a state and local
transfer tax upon taking title, or $2.9 million if no transfer tax is payable upon the transfer.
As part of the Prentiss acquisition, TRC acquisition and several of our other acquisitions, the
Partnership has agreed not to sell certain of the acquired properties in transactions that would
trigger taxable income to the former owners. In the case of TRC, the Partnership agreed not to
sell certain of the acquired properties for periods ranging from three to 15 years from the
acquisition date as follows: 201 Radnor Financial Center, 555 Radnor Financial Center and 300
Delaware Avenue (September 2007); One Rodney Square and 130/150/170 Radnor Financial Center
(September 2014); and One Logan Square, Two Logan Square and Radnor Corporate Center (September
2019). In the case of the Prentiss acquisition, the Partnership assumed the obligation of Prentiss
not to sell Concord Airport Plaza before March 2018 and 6600 Rockledge before July 2008. The
Partnership also owns 14 other properties that aggregate 1.0 million square feet and has agreed not
to sell these properties for periods that expire through 2008. These agreements generally provide
that the Partnership may dispose of the subject Properties only in transactions that qualify as
tax-free exchanges under Section 1031 of the Code or in other tax deferred transactions. In the
event that the Partnership sells any of the properties within the applicable restricted period in
non-exempt transactions, the Partnership has agreed to pay significant tax liabilities that would
be incurred by the parties who sold the applicable property.
The Partnership invests in its Properties and regularly incurs capital expenditures in the ordinary
course of business to maintain the Properties. The Partnership believes that such expenditures
enhance the competitiveness of the Properties. The Partnership also enters into construction,
utility and service contracts in the ordinary course of business which may extend beyond one year.
These contracts include terms that provide for cancellation with insignificant or no cancellation
penalties.
15. SUBSEQUENT EVENTS
On July 11, 2007, the Partnership repaid two mortgage notes totaling $136.0 million pursuant to a
notice which was given in May 2007. The Partnership funded the repayments of these notes from
borrowings under its Credit Facility and there were no prepayment penalties associated with these
prepayments.
62
BRANDYWINE OPERATING PARTNERHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
On July 19, 2007, the Partnership acquired five buildings aggregating 508,607 square feet and a 5.6
acre land parcel in the Boulders office park in Richmond, VA for $96.5 million. The Partnership
funded a portion of the purchase price using the remaining 1031 proceeds from the sale of the 10
office properties located in Reading and Harrisburg, Pennsylvania in March 2007.
During July 2007, the Partnership repurchased 214,600 shares for $5.9 million under its share
repurchase program.
During July 2007, the Partnership entered into four treasury lock agreements designated as cash
flow hedges on interest rate risk relating to a forecasted debt issuance. The treasury lock
agreements were for notional amounts totaling $150.0 million for an expiration of five years and
have an average all-in rate of 4.9%.
63
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. This Quarterly Report on Form 10-Q and other materials filed by us with the SEC (as
well as information included in oral or other written statements made by us) contain statements
that are forward-looking, including statements relating to business and real estate development
activities, acquisitions, dispositions, future capital expenditures, financing sources,
governmental regulation (including environmental regulation) and competition. The words
anticipate, believe, estimate, expect, intend, will, should and similar expressions,
as they relate to us, are intended to identify forward-looking statements. Although we believe
that the expectations reflected in such forward-looking statements are based on reasonable
assumptions, we can give no assurance that our expectations will be achieved. As forward-looking
statements, these statements involve important risks, uncertainties and other factors that could
cause actual results to differ materially from the expected results and, accordingly, such results
may differ from those expressed in any forward-looking statements made by us or on our behalf.
Factors that could cause actual results to differ materially from our expectations include, but are
not limited to:
|
|
|
our failure to lease unoccupied space in accordance with our projections; |
|
|
|
|
our failure to re-lease occupied space upon expiration of leases; |
|
|
|
|
the bankruptcy of major tenants; |
|
|
|
|
changes in prevailing interest rates; |
|
|
|
|
the unavailability of equity and debt financing; |
|
|
|
|
unanticipated costs associated with the acquisition and integration of our acquisitions; |
|
|
|
|
unanticipated costs to complete and lease-up pending developments; |
|
|
|
|
impairment charges; |
|
|
|
|
increased costs for, or lack of availability of, adequate insurance, including for terrorist acts; |
|
|
|
|
risks associated with actual or threatened terrorist attacks; |
|
|
|
|
demand for tenant services beyond those traditionally provided by landlords; |
|
|
|
|
potential liability under environmental or other laws; |
|
|
|
|
earthquakes and other natural disasters; |
|
|
|
|
risks associated with state and local tax audits; |
|
|
|
|
complex regulations relating to our status as a REIT and the adverse consequences of our
failure to qualify as a REIT; |
|
|
|
|
changes in local real estate conditions (including changes in rental rates and the
number of competing properties); |
|
|
|
|
changes in the economic conditions affecting industries in which our principal tenants compete; |
|
|
|
|
changes in general economic conditions; |
|
|
|
|
the impact of newly adopted accounting principles on our accounting policies and on
period-to-period comparisons of financial results and the other risks identified in the
Risk Factors section and elsewhere in our Annual Report on Form 10-K for the year ended
December 31, 2006. |
In light of these uncertainties, we caution readers not to place undue reliance on forward-looking
statements. We assume no obligation to update or supplement forward-looking statements that become
untrue because of subsequent events except as required by law.
The discussion that follows is based primarily on our consolidated financial statements as of June
30, 2007 and December 31, 2006 and for the three- and six- months ended June 30, 2007 and 2006 and
should be read along with the consolidated financial statements and related notes appearing
elsewhere in this report. The ability to compare one period to another may be significantly
affected by acquisitions completed, development properties placed in service and dispositions made
during those periods.
OVERVIEW
As of June 30, 2007, our portfolio consisted of 238 office properties, 23 industrial facilities and
one mixed-use property that contain an aggregate of approximately 25.7 million net rentable square
feet. We also had, as of June 30, 2007, six properties under development and 10 properties under
redevelopment containing an aggregate 2.4 million net rentable square feet. As of June 30, 2007,
we consolidate three office properties owned by real estate ventures containing 0.4 million net
rentable square feet. Therefore, as of June 30, 2007, we consolidated 281 properties with an
64
aggregate of 28.5 million net rentable square feet. As of June 30, 2007, we held economic
interests in 12 unconsolidated real estate ventures that contain approximately 2.8 million net
rentable square feet (the Real Estate Ventures) formed with third parties to develop or own
commercial properties.
As of June 30, 2007 we managed our portfolio within nine geographic segments: (1)
PennsylvaniaWest, (2) PennsylvaniaNorth, (3) New Jersey, (4) Urban, (5) Richmond, Virginia, (6)
Northern California, (7) Southern California, (8) Metropolitan Washington, D.C. and (9) Southwest.
The PennsylvaniaWest segment includes properties in Chester, Delaware and Montgomery counties in
the Philadelphia suburbs of Pennsylvania. The PennsylvaniaNorth segment includes properties north
of Philadelphia in Bucks, Lehigh and Montgomery counties. The New Jersey segment includes
properties in counties in the southern and central parts of New Jersey including Burlington, Camden
and Mercer counties and in Bucks County, Pennsylvania. The Urban segment includes properties in
the City of Philadelphia, Pennsylvania and the state of Delaware. The Richmond, Virginia segment
includes properties primarily in Albemarle, Chesterfield and Henrico counties, the Cities of
Richmond and Durham, North Carolina. The Northern California segment includes properties in the
City of Oakland and Concord. The Southern California segment includes properties in San Diego
County. The Metropolitan Washington D.C. segment includes properties in Northern Virginia and
Suburban Maryland. The Southwest segment includes properties in Travis County of Texas.
We generate cash and revenue from leases of space at our properties and, to a lesser extent, from
the management of properties owned by third parties and from investments in the Real Estate
Ventures. Factors that we evaluate when leasing space include rental rates, costs of tenant
improvements, tenant creditworthiness, current and expected operating costs, the length of the
lease, vacancy levels and demand for office and industrial space. We also generate cash through
sales of assets, including assets that we do not view as core to our portfolio, either because of
location or expected growth potential, and assets that are commanding premium prices from third
party investors.
Our financial and operating performance is dependent upon the demand for office, industrial and
other commercial space in our markets, our leasing results, our acquisition, disposition and
development activity, our financing activity, our cash requirements and economic and market
conditions, including prevailing interest rates.
We seek revenue growth at our portfolio through an increase in occupancy and rental rates. Our
occupancy was 93.9% at June 30, 2007, or 88.4% including our 16 properties under development or
redevelopment.
In seeking to increase revenue through our operating, financing and investment activities, we also
seek to minimize operating risks, including (i) tenant rollover risk, (ii) tenant credit risk and
(iii) development risk.
Tenant Rollover Risk:
We are subject to the risk that tenant leases, upon expiration, are not renewed, that space may not
be relet, or that the terms of renewal or reletting (including the cost of renovations) may be less
favorable to us than the current lease terms. Leases accounting for approximately 4.2% of our
aggregate annualized base rents as of June 30, 2007 (representing approximately 4.0% of the net
rentable square feet of the Properties) expire without penalty through the end of 2007. We
maintain an active dialogue with our tenants in an effort to achieve a high level of lease
renewals. Our retention rate for leases that were scheduled to expire in the six-month period
ended June 30, 2007 was 78.3%. If we were unable to renew leases for a substantial portion of the
space under expiring leases, or to promptly relet this space, at anticipated rental rates, our cash
flow would be adversely impacted.
Tenant Credit Risk:
In the event of a tenant default, we may experience delays in enforcing our rights as a landlord
and may incur substantial costs in protecting our investment. Our management regularly evaluates
our accounts receivable reserve policy in light of our tenant base and general and local economic
conditions. The accounts receivable allowance was $7.5 million or 7.3% of total receivables
(including accrued rent receivable) as of June 30, 2007 compared to $9.3 million or 9.0% of total
receivables (including accrued rent receivable) as of December 31, 2006.
Development Risk:
As of June 30, 2007, we had in development or redevelopment 16 sites aggregating approximately 2.4
million net rentable square feet. The total budgeted costs of these projects is currently $514.6
million and we had incurred $432.0 million of these costs as of June 30, 2007. We are actively
marketing space at these projects to prospective
65
tenants but can provide no assurance as to the timing or terms of any leases of space at these
projects which were 29.7% occupied and 45.2% leased at June 30, 2007. As of June 30, 2007, we
owned, or had an option to acquire, approximately 394 acres of land available for future
development. Risks associated with development of this land include construction cost increases or
overruns and construction delays, insufficient occupancy rates, building moratoriums and inability
to obtain zoning, land-use, building, occupancy and other required governmental approvals.
RECENT ACQUISITIONS AND DISPOSITIONS
During the six-month period ended June 30, 2007, we sold 18 properties containing an aggregate of
3.5 million net rentable square feet and a 4.7 acre land parcel. We acquired the 49% minority
interest in one of our consolidated real estate ventures that owned 10 office properties containing
an aggregate of 1.1 million net rentable square feet and also acquired one office property
containing 204,278 net rentable square feet.
Highlights of 2007 include:
On January 18, 2007, we sold Norriton Office Center, an office property located in East
Norriton, Pennsylvania containing 73,394 net rentable square feet, for a sales price of $7.8
million.
On January 19, 2007, we sold four office properties located in Dallas, Texas containing
1,091,186 net rentable square feet and a 4.7 acre land parcel, for an aggregate sales price of
$107.1 million.
On January 31, 2007, we sold George Kachel Farmhouse, an office property located in Reading,
Pennsylvania containing 1,664 net rentable square feet, for a sales price of $0.2 million.
On March 30, 2007, we sold 1007 Laurel Oak, an office property located in Voorhees, New Jersey
containing 78,205 net rentable square feet, for a sales price of $7.0 million.
On March 30, 2007, we sold 10 office properties located in Reading and Harrisburg, Pennsylvania
containing 940,486 net rentable square feet, for an aggregate sales price of $112.0 million. We
structured this transaction to qualify as a like-kind exchange under Section 1031 of the Code and
the cash from the sale was held by a qualified intermediary for purposes of accomplishing the
like-kind exchange.
On April 30, 2007, we sold Cityplace Center, an office property located Dallas, Texas containing
1,295,832 net rentable square feet, for an aggregate sales price of $115.0 million.
On May 10, 2007, we acquired Lake Merritt Tower, an office property located in Oakland,
California containing 204,278 net rentable square feet for an aggregate contracted purchase price
of $72.0 million (not including closing costs of $0.5 million). A portion of the proceeds from the
sale of the 10 office properties located in Reading and Harrisburg, Pennsylvania in March 2007 was
used to fully fund this purchase.
On July 19, 2007, we acquired five buildings containing 508,607 net rentable square feet and a
5.6 acre land parcel in the Boulders office park in Richmond, Virginia for an aggregate purchase
price of $96.5 million. We funded a portion of the purchase price using the remaining proceeds
from the sale of the 10 office properties located in Reading and Harrisburg, Pennsylvania in March
2007.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Certain
accounting policies are considered to be critical accounting policies, as they require management
to make assumptions about matters that are highly uncertain at the time the estimate is made and
changes in accounting policies are reasonably likely to occur from period to period. Management
bases its estimates and assumptions on historical experience and current economic conditions. On
an on-going basis, management evaluates its estimates and
66
assumptions including those related to revenue, impairment of long-lived assets and the allowance
for doubtful accounts. Actual results may differ from those estimates and assumptions.
Our Annual Report on Form 10-K for the year ended December 31, 2006 contains a discussion of our
critical accounting policies. There have been no significant changes in our critical accounting
policies since December 31, 2006. See also Note 2 in our unaudited consolidated financial
statements for the three- and six-months ended June 30, 2007 set forth herein. Management
discusses our critical accounting policies and managements judgments and estimates with our Audit
Committee.
67
RESULTS OF OPERATIONS
Comparison of the Three-Month Periods Ended June 30, 2007 and 2006
The table below shows selected operating information for the Same Store Property Portfolio and
the Total Portfolio. The Same Store Property Portfolio consists of 256 Properties containing an
aggregate of approximately 24.0 million net rentable square feet that we owned for the entire
three-month periods ended June 30, 2007 and 2006. This table also includes a reconciliation from
the Same Store Property Portfolio to the Total Portfolio net income (i.e., all properties owned by
us during the three-month periods ended June 30, 2007 and 2006) by providing information for the
properties which were acquired, under development, redevelopment or placed into service and
administrative/elimination information for the three-month periods ended June 30, 2007 and 2006 (in
thousands).
The Total Portfolio net income presented in the table agrees to the net income of Brandywine Realty
Trust. The only difference between the reported net income of Brandywine Realty Trust and
Brandywine Operating Partnership is the allocation of the minority interest attributable to
continuing and discontinued operations for limited partnership units of the Operating Partnership
that is reflected in the statement of operations for Brandywine Realty Trust.
68
Comparison of three-months ended June 30, 2007 to the three-months ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired/Completed |
|
|
Development/Redevelopment |
|
|
Administrative/ |
|
|
|
|
|
|
Same Store Property Portfolio |
|
|
Properties |
|
|
Properties |
|
|
Eliminations (a) |
|
|
Total Portfolio |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
(dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash rents |
|
$ |
114,320 |
|
|
$ |
113,337 |
|
|
$ |
983 |
|
|
$ |
12,474 |
|
|
$ |
3,046 |
|
|
$ |
4,141 |
|
|
$ |
5,546 |
|
|
$ |
(1,152 |
) |
|
$ |
266 |
|
|
$ |
129,783 |
|
|
$ |
122,195 |
|
|
$ |
7,588 |
|
Straight-line rents |
|
|
3,342 |
|
|
|
4,416 |
|
|
|
(1,074 |
) |
|
|
2,038 |
|
|
|
2,307 |
|
|
|
742 |
|
|
|
368 |
|
|
|
|
|
|
|
|
|
|
|
6,122 |
|
|
|
7,091 |
|
|
|
(969 |
) |
Rents FAS 141 |
|
|
2,414 |
|
|
|
1,612 |
|
|
|
802 |
|
|
|
402 |
|
|
|
|
|
|
|
(124 |
) |
|
|
(431 |
) |
|
|
|
|
|
|
|
|
|
|
2,692 |
|
|
|
1,181 |
|
|
|
1,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rents |
|
|
120,076 |
|
|
|
119,365 |
|
|
|
711 |
|
|
|
14,914 |
|
|
|
5,353 |
|
|
|
4,759 |
|
|
|
5,483 |
|
|
|
(1,152 |
) |
|
|
266 |
|
|
|
138,597 |
|
|
|
130,467 |
|
|
|
8,130 |
|
Tenant reimbursements |
|
|
19,482 |
|
|
|
14,337 |
|
|
|
5,145 |
|
|
|
762 |
|
|
|
220 |
|
|
|
637 |
|
|
|
704 |
|
|
|
135 |
|
|
|
235 |
|
|
|
21,016 |
|
|
|
15,496 |
|
|
|
5,520 |
|
Termination fess |
|
|
464 |
|
|
|
1,276 |
|
|
|
(812 |
) |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499 |
|
|
|
1,276 |
|
|
|
(777 |
) |
Other, excluding termination fees |
|
|
661 |
|
|
|
681 |
|
|
|
(20 |
) |
|
|
44 |
|
|
|
1 |
|
|
|
4 |
|
|
|
17 |
|
|
|
3,483 |
|
|
|
2,491 |
|
|
|
4,192 |
|
|
|
3,190 |
|
|
|
1,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
140,683 |
|
|
|
135,659 |
|
|
|
5,024 |
|
|
|
15,755 |
|
|
|
5,574 |
|
|
|
5,400 |
|
|
|
6,204 |
|
|
|
2,466 |
|
|
|
2,992 |
|
|
|
164,304 |
|
|
|
150,429 |
|
|
|
13,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
41,934 |
|
|
|
39,875 |
|
|
|
2,059 |
|
|
|
4,422 |
|
|
|
1,984 |
|
|
|
2,210 |
|
|
|
2,369 |
|
|
|
(2,601 |
) |
|
|
(2,724 |
) |
|
|
45,965 |
|
|
|
41,504 |
|
|
|
4,461 |
|
Real estate taxes |
|
|
14,393 |
|
|
|
13,099 |
|
|
|
1,294 |
|
|
|
914 |
|
|
|
253 |
|
|
|
1,067 |
|
|
|
994 |
|
|
|
61 |
|
|
|
42 |
|
|
|
16,435 |
|
|
|
14,388 |
|
|
|
2,047 |
|
Subtotal |
|
|
84,356 |
|
|
|
82,685 |
|
|
|
1,671 |
|
|
|
10,419 |
|
|
|
3,337 |
|
|
|
2,123 |
|
|
|
2,841 |
|
|
|
5,006 |
|
|
|
5,674 |
|
|
|
101,904 |
|
|
|
94,537 |
|
|
|
7,367 |
|
Administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,993 |
|
|
|
7,724 |
|
|
|
6,993 |
|
|
|
7,724 |
|
|
|
(731 |
) |
Depreciation and amortization |
|
|
48,298 |
|
|
|
48,060 |
|
|
|
238 |
|
|
|
6,752 |
|
|
|
45 |
|
|
|
2,422 |
|
|
|
15,379 |
|
|
|
755 |
|
|
|
661 |
|
|
|
58,227 |
|
|
|
64,145 |
|
|
|
(5,918 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss) |
|
$ |
36,058 |
|
|
$ |
34,625 |
|
|
$ |
1,433 |
|
|
$ |
3,667 |
|
|
$ |
3,292 |
|
|
$ |
(299 |
) |
|
$ |
(12,538 |
) |
|
$ |
(2,742 |
) |
|
$ |
(2,711 |
) |
|
$ |
36,684 |
|
|
$ |
22,668 |
|
|
$ |
14,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
|
256 |
|
|
|
256 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281 |
|
|
|
|
|
|
|
|
|
Square feet |
|
|
24,001 |
|
|
|
24,001 |
|
|
|
|
|
|
|
2,033 |
|
|
|
|
|
|
|
2,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,467 |
|
|
|
|
|
|
|
|
|
Occupancy % |
|
|
93.6 |
% |
|
|
93.0 |
% |
|
|
|
|
|
|
96.4 |
% |
|
|
|
|
|
|
29.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,603 |
|
|
|
2,573 |
|
|
|
(970 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,803 |
) |
|
|
(41,596 |
) |
|
|
793 |
|
Interest expense Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,065 |
) |
|
|
(794 |
) |
|
|
(271 |
) |
Equity in income of real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,504 |
|
|
|
463 |
|
|
|
4,041 |
|
Net gain on sales of interests in real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,608 |
|
|
|
(2,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
923 |
|
|
|
(14,078 |
) |
|
|
15,001 |
|
Minority interest partners share of consolidated real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
(17 |
) |
|
|
25 |
|
Minority interest attributable to continuing operations LP units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
707 |
|
|
|
(661 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
977 |
|
|
|
(13,388 |
) |
|
|
14,365 |
|
Income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227 |
|
|
|
1,832 |
|
|
|
(1,605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,204 |
|
|
$ |
(11,556 |
) |
|
$ |
12,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.01 |
) |
|
$ |
(0.15 |
) |
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPLANATORY NOTES
(a) - Represents certain revenues and expenses at the corporate level as well as various
intercompany costs that are eliminated in consolidation
69
Revenue
Cash rents from the Total Portfolio increased by $7.6 million during the three month period ended
June 30, 2007 compared to the same period in 2006, primarily reflecting:
|
1) |
|
An additional $1.0 million at the Same Store Portfolio from increased occupancy
and a decrease in free rent periods as noted by the corresponding decrease of $1.1
million in straight-line rents for the Same Store Portfolio. |
|
|
2) |
|
An additional $9.4 million from four properties that we acquired after June 30,
2006 and four development properties (including additional occupancy at Cira Centre)
that we completed and placed in service subsequent to June 30, 2006. |
|
|
3) |
|
These increases were offset by the decrease in cash rents at our
development/redevelopment properties primarily as a result of one building, which is
now included in redevelopment, that was occupied during the three-months ended June 30,
2006 and had no occupancy during the three-months ended June 30, 2007. We acquired
this building in New Jersey with the intent to begin redevelopment after the single
tenant vacated in the third quarter of 2006. |
Our rents at the Total Portfolio that we recognized from the net amortization of above and below
market leases at acquired properties, in conformity with SFAS No. 141, increased by $1.5 million
primarily as a result of $0.8 million of above market leases in our Same Store Portfolio being
fully amortized and the acquisition of four properties after the June 30, 2006.
Tenant reimbursements for the Total Portfolio increased by $5.5 million primarily as a result of
increased operating expenses of $6.5 million.
Property Operating Expenses
Property operating expenses, including real estate taxes, for the Total Portfolio increased by $6.5
million during the three-month period ended June 30, 2007 compared to the same period in 2006,
primarily reflecting:
|
1) |
|
An increase of $3.4 million at the Same Store Portfolio, primarily due to increased
occupancy and real estate tax reassessments. Increased occupancy at our properties causes
an increase in the amount of expense incurred for utilities, security, and janitorial
services. |
|
|
2) |
|
The incurrence of $3.1 million of property operating expenses for the four properties
that we acquired and the four properties that we placed in service after the second quarter
of 2006. |
Depreciation and Amortization Expense
Depreciation and amortization decreased by $5.9 million during the three-month period ended June
30, 2007 compared to the same period in 2006, primarily reflecting:
|
1) |
|
The incurrence of $2.9 million of depreciation and amortization expense on account of
the four properties acquired after the second quarter of 2006. |
|
|
2) |
|
The incurrence of $2.7 million of depreciation and amortization expense during the
three-months ended June 30, 2007 on account of Cira Centre, which we placed in service in
the fourth quarter of 2006. |
|
|
3) |
|
The increases were offset by $11.9 million of accelerated depreciation expense for one
of our properties (50 E. Swedesford Road) which was demolished as part of an office park
development in suburban Philadelphia during the three-months ended June 30, 2006. |
Administrative Expenses
Our administrative expenses decreased by approximately $0.7 million during the three-month period
ended June 30, 2007 compared to the same period in 2006, primarily reflecting higher costs in 2006
incurred as part of our integration activities following our January 2006 merger with Prentiss.
70
Interest Income/ Expense
We used our investment in marketable securities to pay down defeased debt in the fourth quarter of
2006. This pay down caused a decrease of $1.9 million in interest income. This decrease was
partially offset by the amount of interest income earned on funds held in escrow with a qualified
intermediary as part of completed 1031 like-kind transactions.
Equity in income of Real Estate Ventures
The increase of $4.0 million over the comparable 2006 period is primarily due to a distribution of
$3.8 million received as a result of our residual profit interest in a Real Estate Venture.
Minority Interest-partners share of consolidated Real Estate Ventures
Minority interest-partners share of consolidated Real Estate Ventures represents the portion of
income from our consolidated Real Estate Ventures that is allocated to our minority interest
partners.
As of June 30, 2007 we held an ownership interest in three properties through consolidated Real
Estate Ventures, compared to 14 properties owned by consolidated Real Estate Ventures at June 30,
2006, one of which we sold in the third quarter of 2006. On March 1, 2007 we acquired the minority
interest partners share in a Real Estate Venture that owns 10 properties for $63.7 million.
Minority Interest attributable to continuing operations LP units
Minority interest attributable to continuing operations LP units, represents the equity in loss
(income) attributable to the portion of the Operating Partnership not owned by us. Minority
interests owned 4.6% of the Operating Partnership as of each of June 30, 2007 and 2006.
Discontinued Operations
During the quarter ended June 30, 2007, we sold one property in Dallas, TX that had total revenue
of $2.2 million, operating expenses of $1.1 million and incurred a loss on sale of $0.6 million.
The June 30, 2006 amount is reclassified to include the operations of the property sold during the
second quarter of 2007, as well as the 17 properties that were sold in the first quarter of 2007
and the 23 properties that were sold during the year ended December 31, 2006. Therefore, the
discontinued operations amount for the quarter ended June 30, 2006 includes 41 properties with
total revenue of $23.5 million, operating expenses of $21.1 million, interest expense of $0.3
million and minority interest attributable to discontinued operations of $0.3 million. Of the 23
properties that were sold during the year ended December 31,
2006, nine were sold in the six-months ended June 30, 2006. The eight properties that we sold in the first quarter of 2006 did not have
gains on sale since we acquired such properties were through our January 2006 acquisition of
Prentiss and we sold the properties for the fair value ascribed to them in purchase accounting.
Net Income
Net income increased by $12.8 million compared to the second quarter of 2006 primarily as a result
of a distribution we received on a $3.8 million residual profits interest received held by us in a
Real Estate Venture and the decrease of $5.9 million in depreciation expense noted above. Net
income is significantly impacted by depreciation of operating properties and amortization of
acquired intangibles. These charges do not affect our ability to pay dividends and may not be
comparable to those of other real estate companies. Such charges can be expected to continue until
the values ascribed to the lease intangibles are fully amortized. These intangibles are amortizing
over the related lease terms or estimated tenant relationship.
Earnings (Loss) Per Share
Loss per share (diluted and basic) was $(0.01) in the second quarter of 2007 as compared to a loss
per share (diluted and basic) of $(0.15) in the second quarter of 2006 as a result of the factors
described above and a decrease in the
71
average number of common shares outstanding. The decrease in the average number of common shares
outstanding is the result of 1.6 million shares repurchased in 2007 and 1.2 million shares that we
repurchased in 2006, subsequent to the end of the first quarter. This decrease in the number of
shares was partially offset by the issuance of shares upon option exercises and restricted share
vesting.
72
Comparison of the Six-Month Periods Ended June 30, 2007 and 2006
The table below shows selected operating information for the Same Store Property Portfolio and
the Total Portfolio. The Same Store Property Portfolio consists of 256 Properties containing an
aggregate of approximately 24.0 million net rentable square feet that we owned for the entire
six-month periods ended June 30, 2007 and substantially all of the period ended June 30, 2006. We
consider the properties that we acquired in the Prentiss merger on January 5, 2006 as part of our
Same Store Portfolio and, therefore, the results of operations for the six-month ended June 30,
2006 do not include four days of activity. This table also includes a reconciliation from the Same
Store Property Portfolio to the Total Portfolio net income (i.e., all properties owned by us during
the six-month periods ended June 30, 2007 and 2006) by providing information for the properties
which were acquired, under development, redevelopment or placed into service and
administrative/elimination information for the six-month periods ended June 30, 2007 and 2006 (in
thousands).
The Total Portfolio net income presented in the table agrees to the net income of Brandywine Realty
Trust. The only difference between the reported net income of Brandywine Realty Trust and
Brandywine Operating Partnership is the allocation of the minority interest attributable to
continuing and discontinued operations for limited partnership units that is on the statement of
operations for Brandywine Realty Trust.
73
Comparison of six-months ended June 30, 2007 to the six-months ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired/Completed |
|
|
Development/Redevelopment |
|
|
Administrative/ |
|
|
|
|
|
|
Same Store Property Portfolio |
|
|
Properties |
|
|
Properties |
|
|
Eliminations (a) |
|
|
Total Portfolio |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
(dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash rents |
|
$ |
227,672 |
|
|
$ |
221,267 |
|
|
$ |
6,405 |
|
|
$ |
22,446 |
|
|
$ |
4,976 |
|
|
$ |
8,553 |
|
|
$ |
10,652 |
|
|
$ |
(2,032 |
) |
|
$ |
369 |
|
|
$ |
256,639 |
|
|
$ |
237,264 |
|
|
$ |
19,375 |
|
Straight-line rents |
|
|
6,713 |
|
|
|
9,267 |
|
|
|
(2,554 |
) |
|
|
4,976 |
|
|
|
3,185 |
|
|
|
2,675 |
|
|
|
699 |
|
|
|
|
|
|
|
|
|
|
|
14,364 |
|
|
|
13,151 |
|
|
|
1,213 |
|
Rents FAS 141 |
|
|
4,671 |
|
|
|
3,677 |
|
|
|
994 |
|
|
|
1,114 |
|
|
|
|
|
|
|
(251 |
) |
|
|
(556 |
) |
|
|
|
|
|
|
|
|
|
|
5,534 |
|
|
|
3,121 |
|
|
|
2,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rents |
|
|
239,056 |
|
|
|
234,211 |
|
|
|
4,845 |
|
|
|
28,536 |
|
|
|
8,161 |
|
|
|
10,977 |
|
|
|
10,795 |
|
|
|
(2,032 |
) |
|
|
369 |
|
|
|
276,537 |
|
|
|
253,536 |
|
|
|
23,001 |
|
Tenant reimbursements |
|
|
38,828 |
|
|
|
30,076 |
|
|
|
8,752 |
|
|
|
1,553 |
|
|
|
296 |
|
|
|
1,214 |
|
|
|
1,401 |
|
|
|
244 |
|
|
|
357 |
|
|
|
41,839 |
|
|
|
32,130 |
|
|
|
9,709 |
|
Termination fess |
|
|
1,021 |
|
|
|
1,866 |
|
|
|
(845 |
) |
|
|
659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148 |
|
|
|
|
|
|
|
1,828 |
|
|
|
1,866 |
|
|
|
(38 |
) |
Other, excluding termination fees |
|
|
1,324 |
|
|
|
1,465 |
|
|
|
(141 |
) |
|
|
93 |
|
|
|
11 |
|
|
|
10 |
|
|
|
34 |
|
|
|
5,774 |
|
|
|
5,305 |
|
|
|
7,201 |
|
|
|
6,815 |
|
|
|
386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
280,229 |
|
|
|
267,618 |
|
|
|
12,611 |
|
|
|
30,841 |
|
|
|
8,468 |
|
|
|
12,201 |
|
|
|
12,230 |
|
|
|
4,134 |
|
|
|
6,031 |
|
|
|
327,405 |
|
|
|
294,347 |
|
|
|
33,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
84,366 |
|
|
|
79,700 |
|
|
|
4,666 |
|
|
|
8,594 |
|
|
|
3,415 |
|
|
|
4,581 |
|
|
|
4,866 |
|
|
|
(6,371 |
) |
|
|
(5,503 |
) |
|
|
91,170 |
|
|
|
82,478 |
|
|
|
8,692 |
|
Real estate taxes |
|
|
28,400 |
|
|
|
26,031 |
|
|
|
2,369 |
|
|
|
1,534 |
|
|
|
464 |
|
|
|
2,213 |
|
|
|
1,990 |
|
|
|
315 |
|
|
|
110 |
|
|
|
32,462 |
|
|
|
28,595 |
|
|
|
3,867 |
|
|
Subtotal |
|
|
167,463 |
|
|
|
161,887 |
|
|
|
5,576 |
|
|
|
20,713 |
|
|
|
4,589 |
|
|
|
5,407 |
|
|
|
5,374 |
|
|
|
10,190 |
|
|
|
11,424 |
|
|
|
203,773 |
|
|
|
183,274 |
|
|
|
20,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,262 |
|
|
|
16,214 |
|
|
|
14,262 |
|
|
|
16,214 |
|
|
|
(1,952 |
) |
Depreciation and amortization |
|
|
96,336 |
|
|
|
96,623 |
|
|
|
(287 |
) |
|
|
12,752 |
|
|
|
88 |
|
|
|
9,649 |
|
|
|
17,534 |
|
|
|
1,537 |
|
|
|
1,112 |
|
|
|
120,274 |
|
|
|
115,357 |
|
|
|
4,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss) |
|
$ |
71,127 |
|
|
$ |
65,264 |
|
|
$ |
5,863 |
|
|
$ |
7,961 |
|
|
$ |
4,501 |
|
|
$ |
(4,242 |
) |
|
$ |
(12,160 |
) |
|
$ |
(5,609 |
) |
|
$ |
(5,902 |
) |
|
$ |
69,237 |
|
|
$ |
51,703 |
|
|
$ |
17,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
|
256 |
|
|
|
256 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281 |
|
|
|
|
|
|
|
|
|
Square feet |
|
|
24,001 |
|
|
|
24,001 |
|
|
|
|
|
|
|
2,033 |
|
|
|
|
|
|
|
2,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,467 |
|
|
|
|
|
|
|
|
|
Occupancy % |
|
|
93.6 |
% |
|
|
93.0 |
% |
|
|
|
|
|
|
96.4 |
% |
|
|
|
|
|
|
29.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,390 |
|
|
|
5,223 |
|
|
|
(2,833 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,161 |
) |
|
|
(81,974 |
) |
|
|
813 |
|
Interest expense Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,323 |
) |
|
|
(1,273 |
) |
|
|
(1,050 |
) |
Equity in income of real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,258 |
|
|
|
1,428 |
|
|
|
3,830 |
|
Net gain on sales of interests in real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,608 |
|
|
|
(2,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,599 |
) |
|
|
(22,285 |
) |
|
|
15,686 |
|
Minority interest partners share of consolidated real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(108 |
) |
|
|
281 |
|
|
|
(389 |
) |
Minority interest attributable to continuing operations LP units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
457 |
|
|
|
1,142 |
|
|
|
(685 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,250 |
) |
|
|
(20,862 |
) |
|
|
14,612 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,826 |
|
|
|
6,664 |
|
|
|
20,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,576 |
|
|
$ |
(14,198 |
) |
|
$ |
34,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.19 |
|
|
$ |
(0.20 |
) |
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPLANATORY NOTES
(a) - Represents certain revenues and expenses at the corporate level as well as various
intercompany costs that are eliminated in consolidation
74
Revenue
Cash rents from the Total Portfolio increased by $19.4 million during the six-month period ended
June 30, 2007 compared to the same period in 2006, primarily reflecting:
|
1) |
|
An additional $6.4 million at the Same Store Portfolio from increased occupancy
and increased rents received on lease renewals. |
|
|
2) |
|
An additional $17.5 million from four properties that we acquired after June
30, 2006 and four development properties (including additional occupancy at Cira
Centre) that we completed and placed in service after June 30, 2006. |
|
|
3) |
|
These increases were offset by the decrease in cash rents at our
development/redevelopment properties primarily as a result of one building, which is
now included in redevelopment, that was occupied during the six-months ended June 30,
2006 and had no occupancy during the six-months ended June 30, 2007. We acquired this
building in New Jersey with the intent to begin redevelopment after the single tenant
vacated in the third quarter of 2006. |
Straight-line rents at the Total Portfolio increased by $1.2 million, reflecting an increase of
$2.0 million in straight line rents from commencement of leases at our development properties and
an increase of $1.8 million in straight line rents from four properties that we acquired after the
second quarter of 2006 and four development properties that we placed in service subsequent to June
30, 2006. These increases were offset by a $2.6 million decrease in straight line rental income at
the Same Store Portfolio. Approximately $0.8 million of this decrease resulted from free rent
recognized in the quarter ended March 31, 2006 and the balance resulted from the shortening of the
remaining stipulated increase period in leases.
Our rents at the Total Portfolio that we recognized from the net amortization of above and below
market leases at acquired properties, in conformity with SFAS No. 141, increased by $2.4 million
primarily as a result of $1.0 million of above market leases in our Same Store Portfolio being
fully amortized and the acquisition of four properties after June 30, 2006.
Tenant reimbursements at the Total Portfolio increased by $9.7 million primarily as a result of
increased operating expenses of $12.6 million.
Property Operating Expenses
Property operating expenses, including real estate taxes, at the Total Portfolio increased by $12.6
million during the six-month period ended June 30, 2007 compared to the same period in 2006,
primarily reflecting:
|
1) |
|
An increase of $7.0 million at the Same Store Portfolio, primarily due to increased
occupancy and real estate tax reassessments. Increased occupancy at our properties causes
an increase in the amount of expense incurred for utilities, security, and janitorial
services. |
|
|
2) |
|
The incurrence of $6.2 million of property operating expenses for the four properties
that we acquired after June 30, 2006. |
Depreciation and Amortization Expense
Depreciation and amortization increased by $4.9 million during the six-month period ended June 30,
2007 compared to the same period in 2006, primarily reflecting:
|
1) |
|
The incurrence of $12.2 million of depreciation and amortization expense on account of
the four properties that we acquired after the second quarter of 2006 and four development
properties (including Cira Centre) that we completed and placed in service subsequent to
June 30, 2006. |
|
|
2) |
|
The incurrence of $2.8 million of accelerated amortization related to customer
relationship and in-place lease intangible assets for one of our properties that is
currently included in Development Properties. The value ascribed to these intangibles
considered renewal periods and when the renewals did not occur, we expensed the unamortized
value of the intangibles and the property was placed into development for future tenants. |
|
|
3) |
|
The incurrence of $2.0 million of accelerated depreciation associated with tenant
move-outs, primarily one tenant that was in a Development Property. There was no
termination fee received in connection with this move-out as a result of the tenants
bankruptcy. |
75
|
4) |
|
The increases were offset by $11.9 million of accelerated depreciation expense for one
of our properties (50 E. Swedesford Road) which was demolished as part of an office park
development in suburban Philadelphia during the six-months ended June 30, 2006. |
Administrative Expenses
Our administrative expenses decreased by approximately $2.0 million during the six-month period
ended June 30, 2007 compared to the same period in 2006, primarily reflecting higher costs that we
incurred in 2006 as part of our integration activities following our January 2006 merger with
Prentiss.
Interest Income/ Expense
We used our investment in marketable securities to pay down defeased debt in the fourth quarter of
2006. This pay down caused a decrease of $1.9 million in interest income.
Interest expense deferred financing costs increased by $1.1 million as a result of the
amortization of expenses related to our unsecured note issuances subsequent to the second quarter
of 2006.
Equity in income of Real Estate Ventures
The increase of $3.8 million over the comparable 2006 period is due to a distribution of $3.8
million received as a result of our residual profit interest in a Real Estate Venture.
Minority Interest-partners share of consolidated Real Estate Ventures
Minority interest-partners share of consolidated Real Estate Ventures represents the portion of
income from our consolidated Real Estate Ventures that is allocated to our minority interest
partners.
As of June 30, 2007 we held an ownership interest in 3 properties through consolidated Real Estate
Ventures, compared to 14 properties owned by consolidated Real Estate Ventures at June 30, 2006,
one of which was sold in the third quarter of 2006. On March 1, 2007 we acquired the minority
interest partners share of 10 properties for $63.7 million.
Minority Interest attributable to continuing operations LP units
Minority interest attributable to continuing operations LP units, represents the equity in loss
(income) attributable to the portion of the Operating Partnership not owned by us. Minority
interests owned 4.6% of the Operating Partnership as of June 30, 2007 and 2006.
Discontinued Operations
During the six-months ended June 30, 2007, we sold one property in East Norriton, PA, five
properties in Dallas, TX, and 11 properties in Reading and Harrisburg, PA and one in Voorhees, NJ.
These properties had total revenue of $13.9 million, operating expenses of $11.0 million, gains on
sale of $25.2 million and minority interest attributable to discontinued operations of $1.2
million.
The June 30, 2006 amount is reclassified to include the operations of the properties sold during
the six-months ended June 30, 2007, as well as the 23 properties that were sold during the year
ended December 31, 2006. Therefore, the discontinued operations amount for the six-months ended
June 30, 2006 includes 41 properties with total revenue of $51.0 million, operating expenses of
$43.1 million, interest expense of $0.6 million and minority interest of $0.7 million. Of the 23
properties that were sold during the year ended December 31,
2006, nine were sold in the six-months ended June 30, 2006. The eight properties that were sold in the first quarter of 2006 did not have
gains on sale since such properties were acquired as part of the Prentiss merger and the value
ascribed to those properties in purchase accounting was approximately the fair value amount for
which the properties were sold.
76
Net Income
Net income increased by $34.8 million from the same period of 2006 primarily as a result of the
gains recognized on the buildings sold of $25.2 million, a $3.8 million distribution on a residual
profits interest held by us in a Real Estate Venture and other items noted above. Net income is
significantly impacted by depreciation of operating properties and amortization of acquired
intangibles. These charges do not affect our ability to pay dividends and may not be comparable to
those of other real estate companies.. Such charges can be expected to continue until the values
ascribed to the lease intangibles are fully amortized. These intangibles are amortizing over the
related lease terms or estimated tenant relationship.
Earnings Per Share
Earnings per share (diluted and basic) were $0.19 for the six-months ended June 30, 2007 as
compared to a loss per share (diluted and basic) of $(0.20) for the six months ended June 30, 2006
as a result of the factors described above and a decrease in the average number of common shares
outstanding. The decrease in the average number of common shares outstanding is the result of 1.6
million shares repurchased in 2007 and 1.2 million shares that we repurchased in 2006, subsequent
to the end of the first quarter. This decrease in the number of shares was partially offset by the
issuance of shares upon option exercises and restricted share vesting.
77
LIQUIDITY AND CAPITAL RESOURCES
General
Our principal liquidity needs for the next twelve months are as follows:
|
|
|
fund normal recurring expenses, |
|
|
|
|
fund capital expenditures, including capital and tenant improvements and leasing costs, |
|
|
|
|
fund development and redevelopment costs, |
|
|
|
|
fund new property acquisitions, and |
|
|
|
|
fund distributions declared by our Board of Trustees, including the minimum distribution
required to maintain our REIT qualification under the Internal Revenue Code. |
We believe that our liquidity needs will be satisfied through cash flows generated by our operating
and financing activities. Rental revenue, expense recoveries from tenants, and other income from
operations are our principal sources of cash that we use to pay operating expenses, debt service,
recurring capital expenditures and the minimum distributions required to maintain our REIT
qualification. We seek to increase cash flows from our properties by maintaining quality standards
for our properties that promote high occupancy rates and permit increases in rental rates while
reducing tenant turnover and controlling operating expenses. Our revenue also includes third-party
fees generated by our property management, leasing, development and construction businesses. We
believe our revenue, together with proceeds from equity and debt financings, will continue to
provide funds for our short-term liquidity needs. However, material changes in our operating or
financing activities may adversely affect our net cash flows. Such changes, in turn, would
adversely affect our ability to fund distributions, debt service payments and tenant improvements.
In addition, a material adverse change in our cash provided by operations would affect the
financial performance covenants under our unsecured credit facility and unsecured notes.
Our principal liquidity needs for periods beyond twelve months are for costs of developments,
redevelopments, property acquisitions, scheduled debt maturities, major renovations, expansions and
other non-recurring capital improvements. We draw on multiple financing sources to fund our
long-term capital needs. We use our credit facility for general business purposes, including the
acquisition, development and redevelopment of properties and the repayment of other debt. In April
2007 and March 2006, we sold $300 million and $850 million, respectively of unsecured notes and in
September and October 2006, we sold an aggregate of $345 million of exchangeable notes. As of June
30, 2007 we also had approximately $757.1 million of mortgage loans. We expect to use the debt and
equity markets for other long-term capital needs.
Our ability to incur additional debt is dependent upon a number of factors, including our credit
ratings, the value of our unencumbered assets, our degree of leverage and borrowing restrictions
imposed by our current lenders. We currently have investment grade ratings for prospective
unsecured debt offerings from three major rating agencies. If a rating agency were to downgrade our
credit rating, our access to capital in the unsecured debt market would be more limited and the
interest rate under our existing credit facility would increase.
Our ability to sell common and preferred shares is dependent on, among other things, general market
conditions for REITs, market perceptions about our company and the current trading price of our
shares. We regularly analyze which source of capital is most advantageous to us at any particular
point in time. The equity markets may not be consistently available on terms that we consider
attractive.
The asset sales during 2006 and through the second quarter of 2007 have also been a significant
source of cash. During the six-months ended June 30, 2007 we sold 18 properties, containing an
aggregate of 3.5 million net rentable square feet and a land parcel containing 4.7 acres for
aggregate proceeds of $349.1 million, a portion of which was held in escrow with a qualified
intermediary until the completion of 1031 like kind exchanges. We have several options for
proceeds from asset sales, including the acquisition of assets in our core markets, repayment of
debt and repurchase of our shares.
Cash Flows
The following summary discussion of our cash flows is based on the consolidated statement of cash
flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the
periods presented.
78
As of June 30, 2007 and December 31, 2006, we maintained cash and cash equivalents of $28.5 million
and $25.4 million, respectively, an increase of $3.1 million. This increase was the result of the
following changes in cash flow from our activities for the six-month period ended June 30 (in
thousands):
|
|
|
|
|
|
|
|
|
Activity |
|
2007 |
|
|
2006 |
|
Operating |
|
$ |
99,953 |
|
|
$ |
124,774 |
|
Investing |
|
|
15,301 |
|
|
|
(955,216 |
) |
Financing |
|
|
(112,111 |
) |
|
|
849,645 |
|
|
|
|
|
|
|
|
Net cash flows |
|
$ |
3,143 |
|
|
$ |
19,203 |
|
|
|
|
|
|
|
|
Our principal source of cash flows is from the operation of our properties. The decrease in cash
inflows from operating activities was primarily the result of the timing of cash receipts from our
tenants and cash expenditures in the normal course of operations of our properties.
The decrease in cash outflows from investing activities was primarily attributable to our
acquisition of Prentiss on January 5, 2006 resulting in a cash outflow of $935.9 million compared
to the $63.7 million outflow we incurred in the first quarter of 2007 for the acquisition of the
49% minority interest partners share in one of our consolidated Real Estate Ventures. These
outflows were offset by net proceeds on property sales of $222.6 and $144.0 for the six-month
periods ended June 30, 2007 and 2006, respectively.
Decreased cash flow from financing activities was primarily attributable to our repurchase of 1.6
million shares for $53.5 million during the six-months ended June 30, 2007 compared to our issuance
of $850.0 million of unsecured notes for the same period in 2006. During the six-months ended
June 30, 2007, we repaid our $300.0 million 2009 three year floating rate note, issued in March
2006, using proceeds from our Credit Facility. We also issued $300.0 million of unsecured notes
during the six-months ended June 30, 2007 and used those proceeds to pay-down indebtedness on our
Credit Facility. We also made distributions of $81.7 million to shareholders during the six-months
ended June 30, 2007 compared to $68.3 million for the same period in 2006.
Capitalization
Indebtedness
On June 29, 2007, we amended our $600.0 million unsecured revolving credit facility (the Credit
Facility). The amendment extended the maturity date of the Credit Facility from December 22, 2009
to June 29, 2011 (subject to an extension of one year, at our option, upon our payment of an
extension fee equal to 15 basis points of the committed amount under the Credit Facility). The
amendment also reduced the per annum variable interest rate on outstanding balances from Eurodollar
plus 0.80% to Eurodollar plus 0.725% per annum. In addition, the amendment reduced the quarterly
facility fee from 20 basis points to 17.5 basis points per annum. The interest rate and facility
fee are subject to adjustment upon a change in our unsecured debt ratings. The amendment also
lowered to 7.50% from 8.50% the capitalization rate used in the calculation of several of the
financial covenants; increased our swing loan availability from $50.0 million to $60.0 million; and
increased the number of competitive bid loan requests available to us from two to four in any 30
day period. The competitive bid feature allows banks that are part of the lender consortium under
the Credit Facility to bid to make loans to us at a reduced Eurodollar rate.
On April 30, 2007, we consummated the public offering of $300 million aggregate principal amount of
unsecured 5.70% Guaranteed Notes due 2017 and used the net proceeds from this offering to reduce
borrowings under the Credit Facility.
On October 4, 2006, we sold $300 million aggregate principal amount of unsecured 3.875%
Exchangeable Guaranteed Notes due 2026 in reliance upon an exemption from registration rights under
Rule 144A under the Securities Act of 1933 and sold an additional $45 million of 3.875%
Exchangeable Guaranteed Notes due 2026 on October 16, 2006 to cover over-allotments. We have
registered the resale of the exchangeable notes. At certain times and upon certain events, the
notes are exchangeable for cash up to their principal amount and, with respect to the remainder, if
any, of the exchange value in excess of such principal amount, cash or our common shares. The
initial exchange rate is 25.4065 shares per $1,000 principal amount of notes (which is equivalent
to an initial exchange price of $39.36 per share). We
79
may not redeem the notes prior to October 20, 2011 (except to preserve our status as a REIT for
U.S. federal income tax purposes), but we may redeem the notes at any time thereafter, in whole or
in part, at a redemption price equal to the principal amount of the notes to be redeemed plus
accrued and unpaid interest. In addition, on October 20, 2011, October 15, 2016 and October 15,
2021 as well as upon the occurrence of certain change in control transactions prior to October 20,
2011, holders of notes may require us to repurchase all or a portion of the notes at a purchase
price equal to the principal amount of the notes to be purchased plus accrued and unpaid interest.
We used net proceeds from the notes to repurchase approximately $60.0 million of common shares at a
price of $32.80 per share and for general corporate purposes, including the repayment of
outstanding borrowings under the Credit Facility.
On March 28, 2006, we consummated the public offering of $850 million of unsecured notes,
consisting of (1) $300 million aggregate principal amount of Floating Rate Guaranteed Notes due
2009, (2) $300 million aggregate principal amount of 5.75% Guaranteed Notes due 2012 and (3) $250
million aggregate principal amount of 6.00% Guaranteed Notes due 2016. We used the net proceeds
from this offering to repay a $750 million unsecured term loan and to reduce borrowings under the
Credit Facility.
The Operating Partnership is the issuer of our unsecured notes, and Brandywine Realty Trust has
fully and unconditionally guaranteed the payment of principal and interest on the notes.
On November 29, 2006, we called for redemption of our $300 million Floating Rate Guaranteed Notes
due 2009 and repaid these notes on January 2, 2007 in accordance with the November call. As a
result of the early repayment of these notes, we incurred accelerated amortization of $1.4 million
in associated deferred financing costs in the fourth quarter 2006.
As of June 30, 2007, we had approximately $3.2 billion of outstanding indebtedness. The table
below summarizes our mortgage notes payable, our unsecured notes and our Credit Facility at June
30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(dollars in thousands) |
|
Balance: |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
2,877,939 |
|
|
$ |
2,707,176 |
|
Variable rate |
|
|
288,611 |
|
|
|
439,162 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,166,550 |
|
|
$ |
3,146,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Debt: |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
91 |
% |
|
|
86 |
% |
Variable rate |
|
|
9 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average interest rate at period end: |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
5.63 |
% |
|
|
5.58 |
% |
Variable rate |
|
|
5.98 |
% |
|
|
5.97 |
% |
Total |
|
|
5.66 |
% |
|
|
5.63 |
% |
The variable rate debt shown above generally bears interest based on various spreads over a LIBOR
term selected by us.
We use borrowings under the Credit Facility for general business purposes, including the
acquisition, development and redevelopment of properties and the repayment of other debt. The
Credit Facility requires the maintenance of financial covenants, including ratios related to
minimum net worth, debt to total capitalization and fixed charge coverage and customary
non-financial covenants. We were in compliance with all covenants as of June 30, 2007.
The indenture under which we issued our unsecured notes, and the note purchase agreement that
governs an additional $113 million of 4.34% unsecured notes that mature in December 2008, contain
financial covenants, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage
ratio not to exceed 40%, (3) a debt service coverage ratio
80
of greater than 1.5 to 1.0 and (4) an unencumbered asset value of not less than 150% of unsecured
debt. We were in compliance with all covenants as of June 30, 2007.
We have mortgage loans that are collateralized by certain of our properties. Payments on mortgage
loans are generally due in monthly installments of principal and interest, or interest only.
We intend to refinance or repay our mortgage loans as they mature, primarily through the use of
unsecured debt or equity. We prepaid two mortgage notes totaling $136.0 million on July 11, 2007,
notice of which was given in May 2007. We funded the prepayments of these notes from borrowings
under our Credit Facility and there were no penalties associated with these prepayments.
Our charter documents do not limit the amount or form of indebtedness that we may incur, and our
policies on debt incurrence are solely within the discretion of our Board, subject to financial
covenants in the Credit Facility, indenture and other credit agreements.
Equity
On June 12, 2007, we declared a distribution of $0.44 per Common Share, totaling $38.5 million,
which we paid on July 19, 2007 to shareholders of record as of July 5, 2007. The Operating
Partnership simultaneously declared a $0.44 per unit cash distribution to holders of Class A Units
totaling $1.7 million.
On June 12, 2007, we declared distributions on our Series C Preferred Shares and Series D Preferred
Shares to holders of record as of July 5, 2007. These shares are entitled to a preferential return
of 7.50% and 7.375%, respectively. Distributions paid on July 16, 2007 to holders of Series C
Preferred Shares and Series D Preferred Shares totaled $0.9 million and $1.1 million, respectively.
We maintain a share repurchase program under which our Board has authorized us to repurchase our
common shares from time to time. Our Board initially authorized this program in 1998 and has
periodically replenished capacity under the program, including, most recently, on May 2, 2006 when
our Board restored capacity to 3.5 million common shares. During the six-month period ended June
30, 2007, we repurchased approximately 1.6 million common shares under this program at an average
price of $34.18 per share, leaving approximately 0.8 million shares in remaining capacity at June
30, 2007. During July 2007, we repurchased an additional 0.2 million shares at an average price of
$27.44 per share, leaving approximately 0.6 million shares in remaining capacity. Our Board has
not limited the duration of the program and it may be terminated at any time.
Shelf Registration Statement
Together with our Operating Partnership, we maintain a shelf registration statement that registered
common shares, preferred shares, depositary shares and warrants and unsecured debt securities.
Subject to our ongoing compliance with securities laws, and if warranted by market conditions, we
may offer and sell equity and debt securities from time to time under the registration statement.
Short- and Long-Term Liquidity
We believe that our cash flow from operations is adequate to fund our short-term liquidity
requirements. Cash flow from operations is generated primarily from rental revenues and operating
expense reimbursements from tenants and management services income from providing services to third
parties. We intend to use these funds to meet short-term liquidity needs, which are to fund
operating expenses, debt service requirements, recurring capital expenditures, tenant allowances,
leasing commissions and the minimum distributions required to maintain our REIT qualification under
the Internal Revenue Code.
We expect to meet our long-term liquidity requirements, such as for property acquisitions,
development, investments in real estate ventures, scheduled debt maturities, major renovations,
expansions and other significant capital improvements, through cash from operations, borrowings
under the Credit Facility, additional unsecured and secured indebtedness, the issuance of equity
securities, investments from joint venture investors and proceeds from asset dispositions.
81
Inflation
A majority of our leases provide for reimbursement of real estate taxes and operating expenses
either on a triple net basis
or over a base amount. In addition, many of our office leases provide for fixed base rent
increases. We believe that inflationary increases in expenses may be at least partially offset by
the contractual rent increases and operating expense escalations.
Commitments and Contingencies
The following table outlines the timing of payment requirements under our contractual commitments
as of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments by Period (in thousands) |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Mortgage notes payable (a) |
|
$ |
744,940 |
|
|
$ |
143,237 |
|
|
$ |
102,103 |
|
|
$ |
282,450 |
|
|
$ |
217,150 |
|
Revolving credit facility |
|
|
210,000 |
|
|
|
|
|
|
|
|
|
|
|
210,000 |
|
|
|
|
|
Unsecured debt (a) |
|
|
2,211,610 |
|
|
|
|
|
|
|
388,000 |
|
|
|
645,000 |
|
|
|
1,178,610 |
|
Ground leases (b) |
|
|
278,038 |
|
|
|
868 |
|
|
|
3,554 |
|
|
|
3,637 |
|
|
|
269,979 |
|
Other liabilities |
|
|
1,957 |
|
|
|
|
|
|
|
1,269 |
|
|
|
|
|
|
|
688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|