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, 2008
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)
DELAWARE (Brandywine Operating Partnership L.P.)
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23-2413352
23-2862640 |
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(State or other jurisdiction of
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 Smaller reporting company o |
Brandywine Operating Partnership, L.P.:
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Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
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Brandywine Realty Trust
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Yes o No þ |
Brandywine Operating Partnership, L.P.
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Yes o No þ |
A total of 88,610,053 Common Shares of Beneficial Interest, par value $0.01 per share, were
outstanding as of August 5, 2008.
TABLE OF CONTENTS
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Page |
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Brandywine Realty Trust |
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PART I FINANCIAL INFORMATION
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Financial Statements (unaudited) |
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Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 |
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3 |
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4 |
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5 |
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Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2008 and 2007 |
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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, 2008 and December 31, 2007 |
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33 |
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Consolidated Statements of Operations for the three- and six-month periods ended June 30, 2008 and 2007 |
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34 |
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35 |
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Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2008 and 2007 |
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36 |
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Notes to Unaudited Consolidated Financial Statements |
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37 |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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63 |
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Quantitative and Qualitative Disclosures about Market Risk |
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80 |
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Controls and Procedures |
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80 |
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PART II OTHER INFORMATION
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Legal Proceedings |
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81 |
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Risk Factors |
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81 |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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81 |
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Defaults Upon Senior Securities |
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81 |
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Submission of Matters to a Vote of Security Holders |
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81 |
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Other Information |
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82 |
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Exhibits |
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82 |
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Signatures |
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84 |
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Statement re Computation of Ratios of Brandywine Realty Trust |
Statement re Computation of Ratios of Brandywine Operating Partnership, L.P. |
Certification of the Chief Executive Officer of Brandywine Realty Trust pursuant to 13a 14 under the Securities Exchange Act of 1934 |
Certification of the Chief Financial Officer of Brandywine Realty Trust pursuant to 13a-14 under the Securities Exchange Act of 1934 |
Certification of the Chief Executive Officer of Brandywine Realty Trust, in its capacity as the general partner of Brandywine Operating Partnership, L.P. |
Certification of the Chief Financial Officer of Brandywine Realty Trust, in its capacity as the general partner of Brandywine Operating Partnership, L.P. |
Certification of the Chief Executive Officer of Brandywine Realty Trust pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Certification of the Chief Financial Officer of Brandywine Realty Trust pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Certification of the Chief Executive Officer of Brandywine Realty Trust, in its capacity as the general partner of Brandywine Operating Partnership, L.P. |
Certification of the Chief Financial Officer of Brandywine Realty Trust, in its capacity as the general partner of Brandywine Operating Partnership, L.P. |
Filing Format
This combined Form 10-Q is being filed separately by Brandywine Realty Trust and Brandywine
Operating Partnership, L.P.
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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2008 |
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2007 |
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ASSETS |
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Real estate investments: |
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Rental properties |
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$ |
4,478,032 |
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$ |
4,813,563 |
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Accumulated depreciation |
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(595,209 |
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(558,908 |
) |
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Operating real estate investments, net |
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3,882,823 |
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4,254,655 |
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Development land and construction-in-progress |
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363,936 |
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402,270 |
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Total real estate invesmtents, net |
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4,246,759 |
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4,656,925 |
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Cash and cash equivalents |
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4,791 |
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5,600 |
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Accounts receivable, net |
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11,888 |
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17,057 |
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Accrued rent receivable, net |
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86,783 |
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83,098 |
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Asset held for sale, net |
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417,127 |
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Investment in real estate ventures, at equity |
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71,078 |
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71,598 |
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Deferred costs, net |
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85,665 |
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87,123 |
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Intangible assets, net |
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167,115 |
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218,149 |
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Other assets |
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59,712 |
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74,549 |
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Total assets |
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$ |
5,150,918 |
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$ |
5,214,099 |
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LIABILITIES AND BENEFICIARIES EQUITY |
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Mortgage notes payable |
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$ |
493,505 |
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$ |
611,898 |
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Unsecured term loan |
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183,000 |
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150,000 |
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Borrowing under credit facilities |
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163,000 |
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130,727 |
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Unsecured senior notes, net of discounts |
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2,177,118 |
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2,208,344 |
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Accounts payable and accrued expenses |
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67,946 |
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80,164 |
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Distributions payable |
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42,419 |
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42,368 |
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Tenant security deposits and deferred rents |
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58,469 |
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65,241 |
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Acquired below market leases, net |
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53,662 |
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67,281 |
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Other liabilities |
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27,040 |
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30,154 |
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Mortgage notes payable and other liabilities held for sale |
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113,897 |
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Total liabilities |
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3,380,056 |
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3,386,177 |
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Minority interest |
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66,940 |
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83,990 |
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Commitments and contingencies (Note 14) |
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Beneficiaries equity: |
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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 2008 and 2007 |
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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 2008 and 2007 |
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23 |
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23 |
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Common Shares of beneficial interest, $0.01 par value; shares authorized
200,000,000; 88,612,439 and 88,623,635 issued in 2008 and 2007, respectively
and 87,697,983 and 87,015,600 outstanding in 2008 and 2007, respectively |
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877 |
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870 |
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Additional paid-in capital |
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2,320,305 |
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2,320,857 |
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Common shares in treasury, at cost, 914,456 and 1,599,637 in 2008 and 2007,
respectively |
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(29,970 |
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(53,449 |
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Cumulative earnings |
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494,704 |
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477,150 |
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Accumulated other comprehensive loss |
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(1,151 |
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(1,885 |
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Cumulative distributions |
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(1,080,886 |
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(999,654 |
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Total beneficiaries equity |
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1,703,922 |
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1,743,932 |
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Total liabilities, minority interest and beneficiaries equity |
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$ |
5,150,918 |
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$ |
5,214,099 |
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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 ended |
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For the six-month periods ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue: |
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Rents |
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$ |
126,051 |
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$ |
125,660 |
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$ |
251,656 |
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$ |
251,315 |
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Tenant reimbursements |
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20,859 |
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19,419 |
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39,966 |
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38,744 |
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Termination fees |
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892 |
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498 |
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4,124 |
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1,764 |
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Third Party management fees, labor reimbursement and leasing |
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5,170 |
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5,369 |
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10,849 |
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9,704 |
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Other |
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815 |
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1,274 |
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1,599 |
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2,439 |
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Total revenue |
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153,787 |
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152,220 |
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308,194 |
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303,966 |
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Operating Expenses: |
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Property operating expenses |
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41,282 |
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41,280 |
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82,904 |
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82,299 |
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Real estate taxes |
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15,581 |
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15,214 |
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31,328 |
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29,956 |
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Third party management expenses |
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2,381 |
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2,496 |
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4,627 |
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4,991 |
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Depreciation and amortization |
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52,472 |
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53,542 |
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104,324 |
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111,340 |
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General & administrative expenses |
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6,127 |
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7,007 |
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11,039 |
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14,417 |
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Total operating expenses |
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117,843 |
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119,539 |
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234,222 |
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243,003 |
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Operating income |
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35,944 |
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32,681 |
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73,972 |
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60,963 |
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Other Income (Expense): |
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Interest income |
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179 |
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1,597 |
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382 |
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2,378 |
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Interest expense |
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(35,709 |
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(39,423 |
) |
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(71,807 |
) |
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(78,396 |
) |
Deferred financing costs |
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(1,198 |
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(1,065 |
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(2,706 |
) |
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(2,323 |
) |
Equity in income of real estate ventures |
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1,664 |
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4,504 |
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2,779 |
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5,258 |
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Net gain (loss) on dispostion of undepreciated real estate |
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(24 |
) |
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Gain on early extinguishment of debt |
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986 |
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4,342 |
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Income (loss) before minority interest |
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1,866 |
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(1,706 |
) |
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6,938 |
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(12,120 |
) |
Minority interest partners share of consolidated real estate ventures |
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(38 |
) |
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8 |
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(78 |
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(108 |
) |
Minority interest attributable to continuing operations LP units |
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16 |
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158 |
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(103 |
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681 |
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Income (loss) from continuing operations |
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1,844 |
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(1,540 |
) |
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6,757 |
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(11,547 |
) |
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Discontinued operations: |
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Income from discontinued operations |
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1,253 |
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3,708 |
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3,535 |
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8,235 |
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Net gain (loss) on disposition of discontinued operations |
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13,420 |
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(856 |
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21,401 |
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25,153 |
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Provision for impairment |
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(6,850 |
) |
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(6,850 |
) |
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Minority interest attributable to discontinued operations LP
units |
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(299 |
) |
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(123 |
) |
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(731 |
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(1,427 |
) |
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Total discontinued operations |
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7,524 |
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2,729 |
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17,355 |
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31,961 |
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Net income |
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9,368 |
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|
|
1,189 |
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|
24,112 |
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|
20,414 |
|
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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$ |
7,370 |
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|
$ |
(809 |
) |
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$ |
20,116 |
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$ |
16,418 |
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Basic earnings (loss) per Common Share: |
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Continuing operations |
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$ |
(0.00 |
) |
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$ |
(0.04 |
) |
|
$ |
0.03 |
|
|
$ |
(0.18 |
) |
Discontinued operations |
|
|
0.09 |
|
|
|
0.03 |
|
|
|
0.20 |
|
|
|
0.36 |
|
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|
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|
$ |
0.08 |
|
|
$ |
(0.01 |
) |
|
$ |
0.23 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.00 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.03 |
|
|
$ |
(0.18 |
) |
Discontinued operations |
|
|
0.09 |
|
|
|
0.03 |
|
|
|
0.20 |
|
|
|
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.08 |
|
|
$ |
(0.01 |
) |
|
$ |
0.23 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per Common Share |
|
$ |
0.44 |
|
|
$ |
0.44 |
|
|
$ |
0.88 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
87,280,576 |
|
|
|
87,080,785 |
|
|
|
87,092,271 |
|
|
|
87,680,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
87,512,345 |
|
|
|
87,080,785 |
|
|
|
87,300,005 |
|
|
|
88,298,521 |
|
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, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
9,368 |
|
|
$ |
1,189 |
|
|
$ |
24,112 |
|
|
$ |
20,414 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative financial instruments |
|
|
5,358 |
|
|
|
(1,872 |
) |
|
|
526 |
|
|
|
(422 |
) |
Settlement of forward starting swaps |
|
|
|
|
|
|
1,148 |
|
|
|
|
|
|
|
1,148 |
|
Reclassification of realized (gains)/losses on derivative
financial
instruments to operations, net |
|
|
(20 |
) |
|
|
(394 |
) |
|
|
(40 |
) |
|
|
(385 |
) |
Unrealized gain (loss) on available-for-sale securities |
|
|
|
|
|
|
13 |
|
|
|
248 |
|
|
|
(595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
5,338 |
|
|
|
(1,105 |
) |
|
|
734 |
|
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
14,706 |
|
|
$ |
84 |
|
|
$ |
24,846 |
|
|
$ |
20,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
|
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
24,112 |
|
|
$ |
20,414 |
|
Adjustments to reconcile net income (loss) to net cash from
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
81,948 |
|
|
|
90,405 |
|
Amortization: |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
2,706 |
|
|
|
2,323 |
|
Deferred leasing costs |
|
|
8,152 |
|
|
|
7,731 |
|
Acquired above (below) market leases, net |
|
|
(4,673 |
) |
|
|
(6,304 |
) |
Acquired lease intangibles |
|
|
22,333 |
|
|
|
26,700 |
|
Deferred compensation costs |
|
|
2,574 |
|
|
|
2,552 |
|
Straight-line rent |
|
|
(11,233 |
) |
|
|
(14,775 |
) |
Provision for doubtful accounts |
|
|
2,650 |
|
|
|
500 |
|
Provision for impairment |
|
|
6,850 |
|
|
|
|
|
Real estate venture income in excess of distributions |
|
|
(569 |
) |
|
|
(104 |
) |
Net gain on sale of interests in real estate |
|
|
(21,377 |
) |
|
|
(25,153 |
) |
Gain on early extinguishment of debt |
|
|
(4,342 |
) |
|
|
|
|
Minority interest (expense)/income |
|
|
912 |
|
|
|
854 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
3,324 |
|
|
|
3,916 |
|
Other assets |
|
|
7,168 |
|
|
|
1,366 |
|
Accounts payable and accrued expenses |
|
|
(7,430 |
) |
|
|
(6,151 |
) |
Tenant security deposits and deferred rents |
|
|
(2,883 |
) |
|
|
5,665 |
|
Other liabilities |
|
|
(6,395 |
) |
|
|
(10,148 |
) |
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
103,827 |
|
|
|
99,791 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of minority interest partners share of consolidated real estate venture |
|
|
|
|
|
|
(64,174 |
) |
Sales of properties, net |
|
|
53,601 |
|
|
|
222,592 |
|
Capital expenditures |
|
|
(89,034 |
) |
|
|
(133,264 |
) |
Investment in unconsolidated real estate ventures |
|
|
(469 |
) |
|
|
(523 |
) |
Cash distributions from unconsolidated real estate ventures
in excess of equity in income |
|
|
1,558 |
|
|
|
2,169 |
|
Leasing costs |
|
|
(5,468 |
) |
|
|
(11,499 |
) |
|
|
|
|
|
|
|
Net cash (used in) from investing activities |
|
|
(39,812 |
) |
|
|
15,301 |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
258,000 |
|
|
|
620,875 |
|
Repayments of Credit Facility borrowings |
|
|
(192,727 |
) |
|
|
(470,875 |
) |
Repayments of mortgage notes payable |
|
|
(18,650 |
) |
|
|
(126,780 |
) |
Proceeds from unsecured notes |
|
|
|
|
|
|
299,644 |
|
Repayments of unsecured notes |
|
|
(26,924 |
) |
|
|
(299,866 |
) |
Proceeds from forward starting swap termination |
|
|
|
|
|
|
1,148 |
|
Debt financing costs |
|
|
(209 |
) |
|
|
(3,776 |
) |
Exercise of stock options |
|
|
|
|
|
|
6,221 |
|
Repurchases of Common Shares |
|
|
|
|
|
|
(53,524 |
) |
Distributions paid to shareholders |
|
|
(80,935 |
) |
|
|
(81,554 |
) |
Distributions to minority interest holders |
|
|
(3,379 |
) |
|
|
(3,462 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(64,824 |
) |
|
|
(111,949 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(809 |
) |
|
|
3,143 |
|
Cash and cash equivalents at beginning of period |
|
|
5,600 |
|
|
|
25,379 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
4,791 |
|
|
$ |
28,522 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest |
|
$ |
109,355 |
|
|
$ |
92,541 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
|
|
|
|
Cash escrowed with qualified intermediary |
|
|
|
|
|
|
109,102 |
|
Acquisition of property using cash escrowed with qualified intermediary |
|
|
|
|
|
|
(72,511 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
6
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
1. THE COMPANY
Brandywine Realty Trust, a Maryland real estate investment trust, or 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, 2008, the Company owned 211 office properties, 22 industrial facilities and one
mixed-use property (collectively, the Properties) containing an aggregate of approximately 23.3
million net rentable square feet. The Company also had six properties under development and six
properties under redevelopment containing an aggregate 3.2 million net rentable square feet. The
Company consolidated three office properties owned by real estate ventures containing 0.4 million
net rentable square feet. In addition, as of June 30, 2008, the Company owned three office
properties, one property under redevelopment and one property under development, located in
Oakland, CA totaling approximately 1.7 million net rentable square feet, that were all designated
as held for sale assets. Therefore, as of June 30, 2008, the Company owned and consolidated 254
properties containing an aggregate of 28.6 million net rentable square feet. As of June 30, 2008,
the Company also owned economic interests in 14 unconsolidated real estate ventures that contain
approximately 4.4 million net rentable square feet (collectively, the Real Estate Ventures). The
Properties and the properties owned by the Real Estate Ventures are located in or near
Philadelphia, PA, Wilmington, DE, Southern and Central New Jersey, Richmond, VA, Metropolitan
Washington, D.C., Austin, TX and Oakland, Carlsbad and Rancho Bernardo, CA.
Brandywine Realty Trust is the sole general partner of the Operating Partnership and, as of June
30, 2008, owned a 96.2% interest in the Operating Partnership. The Company conducts its
third-party real estate management services business primarily through wholly-owned management
company subsidiaries.
As of June 30, 2008, the management company subsidiaries were managing properties containing an
aggregate of approximately 38.8 million net rentable square feet, of which approximately 28.3
million net rentable square feet related to Properties owned by the Company and approximately 10.5
million net rentable square feet related to properties owned by third parties and Real Estate
Ventures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared by the Company pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission (the SEC). 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, 2008, the results of its operations for the
three- and six-month periods ended June 30, 2008 and 2007 and its cash flows for the six-month
periods ended June 30, 2008 and 2007 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 included in the Companys 2007 Annual Report on Form 10-K filed with the
SEC on February 28, 2008.
The consolidated balance sheet as of December 31, 2007 is derived from the audited financial
statements at that date; however during the quarter ended June 30, 2008 the Company identified
certain instances dating back to 1998 in which the Company canceled, upon the vesting of restricted
shares, a portion of such shares in settlement of employee tax
withholdings in excess of minimum statutory rates.
As a result, the Company has changed the classification of the affected
7
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
restricted share grants
from equity to liability awards in accordance with FASB Statement No.
123(R), Share-Based
Payment, and its predecessors. When an award is classified as a liability, compensation expense is recognized for
that award and is based on the current fair value of the award during the period in
which it is reviewed. The cumulative impact of this error from the period January 1,
2002 through December 31, 2007 was primarily an overstatement of cumulative earnings and cumulative
distributions as a result of recalculating the amount of compensation expense that would have been
incurred if such shares had been treated as liability awards. The Company
assessed the materiality of this item on the year ended December 31, 2002 (the first year that
awards granted in 1998 vested with excess withholdings), the full year ended December 31, 2007, and
any other periods between and subsequent to those dates, in accordance with the SECs Staff
Accounting Bulletin (SAB) No. 99 and concluded that the error was not material to any such
periods. The Company also concluded the impact of correcting the error would have been misleading
to the users of the financial statements for the quarter ended June 30, 2008, and therefore, has not recorded a
single period cumulative adjustment. Accordingly, in accordance with SAB No. 108, the December 31,
2007 balance sheet herein has been revised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported |
|
Adjustment |
|
As Revised |
Accounts
payable and accrued expenses |
|
|
80,732 |
|
|
|
(568 |
) |
|
|
80,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
84,119 |
|
|
|
(129 |
) |
|
|
83,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
2,319,410 |
|
|
|
1,447 |
|
|
|
2,320,857 |
|
Cumulative earnings |
|
|
480,217 |
|
|
|
(3,067 |
) |
|
|
477,150 |
|
Cumulative distributions |
|
|
(1,001,971 |
) |
|
|
2,317 |
|
|
|
(999,654 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total beneficiaries equity |
|
|
1,743,235 |
|
|
|
697 |
|
|
|
1,743,932 |
|
The changes above are the result of compensation expense that would have been recognized from 2002
through the year ended December 31, 2007 if awards with excess withholdings upon vesting had been
categorized as liability awards. Under the Companys restricted share program, dividends are paid
on unvested shares. Such dividends should be expensed if the grant is treated as a liability
award. The reduction in cumulative distributions and the majority of the reduction in cumulative
earnings results from treating dividends on unvested shares as expense from 1998 through the year
ended December 31, 2007.
General and administrative expenses on the statement of operations had a nominal increase for the
three-months ended June 30, 2007 and a $0.2 million
increase for the six-months ended June 30,
2007. The Company will make corresponding adjustments to other periods in 2007 as appropriate the
next time those financial statements are filed.
For the years ended December 31, 2007, 2006, and 2005, general and administrative expenses would
have increased/(decreased) by $(0.3) million, $0.7 million, and $0.6 million, respectively.
On July 28, 2008, the Company determined that shares redeemed in an amount to satisfy
employee tax withholdings on restricted share awards would not exceed the minimum
statutory rate. Consequently, there will no longer be liability classified restricted share
awards.
Certain other prior period amounts have been reclassified to conform to the current period
presentation. The reclassifications are primarily due to the
treatment of sold or held for sale properties as
discontinued operations on the statement of operations for all periods presented and the
reclassification of labor reimbursements received under our third party contracts to a gross
presentation.
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.
8
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
Operating Properties
Operating properties are carried at historical cost less accumulated depreciation and impairment
losses. 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 (including below market fixed-rate renewal periods).
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 below market 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 Accounting for Conditional Asset Retirement Obligations (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 below market fixed-rate renewal periods.
In the event that a tenant terminates its lease, the unamortized portion of each intangible,
including market rate adjustments (above or below), 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
9
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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. The straight-line rent adjustment increased
revenue by approximately $3.8 and $9.9 million for the three- and six-month periods ended June 30,
2008 and approximately $5.6 million and $12.6 million for the three- and six-month periods ended
June 30, 2007. Deferred rents on the balance sheet represent rental revenue received prior to
their due dates and amounts paid by the tenant for certain improvements considered to be landlord
assets that will remain the Companys property at the end of the tenants lease term. The
amortization of the amounts paid by the tenant for such improvements 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 $0.9 million and $1.4 million for the three- and six-month periods
ended June 30, 2008 and $0.5 million and $2.1 million for the three- and six-month periods ended
June 30, 2007. 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. Termination fees, third party management fees, labor
reimbursement and leasing income are recorded when earned.
Stock-Based Compensation Plans
The Company maintains a shareholder-approved equity-incentive plan known as the Amended and
Restated 1997 Long-Term Incentive Plan (the 1997 Plan). The 1997 Plan is administered by the
Compensation Committee of the Companys Board of Trustees. Under the 1997 Plan the Compensation
Committee is authorized to award equity and equity-based awards, including incentive stock options,
non-qualified stock options, restricted shares and performance-based shares. As of June 30, 2008,
3.0 million common shares remained available for future awards under the 1997 Plan. Through June
30, 2008 all options awarded under the 1997 Plan were non-qualified stock options that had a
ten-year term. On April 8, 2008, the Compensation Committee awarded incentive stock options
exercisable for an aggregate of 1.6 million common shares. These options, together with
non-qualified options awarded in March 2008, vest over a three-year period.
The Company recognized stock-based compensation expense of $1.4 million and $2.6 million during the
three- and six-month periods ended June 30, 2008 and $1.3 million and $2.8 million during the
three- and six-month periods ended June 30, 2007, respectively, included in general and
administrative expense on the Companys consolidated income statement in the respective periods.
Accounting for Derivative Instruments and Hedging Activities
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, enters 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.
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. See disclosures below related to the
Companys adoption of Statement of Financial Accounting Standard No. 157, Fair Value
Measurements. 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. The ineffective portions of hedges are recognized in
earnings in the current period. For the three-month and six-month periods ended
June 30, 2008 and 2007, 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.
10
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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 order to continue to qualify as a REIT,
Brandywine Realty Trust is required to, among other things, distribute at least 90% of its annual
REIT taxable income to its stockholders and meet certain tests regarding the nature of its income
and assets. As a REIT, Brandywine Realty Trust is not subject to federal and state income taxes
with respect to the portion of its income that meets certain criteria and is distributed annually
to its stockholders. Accordingly, no provision for federal and state income taxes is included in
the accompanying consolidated financial statements with respect to the operations of Brandywine
Realty Trust. Brandywine Realty Trust intends to continue to operate in a manner that allows it to
meet the requirements for taxation as a REIT. If Brandywine Realty Trust fails to qualify as a
REIT in any taxable year, Brandywine Realty Trust will be subject to federal and state income taxes
and may not be able to qualify as a REIT for the four subsequent tax years. Brandywine Realty
Trust is subject to certain local income 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 has elected to treat several of its subsidiaries as REITs under Sections
856 through 860 of the Code. As a result, each subsidiary REIT generally is not subject to federal
and state income taxation at the corporate level to the extent it distributes annually at least
100% of its REIT taxable income to its stockholders and satisfies certain other organizational and
operational requirements. Each subsidiary REIT has met these requirements and, accordingly, no
provision has been made for federal and state income taxes in the accompanying consolidated
financial statements. If any subsidiary REIT fails to qualify as a REIT in any taxable year, that
subsidiary REIT will be subject to federal and state income taxes and may not be able to qualify as
a REIT for the four subsequent taxable years. In addition, this may adversely impact Brandywine
Realty Trusts ability to qualify as a REIT. Also, each subsidiary REIT may be subject to local
income taxes.
Brandywine Realty Trust has elected to treat several of its subsidiaries as taxable REIT
subsidiaries (each a TRS). A TRS is subject to federal, state and local income tax. In general,
a TRS may perform additional non-customary services for tenants and generally may engage in any
real estate or non-real estate related businesses that are not permitted REIT activities.
Accounting Pronouncements Adopted January 1, 2008
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157) as amended by FASB Staff Position SFAS 157-1, Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13
(FSP FAS 157-1) and FASB Staff Position SFAS 157-2, Effective Date of FASB Statement No. 157
(FSP FAS 157-2). SFAS 157 defines fair value, establishes a framework for measuring fair value in
GAAP and provides for expanded disclosure about fair value measurements. SFAS 157 is applied
prospectively, including to all other accounting pronouncements that require or permit fair value
measurements. FSP FAS 157-1 amends SFAS 157 to exclude from the scope of SFAS 157 certain leasing
transactions accounted for under Statement of Financial Accounting Standards No. 13, Accounting
for Leases for purposes of measurements and classifications. FSP FAS 157-2 amends SFAS 157 to
defer the effective date of SFAS 157 for all non-financial assets and non-financial liabilities
except those that are recognized or disclosed at fair value in the financial statements on a
recurring basis to fiscal years beginning after November 15, 2008.
SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. SFAS 157
also establishes a fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value. Financial assets and
liabilities
11
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
recorded on the Consolidated Balance Sheets at fair value are categorized based on the
inputs to the valuation techniques as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities
that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices
included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as
well as inputs that are observable for the asset or liability (other than quoted prices), such as
interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically
based on an entitys own assumptions, as there is little, if any, related market activity or
information. In instances where the determination of the fair value measurement is based on inputs
from different levels of the fair value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The Companys assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment,
and considers factors specific to the asset or liability. SFAS 157 was applied to the Companys
outstanding derivatives and available-for-sale-securities effective January 1, 2008.
The following table sets forth the Companys financial assets and liabilities that were accounted
for at fair value on a recurring basis as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
June 30, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
846 |
|
|
$ |
846 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
3,548 |
|
|
|
|
|
|
$ |
3,548 |
|
|
|
|
|
Forward Starting Interest Rate Swaps |
|
|
(995 |
) |
|
|
|
|
|
|
(995 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,553 |
|
|
$ |
|
|
|
$ |
2,553 |
|
|
$ |
|
|
The partial adoption of SFAS 157 under FSP FAS 157-2 did not have a material impact on the
Companys financial assets and liabilities. Management is evaluating the impact that SFAS 157 will
have on its non-financial assets and non-financial liabilities since the application of SFAS 157
for such items was deferred to January 1, 2009. The Company believes that the impact of these
items will not be material to its consolidated financial statements. Assets and liabilities
typically recorded at fair value on a non-recurring basis to which the Company has not yet applied
SFAS 157 due to the deferral of SFAS 157 for such items include:
|
|
|
Non-financial assets and liabilities initially measured at fair value in an acquisition
or business combination that are not remeasured at least annually at fair value |
|
|
|
|
Long-lived assets measured at fair value due to an impairment under Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets |
|
|
|
|
Asset retirement obligations initially measured at fair value under Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations |
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 159,
"The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159
permits entities to choose to measure many financial instruments and certain other items at fair
value. The objective of the guidance is to improve financial reporting by providing entities with
the opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions. The
12
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
adoption
of SFAS 159 did not have any impact on the Companys consolidated financial statements since the
Company did not elect to apply the fair value option to any of its eligible financial instruments
or other items.
New Pronouncements
In June 2008, the FASB issued FASB Staff Position EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1).
This new standard requires that nonvested share-based payment awards that contain non-forfeitable
rights to dividends or dividend equivalents be treated as participating securities in the
computation of earnings per share pursuant to the two-class method. The Company believes that FSP
EITF 03-6-1 will require the Company to include the impact of its nonvested shares of common stock
and restricted stock units in earnings per share using this more dilutive methodology. However,
the Company currently believes that FSP EITF 03-6-1 will not have a material impact on the
Companys consolidated financial statements and results of operations for the share-based payment
programs currently in place. FSP EITF 03-6-1 will be applied retrospectively to all periods
presented for fiscal years beginning after December 15, 2008.
In May 2008, the FASB issued FASB Staff Position APB 14-1 Accounting for Convertible Debt
Instruments That May Be Settled Upon Conversion (Including Partial Cash Settlement) (FSP APB
14-1). This new standard requires the initial proceeds from convertible debt that may be settled
in cash to be bifurcated between a liability component and an equity component. The objective of
the guidance is to require the liability and equity components of convertible debt to be separately
accounted for in a manner such that the interest expense recorded on the convertible debt would not
equal the contractual rate of interest on the convertible debt, but instead would be recorded at a
rate that would reflect the issuers conventional debt borrowing rate. This is accomplished
through the creation of a discount on the debt that would be accreted using the effective interest
method as additional non-cash interest expense over the period the debt is expected to remain
outstanding. The provisions of FSP APB 14-1 will be applied retrospectively to all periods
presented for fiscal years beginning after December 31, 2008. Management believes that FSP APB
14-1 will impact the accounting for the Companys 3.875% Exchangeable Notes and will have a
material impact on the Companys consolidated financial statements and results of operations.
In April 2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 is to be applied prospectively for fiscal years
beginning after December 15, 2008. Management is currently evaluating the impact of FSP 142-3 on
the Companys consolidated financial position, results of operations and cash flows but currently
does not believe it will have a material impact on the Companys consolidated financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 Disclosures
about Derivative Instruments and Hedging Activities (SFAS 161). This new standard enhances
disclosure requirements for derivative instruments in order to provide users of financial
statements with an enhanced understanding of (i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedged items are accounted for under Financial
Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities and its
related interpretations and (iii) how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows. SFAS 161 is to be applied
prospectively for the first annual reporting period beginning on or after November 15, 2008. The
Company believes that the adoption of SFAS 161 will not have a material impact on the Companys
financial statement disclosures based on the Companys current disclosures.
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations (SFAS
141(R)), which establishes principles and requirements for how the acquirer shall recognize and
measure in its financial
statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in
the acquiree and goodwill acquired in a business combination. This statement is effective for
business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements an Amendment of ARB No. 51 (SFAS 160), which establishes and expands
accounting and reporting standards for minority interests, which will be recharacterized as
noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. SFAS 160 is
effective for business combinations for which the acquisition date is on
13
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
or after the beginning of
the first annual reporting period beginning on or after December 15, 2008. This statement is
effective for fiscal years beginning on or after December 15, 2008.
3. REAL ESTATE INVESTMENTS
As of June 30, 2008 and December 31, 2007 the gross carrying value of the Companys operating
properties was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
Land |
|
$ |
682,980 |
|
|
$ |
727,979 |
|
Building and improvements |
|
|
3,383,725 |
|
|
|
3,672,638 |
|
Tenant improvements |
|
|
411,327 |
|
|
|
412,946 |
|
|
|
|
|
|
|
|
|
|
|
4,478,032 |
|
|
|
4,813,563 |
|
|
|
|
|
|
|
|
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.
2008
On June 27, 2008, the Company entered into an agreement to sell five properties, totaling
approximately 1.7 net rentable square feet in Oakland, California for an aggregate sales price of
$412.5 million (including debt assumption). These five properties are designated as held for sale
at June 30, 2008 (see Note 9).
On April 25, 2008, the Company sold 100 Brandywine Boulevard, an office property located in
Newtown, Pennsylvania containing 102,000 net rentable square feet, for a sales price of $28.0
million.
On February 29, 2008, the Company sold 1400 Howard Boulevard, an office property located in Mount
Laurel, New Jersey containing 75,590 net rentable square feet, for a sales price of $22.0 million.
On February 14, 2008, the Company sold a parcel of land located in Henrico, Virginia containing
3.24 acres, for a sales price of $0.4 million.
On January 14, 2008, the Company sold 7130 Ambassador Drive, an office property located in
Allentown, Pennsylvania containing 114,049 net rentable square feet, for a sales price of $5.8
million.
2007
DRA Venture
On December 19, 2007, the Company formed G&I Interchange Office LLC, a new venture (the Venture)
with G&I VI Investment Interchange Office LLC (G&I VI), an investment arrangement advised by DRA
Advisors LLC. The Venture owns interests in 29 office properties which are located in Pennsylvania
and contain an aggregate of 1,616,227 net rentable square feet. The Company transferred or
contributed 100% of its ownership interests in 26 properties and
transferred to the Venture an 89% interest in three of the properties (with the remaining 11%
interest in the three properties subject to a put/call at fixed prices after three years). In
connection with the formation, the Company effectively transferred an 80% interest in the Venture
to G&I IV for cash and the Venture borrowed approximately $184.0 million in third party financing
the aggregate proceeds of which were distributed to the Company. The Company used the net proceeds
of these transactions of approximately $230.9 million to reduce outstanding indebtedness under the
Companys unsecured revolving credit facility.
14
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
The Company was engaged by the Venture to perform property management and leasing services. The
venture agreements provide for certain control rights and participation as a venture partner and
based on an evaluation of control rights, the Company does not consolidate the Venture.
The Companys continuing involvement with the properties through its venture interest and
management fees and leasing commissions represents a significant continuing involvement in the
properties. Accordingly, under EITF 03-13, Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report Discontinued Operations, the Company has
determined that the operations of the properties should not be included in discontinued operations
for the six-months ended June 30, 2007.
Other 2007 Acquisitions and Dispositions
On November 30, 2007, the Company sold 111/113 Pencader Drive, an office property located in
Newark, Delaware containing 52,665 net rentable square feet, for a sales price of $5.1 million.
On November 15, 2007, the Company sold 2490 Boulevard of the Generals, an office property located
in West Norriton, Pennsylvania containing 20,600 net rentable square feet, for a sales price of
$1.5 million.
On September 7, 2007, the Company sold seven land parcels located in the Iron Run Business Park in
Lehigh County, Pennsylvania containing an aggregate 51.5 acres of land, for an aggregate sales
price of $6.6 million.
On July 19, 2007, the Company acquired the United States Post Office building, an office property
located in Philadelphia, Pennsylvania containing 862,692 net rentable square feet, for an aggregate
purchase price of $28.0 million. The Company intends to redevelop the building into office space
for lease by the Internal Revenue Service (IRS). As part of this acquisition, the Company also
acquired a 90 year ground lease interest in an adjacent parcel of ground of approximately 2.54
acres, commonly referred to as the postal annex. The Company is currently demolishing the
existing structure located on the postal annex and intends to rebuild a parking facility containing
approximately 733,000 square feet that will primarily be used by the IRS employees upon their move
into the planned office space at the Post Office building. The remaining postal annex ground
leased parcels can also accommodate additional office, retail, hotel and residential development
and the Company is currently in the planning stage with respect to these parcels and is seeking
zoning and other relevant authorizations related thereto.
On July 19, 2007, the Company acquired five office properties containing 508,607 net rentable
square feet and a 4.9 acre land parcel in the Boulders office park in Richmond, Virginia for an
aggregate purchase price of $96.3 million. The Company funded $36.6 million 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 (discussed below).
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 purchase price of $72.0
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 April 30, 2007, the Company sold Cityplace Center, an office property located in Dallas, Texas
containing 1,295,832 net rentable square feet, for a sales price of $115.0 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
million. The Company structured this transaction to qualify as a like-kind exchange under Section
1031 of the Internal Revenue Code and the cash from the sale was held by a qualified intermediary
for purposes of accomplishing the like-kind exchange as noted in the above transactions.
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.
15
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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 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 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 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.
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of June 30, 2008, the Company had an aggregate investment of approximately $71.1 million in its
14 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 44 office buildings that contain an aggregate of approximately 4.4 million net
rentable square feet, one Real Estate Venture developed a hotel property that contains 137 rooms,
one Real Estate Venture constructed and sold condominiums in Charlottesville, VA, one Real Estate
Venture is developing an office property located in Charlottesville, VA and one Real Estate Venture
is in the planning stages of an office development in Conshohocken, PA.
The Company accounts for its unconsolidated interests in its Real Estate Ventures using the equity
method. Unconsolidated interests range from 5% to 50%, subject to specified priority allocations in
certain of the Real Estate Ventures.
The amounts reflected in the following tables (except for the 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 Properties Trust merger in 2006,
had a negative equity balance on a historical cost basis as a result of historical depreciation and
distribution 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 Company does not allocate operating losses of the Real
Estate Ventures in excess of its investment balance unless the Company is liable for the
obligations of the Real Estate Venture or is otherwise committed to provide financial support to
the Real Estate Venture.
The following is a summary of the financial position of the Real Estate Ventures as of June 30,
2008 and December 31, 2007 (in thousands):
16
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2008 |
|
2007 |
Operating property, net of accumulated depreciation |
|
$ |
599,457 |
|
|
$ |
587,537 |
|
Other assets |
|
|
111,847 |
|
|
|
113,268 |
|
Liabilities |
|
|
41,618 |
|
|
|
41,459 |
|
Debt |
|
|
544,376 |
|
|
|
538,766 |
|
Equity |
|
|
125,355 |
|
|
|
120,581 |
|
Companys share of equity (Companys basis) |
|
|
71,078 |
|
|
|
71,598 |
|
The following is a summary of results of operations of the Real Estate Ventures for the three- and
six-month periods ended June 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
Six-month periods |
|
|
ended June 30, |
|
ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Revenue |
|
$ |
25,863 |
|
|
$ |
18,986 |
|
|
$ |
52,896 |
|
|
$ |
37,300 |
|
Operating expenses |
|
|
8,875 |
|
|
|
6,643 |
|
|
|
17,797 |
|
|
|
12,940 |
|
Interest expense, net |
|
|
7,956 |
|
|
|
5,410 |
|
|
|
15,753 |
|
|
|
10,648 |
|
Depreciation and amortization |
|
|
9,472 |
|
|
|
3,776 |
|
|
|
18,624 |
|
|
|
8,004 |
|
Net (loss) income |
|
|
(440 |
) |
|
|
3,156 |
|
|
|
722 |
|
|
|
5,707 |
|
Companys share of income (Company basis) |
|
|
1,664 |
|
|
|
4,504 |
|
|
|
2,779 |
|
|
|
5,258 |
|
As of June 30, 2008, the Company had guaranteed repayment of approximately $1.1 million of loans on
behalf of certain Real Estate Ventures. The Company also provides customary environmental
indemnities in connection with construction and permanent financing both for its own account and on
behalf of its Real Estate Ventures. For the Real Estate Ventures with construction projects, the
Company expects that it will be required to fund approximately $10.6 million of the construction
costs through capital calls.
5. DEFERRED COSTS
As of June 30, 2008 and December 31, 2007, the Companys deferred costs were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
103,808 |
|
|
$ |
(34,950 |
) |
|
$ |
68,858 |
|
Financing Costs |
|
|
27,108 |
|
|
|
(10,301 |
) |
|
|
16,807 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
130,916 |
|
|
$ |
(45,251 |
) |
|
$ |
85,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
99,077 |
|
|
$ |
(31,259 |
) |
|
$ |
67,818 |
|
Financing Costs |
|
|
27,597 |
|
|
|
(8,292 |
) |
|
|
19,305 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
126,674 |
|
|
$ |
(39,551 |
) |
|
$ |
87,123 |
|
|
|
|
|
|
|
|
|
|
|
17
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
6. INTANGIBLE ASSETS
As of June 30, 2008 and December 31, 2007, the Companys intangible assets were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
In-place lease value |
|
$ |
150,183 |
|
|
$ |
(63,624 |
) |
|
$ |
86,559 |
|
Tenant relationship value |
|
|
104,025 |
|
|
|
(34,813 |
) |
|
|
69,212 |
|
Above market leases acquired |
|
|
25,352 |
|
|
|
(14,008 |
) |
|
|
11,344 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
279,560 |
|
|
$ |
(112,445 |
) |
|
$ |
167,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
85,791 |
|
|
$ |
(32,129 |
) |
|
$ |
53,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
In-place lease value |
|
$ |
180,456 |
|
|
$ |
(65,742 |
) |
|
$ |
114,714 |
|
Tenant relationship value |
|
|
121,094 |
|
|
|
(32,895 |
) |
|
|
88,199 |
|
Above market leases acquired |
|
|
29,337 |
|
|
|
(14,101 |
) |
|
|
15,236 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
330,887 |
|
|
$ |
(112,738 |
) |
|
$ |
218,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
103,825 |
|
|
$ |
(36,544 |
) |
|
$ |
67,281 |
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, the Companys annual amortization for its intangible assets/liabilities is as
follows (in thousands, and assuming no early lease terminations):
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
Liabilities |
|
2008 |
|
$ |
20,687 |
|
|
$ |
6,017 |
|
2009 |
|
|
37,117 |
|
|
|
10,179 |
|
2010 |
|
|
30,494 |
|
|
|
8,420 |
|
2011 |
|
|
23,492 |
|
|
|
7,086 |
|
2012 |
|
|
17,866 |
|
|
|
6,336 |
|
Thereafter |
|
|
37,459 |
|
|
|
15,624 |
|
|
|
|
|
|
|
|
Total |
|
$ |
167,115 |
|
|
$ |
53,662 |
|
|
|
|
|
|
|
|
The following table sets forth information regarding the Companys debt obligations outstanding at
June 30, 2008 and December 31, 2007 (in thousands):
18
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Interest |
|
|
Maturity |
Property / Location |
|
2008 |
|
|
2007 |
|
|
Rate |
|
|
Date |
MORTGAGE DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400 Commerce Drive |
|
$ |
|
|
|
$ |
11,575 |
|
|
|
7.12 |
% |
|
Jun-08 |
Two Logan Square |
|
|
69,479 |
|
|
|
70,124 |
|
|
|
5.78 |
%(a) |
|
Jul-09 |
200 Commerce Drive |
|
|
5,725 |
|
|
|
5,765 |
|
|
|
7.12 |
%(a) |
|
Jan-10 |
1333 Broadway |
|
|
|
|
|
|
23,997 |
|
|
|
5.54 |
%(a) |
|
May-10 |
1 Kaiser Plaza (The Ordway) |
|
|
|
|
|
|
45,509 |
|
|
|
5.29 |
%(a) |
|
Aug-10 |
1901 Harrison Stree (World Savings Center) |
|
|
|
|
|
|
27,142 |
|
|
|
5.29 |
%(a) |
|
Nov-10 |
Plymouth Meeting Exec. |
|
|
43,134 |
|
|
|
43,470 |
|
|
|
7.00 |
%(a) |
|
Dec-10 |
Four Tower Bridge |
|
|
10,442 |
|
|
|
10,518 |
|
|
|
6.62 |
% |
|
Feb-11 |
Arboretum I, II, III & V |
|
|
21,946 |
|
|
|
22,225 |
|
|
|
7.59 |
% |
|
Jul-11 |
Midlantic Drive/Lenox Drive/DCC I |
|
|
60,567 |
|
|
|
61,276 |
|
|
|
8.05 |
% |
|
Oct-11 |
Research Office Center |
|
|
41,165 |
|
|
|
41,527 |
|
|
|
5.30 |
%(a) |
|
Oct-11 |
Concord Airport Plaza |
|
|
37,102 |
|
|
|
37,570 |
|
|
|
5.55 |
%(a) |
|
Jan-12 |
Six Tower Bridge |
|
|
14,283 |
|
|
|
14,472 |
|
|
|
7.79 |
% |
|
Aug-12 |
Newtown Square/Berwyn Park/Libertyview |
|
|
61,507 |
|
|
|
62,125 |
|
|
|
7.25 |
% |
|
May-13 |
Coppell Associates |
|
|
3,395 |
|
|
|
3,512 |
|
|
|
6.89 |
% |
|
Dec-13 |
Southpoint III |
|
|
4,150 |
|
|
|
4,426 |
|
|
|
7.75 |
% |
|
Apr-14 |
Tysons Corner |
|
|
100,000 |
|
|
|
100,000 |
|
|
|
5.36 |
%(a) |
|
Aug-15 |
Coppell Associates |
|
|
16,600 |
|
|
|
16,600 |
|
|
|
5.75 |
% |
|
Feb-16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
489,495 |
|
|
|
601,833 |
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt premiums, net |
|
|
4,010 |
|
|
|
10,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
493,505 |
|
|
$ |
611,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNSECURED DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sweep Agreement Line |
|
|
|
|
|
|
10,727 |
|
|
Libor +1.600 |
% |
|
Apr-09 |
Private Placement Notes due 2008 |
|
|
113,000 |
|
|
|
113,000 |
|
|
|
4.34 |
% |
|
Dec-08 |
2009 Five Year Notes |
|
|
275,000 |
|
|
|
275,000 |
|
|
|
4.62 |
% |
|
Nov-09 |
Bank Term Loan |
|
|
183,000 |
|
|
|
150,000 |
|
|
Libor + 0.80 |
% |
|
Oct-10 |
2010 Five Year Notes |
|
|
300,000 |
|
|
|
300,000 |
|
|
|
5.61 |
% |
|
Dec-10 |
Line-of-Credit |
|
|
163,000 |
|
|
|
120,000 |
|
|
Libor + 0.725 |
% |
|
Jun-11 |
3.875% Exchangeable Notes |
|
|
313,500 |
|
|
|
345,000 |
|
|
|
3.93 |
% |
|
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 |
|
|
|
300,000 |
|
|
|
5.75 |
% |
|
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 |
|
|
2,526,110 |
|
|
|
2,492,337 |
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt discounts, net |
|
|
(2,992 |
) |
|
|
(3,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unsecured indebtedness |
|
$ |
2,523,118 |
|
|
$ |
2,489,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Obligations |
|
$ |
3,016,623 |
|
|
$ |
3,100,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Loans were assumed upon acquisition of the related property. Interest rates presented above
reflect the market rate at the time of acquisition. |
The aggregate mortgage note payable balance of $95.8 million with net unamortized fixed-rate debt
premiums of $3.9 million for 1333 Broadway, 1 Kaiser Plaza and 1901 Harrison Street, as of June 30,
2008, not included in the table above, is included in Mortgage notes payable and other liabilities
held for sale on the consolidated balance sheets.
During the six-month periods ended June 30, 2008 and 2007, the Companys weighted-average effective
interest rate on its mortgage notes payable was 6.41% and 6.9%, respectively.
During the six-month period ended June 30, 2008, the Company repurchased $31.5 million of the
3.875% Exchangeable Notes in a series of transactions and recognized a gain on early extinguishment
of debt of $4.3 million. In addition, the Company accelerated amortization of the related deferred
financing costs of $0.4 million.
19
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
During the second quarter of 2008, the Company exercised the accordion feature on its $150.0
million unsecured term loan and funded an additional $33.0 million, bringing its total outstanding
balance to $183.0 million. All outstanding borrowings under the term loan bear interest at a
periodic rate of LIBOR plus 80 basis points. The net proceeds of the term loan increase were used
to reduce indebtedness under the Companys unsecured revolving credit facilities.
On April 30, 2007, the Operating Partnership sold $300.0 million aggregate principal amount of
5.70% 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.
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 $113.0 million principal amount unsecured notes
due 2008 contains covenants that are similar to the covenants in the indenture.
On October 15, 2007, the Company entered into a term loan agreement (the Term Loan Agreement)
that provides for an unsecured term loan (the Term Loan) in the amount of $150.0 million. The
Company used the proceeds to pay down a portion of the outstanding amount on its $600.0 million
unsecured revolving credit facility. The Term Loan matures on October 18, 2010 and may be extended
at the Companys option for two, one-year periods but not beyond the maturity date of its revolving
credit facility. There is no scheduled principal amortization of the Term Loan and the Company may
prepay borrowings in whole or in part without premium or penalty. Portions of the Term Loan bear
interest at a per annum floating rate equal to: (i) the higher of (x) the prime rate or (y) the
federal funds rate plus 0.50% per annum or (ii) a London interbank offered rate that is the rate at
which Eurodollar deposits for one, two, three or six months are offered plus between 0.475% and
1.10% per annum (the Libor Margin), depending on the Companys debt rating. The Term Loan
Agreement contains financial and operating covenants. Financial covenants include minimum net
worth, fixed charge coverage ratio, maximum leverage ratio, restrictions on unsecured and secured
debt as a percentage of unencumbered assets and other financial tests. Operating covenants include
limitations on the Companys ability to incur additional indebtedness, grant liens on assets, enter
into affiliate transactions, and pay dividends.
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 plus 0.80% to Eurodollar plus 0.725% per annum. In addition, the amendment reduced
the facility fee paid quarterly 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. Borrowings are always available to the extent
of borrowing capacity at the stated rates, however, 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, 2008, the Company had $163.0
million of borrowings and $12.6 million of letters of credit outstanding under the Credit Facility,
leaving $424.4 million of unused availability. For the six-month periods ended June 30, 2008 and
2007, the weighted-average interest rate on the Credit Facility, including the effect of interest
rate hedges, was 4.62% and 6.35%, 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.
20
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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%. As of June 30, 2008, the Company had $0 million of borrowing
outstanding under the Sweep Agreement, leaving $20.0 million of unused availability. In April
2008, the Sweep Agreement was extended until April 2009 and borrowings now bear interest at
one-month LIBOR plus 1.60%.
As of June 30, 2008, the Companys aggregate scheduled principal payments of debt obligations, net
of amortization of discounts and premiums, are as follows (in thousands):
|
|
|
|
|
2008 |
|
$ |
117,990 |
|
2009 |
|
|
353,232 |
|
2010 |
|
|
539,858 |
|
2011 |
|
|
608,761 |
|
2012 |
|
|
351,053 |
|
Thereafter |
|
|
1,044,711 |
|
|
|
|
|
Total principal payments |
|
|
3,015,605 |
|
Net unamortized premiums/discounts |
|
|
1,018 |
|
|
|
|
|
Outstanding indebtedness |
|
$ |
3,016,623 |
|
|
|
|
|
8. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
Risk Management
In the 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
primarily 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 through derivative financial instruments.
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.
The related ineffectiveness would be charged to the Statement of Operations.
The valuation of these instruments is determined using widely accepted valuation techniques
including discounted cash flow analysis on the expected cash flows of each derivative. This
analysis reflects the contractual terms of the derivatives, including the period to maturity, and
uses observable market-based inputs, including interest rate curves and implied volatilities. The
fair values of interest rate swaps are determined using the market standard methodology of netting
the discounted future fixed cash receipts (or payments) and the discounted expected variable cash
payments
21
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(or receipts). The variable cash payments (or receipts) are based on an expectation of
future interest rates (forward curves) derived from observable market interest rate curves.
To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation
adjustments to appropriately reflect both its own nonperformance risk and the respective
counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of
its derivative contracts for the effect of nonperformance risk, the Company has considered the
impact of netting and any applicable credit enhancements, such as collateral postings, thresholds,
mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives
fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with
its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the
likelihood of default by itself and its counterparties. However, as of June 30, 2008, the Company
has assessed the significance of the impact of the credit valuation adjustments on the overall
valuation of its derivative positions and has determined that the credit valuation adjustments are
not significant to the overall valuation of its derivatives. As a result, the Company has
determined that its derivative valuations in their entirety are classified in Level 2 of the fair
value hierarchy.
The following table summarizes the terms and fair values of the Companys derivative financial
instruments at June 30, 2008. The notional amounts at June 30, 2008 provide an indication of the
extent of the Companys involvement in these instruments at that time, but do not represent
exposure to credit, interest rate or market risks. The fair values of the hedges at June 30, 2008
are included in other liabilities and accumulated other comprehensive income in the accompanying
balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge |
|
Hedge |
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
Trade |
|
|
Maturity |
|
|
|
|
Product |
|
Type |
|
|
Designation |
|
|
Amount |
|
|
Strike |
|
|
Date |
|
|
Date |
|
|
Fair Value |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
$ |
71,400 |
(a) |
|
|
4.709 |
% |
|
|
9/20/07 |
|
|
|
10/18/10 |
|
|
$ |
(2,745 |
) |
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
4.415 |
% |
|
|
10/19/07 |
|
|
|
10/18/10 |
|
|
|
(543 |
) |
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
3.747 |
% |
|
|
11/26/07 |
|
|
|
10/18/10 |
|
|
|
(171 |
) |
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
3.338 |
% |
|
|
1/4/08 |
|
|
|
12/18/09 |
|
|
|
(89 |
) |
Forward Starting Swap |
|
Interest Rate |
|
Cash Flow (c) |
|
|
25,000 |
|
|
|
4.770 |
% |
|
|
1/4/08 |
|
|
|
12/18/19 |
|
|
|
131 |
|
Forward Starting Swap |
|
Interest Rate |
|
Cash Flow (c) |
|
|
25,000 |
|
|
|
4.423 |
% |
|
|
3/19/08 |
|
|
|
12/18/19 |
|
|
|
864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
196,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
- Notional amount accreting up to $155,000 through October 8, 2010. |
|
(b) |
|
- Hedging unsecured variable rate debt. |
|
(c) |
|
- Future issuance of long-term debt with an expected forward starting date in December 2009. |
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, 2008 or 2007.
9. DISCONTINUED OPERATIONS
For the three- and six-month periods ended June 30, 2008, income from discontinued operations
relates to three properties that the Company sold during 2008 and five properties designated as
held for sale at June 30, 2008. The Company determined that five Northern California properties
(disposal group) met the criteria for assets to be disposed of by sale pursuant to FASB 144
Accounting for the Impairment or Disposal of Long-Lived Assets. On June 27, 2008, the Company
entered into a binding purchase and sale agreement for the sale of these operations to a single
purchaser. Accordingly, at June 30, 2008, the disposal group is required to be measured at the
lower of its
22
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
estimated fair value less costs to sell or its recorded amount. In connection with
the reclassification of the related assets and liabilities from assets held in use to held for
sale, the Company recorded a $6.85 million provision for impairment which has reduced the amounts
recorded in the line item Assets held for sale, net on the consolidated balance sheet. The
significant terms of the purchase agreement require the buyer to pay cash, assume mortgage
obligations and for the Company to provide seller financing. The Company expects the sale to close
in the third quarter of 2008. At that time, the provision for impairment will be adjusted in the
third quarter based on the actual results of the transaction.
The following table summarizes the revenue and expense information for properties classified as
discontinued operations in the three- and six-month periods ended June 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Six-month period |
|
|
|
ended June 30, 2008 |
|
|
ended June 30, 2008 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
11,235 |
|
|
$ |
23,496 |
|
Tenant reimbursements |
|
|
425 |
|
|
|
934 |
|
Termination fees |
|
|
|
|
|
|
25 |
|
Other |
|
|
50 |
|
|
|
148 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
11,710 |
|
|
|
24,603 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
4,190 |
|
|
|
8,149 |
|
Real estate taxes |
|
|
911 |
|
|
|
2,129 |
|
Depreciation and amortization |
|
|
4,019 |
|
|
|
8,107 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,120 |
|
|
|
18,385 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,590 |
|
|
|
6,218 |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
5 |
|
|
|
11 |
|
Interest expense |
|
|
(1,342 |
) |
|
|
(2,694 |
) |
|
|
|
|
|
|
|
|
Income from discontinued operations before gain
on sale of interests in real estate and minority interest |
|
|
1,253 |
|
|
|
3,535 |
|
|
|
|
|
|
|
|
|
|
Net gain on sale of interests in real estate |
|
|
13,420 |
|
|
|
21,401 |
|
Provision for impairment |
|
|
(6,850 |
) |
|
|
(6,850 |
) |
Minority interest attributable to discontinued
operations LP units |
|
|
(299 |
) |
|
|
(731 |
) |
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
7,524 |
|
|
$ |
17,355 |
|
|
|
|
|
|
|
|
For the three- and six-month periods ended June 30, 2007, income from discontinued operations
relates to the properties sold during 2008 and 2007 and the five properties designated as held for
sale at June 30, 2008. The following table summarizes the revenue and expense information for the
properties classified as discontinued operations in the three- and six-month periods ended June 30,
2007 (in thousands):
23
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Six-month period |
|
|
|
ended June 30, 2007 |
|
|
ended June 30, 2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
14,397 |
|
|
$ |
37,619 |
|
Tenant reimbursements |
|
|
2,159 |
|
|
|
4,341 |
|
Termination fees |
|
|
|
|
|
|
63 |
|
Other |
|
|
190 |
|
|
|
262 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
16,746 |
|
|
|
42,285 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
5,517 |
|
|
|
13,714 |
|
Real estate taxes |
|
|
1,462 |
|
|
|
4,055 |
|
Depreciation and amortization |
|
|
4,685 |
|
|
|
13,528 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
11,664 |
|
|
|
31,297 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
5,082 |
|
|
|
10,988 |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
6 |
|
|
|
12 |
|
Interest expense |
|
|
(1,380 |
) |
|
|
(2,765 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before gain
on sale of interests in real estate and minority interest |
|
|
3,708 |
|
|
|
8,235 |
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on sale of interests in real estate |
|
|
(856 |
) |
|
|
25,153 |
|
Minority interest attributable to discontinued
operations LP units |
|
|
(123 |
) |
|
|
(1,427 |
) |
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
2,729 |
|
|
$ |
31,961 |
|
|
|
|
|
|
|
|
The following table summarizes the balance sheet information for the five properties identified as
held for sale at June 30, 2008 (in thousands):
|
|
|
|
|
Real Estate Investments: |
|
|
|
|
Operating property, development land and construction-in-progress |
|
$ |
412,044 |
|
Accumulated depreciation |
|
|
(23,169 |
) |
|
|
|
|
|
|
|
388,875 |
|
|
|
|
|
|
Other assets |
|
|
35,102 |
|
Provision for impairment |
|
|
(6,850 |
) |
|
|
|
|
Total Assets Held for Sale |
|
$ |
417,127 |
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable and other liabilities held for sale |
|
$ |
113,897 |
|
|
|
|
|
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 OPERATING PARTNERSHIP AND CONSOLIDATED REAL ESTATE VENTURES
Operating Partnership
As of June 30, 2008 and December 31, 2007, the aggregate book value of the minority interest
associated with these units in the accompanying consolidated balance sheet was $66.9 million and
$84.0 million, respectively and the Company believes that the aggregate settlement value of these
interests was approximately $51.6 million and $68.8 million, respectively. This amount is based on
the number of units outstanding and the closing share price on the balance sheet date.
Minority Interest Partners Share of Consolidated Real Estate Ventures
As of June 30, 2008 and December 31, 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. Two of these consolidated real estate ventures are variable interest entities under
FIN 46R of which the Company is the primary
24
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
beneficiary. The third is a real estate venture for
which the Company serves as the general partner and the limited partner does not have substantive
participating rights.
During the period ended June 30, 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. Minority interest in Real Estate Ventures
represents the portion of these consolidated real estate ventures not owned by the Company.
For the remaining consolidated joint ventures, the minority interest is reflected at zero carrying
amounts as a result of accumulated losses and distributions in excess of basis.
The minority interests associated with certain of the real estate ventures that have finite lives
under the terms of the partnership agreements represent mandatorily redeemable interests as defined
in SFAS 150. As of June 30, 2008 and December 31, 2007, the aggregate book value of these minority
interests in the accompanying consolidated balance sheet was $0 and the Company believes that the
aggregate settlement value of these interests was approximately $6.3 million. This amount is based
on the estimated liquidation fair values of the assets and liabilities and the resulting proceeds
that the Company would distribute to its real estate venture partners upon dissolution, as required
under the terms of the respective partnership agreements. Subsequent changes to the estimated liquidation
values of the assets and liabilities of the consolidated real estate ventures will affect the
Companys estimate of the aggregate settlement value. The partnership agreements do not limit the
amount that the minority partners would be entitled to in the event of liquidation of the assets
and liabilities and dissolution of the respective partnerships.
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, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Income (loss) from continuing operations |
|
$ |
1,844 |
|
|
$ |
1,844 |
|
|
$ |
(1,540 |
) |
|
$ |
(1,540 |
) |
Income allocated to Preferred Shares |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to common shareholders |
|
|
(154 |
) |
|
|
(154 |
) |
|
|
(3,538 |
) |
|
|
(3,538 |
) |
Income from discontinued operations |
|
|
7,524 |
|
|
|
7,524 |
|
|
|
2,729 |
|
|
|
2,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income alloctaed to common shareholders |
|
$ |
7,370 |
|
|
$ |
7,370 |
|
|
$ |
(809 |
) |
|
$ |
(809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
87,280,576 |
|
|
|
87,280,576 |
|
|
|
87,080,785 |
|
|
|
87,080,785 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
231,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
87,280,576 |
|
|
|
87,512,345 |
|
|
|
87,080,785 |
|
|
|
87,080,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.04 |
) |
Discontinued operations |
|
|
0.09 |
|
|
|
0.09 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
25
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month periods ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Income (loss) from continuing operations |
|
$ |
6,757 |
|
|
$ |
6,757 |
|
|
$ |
(11,547 |
) |
|
$ |
(11,547 |
) |
Income allocated to Preferred Shares |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available
to common shareholders |
|
|
2,761 |
|
|
|
2,761 |
|
|
|
(15,543 |
) |
|
|
(15,543 |
) |
Income from discontinued operations |
|
|
17,355 |
|
|
|
17,355 |
|
|
|
31,961 |
|
|
|
31,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income alloctaed to common shareholders |
|
$ |
20,116 |
|
|
$ |
20,116 |
|
|
$ |
16,418 |
|
|
$ |
16,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
87,092,271 |
|
|
|
87,092,271 |
|
|
|
87,680,773 |
|
|
|
87,680,773 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
207,734 |
|
|
|
|
|
|
|
617,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
87,092,271 |
|
|
|
87,300,005 |
|
|
|
87,680,773 |
|
|
|
88,298,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.18 |
) |
|
$ |
(0.18 |
) |
Discontinued operations |
|
|
0.20 |
|
|
|
0.20 |
|
|
|
0.36 |
|
|
|
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.23 |
|
|
$ |
0.23 |
|
|
$ |
0.19 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities (including Class A Units of the Operating Partnership) totaling 3,276,662 and 3,939,284
as of June 30, 2008 and 2007, respectively, were excluded from the earnings per share computations
because their effect would have been antidilutive.
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 18, 2008, the Company declared a distribution of $0.44 per Common Share, totaling $38.8
million, which was paid on July 18, 2008 to shareholders of record as of July 3, 2008. On June 18,
2008, the Company declared distributions on its Series C Preferred Shares and Series D Preferred
Shares to holders of record as of June 30, 2008. These shares are entitled to a preferential
return of 7.50% and 7.375%, respectively. Distributions paid on July 15, 2008 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 1.6 million shares during the six-month period ended June 30, 2007 for an
aggregate consideration of $53.5 million under its share repurchase program. As of June 30, 2008,
0.9 million shares remain in
26
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
treasury giving the Company the ability to reissue such shares.
Additionally, 0.2 million of these shares were repurchased as part of the Companys deferred
compensation program. 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. As
of June 30, 2008, the Company may purchase an additional 0.5 million shares under the plan. 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.
12. SHARE BASED COMPENSATION
Stock Options
At June 30, 2008, the Company had 2,037,897 options outstanding under its shareholder approved
equity incentive plan. There were 1,824,594 options unvested as of June 30, 2008 and $1.3 million
of unrecognized compensation expense associated with these options. Option activity as of June 30,
2008 and changes during the six months ended June 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining Contractual |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Value (in 000s) |
|
Outstanding at January 1, 2008 |
|
|
1,070,099 |
|
|
$ |
26.13 |
|
|
|
0.54 |
|
|
|
(8,775 |
) |
Granted |
|
|
1,824,594 |
|
|
|
20.61 |
|
|
|
9.77 |
|
|
|
(8,849 |
) |
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(856,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008 |
|
|
2,037,897 |
|
|
$ |
20.75 |
|
|
|
8.97 |
|
|
|
(10,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at June 30, 2008 |
|
|
213,303 |
|
|
$ |
21.93 |
|
|
|
2.15 |
|
|
|
(1,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2008 |
|
|
213,303 |
|
|
$ |
21.93 |
|
|
|
2.15 |
|
|
|
(1,316 |
) |
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 Share Awards
As of June 30, 2008, 516,830 restricted shares were outstanding and vest over three to seven years
from the initial grant date. The remaining compensation expense to be recognized for the 516,830
restricted shares outstanding at June 30, 2008 was approximately $9.7 million. That expense is
expected to be recognized over a weighted average remaining vesting period of 3.6 years. For the
six-month periods ended June 30, 2008 and 2007, the Company recognized $1.7 million and $1.9
million of compensation expense included in general and administrative expense in the respective
period related to outstanding restricted shares. The following table summarizes the Companys
restricted share activity for the six-months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair value |
|
Non-vested at January 1, 2008 |
|
|
409,282 |
|
|
$ |
31.91 |
|
Granted |
|
|
224,691 |
|
|
|
17.47 |
|
Vested |
|
|
(109,701 |
) |
|
|
29.63 |
|
Forfeited |
|
|
(7,442 |
) |
|
|
23.05 |
|
|
|
|
|
|
|
|
Non-vested at June 30, 2008 |
|
|
516,830 |
|
|
$ |
25.87 |
|
|
|
|
|
|
|
|
27
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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 the Companys 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 August 28, 2006,
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 five year period. On the date of each grant, the
awards were valued using a Monte Carlo simulation. For the three- and six- month period ended June
30, 2008, the Company recognized $0.4 million and $0.7 million of compensation expense related to
the outperformance program.
For the three- and six- month period ended June 30, 2007, the Company recognized $0.4 million and
$0.8 million of compensation expense 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. Under the plan
document, maximum participant contribution for any plan year is limited to the lesser of 20% of
compensation or $50,000. The number of shares reserved for issuance under the ESPP is 1.25
million. During the six-month period ended June 30, 2008, employees made purchases of $0.3 million
under the ESPP and the Company recognized $0.1 million compensation expense related to the ESPP.
The Board of Directors of the Company may terminate the ESPP at its sole discretion at anytime.
13. SEGMENT INFORMATION
As of June 30, 2008, the Company manages its portfolio within seven segments: (1) Pennsylvania,
(2) New Jersey/Delaware, (3) Richmond, Virginia, (4) CaliforniaNorth, (5) CaliforniaSouth, (6)
Metropolitan Washington D.C and (7) Southwest. The Pennsylvania segment includes properties in
Chester, Delaware, Bucks, Lehigh and Montgomery counties in the Philadelphia suburbs and the City
of Philadelphia in Pennsylvania. The New Jersey/Delaware segment includes properties in counties
in the southern and central part of New Jersey including Burlington, Camden and Mercer counties and
the state of Delaware. The Richmond, Virginia segment includes properties primarily in
Chesterfield and Henrico counties, the City of Richmond and Durham, North Carolina. The
CaliforniaNorth segment includes properties in the City of Oakland and Concord. The
CaliforniaSouth segment includes properties in the City of Carlsbad and Rancho Bernardo. The
Metropolitan Washington, D.C. segment includes properties in Northern Virginia and suburban
Maryland. The Southwest segment includes properties in Travis county of Texas. The corporate
group is responsible for cash and investment management, development of certain real estate
properties during the construction period, and certain other general support functions. Land held
for development and construction in progress are transferred to operating properties by region upon
completion of the associated construction or project.
28
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
Segment information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
California - |
|
|
California - |
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
/Delaware |
|
|
Virginia |
|
|
North |
|
|
South |
|
|
D.C. |
|
|
Southwest |
|
|
Corporate |
|
|
Total |
|
As of June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,699,105 |
|
|
$ |
639,451 |
|
|
$ |
350,451 |
|
|
$ |
131,084 |
|
|
$ |
106,391 |
|
|
$ |
1,314,760 |
|
|
$ |
236,790 |
|
|
$ |
|
|
|
$ |
4,478,032 |
|
Development land and
construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
363,936 |
|
|
|
363,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,682,839 |
|
|
$ |
663,503 |
|
|
$ |
348,310 |
|
|
$ |
472,818 |
|
|
$ |
106,303 |
|
|
$ |
1,302,833 |
|
|
$ |
236,957 |
|
|
$ |
|
|
|
$ |
4,813,563 |
|
Developed land and
construction-in-progress |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
402,270 |
|
|
|
402,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
61,459 |
|
|
$ |
28,971 |
|
|
$ |
11,407 |
|
|
$ |
4,352 |
|
|
$ |
2,957 |
|
|
$ |
35,145 |
|
|
$ |
9,913 |
|
|
$ |
(417 |
) |
|
$ |
153,787 |
|
Property operating expenses and real estate taxes |
|
|
21,550 |
|
|
|
12,387 |
|
|
|
4,008 |
|
|
|
1,811 |
|
|
|
1,146 |
|
|
|
12,155 |
|
|
|
4,336 |
|
|
|
1,851 |
|
|
|
59,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
39,909 |
|
|
$ |
16,584 |
|
|
$ |
7,399 |
|
|
$ |
2,541 |
|
|
$ |
1,811 |
|
|
$ |
22,990 |
|
|
$ |
5,577 |
|
|
$ |
(2,268 |
) |
|
$ |
94,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
65,865 |
|
|
$ |
28,657 |
|
|
$ |
8,216 |
|
|
$ |
3,972 |
|
|
$ |
3,450 |
|
|
$ |
33,795 |
|
|
$ |
10,183 |
|
|
$ |
(1,918 |
) |
|
$ |
152,220 |
|
Property operating expenses and real estate taxes |
|
|
26,291 |
|
|
|
12,707 |
|
|
|
3,130 |
|
|
|
1,254 |
|
|
|
1,233 |
|
|
|
11,201 |
|
|
|
4,050 |
|
|
|
(876 |
) |
|
|
58,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
39,574 |
|
|
$ |
15,950 |
|
|
$ |
5,086 |
|
|
$ |
2,718 |
|
|
$ |
2,217 |
|
|
$ |
22,594 |
|
|
$ |
6,133 |
|
|
$ |
(1,042 |
) |
|
$ |
93,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
California - |
|
|
California - |
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
/Delaware |
|
|
Virginia |
|
|
North |
|
|
South |
|
|
D.C. |
|
|
Southwest |
|
|
Corporate |
|
|
Total |
|
For the six-months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
126,025 |
|
|
$ |
56,967 |
|
|
$ |
22,469 |
|
|
$ |
8,708 |
|
|
$ |
5,924 |
|
|
$ |
70,108 |
|
|
$ |
18,981 |
|
|
$ |
(988 |
) |
|
$ |
308,194 |
|
Property operating expenses and real estate taxes |
|
|
43,792 |
|
|
|
24,519 |
|
|
|
7,721 |
|
|
|
3,426 |
|
|
|
2,337 |
|
|
|
24,573 |
|
|
|
8,411 |
|
|
|
4,080 |
|
|
|
118,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
82,233 |
|
|
$ |
32,448 |
|
|
$ |
14,748 |
|
|
$ |
5,282 |
|
|
$ |
3,587 |
|
|
$ |
45,535 |
|
|
$ |
10,570 |
|
|
$ |
(5,068 |
) |
|
$ |
189,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
131,466 |
|
|
$ |
56,969 |
|
|
$ |
17,196 |
|
|
$ |
7,060 |
|
|
$ |
6,664 |
|
|
$ |
67,340 |
|
|
$ |
19,109 |
|
|
$ |
(1,838 |
) |
|
$ |
303,966 |
|
Property operating expenses and real estate taxes |
|
|
51,452 |
|
|
|
25,024 |
|
|
|
6,144 |
|
|
|
2,127 |
|
|
|
2,565 |
|
|
|
22,710 |
|
|
|
7,562 |
|
|
|
(338 |
) |
|
|
117,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
80,014 |
|
|
$ |
31,945 |
|
|
$ |
11,052 |
|
|
$ |
4,933 |
|
|
$ |
4,099 |
|
|
$ |
44,630 |
|
|
$ |
11,547 |
|
|
$ |
(1,500 |
) |
|
$ |
186,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
Net operating income is defined as total revenue less property operating expenses and real estate
taxes. Segment net operating income includes revenue, real estate taxes and property operating
expenses directly related to operation and management of the properties owned and managed within
the respective geographical region. Segment net operating income excludes property level
depreciation and amortization, revenue and expenses directly associated with third party real
estate management services, expenses associated with corporate administrative support services, and
inter-company eliminations. Below is a reconciliation of consolidated net operating income to
consolidated income (loss) from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
Six-month periods |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Consolidated net operating income |
|
$ |
94,543 |
|
|
$ |
93,230 |
|
|
$ |
189,335 |
|
|
$ |
186,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
179 |
|
|
|
1,597 |
|
|
|
382 |
|
|
|
2,378 |
|
Interest expense |
|
|
(35,709 |
) |
|
|
(39,423 |
) |
|
|
(71,807 |
) |
|
|
(78,396 |
) |
Deferred financing costs |
|
|
(1,198 |
) |
|
|
(1,065 |
) |
|
|
(2,706 |
) |
|
|
(2,323 |
) |
Depreciation and amortization |
|
|
(52,472 |
) |
|
|
(53,542 |
) |
|
|
(104,324 |
) |
|
|
(111,340 |
) |
General & administrative expenses |
|
|
(6,127 |
) |
|
|
(7,007 |
) |
|
|
(11,039 |
) |
|
|
(14,417 |
) |
Minority interest partners share of consolidated
real estate ventures |
|
|
(38 |
) |
|
|
8 |
|
|
|
(78 |
) |
|
|
(108 |
) |
Minority interest attributable to continuing
operations LP units |
|
|
16 |
|
|
|
158 |
|
|
|
(103 |
) |
|
|
681 |
|
Equity in income of real estate ventures |
|
|
1,664 |
|
|
|
4,504 |
|
|
|
2,779 |
|
|
|
5,258 |
|
Net (loss) gain on disposition of undepreciated real estate |
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
|
|
Gain on early extinguishment of debt |
|
|
986 |
|
|
|
|
|
|
|
4,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
1,844 |
|
|
|
(1,540 |
) |
|
|
6,757 |
|
|
|
(11,547 |
) |
Income from discontinued operations |
|
|
7,524 |
|
|
|
2,729 |
|
|
|
17,355 |
|
|
|
31,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,368 |
|
|
$ |
1,189 |
|
|
$ |
24,112 |
|
|
$ |
20,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 recent reports of 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. In 2005,
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 the date of this Form 10-Q, the insurance carrier continues to tender
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.
31
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
Ground Rent
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 rental payments on non-cancelable leases at June 30, 2008 are as follows (in
thousands):
|
|
|
|
|
2008 |
|
$ |
868 |
|
2009 |
|
|
1,986 |
|
2010 |
|
|
2,318 |
|
2011 |
|
|
2,318 |
|
2012 |
|
|
2,318 |
|
Thereafter |
|
|
291,831 |
|
Certain of the land leases provide for prepayment of rent on a present value basis using a fixed
discount rate. Further, certain of the land leases for properties (currently under development)
provide for contingent rent participation by the lessor in certain capital transactions and net
operating cash flows of the property after certain returns are achieved by the Company. Such
amounts, if any, will be reflected as contingent rent when incurred. The leases also provide for
payment by the Company of certain operating costs relating to the land, primarily real estate
taxes. The above schedule of future minimum rental payments does not include any contingent rent
amounts nor any reimbursed expenses.
Other Commitments or Contingencies
As part of the Companys September 2004 acquisition of a portfolio of properties from The
Rubenstein Company (which the Company refers to as the TRC acquisition), the Company acquired its
interest in Two Logan Square, a 696,477 square foot office building in Philadelphia, primarily
through its ownership of a second and third mortgage secured by this property. This property is
consolidated as the borrower is a variable interest entity and the Company, through its ownership
of the second and third mortgages, is the primary beneficiary. The Company currently does not
expect to take title to Two Logan Square until, at the earliest, September 2019. If the Company
takes fee title to Two Logan Square upon a foreclosure of its mortgage, the Company has agreed to
pay an unaffiliated third party that holds a residual interest in the fee owner of this property an
amount equal to $0.6 million (if we must pay a state and local transfer upon taking title) and $2.9
million (if no transfer tax is payable upon the transfer).
As part of the Companys 2006 acquisition of Prentiss Properties Trust, the TRC acquisition in 2004
and several of our other transactions, the Company agreed not to sell certain of the properties it
acquired in transactions that would trigger taxable income to the former owners. In the case of
the TRC acquisition, the Company agreed not to sell acquired properties for periods up to 15 years
from the acquisition date as follows: 201 King of Prussia Road, 555 East Lancaster Avenue and 300
Delaware Avenue (January 2008); One Rodney Square and 130/150/170 Radnor Financial Center (January
2015); and One Logan Square, Two Logan Square and Radnor Corporate Center (January 2020). In 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 agreed not to sell
14 other properties that contain an aggregate of 1.2 million square feet for periods that expire by
the end of 2008. The Companys agreements generally provide that it may dispose of the subject
properties only in transactions that qualify as tax-free exchanges under Section 1031 of the
Internal Revenue Code or in other tax deferred transactions. If the Company were to sell a
restricted property before expiration of the restricted period in a non-exempt transaction, the
Company would be required to make significant payments to the parties who sold it the applicable property on account
of tax liabilities attributed to them.
The Company invests in its properties and regularly incurs capital expenditures in the ordinary
course to maintain the properties. The Company believes that such expenditures enhance our
competitiveness. The Company also enters into construction, utility and service contracts in the
ordinary course of business which may extend beyond one year. These contracts typically provide
for cancellation with insignificant or no cancellation penalties.
32
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(unaudited, in
thousands, except unit and per unit information)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Real estate investments: |
|
|
|
|
|
|
|
|
Rental properties |
|
$ |
4,478,032 |
|
|
$ |
4,813,563 |
|
Accumulated depreciation |
|
|
(595,209 |
) |
|
|
(558,908 |
) |
|
|
|
|
|
|
|
Operating real estate investments, net |
|
|
3,882,823 |
|
|
|
4,254,655 |
|
Development land and construction-in-progress |
|
|
363,936 |
|
|
|
402,270 |
|
|
|
|
|
|
|
|
Total real estate investments, net |
|
|
4,246,759 |
|
|
|
4,656,925 |
|
|
Cash and cash equivalents |
|
|
4,791 |
|
|
|
5,600 |
|
Accounts receivable, net |
|
|
11,888 |
|
|
|
17,057 |
|
Accrued rent receivable, net |
|
|
86,783 |
|
|
|
83,098 |
|
Asset held for sale, net |
|
|
417,127 |
|
|
|
|
|
Investment in real estate ventures, at equity |
|
|
71,078 |
|
|
|
71,598 |
|
Deferred costs, net |
|
|
85,665 |
|
|
|
87,123 |
|
Intangible assets, net |
|
|
167,115 |
|
|
|
218,149 |
|
Other assets |
|
|
59,712 |
|
|
|
74,549 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,150,918 |
|
|
$ |
5,214,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND BENEFICIARIES EQUITY |
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
493,505 |
|
|
$ |
611,898 |
|
Unsecured term loan |
|
|
183,000 |
|
|
|
150,000 |
|
Borrowing under credit facilities |
|
|
163,000 |
|
|
|
130,727 |
|
Unsecured senior notes, net of discounts |
|
|
2,177,118 |
|
|
|
2,208,344 |
|
Accounts payable and accrued expenses |
|
|
67,946 |
|
|
|
80,164 |
|
Distributions payable |
|
|
42,419 |
|
|
|
42,368 |
|
Tenant security deposits and deferred rents |
|
|
58,469 |
|
|
|
65,241 |
|
Acquired below market leases, net |
|
|
53,662 |
|
|
|
67,281 |
|
Other liabilities |
|
|
27,040 |
|
|
|
30,154 |
|
Mortgage notes payable and other liabilities held for sale |
|
|
113,897 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,380,056 |
|
|
|
3,386,177 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
|
Redeemable limited partnership units at redemption value;
3,276,662 and 3,838,229 issued and outstanding in 2008 and 2007, respectively |
|
|
51,640 |
|
|
|
68,819 |
|
Partners equity: |
|
|
|
|
|
|
|
|
7.50% Series D Preferred Mirror Units; 2,000,000 issued and outstanding in 2008
and 2007 |
|
|
47,912 |
|
|
|
47,912 |
|
7.375% Series E Preferred Mirror Units; 2,300,000 issued and outstanding in 2008
and 2007 |
|
|
55,538 |
|
|
|
55,538 |
|
General Partnership Capital, 88,612,439 and 88,623,635 units issued in 2008 and
2007, respectively and 87,697,983 and 87,015,600 units outstanding in
2008 and 2007, respectively |
|
|
1,616,923 |
|
|
|
1,657,538 |
|
Accumulated other comprehensive loss |
|
|
(1,151 |
) |
|
|
(1,885 |
) |
|
|
|
|
|
|
|
Total partners equity |
|
|
1,719,222 |
|
|
|
1,759,103 |
|
|
|
|
|
|
|
|
Total liabilities, minority interest, and partners equity |
|
$ |
5,150,918 |
|
|
$ |
5,214,099 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
33
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods |
|
|
For the six-month periods |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rents |
|
$ |
126,051 |
|
|
$ |
125,660 |
|
|
$ |
251,656 |
|
|
$ |
251,315 |
|
Tenant reimbursements |
|
|
20,859 |
|
|
|
19,419 |
|
|
|
39,966 |
|
|
|
38,744 |
|
Termination fees |
|
|
892 |
|
|
|
498 |
|
|
|
4,124 |
|
|
|
1,764 |
|
Third Party management fees, labor reimbursement and leasing |
|
|
5,170 |
|
|
|
5,369 |
|
|
|
10,849 |
|
|
|
9,704 |
|
Other |
|
|
815 |
|
|
|
1,274 |
|
|
|
1,599 |
|
|
|
2,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
153,787 |
|
|
|
152,220 |
|
|
|
308,194 |
|
|
|
303,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
41,282 |
|
|
|
41,280 |
|
|
|
82,904 |
|
|
|
82,299 |
|
Real estate taxes |
|
|
15,581 |
|
|
|
15,214 |
|
|
|
31,328 |
|
|
|
29,956 |
|
Third party management expenses |
|
|
2,381 |
|
|
|
2,496 |
|
|
|
4,627 |
|
|
|
4,991 |
|
Depreciation and amortization |
|
|
52,472 |
|
|
|
53,542 |
|
|
|
104,324 |
|
|
|
111,340 |
|
General & administrative expenses |
|
|
6,127 |
|
|
|
7,007 |
|
|
|
11,039 |
|
|
|
14,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
117,843 |
|
|
|
119,539 |
|
|
|
234,222 |
|
|
|
243,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
35,944 |
|
|
|
32,681 |
|
|
|
73,972 |
|
|
|
60,963 |
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
179 |
|
|
|
1,597 |
|
|
|
382 |
|
|
|
2,378 |
|
Interest expense |
|
|
(35,709 |
) |
|
|
(39,423 |
) |
|
|
(71,807 |
) |
|
|
(78,396 |
) |
Deferred financing costs |
|
|
(1,198 |
) |
|
|
(1,065 |
) |
|
|
(2,706 |
) |
|
|
(2,323 |
) |
Equity in income of real estate ventures |
|
|
1,664 |
|
|
|
4,504 |
|
|
|
2,779 |
|
|
|
5,258 |
|
Net gain (loss) on dispostion of undepreciated real estate |
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
|
|
Gain on early extinguishment of debt |
|
|
986 |
|
|
|
|
|
|
|
4,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
1,866 |
|
|
|
(1,706 |
) |
|
|
6,938 |
|
|
|
(12,120 |
) |
Minority interest partners share of consolidated real estate ventures |
|
|
(38 |
) |
|
|
8 |
|
|
|
(78 |
) |
|
|
(108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
1,828 |
|
|
|
(1,698 |
) |
|
|
6,860 |
|
|
|
(12,228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
1,253 |
|
|
|
3,708 |
|
|
|
3,535 |
|
|
|
8,235 |
|
Net gain (loss) on disposition of discontinued operations |
|
|
13,420 |
|
|
|
(856 |
) |
|
|
21,401 |
|
|
|
25,153 |
|
Provision for impairment |
|
|
(6,850 |
) |
|
|
|
|
|
|
(6,850 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
7,823 |
|
|
|
2,852 |
|
|
|
18,086 |
|
|
|
33,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
9,651 |
|
|
|
1,154 |
|
|
|
24,946 |
|
|
|
21,160 |
|
Income allocated to Preferred Units |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to Common Partnership Units |
|
$ |
7,653 |
|
|
$ |
(844 |
) |
|
$ |
20,950 |
|
|
$ |
17,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.00 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.03 |
|
|
$ |
(0.18 |
) |
Discontinued operations |
|
|
0.09 |
|
|
|
0.03 |
|
|
|
0.20 |
|
|
|
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.08 |
|
|
$ |
(0.01 |
) |
|
$ |
0.23 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.00 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.03 |
|
|
$ |
(0.18 |
) |
Discontinued operations |
|
|
0.09 |
|
|
|
0.03 |
|
|
|
0.20 |
|
|
|
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.08 |
|
|
$ |
(0.01 |
) |
|
$ |
0.23 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average Common Partnership Unit |
|
|
90,747,434 |
|
|
|
91,020,069 |
|
|
|
90,736,342 |
|
|
|
91,620,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average Common Partnership Unit |
|
|
90,979,203 |
|
|
|
91,020,069 |
|
|
|
90,944,076 |
|
|
|
92,237,966 |
|
The accompanying notes are an integral part of these consolidated financial statements.
34
BRANDYWINE OPERATING PARTNERSHIP, L.P.
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, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
9,651 |
|
|
$ |
1,154 |
|
|
$ |
24,946 |
|
|
$ |
21,160 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative financial instruments |
|
|
5,358 |
|
|
|
(1,872 |
) |
|
|
526 |
|
|
|
(422 |
) |
Settlement of forward starting swaps |
|
|
|
|
|
|
1,148 |
|
|
|
|
|
|
|
1,148 |
|
Reclassification of realized (gains)/losses on derivative
financial
instruments to operations, net |
|
|
(20 |
) |
|
|
(394 |
) |
|
|
(40 |
) |
|
|
(385 |
) |
Unrealized gain (loss) on available-for-sale securities |
|
|
|
|
|
|
13 |
|
|
|
248 |
|
|
|
(595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
5,338 |
|
|
|
(1,105 |
) |
|
|
734 |
|
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
14,989 |
|
|
$ |
49 |
|
|
$ |
25,680 |
|
|
$ |
20,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
35
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six-month periods |
|
|
|
ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
24,946 |
|
|
$ |
21,160 |
|
Adjustments to reconcile net income (loss) to net cash from
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
81,948 |
|
|
|
90,405 |
|
Amortization: |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
2,706 |
|
|
|
2,323 |
|
Deferred leasing costs |
|
|
8,152 |
|
|
|
7,731 |
|
Acquired above (below) market leases, net |
|
|
(4,673 |
) |
|
|
(6,304 |
) |
Acquired lease intangibles |
|
|
22,333 |
|
|
|
26,700 |
|
Deferred compensation costs |
|
|
2,574 |
|
|
|
2,552 |
|
Straight-line rent |
|
|
(11,233 |
) |
|
|
(14,775 |
) |
Provision for doubtful accounts |
|
|
2,650 |
|
|
|
500 |
|
Provision for impairment |
|
|
6,850 |
|
|
|
|
|
Real estate venture income in excess of distributions |
|
|
(569 |
) |
|
|
(104 |
) |
Net gain on sale of interests in real estate |
|
|
(21,377 |
) |
|
|
(25,153 |
) |
Gain on early extinguishment of debt |
|
|
(4,342 |
) |
|
|
|
|
Minority interest (expense)/income |
|
|
78 |
|
|
|
108 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
3,324 |
|
|
|
3,916 |
|
Other assets |
|
|
7,168 |
|
|
|
1,366 |
|
Accounts payable and accrued expenses |
|
|
(7,430 |
) |
|
|
(6,151 |
) |
Tenant security deposits and deferred rents |
|
|
(2,883 |
) |
|
|
5,665 |
|
Other liabilities |
|
|
(6,395 |
) |
|
|
(10,148 |
) |
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
103,827 |
|
|
|
99,791 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of minority interest partners share of consolidated real estate venture |
|
|
|
|
|
|
(64,174 |
) |
Sales of properties, net |
|
|
53,601 |
|
|
|
222,592 |
|
Capital expenditures |
|
|
(89,034 |
) |
|
|
(133,264 |
) |
Investment in unconsolidated real estate ventures |
|
|
(469 |
) |
|
|
(523 |
) |
Cash distributions from unconsolidated real estate ventures
in excess of equity in income |
|
|
1,558 |
|
|
|
2,169 |
|
Leasing costs |
|
|
(5,468 |
) |
|
|
(11,499 |
) |
|
|
|
|
|
|
|
Net cash (used in) from investing activities |
|
|
(39,812 |
) |
|
|
15,301 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
258,000 |
|
|
|
620,875 |
|
Repayments of Credit Facility borrowings |
|
|
(192,727 |
) |
|
|
(470,875 |
) |
Repayments of mortgage notes payable |
|
|
(18,650 |
) |
|
|
(126,780 |
) |
Proceeds from unsecured notes |
|
|
|
|
|
|
299,644 |
|
Repayments of unsecured notes |
|
|
(26,924 |
) |
|
|
(299,866 |
) |
Proceeds from forward starting swap termination |
|
|
|
|
|
|
1,148 |
|
Debt financing costs |
|
|
(209 |
) |
|
|
(3,776 |
) |
Exercise of stock options |
|
|
|
|
|
|
6,221 |
|
Repurchases
of Common Partnership Units |
|
|
|
|
|
|
(53,524 |
) |
Distributions paid to preferred and common partnership unitholders |
|
|
(84,314 |
) |
|
|
(85,016 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(64,824 |
) |
|
|
(111,949 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(809 |
) |
|
|
3,143 |
|
Cash and cash equivalents at beginning of period |
|
|
5,600 |
|
|
|
25,379 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
4,791 |
|
|
$ |
28,522 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest |
|
$ |
109,355 |
|
|
$ |
92,541 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
|
|
|
|
Cash escrowed with qualified intermediary |
|
|
|
|
|
|
109,102 |
|
Acquisition of property using cash escrowed with qualified intermediary |
|
|
|
|
|
|
(72,511 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
36
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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.
As of June 30, 2008, the Partnership owned 211 office properties, 22 industrial facilities and one
mixed-use property (collectively, the Properties) containing an aggregate of approximately 23.3
million net rentable square feet. The Partnership also had six properties under development and
six properties under redevelopment containing an aggregate 3.2 million net rentable square feet.
The Partnership consolidated three office properties owned by real estate ventures containing 0.4
million net rentable square feet. In addition, as of June 30, 2008, the Partnership owned three
office properties, one property under redevelopment and one property under development, located in
Oakland, CA totaling approximately 1.7 million net rentable square feet, that were all designated
as held for sale assets. Therefore, as of June 30, 2008, the Partnership owned and consolidated
254 properties containing an aggregate of 28.6 million net rentable square feet. As of June 30,
2008, the Partnership also owned economic interests in 14 unconsolidated real estate ventures that
contain approximately 4.4 million net rentable square feet (collectively, the Real Estate
Ventures). The Properties and the properties owned by the Real Estate Ventures are located in or
near Philadelphia, PA, Wilmington, DE, Southern and Central New Jersey, Richmond, VA, Metropolitan
Washington, D.C., Austin, TX and Oakland, Carlsbad and Rancho Bernardo, CA.
The Company is the sole general partner of the Operating Partnership and, as of June 30, 2008,
owned a 96.2% interest in the Operating Partnership. The Partnership conducts its third-party real
estate management services business primarily through wholly-owned management company subsidiaries.
As of June 30, 2008, the management company subsidiaries were managing properties containing an
aggregate of approximately 38.8 million net rentable square feet, of which approximately 28.3
million net rentable square feet related to Properties owned by the Partnership and approximately
10.5 million net rentable square feet related to properties owned by third parties and Real Estate
Ventures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared by the Partnership pursuant to the rules
and regulations of the U.S. Securities and Exchange Commission (the SEC). 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, 2008, the results of its operations for
the three- and six-month periods ended June 30, 2008 and 2007 and its cash flows for the six-month
periods ended June 30, 2008 and 2007 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 2007 Annual Report on Form 10-K filed with
the SEC on February 28, 2008.
The consolidated balance sheet as of December 31, 2007 is derived from the audited financial
statements at that date; however during the quarter ended June 30, 2008 the Partnership identified
certain instances dating back to 1998 in which the Partnership canceled, upon the vesting of
restricted shares, a portion of such shares in settlement of employee tax withholdings in excess of
minimum statutory rates. As a result, the Partnership has changed the classification of the affected
restricted share grants from equity to liability awards
in accordance with FASB Statement No. 123(R), Shared-Based Payment, and its predecessors.
When an award is classified as a liability,
compensation expense is recognized for that award and is based
on the current fair value of the award
during the period in which it is reviewed.
The cumulative impact of this error from
the period January 1, 2002 through December 31, 2007 was primarily an overstatement of cumulative
earnings and cumulative distributions as a result of recalculating the amount of compensation
expense that would have been incurred if such
shares had been
37
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
treated as liability awards. The Partnership assessed the
materiality of this item on the year ended December 31, 2002 (the first year that awards granted
in 1998 vested with excess withholdings), the full year ended December 31, 2007, and any other
periods between and subsequent to those dates, in accordance with the SECs Staff Accounting
Bulletin (SAB) No. 99 and concluded that the error was not material to any such periods. The
Partnership also concluded the impact of correcting the error would have been misleading to the
users of the financial statements for the quarter ended June 30, 2008, and therefore, has not recorded a single
period cumulative adjustment. Accordingly, in accordance with SAB No. 108, the December 31, 2007
balance sheet herein has been revised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported |
|
Adjustment |
|
As Revised |
Accounts
payable and accrued expenses |
|
|
80,732 |
|
|
|
(568 |
) |
|
|
80,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Partnership Capital |
|
|
1,656,970 |
|
|
|
568 |
|
|
|
1,657,538 |
|
The changes above are the result of compensation expense that would have been recognized from 2002
through the year ended December 31, 2007 if awards with excess withholdings upon vesting had been
categorized as liability awards. Under the Partnerships restricted share program, dividends are
paid on unvested shares. Such dividends should be expensed if the grant is treated as a liability
award. The reduction in cumulative distributions and the majority of the reduction in cumulative
earnings results from treating dividends on unvested shares as expense from 1998 through the year
ended December 31, 2007.
General and administrative expenses on the statement of operations had a nominal increase for the
three-months ended June 30, 2007 and a $0.2 million
increase for the six-months ended June 30,
2007. The Partnership will make corresponding adjustments to other periods in 2007 as appropriate
the next time those financial statements are filed.
For the years ended December 31, 2007, 2006, and 2005, general and administrative expenses would
have increased/(decreased) by $(0.3) million, $0.7 million, and $0.6 million, respectively.
On July 28, 2008, the Company determined that shares redeemed
in an amount to satisfy employee tax withholdings on restricted share
awards would not exceed the minimum statutory rate. Consequently, there
will no longer be liability classified restricted share awards.
Certain other prior period amounts have been reclassified to conform to the current period
presentation. The reclassifications are primarily due to the
treatment of sold or held for sale properties as
discontinued operations on the statement of operations for all periods presented and the
reclassification of labor reimbursements received under our third party contracts to a gross
presentation.
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 neither
have the ability to dissolve the entity or remove the Partnership without cause nor any 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, plus contributions,
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
38
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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. 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 (including below market fixed rate renewal
periods). 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 below market fixed-rate renewal periods.
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 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. 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 Accounting for
Conditional Asset Retirement Obligations (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
39
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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 below market
fixed-rate renewal periods.
In the event that a tenant terminates its lease, the unamortized portion of each intangible,
including market rate adjustments (above or below), 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. The straight-line rent adjustment increased
revenue by approximately $3.8 and $9.9 million for the three- and six-month periods ended June 30,
2008 and approximately $5.6 million and $12.6 million for the three- and six-month periods ended
June 30, 2007. Deferred rents on the balance sheet represent rental revenue received prior to
their due dates and amounts paid by the tenant for certain improvements considered to be landlord
assets that will remain the Partnerships property at the end of the tenants lease term. The
amortization of the amounts paid by the tenant for such improvements 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 $0.9 million and $1.4 million for the three- and six-month periods
ended June 30, 2008 and $0.5 million and $2.1 million for the three- and six-month periods ended
June 30, 2007. 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. Termination fees, third party management fees, labor
reimbursement and leasing income are recorded when earned.
Stock-Based Compensation Plans
The Partnership maintains a shareholder-approved equity-incentive plan known as the Amended and
Restated 1997 Long-Term Incentive Plan (the 1997 Plan). The 1997 Plan is administered by the
Compensation Committee of the Partnerships Board of Trustees. Under the 1997 Plan the
Compensation Committee is authorized to award equity and equity-based awards, including incentive
stock options, non-qualified stock options, restricted shares and performance-based shares. As of
June 30, 2008, 3.0 million common shares remained available for future awards under the 1997 Plan.
Through June 30, 2008 all options awarded under the 1997 Plan were non-qualified stock options that
had a ten-year term. On April 8, 2008, the Compensation Committee awarded incentive stock options
exercisable for an aggregate of 1.6 million common shares. These options, together with
non-qualified options awarded in March 2008, vest over a three-year period.
The Partnership recognized stock-based compensation expense of $1.4 million and $2.6 million during
the three- and six-month periods ended June 30, 2008 and $1.3 million and $2.8 million during the
three- and six-month periods ended June 30, 2007, respectively, included in general and
administrative expense on the Partnerships consolidated income statement in the respective
periods.
Accounting for Derivative Instruments and Hedging Activities
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, enters 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.
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. See disclosures below
40
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
related to
the Partnerships adoption of Statement of Financial Accounting Standard No. 157, Fair
Value Measurements. 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. The ineffective portions of hedges are
recognized in earnings in the current period. For the three-month and six-month periods ended June
30, 2008 and 2007, 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.
Income Taxes
In general, the Partnership is not subject to federal and state income taxes, and
accordingly, no provision for income taxes has been made in the accompanying
consolidated financial statements. The partners of the Partnership are required to include
their respective share of the Partnerships profits or losses in their respective 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 elected to treat several of its subsidiaries as real estate investment
trusts (each a REIT) under Sections 856 through 860 of the Code. As a
result, each subsidiary REIT generally is not subject to federal and state income taxation
at the corporate level to the extent it distributes annually at least 100% of its REIT
taxable income to its stockholders and satisfies certain other organizational and
operational requirements. Each subsidiary REIT has met these requirements and,
accordingly, no provision has been made for federal and state income taxes in the
accompanying consolidated financial statements. If any subsidiary REIT fails to qualify
as a REIT in any taxable year, that subsidiary REIT will be subject to federal and state
income taxes and may not be able to qualify as a REIT for the four subsequent taxable
years. Also, each subsidiary REIT may be subject to certain local income taxes.
The Partnership has elected to treat several of its subsidiaries as taxable REIT
subsidiaries (each a TRS). A TRS is subject to federal, state and local
income tax.
Accounting Pronouncements Adopted January 1, 2008
Effective January 1, 2008, the Partnership adopted Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (SFAS 157) as amended by FASB Staff Position SFAS 157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13 (FSP FAS 157-1) and FASB Staff Position SFAS 157-2, Effective Date of FASB
Statement No. 157 (FSP FAS 157-2). SFAS 157 defines fair value, establishes a framework for
measuring fair value in GAAP and provides for expanded disclosure
41
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
about fair value measurements.
SFAS 157 is applied prospectively, including to all other accounting pronouncements that require or
permit fair value measurements. FSP FAS 157-1 amends SFAS 157 to exclude from the scope of
SFAS 157 certain leasing transactions accounted for under Statement of Financial Accounting
Standards No. 13, Accounting for Leases for purposes of measurements and classifications. FSP FAS
157-2 amends SFAS 157 to defer the effective date of SFAS 157 for all non-financial assets and
non-financial liabilities except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis to fiscal years beginning after November 15, 2008.
SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. SFAS 157
also establishes a fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value. Financial assets and
liabilities recorded on the Consolidated Balance Sheets at fair value are categorized based on the
inputs to the valuation techniques as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities
that the Partnership has the ability to access. Level 2 inputs are inputs other than quoted prices
included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as
well as inputs that are observable for the asset or liability (other than quoted prices), such as
interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically
based on an entitys own assumptions, as there is little, if any, related market activity or
information. In instances where the determination of the fair value measurement is based on inputs
from different levels of the fair value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The Partnerships assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment,
and considers factors specific to the asset or liability. SFAS 157 was applied to the
Partnerships outstanding derivatives and available-for-sale-securities effective January 1, 2008.
The following table sets forth the Partnerships financial assets and liabilities that were
accounted for at fair value on a recurring basis as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
June 30, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
846 |
|
|
$ |
846 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
3,548 |
|
|
|
|
|
|
$ |
3,548 |
|
|
|
|
|
Forward Starting Interest Rate Swaps |
|
|
(995 |
) |
|
|
|
|
|
|
(995 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,553 |
|
|
$ |
|
|
|
$ |
2,553 |
|
|
$ |
|
|
The partial adoption of SFAS 157 under FSP FAS 157-2 did not have a material impact on the
Partnerships financial assets and liabilities. Management is evaluating the impact that SFAS 157
will have on its non-financial assets and non-financial liabilities since the application of SFAS
157 for such items was deferred to January 1, 2009. The Partnership believes that the impact of
these items will not be material to its consolidated financial statements.
Assets and liabilities typically recorded at fair value on a non-recurring basis to which the
Partnership has not yet applied SFAS 157 due to the deferral of SFAS 157 for such items include:
|
|
|
Non-financial assets and liabilities initially measured at fair value in an acquisition
or business combination that are not remeasured at least annually at fair value |
42
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
|
|
|
Long-lived assets measured at fair value due to an impairment under Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets |
|
|
|
|
Asset retirement obligations initially measured at fair value under Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations |
Effective January 1, 2008, the Partnership adopted Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS
159 permits entities to choose to measure many financial instruments and certain other items at
fair value. The objective of the guidance is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge accounting provisions. The
adoption of SFAS 159 did not have any impact on the Partnerships consolidated financial statements
since the Partnership did not elect to apply the fair value option to any of its eligible financial
instruments or other items.
New Pronouncements
In June 2008, the FASB issued FASB Staff Position EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). This
new standard requires that nonvested share-based payment awards that contain non-forfeitable rights
to dividends or dividend equivalents be treated as participating securities in the computation of
earnings per share pursuant to the two-class method. The Partnership believes that FSP EITF 03-6-1
will require the Partnership to include the impact of its nonvested shares of common stock and
restricted stock units in earnings per share using this more dilutive methodology. However, the
Partnership currently believes that FSP EITF 03-6-1 will not have a material impact on the
Partnerships consolidated financial statements and results of operations for the share-based
payment programs currently in place. FSP EITF 03-6-1 will be applied retrospectively to all periods
presented for fiscal years beginning after December 15, 2008.
In May 2008, the FASB issued FASB Staff Position APB 14-1 Accounting for Convertible Debt
Instruments That May Be Settled Upon Conversion (Including Partial Cash Settlement) (FSP APB
14-1). This new standard requires the initial proceeds from convertible debt that may be settled
in cash to be bifurcated between a liability component and an equity component. The objective of
the guidance is to require the liability and equity components of convertible debt to be separately
accounted for in a manner such that the interest expense recorded on the convertible debt would not
equal the contractual rate of interest on the convertible debt, but instead would be recorded at a
rate that would reflect the issuers conventional debt borrowing rate. This is accomplished through
the creation of a discount on the debt that would be accreted using the effective interest method
as additional non-cash interest expense over the period the debt is expected to remain outstanding.
The provisions of FSP APB 14-1 will be applied retrospectively to all periods presented for fiscal
years beginning after December 31, 2008. Management believes that FSP APB 14-1 will impact the
accounting for the Partnerships 3.875% Exchangeable Notes and will have a material impact on the
Partnerships consolidated financial statements and results of operations.
In April 2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 is to be applied prospectively for fiscal years
beginning after December 15, 2008. Management is currently evaluating the impact of FSP 142-3 on
the Partnerships consolidated financial position, results of operations and cash flows but
currently does not believe it will have a material impact on the Partnerships consolidated
financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 Disclosures
about Derivative Instruments and Hedging Activities (SFAS 161). This new standard enhances
disclosure requirements for derivative instruments in order to provide users of financial
statements with an enhanced understanding of (i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedged items are accounted
for under Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging
Activities and its related interpretations and (iii) how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash flows. SFAS 161 is to
be applied prospectively for the first annual reporting
43
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
period beginning on or after November 15,
2008. The Partnership believes that the adoption of SFAS 161 will not have a material impact on
the Partnerships financial statement disclosures based on the Partnerships current disclosures.
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations (SFAS
141(R)), which establishes principles and requirements for how the acquirer shall recognize and
measure in its financial statements the identifiable assets acquired, liabilities assumed, any
noncontrolling interest in the acquiree and goodwill acquired in a business combination. This
statement is effective for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements an Amendment of ARB No. 51 (SFAS 160), which establishes and expands
accounting and reporting standards for minority interests, which will be recharacterized as
noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. SFAS 160 is
effective for business combinations for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008. This statement is
effective for fiscal years beginning on or after December 15, 2008.
3. REAL ESTATE INVESTMENTS
As of June 30, 2008 and December 31, 2007 the gross carrying value of the Partnerships operating
properties was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
Land |
|
$ |
682,980 |
|
|
$ |
727,979 |
|
Building and improvements |
|
|
3,383,725 |
|
|
|
3,672,638 |
|
Tenant improvements |
|
|
411,327 |
|
|
|
412,946 |
|
|
|
|
|
|
|
|
|
|
|
4,478,032 |
|
|
|
4,813,563 |
|
|
|
|
|
|
|
|
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.
2008
On June 27, 2008, the Partnership entered into an agreement to sell five properties, totaling
approximately 1.7 net rentable square feet in Oakland, California for an aggregate sales price of
$412.5 million (including debt assumption). These five properties are designated as held for sale
at June 30, 2008 (see Note 9).
On April 25, 2008, the Partnership sold 100 Brandywine Boulevard, an office property located in
Newtown, Pennsylvania containing 102,000 net rentable square feet, for a sales price of $28.0
million.
On February 29, 2008, the Partnership sold 1400 Howard Boulevard, an office property located in
Mount Laurel, New Jersey containing 75,590 net rentable square feet, for a sales price of $22.0
million.
On February 14, 2008, the Partnership sold a parcel of land located in Henrico, Virginia containing
3.24 acres, for a sales price of $0.4 million.
On January 14, 2008, the Partnership sold 7130 Ambassador Drive, an office property located in
Allentown, Pennsylvania containing 114,049 net rentable square feet, for a sales price of $5.8
million.
44
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
2007
DRA Venture
On December 19, 2007, the Partnership formed G&I Interchange Office LLC, a new venture (the
Venture) with G&I VI Investment Interchange Office LLC (G&I VI), an investment arrangement
advised by DRA Advisors LLC. The Venture owns interests in 29 office properties which are located
in Pennsylvania and contain an aggregate of 1,616,227 net rentable square feet. The Partnership
transferred or contributed 100% of its ownership interests in 26 properties and transferred to the
Venture an 89% interest in three of the properties (with the remaining 11% interest in the three
properties subject to a put/call at fixed prices after three years). In connection with the
formation, the Partnership effectively transferred an 80% interest in the Venture to G&I IV for
cash and the Venture borrowed approximately $184.0 million in third party financing the aggregate
proceeds of which were distributed to the Partnership. The Partnership used the net proceeds of
these transactions of approximately $230.9 million to reduce outstanding indebtedness under the
Partnerships unsecured revolving credit facility.
The Partnership was engaged by the Venture to perform property management and leasing services.
The venture agreements provide for certain control rights and participation as a venture partner
and based on an evaluation of control rights, the Partnership does not consolidate the Venture.
The Partnerships continuing involvement with the properties through its venture interest and
management fees and leasing commissions represents a significant continuing involvement in the
properties. Accordingly, under EITF 03-13, Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report Discontinued Operations, the Partnership has
determined that the operations of the properties should not be included in discontinued operations
for the six-months ended June 30, 2007.
Other 2007 Acquisitions and Dispositions
On November 30, 2007, the Partnership sold 111/113 Pencader Drive, an office property located in
Newark, Delaware containing 52,665 net rentable square feet, for a sales price of $5.1 million.
On November 15, 2007, the Partnership sold 2490 Boulevard of the Generals, an office property
located in West Norriton, Pennsylvania containing 20,600 net rentable square feet, for a sales
price of $1.5 million.
On September 7, 2007, the Partnership sold seven land parcels located in the Iron Run Business Park
in Lehigh County, Pennsylvania containing an aggregate 51.5 acres of land, for an aggregate sales
price of $6.6 million.
On July 19, 2007, the Partnership acquired the United States Post Office building, an office
property located in Philadelphia, Pennsylvania containing 862,692 net rentable square feet, for an
aggregate purchase price of $28.0 million. The Partnership intends to redevelop the building into
office space for lease by the Internal Revenue Service (IRS). As part of this acquisition, the
Partnership also acquired a 90 year ground lease interest in an adjacent parcel of ground of
approximately 2.54 acres, commonly referred to as the postal annex. The Partnership is currently
demolishing the existing structure located on the postal annex and intends to rebuild a parking
facility containing approximately 733,000 square feet that will primarily be used by the IRS
employees upon their move into the planned office space at the Post Office building. The remaining
postal annex ground leased parcels can also accommodate additional office, retail, hotel and
residential development and the Partnership is currently in the planning stage with respect to
these parcels and is seeking zoning and other relevant authorizations related thereto.
On July 19, 2007, the Partnership acquired five office properties containing 508,607 net rentable
square feet and a 4.9 acre land parcel in the Boulders office park in Richmond, Virginia for an
aggregate purchase price of $96.3 million. The Partnership funded $36.6 million 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 (discussed below).
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 purchase price of
$72.0 million. A portion of the
45
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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 April 30, 2007, the Partnership sold Cityplace Center, an office property located in Dallas,
Texas containing 1,295,832 net rentable square feet, for a sales price of $115.0 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
million. The Partnership structured this transaction to qualify as a like-kind exchange under
Section 1031 of the Internal Revenue Code and the cash from the sale was held by a qualified
intermediary for purposes of accomplishing the like-kind exchange as noted in the above
transactions.
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 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 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 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 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.
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of June 30, 2008, the Partnership had an aggregate investment of approximately $71.1 million in
its 14 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 44 office buildings that contain an aggregate of approximately 4.4 million net
rentable square feet, one Real Estate Venture developed a hotel property that contains 137 rooms,
one Real Estate Venture constructed and sold condominiums in Charlottesville, VA, one Real Estate
Venture is developing an office property located in Charlottesville, VA and one Real Estate Venture
is in the planning stages of an office development in Conshohocken, PA.
The Partnership accounts for its unconsolidated interests in its Real Estate Ventures using the
equity method. Unconsolidated interests range from 5% to 50%, subject to specified priority
allocations in certain of the Real Estate Ventures.
The amounts reflected in the following tables (except for the 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 Properties Trust merger
in 2006, had a negative equity balance on a historical cost
basis as a result of historical depreciation and distribution 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
46
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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 Partnership does not allocate operating losses of the Real Estate
Ventures in excess of its investment balance unless the Partnership is liable for the obligations
of the Real Estate Venture or is otherwise committed to provide financial support to the Real
Estate Venture.
The following is a summary of the financial position of the Real Estate Ventures as of June 30,
2008 and December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2008 |
|
2007 |
Operating property, net of accumulated depreciation |
|
$ |
599,457 |
|
|
$ |
587,537 |
|
Other assets |
|
|
111,847 |
|
|
|
113,268 |
|
Liabilities |
|
|
41,618 |
|
|
|
41,459 |
|
Debt |
|
|
544,376 |
|
|
|
538,766 |
|
Equity |
|
|
125,355 |
|
|
|
120,581 |
|
Partnerships share of equity (Partnerships basis) |
|
|
71,078 |
|
|
|
71,598 |
|
The following is a summary of results of operations of the Real Estate Ventures for the three- and
six-month periods ended June 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
Six-month periods |
|
|
ended June 30, |
|
ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Revenue |
|
$ |
25,863 |
|
|
$ |
18,986 |
|
|
$ |
52,896 |
|
|
$ |
37,300 |
|
Operating expenses |
|
|
8,875 |
|
|
|
6,643 |
|
|
|
17,797 |
|
|
|
12,940 |
|
Interest expense, net |
|
|
7,956 |
|
|
|
5,410 |
|
|
|
15,753 |
|
|
|
10,648 |
|
Depreciation and amortization |
|
|
9,472 |
|
|
|
3,776 |
|
|
|
18,624 |
|
|
|
8,004 |
|
Net (loss) income |
|
|
(440 |
) |
|
|
3,156 |
|
|
|
722 |
|
|
|
5,707 |
|
Partnerships share of income (Partnerships basis) |
|
|
1,664 |
|
|
|
4,504 |
|
|
|
2,779 |
|
|
|
5,258 |
|
As of June 30, 2008, the Partnership had guaranteed repayment of approximately $1.1 million of
loans on behalf of certain Real Estate Ventures. The Partnership also provides customary
environmental indemnities in connection with construction and permanent financing both for its own
account and on behalf of its Real Estate Ventures. For Real Estate Ventures with construction
projects, the Partnership expects that it will be required to fund approximately $10.6 million of
the construction costs through capital calls.
5. DEFERRED COSTS
As of June 30, 2008 and December 31, 2007, the Partnerships deferred costs were comprised of the
following (in thousands):
47
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
103,808 |
|
|
$ |
(34,950 |
) |
|
$ |
68,858 |
|
Financing Costs |
|
|
27,108 |
|
|
|
(10,301 |
) |
|
|
16,807 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
130,916 |
|
|
$ |
(45,251 |
) |
|
$ |
85,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
99,077 |
|
|
$ |
(31,259 |
) |
|
$ |
67,818 |
|
Financing Costs |
|
|
27,597 |
|
|
|
(8,292 |
) |
|
|
19,305 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
126,674 |
|
|
$ |
(39,551 |
) |
|
$ |
87,123 |
|
|
|
|
|
|
|
|
|
|
|
6. INTANGIBLE ASSETS
As of June 30, 2008 and December 31, 2007, the Companys intangible assets were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Total Cost |
|
|
Amortization |
|
|
Deferred Costs, net |
|
In-place lease value |
|
$ |
150,183 |
|
|
$ |
(63,624 |
) |
|
$ |
86,559 |
|
Tenant relationship value |
|
|
104,025 |
|
|
|
(34,813 |
) |
|
|
69,212 |
|
Above market leases acquired |
|
|
25,352 |
|
|
|
(14,008 |
) |
|
|
11,344 |
|
Total |
|
$ |
279,560 |
|
|
$ |
(112,445 |
) |
|
$ |
167,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
85,791 |
|
|
$ |
(32,129 |
) |
|
$ |
53,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Total Cost |
|
|
Amortization |
|
|
Deferred Costs, net |
|
In-place lease value |
|
$ |
180,456 |
|
|
$ |
(65,742 |
) |
|
$ |
114,714 |
|
Tenant relationship value |
|
|
121,094 |
|
|
|
(32,895 |
) |
|
|
88,199 |
|
Above market leases acquired |
|
|
29,337 |
|
|
|
(14,101 |
) |
|
|
15,236 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
330,887 |
|
|
$ |
(112,738 |
) |
|
$ |
218,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
103,825 |
|
|
$ |
(36,544 |
) |
|
$ |
67,281 |
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, the Partnerships annual amortization for its intangible assets/liabilities is
as follows (in thousands, and assuming no early lease terminations):
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
Liabilities |
|
2008 |
|
$ |
20,687 |
|
|
$ |
6,017 |
|
2009 |
|
|
37,117 |
|
|
|
10,179 |
|
2010 |
|
|
30,494 |
|
|
|
8,420 |
|
2011 |
|
|
23,492 |
|
|
|
7,086 |
|
2012 |
|
|
17,866 |
|
|
|
6,336 |
|
Thereafter |
|
|
37,459 |
|
|
|
15,624 |
|
|
|
|
|
|
|
|
Total |
|
$ |
167,115 |
|
|
$ |
53,662 |
|
|
|
|
|
|
|
|
48
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
7. DEBT OBLIGATIONS
The following table sets forth information regarding the Partnerships debt obligations outstanding
at June 30, 2008 and December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Interest |
|
|
Maturity |
|
Property / Location |
|
2008 |
|
|
2007 |
|
|
Rate |
|
|
Date |
|
MORTGAGE DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400 Commerce Drive |
|
$ |
|
|
|
$ |
11,575 |
|
|
|
7.12% |
|
|
Jun-08 |
Two Logan Square |
|
|
69,479 |
|
|
|
70,124 |
|
|
|
5.78% |
(a) |
|
Jul-09 |
200 Commerce Drive |
|
|
5,725 |
|
|
|
5,765 |
|
|
|
7.12% |
(a) |
|
Jan-10 |
1333 Broadway |
|
|
|
|
|
|
23,997 |
|
|
|
5.54% |
(a) |
|
May-10 |
1 Kaiser Plaza (The Ordway) |
|
|
|
|
|
|
45,509 |
|
|
|
5.29% |
(a) |
|
Aug-10 |
1901 Harrison Stree (World Savings Center) |
|
|
|
|
|
|
27,142 |
|
|
|
5.29% |
(a) |
|
Nov-10 |
Plymouth Meeting Exec. |
|
|
43,134 |
|
|
|
43,470 |
|
|
|
7.00% |
(a) |
|
Dec-10 |
Four Tower Bridge |
|
|
10,442 |
|
|
|
10,518 |
|
|
|
6.62% |
|
|
Feb-11 |
Arboretum I, II, III & V |
|
|
21,946 |
|
|
|
22,225 |
|
|
|
7.59% |
|
|
Jul-11 |
Midlantic Drive/Lenox Drive/DCC I |
|
|
60,567 |
|
|
|
61,276 |
|
|
|
8.05% |
|
|
Oct-11 |
Research Office Center |
|
|
41,165 |
|
|
|
41,527 |
|
|
|
5.30% |
(a) |
|
Oct-11 |
Concord Airport Plaza |
|
|
37,102 |
|
|
|
37,570 |
|
|
|
5.55% |
(a) |
|
Jan-12 |
Six Tower Bridge |
|
|
14,283 |
|
|
|
14,472 |
|
|
|
7.79% |
|
|
Aug-12 |
Newtown Square/Berwyn Park/Libertyview |
|
|
61,507 |
|
|
|
62,125 |
|
|
|
7.25% |
|
|
May-13 |
Coppell Associates |
|
|
3,395 |
|
|
|
3,512 |
|
|
|
6.89% |
|
|
Dec-13 |
Southpoint III |
|
|
4,150 |
|
|
|
4,426 |
|
|
|
7.75% |
|
|
Apr-14 |
Tysons Corner |
|
|
100,000 |
|
|
|
100,000 |
|
|
|
5.36% |
(a) |
|
Aug-15 |
Coppell Associates |
|
|
16,600 |
|
|
|
16,600 |
|
|
|
5.75% |
|
|
Feb-16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
489,495 |
|
|
|
601,833 |
|
|
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt premiums, net |
|
|
4,010 |
|
|
|
10,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
493,505 |
|
|
$ |
611,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNSECURED DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sweep Agreement Line |
|
|
|
|
|
|
10,727 |
|
|
Libor + 1.600% |
|
|
Apr-09 |
Private Placement Notes due 2008 |
|
|
113,000 |
|
|
|
113,000 |
|
|
|
4.34% |
|
|
Dec-08 |
2009 Five Year Notes |
|
|
275,000 |
|
|
|
275,000 |
|
|
|
4.62% |
|
|
Nov-09 |
Bank Term Loan |
|
|
183,000 |
|
|
|
150,000 |
|
|
Libor + 0.80% |
|
|
Oct-10 |
2010 Five Year Notes |
|
|
300,000 |
|
|
|
300,000 |
|
|
|
5.61% |
|
|
Dec-10 |
Line-of-Credit |
|
|
163,000 |
|
|
|
120,000 |
|
|
Libor + 0.725% |
|
|
Jun-11 |
3.875% Exchangeable Notes |
|
|
313,500 |
|
|
|
345,000 |
|
|
|
3.93% |
|
|
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 |
|
|
|
300,000 |
|
|
|
5.75% |
|
|
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 |
|
|
2,526,110 |
|
|
|
2,492,337 |
|
|
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt discounts, net |
|
|
(2,992 |
) |
|
|
(3,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unsecured indebtedness |
|
$ |
2,523,118 |
|
|
$ |
2,489,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Obligations |
|
$ |
3,016,623 |
|
|
$ |
3,100,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Loans were assumed upon acquisition of the related property. Interest rates presented above
reflect the market rate at the time of acquisition. |
The aggregate mortgage note payable balance of $95.8 million with net unamortized fixed-rate debt
premiums of $3.9 million for 1333 Broadway, 1 Kaiser Plaza and 1901 Harrison Street, as of June 30,
2008, not included in the table above, is included in Mortgage notes payable and other liabilities
held for sale on the consolidated balance sheets.
49
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
During the six-month periods ended June 30, 2008 and 2007, the Partnerships weighted-average
effective interest rate on its mortgage notes payable was 6.41% and 6.9%, respectively.
During the six-month period ended June 30, 2008, the Partnership repurchased $31.5 million of the
3.875% Exchangeable Notes in a series of transactions and recognized a gain on early extinguishment
of debt of $4.3 million. In addition, the Partnership accelerated amortization of the related
deferred financing costs of $0.4 million.
During the second quarter of 2008, the Partnership exercised the accordion feature on its $150.0
million unsecured term loan and funded an additional $33.0 million, bringing its total outstanding
balance to $183.0 million. All outstanding borrowings under the term loan bear interest at a
periodic rate of LIBOR plus 80 basis points. The net proceeds of the term loan increase were used
to reduce indebtedness under the Partnerships unsecured revolving credit facilities.
On April 30, 2007, the Operating Partnership sold $300.0 million aggregate principal amount of
5.70% unsecured notes due 2017 (the 2017 Notes). Partnership guaranteed the payment of principal
and interest on the 2017 Notes. The Partnership used proceeds from these notes to reduce
borrowings under the Partnerships revolving credit facility.
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 $113.0 million principal amount unsecured notes
due 2008 contains covenants that are similar to the covenants in the indenture.
On October 15, 2007, the Partnership entered into a term loan agreement (the Term Loan Agreement)
that provides for an unsecured term loan (the Term Loan) in the amount of $150.0 million. The
Partnership used the proceeds to pay down a portion of the outstanding amount on its $600.0 million
unsecured revolving credit facility. The Term Loan matures on October 18, 2010 and may be extended
at the Partnerships option for two, one-year periods but not beyond the maturity date of its
revolving credit facility. There is no scheduled principal amortization of the Term Loan and the
Partnership may prepay borrowings in whole or in part without premium or penalty. Portions of the
Term Loan bear interest at a per annum floating rate equal to: (i) the higher of (x) the prime rate
or (y) the federal funds rate plus 0.50% per annum or (ii) a London interbank offered rate that is
the rate at which Eurodollar deposits
for one, two, three or six months are offered plus between 0.475% and 1.10% per annum (the Libor
Margin), depending on the Partnerships debt rating. The Term Loan Agreement contains financial
and operating covenants. Financial covenants include minimum net worth, fixed charge coverage
ratio, maximum leverage ratio, restrictions on unsecured and secured debt as a percentage of
unencumbered assets and other financial tests. Operating covenants include limitations on the
Partnerships ability to incur additional indebtedness, grant liens on assets, enter into affiliate
transactions, and pay dividends.
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 facility fee paid quarterly 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. Borrowings are always available to the
extent of borrowing capacity at the stated rates, however, 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
50
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
ability to
acquire additional commitments from its existing lenders or new lenders. As of June 30, 2008, the
Partnership had $163.0 million of borrowings and $12.6 million of letters of credit outstanding
under the Credit Facility, leaving $424.4 million of unused availability. For the six-month
periods ended June 30, 2008 and 2007, the weighted-average interest rate on the Credit Facility,
including the effect of interest rate hedges, was 4.62% and 6.35%, 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%. As of June 30, 2008, the Partnership had $0 million of borrowing
outstanding under the Sweep Agreement, leaving $20.0 million of unused availability. In April
2008, the Sweep Agreement was extended until April 2009 and borrowings now bear interest at
one-month LIBOR plus 1.60%.
As of June 30, 2008, the Partnerships aggregate scheduled principal payments of debt obligations,
net of amortization of discounts and premiums, are as follows (in thousands):
|
|
|
|
|
2008 |
|
$ |
117,990 |
|
2009 |
|
|
353,232 |
|
2010 |
|
|
539,858 |
|
2011 |
|
|
608,761 |
|
2012 |
|
|
351,053 |
|
Thereafter |
|
|
1,044,711 |
|
|
|
|
|
Total principal payments |
|
|
3,015,605 |
|
Net unamortized premiums/discounts |
|
|
1,018 |
|
Outstanding indebtedness |
|
$ |
3,016,623 |
|
|
|
|
|
8. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
Risk Management
In the 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
primarily 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 through derivative financial
instruments.
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
51
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
not highly-effective as a hedge or if a derivative
ceases to be a highly-effective hedge, the Partnership will discontinue hedge accounting
prospectively. The related ineffectiveness would be charged to the Statement of Operations.
The valuation of these instruments is determined using widely accepted valuation techniques
including discounted cash flow analysis on the expected cash flows of each derivative. This
analysis reflects the contractual terms of the derivatives, including the period to maturity, and
uses observable market-based inputs, including interest rate curves and implied volatilities. The
fair values of interest rate swaps are determined using the market standard methodology of netting
the discounted future fixed cash receipts (or payments) and the discounted expected variable cash
payments (or receipts). The variable cash payments (or receipts) are based on an expectation of
future interest rates (forward curves) derived from observable market interest rate curves.
To comply with the provisions of SFAS No. 157, the Partnership incorporates credit valuation
adjustments to appropriately reflect both its own nonperformance risk and the respective
counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of
its derivative contracts for the effect of nonperformance risk, the Partnership has considered the
impact of netting and any applicable credit enhancements, such as collateral postings, thresholds,
mutual puts, and guarantees.
Although the Partnership has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads
to evaluate the likelihood of default by itself and its counterparties. However, as of June 30,
2008, the Partnership has assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions and has determined that the credit
valuation adjustments are not significant to the overall valuation of its derivatives. As a
result, the Partnership has determined that its derivative valuations in their entirety are
classified in Level 2 of the fair value hierarchy.
The following table summarizes the terms and fair values of the Partnerships derivative financial
instruments at June 30, 2008. The notional amounts at June 30, 2008 provide an indication of the
extent of the Partnerships involvement in these instruments at that time, but do not represent
exposure to credit, interest rate or market risks. The fair values of the hedges at June 30, 2008
are included in other liabilities and accumulated other comprehensive
income in the accompanying balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge |
|
Hedge |
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
Trade |
|
|
Maturity |
|
|
|
|
Product |
|
Type |
|
|
Designation |
|
|
Amount |
|
|
Strike |
|
|
Date |
|
|
Date |
|
|
Fair Value |
|
Swap |
|
Interest Rate |
|
Cash Flow |
(b) |
|
$ |
71,400 |
(a) |
|
|
4.709 |
% |
|
|
9/20/07 |
|
|
|
10/18/10 |
|
|
$ |
(2,745 |
) |
Swap |
|
Interest Rate |
|
Cash Flow |
(b) |
|
|
25,000 |
|
|
|
4.415 |
% |
|
|
10/19/07 |
|
|
|
10/18/10 |
|
|
|
(543 |
) |
Swap |
|
Interest Rate |
|
Cash Flow |
(b) |
|
|
25,000 |
|
|
|
3.747 |
% |
|
|
11/26/07 |
|
|
|
10/18/10 |
|
|
|
(171 |
) |
Swap |
|
Interest Rate |
|
Cash Flow |
(b) |
|
|
25,000 |
|
|
|
3.338 |
% |
|
|
1/4/08 |
|
|
|
12/18/09 |
|
|
|
(89 |
) |
Forward Starting Swap |
|
Interest Rate |
|
Cash Flow |
(c) |
|
|
25,000 |
|
|
|
4.770 |
% |
|
|
1/4/08 |
|
|
|
12/18/19 |
|
|
|
131 |
|
Forward Starting Swap |
|
Interest Rate |
|
Cash Flow |
(c) |
|
|
25,000 |
|
|
|
4.423 |
% |
|
|
3/19/08 |
|
|
|
12/18/19 |
|
|
|
864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
196,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
- Notional amount accreting up to $155,000 through October 8, 2010. |
|
(b) |
|
- Hedging unsecured variable rate debt. |
|
(c) |
|
- Future issuance of long-term debt with an expected forward starting date in December 2009. |
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, 2008 or 2007.
52
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
9. DISCONTINUED OPERATIONS
For the three- and six-month periods ended June 30, 2008, income from discontinued operations
relates to three properties that the Company sold during 2008 and five properties designated as
held for sale at June 30, 2008. The Company determined that five Northern California properties
(disposal group) met the criteria for assets to be disposed of by sale pursuant to FASB 144
Accounting for the Impairment or Disposal of Long-Lived Assets. On June 27, 2008, the Company
entered into a binding purchase and sale agreement for the sale of these operations to a single
purchaser. Accordingly, at June 30, 2008, the disposal group is required to be measured at the
lower of its estimated fair value less costs to sell or its recorded amount. In connection with
the reclassification of the related assets and liabilities from assets held in use to held for
sale, the Company recorded a $6.85 million provision for impairment which has reduced the amounts
recorded in the line item Assets held for sale, net on the consolidated balance sheet. The
significant terms of the purchase agreement require the buyer to pay cash, assume mortgage
obligations and for the Company to provide seller financing. The Company expects the sale to close
in the third quarter of 2008. At that time, the provision for impairment will be adjusted in the
third quarter based on the actual results of the transaction.
The following table summarizes the revenue and expense information for properties classified as
discontinued operations in the three- and six-month periods ended June 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Six-month period |
|
|
|
ended June 30, 2008 |
|
|
ended June 30, 2008 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
11,235 |
|
|
$ |
23,496 |
|
Tenant reimbursements |
|
|
425 |
|
|
|
934 |
|
Termination fees |
|
|
|
|
|
|
25 |
|
Other |
|
|
50 |
|
|
|
148 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
11,710 |
|
|
|
24,603 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
4,190 |
|
|
|
8,149 |
|
Real estate taxes |
|
|
911 |
|
|
|
2,129 |
|
Depreciation and amortization |
|
|
4,019 |
|
|
|
8,107 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,120 |
|
|
|
18,385 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,590 |
|
|
|
6,218 |
|
Interest income |
|
|
5 |
|
|
|
11 |
|
Interest expense |
|
|
(1,342 |
) |
|
|
(2,694 |
) |
|
|
|
|
|
|
|
|
Income from discontinued operations before gain on
sale of interests in real estate and minority interest |
|
|
1,253 |
|
|
|
3,535 |
|
|
|
|
|
|
|
|
|
|
Net gain on sale of interests in real estate |
|
|
13,420 |
|
|
|
21,401 |
|
Provision for impairment |
|
|
(6,850 |
) |
|
|
(6,850 |
) |
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
7,823 |
|
|
$ |
18,086 |
|
|
|
|
|
|
|
|
For the three- and six-month periods ended June 30, 2007, income from discontinued operations
relates to the properties sold during 2008 and 2007 and the five properties designated as held for
sale at June 30, 2008. The following table summarizes the revenue and expense information for the
properties classified as discontinued operations in the three- and six-month periods ended June 30,
2007 (in thousands):
53
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Six-month period |
|
|
|
ended June 30, 2007 |
|
|
ended June 30, 2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
14,397 |
|
|
$ |
37,619 |
|
Tenant reimbursements |
|
|
2,159 |
|
|
|
4,341 |
|
Termination fees |
|
|
|
|
|
|
63 |
|
Other |
|
|
190 |
|
|
|
262 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
16,746 |
|
|
|
42,285 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
5,517 |
|
|
|
13,714 |
|
Real estate taxes |
|
|
1,462 |
|
|
|
4,055 |
|
Depreciation and amortization |
|
|
4,685 |
|
|
|
13,528 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
11,664 |
|
|
|
31,297 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
5,082 |
|
|
|
10,988 |
|
Interest income |
|
|
6 |
|
|
|
12 |
|
Interest expense |
|
|
(1,380 |
) |
|
|
(2,765 |
) |
|
|
|
|
|
|
|
|
Income from discontinued operations before gain on
sale of interests in real estate and minority interest |
|
|
3,708 |
|
|
|
8,235 |
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on sale of interests in real estate |
|
|
(856 |
) |
|
|
25,153 |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
2,852 |
|
|
$ |
33,388 |
|
|
|
|
|
|
|
|
The following table summarizes the balance sheet information for the five properties identified as
held for sale at June 30, 2008 (in thousands):
|
|
|
|
|
Real Estate Investments: |
|
|
|
|
Operating property, development land and construction-in-progress |
|
$ |
412,044 |
|
Accumulated depreciation |
|
|
(23,169 |
) |
|
|
|
|
|
|
|
388,875 |
|
|
|
|
|
|
Other assets |
|
|
35,102 |
|
Provision for impairment |
|
|
(6,850 |
) |
|
|
|
|
Total Assets Held for Sale |
|
$ |
417,127 |
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable and other liabilities held for sale |
|
$ |
113,897 |
|
|
|
|
|
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 PARTNERS SHARE OF CONSOLIDATED REAL
ESTATE VENTURES
As of June 30, 2008 and December 31, 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. Two of these consolidated real estate ventures are variable interest
entities under FIN 46R of which the Partnership is the primary beneficiary. The third is a real
estate venture for which the Partnership serves as the general partner and the limited partner does
not have substantive participating rights.
54
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
During the period ended June 30, 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 on
January 5, 2006.
For the remaining consolidated joint ventures, the minority interest is reflected at zero carrying
amounts as a result of accumulated losses and distributions in excess of basis.
The minority interests associated with certain of the real estate ventures that have finite lives
under the terms of the partnership agreements represent mandatorily redeemable interests as defined
in SFAS 150. As of June 30, 2008 and December 31, 2007, the aggregate book value of these minority
interests in the accompanying consolidated balance sheet was $0 and the Company believes that the
aggregate settlement value of these interests was approximately $6.3 million. This amount is based
on the estimated liquidation fair values of the assets and liabilities and the resulting proceeds
that the Partnership would distribute to its real estate venture partners upon dissolution, as
required under the terms of the respective partnership agreements. Subsequent changes to the
estimated liquidation values of the assets and liabilities of the consolidated real estate ventures
will affect the Partnerships estimate of the aggregate settlement value. The partnership
agreements do not limit the amount that the minority partners would be entitled to in the event of
liquidation of the assets and liabilities and dissolution of the respective partnerships.
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, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Income (loss) from continuing operations |
|
$ |
1,828 |
|
|
$ |
1,828 |
|
|
$ |
(1,698 |
) |
|
$ |
(1,698 |
) |
Income allocated to Preferred Units |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income afrom continuing operations available to common unitholders |
|
|
(170 |
) |
|
|
(170 |
) |
|
|
(3,696 |
) |
|
|
(3,696 |
) |
Income from discontinued operations |
|
|
7,823 |
|
|
|
7,823 |
|
|
|
2,852 |
|
|
|
2,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders |
|
$ |
7,653 |
|
|
$ |
7,653 |
|
|
$ |
(844 |
) |
|
$ |
(844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common partnership units outstanding |
|
|
90,747,434 |
|
|
|
90,747,434 |
|
|
|
91,020,069 |
|
|
|
91,020,069 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
231,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average partnership units outstanding |
|
|
90,747,434 |
|
|
|
90,979,203 |
|
|
|
91,020,069 |
|
|
|
91,020,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.04 |
) |
Discontinued operations |
|
|
0.09 |
|
|
|
0.09 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
55
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month periods ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Income (loss) from continuing operations |
|
$ |
6,860 |
|
|
$ |
6,860 |
|
|
$ |
(12,228 |
) |
|
$ |
(12,228 |
) |
Income allocated to Preferred Units |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to
common unitholders |
|
|
2,864 |
|
|
|
2,864 |
|
|
|
(16,224 |
) |
|
|
(16,224 |
) |
|
Income from discontinued operations |
|
|
18,086 |
|
|
|
18,086 |
|
|
|
33,388 |
|
|
|
33,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders |
|
$ |
20,950 |
|
|
$ |
20,950 |
|
|
$ |
17,164 |
|
|
$ |
17,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common partnership units outstanding |
|
|
90,736,342 |
|
|
|
90,736,342 |
|
|
|
91,620,218 |
|
|
|
91,620,218 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
207,734 |
|
|
|
|
|
|
|
617,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average partnership units outstanding |
|
|
90,736,342 |
|
|
|
90,944,076 |
|
|
|
91,620,218 |
|
|
|
92,237,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.18 |
) |
|
$ |
(0.18 |
) |
Discontinued operations |
|
|
0.20 |
|
|
|
0.20 |
|
|
|
0.36 |
|
|
|
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.23 |
|
|
$ |
0.23 |
|
|
$ |
0.19 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Partnership Unit and Preferred Mirror Units
On June 18, 2008, the Partnership declared a $0.44 per unit cash distribution to holders of Class A
Units totaling $1.4 million.
On June 18, 2008, the Partnership declared a distribution of $0.44 per Common Partnership Unit,
totaling $38.8 million, which was paid on July 18, 2008 to unitholders of record as of July 3,
2008. On June 18, 2008, the Partnership declared distributions on its Series D Preferred Mirror
Units and Series E Preferred Mirror Units to holders of record as of June 30, 2008. These units
are entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions paid on
July 15, 2008 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 Company repurchased 1.6 million shares during the six-month period ended June 30, 2007 for an
aggregate consideration of $53.5 million under its share repurchase program. As of June 30, 2008,
0.9 million shares remain held in treasury giving the Company the ability to reissue such shares.
Additionally, 0.2 million of these shares were repurchased as part of the Companys deferred
compensation program. 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. As of
June 30, 2008, the Company may purchase an additional 0.5 million shares under the plan. 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.
12. SHARE BASED COMPENSATION
Stock Options
At June 30, 2008, the Partnership had 2,037,897 options outstanding under its shareholder approved
equity incentive plan. There were 1,824,594 options unvested as of June 30, 2008 and $1.3 million
of unrecognized compensation expense associated with these options. Option activity as of June 30,
2008 and changes during the six months ended June 30, 2008 were as follows:
56
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining Contractual |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Value (in 000s) |
|
Outstanding at January 1, 2008 |
|
|
1,070,099 |
|
|
$ |
26.13 |
|
|
|
0.54 |
|
|
|
(8,775 |
) |
Granted |
|
|
1,824,594 |
|
|
|
20.61 |
|
|
|
9.77 |
|
|
|
(8,849 |
) |
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(856,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008 |
|
|
2,037,897 |
|
|
$ |
20.75 |
|
|
|
8.97 |
|
|
|
(10,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at June 30, 2008 |
|
|
213,303 |
|
|
$ |
21.93 |
|
|
|
2.15 |
|
|
|
(1,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2008 |
|
|
213,303 |
|
|
$ |
21.93 |
|
|
|
2.15 |
|
|
|
(1,316 |
) |
The Partnership has the ability and intent to issue shares upon stock option exercises.
Historically, the Partnership has issued new common shares to satisfy such exercises.
Restricted Share Awards
As of June 30, 2008, 516,830 restricted shares were outstanding and vest over three to seven years
from the initial grant date. The remaining compensation expense to be recognized for the 516,830
restricted shares outstanding at June 30, 2008 was approximately $9.7 million. That expense is
expected to be recognized over a weighted average remaining vesting period of 3.6 years. For the
six-month periods ended June 30, 2008 and 2007, the Partnership recognized $1.7 million and $1.9
million of compensation expense included in general and administrative 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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair value |
|
Non-vested at January 1, 2008 |
|
|
409,282 |
|
|
$ |
31.91 |
|
Granted |
|
|
224,691 |
|
|
|
17.47 |
|
Vested |
|
|
(109,701 |
) |
|
|
29.63 |
|
Forfeited |
|
|
(7,442 |
) |
|
|
23.05 |
|
|
|
|
|
|
|
|
Non-vested at June 30, 2008 |
|
|
516,830 |
|
|
$ |
25.87 |
|
|
|
|
|
|
|
|
Outperformance Program
On August 28, 2006, the Compensation Committee of the Partnerships Board of Trustees adopted a
long-term incentive compensation program (the outperformance program). The Partnership will make
payments (in the form of common shares) to executive-participants under the outperformance program
only if the Partnerships 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 Partnership 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
Partnership 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 August 28, 2006,
as adjusted for estimated forfeitures, was approximately $5.6 million and will be amortized into
57
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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 Partnership 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 five year period. On the date of each grant, the awards were valued using
a Monte Carlo simulation. For the three- and six- month period ended June 30, 2008, the
Partnership recognized $0.4 million and $0.7 million of compensation expense related to the
outperformance program.
For the three- and six- month period ended June 30, 2007, the Partnership recognized $0.4 million
and $0.8 million of compensation expense related to the outperformance program.
Employee Share Purchase Plan
On May 9, 2007, the Partnerships 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 Partnership through payroll deductions and voluntary cash
purchases at an amount equal to 85% of the average closing price per share for a specified period.
Under the plan document, maximum participant contribution for any plan year is limited to the
lesser of 20% of compensation or $50,000. The number of shares reserved for issuance under the
ESPP is 1.25 million. During the six-month period ended June 30, 2008, employees made purchases of
$0.3 million under the ESPP and the Partnership recognized $0.1 million compensation expense
related to the ESPP. The Board of Directors of the Partnership may terminate the ESPP at its sole
discretion at anytime.
13. SEGMENT INFORMATION
As of June 30, 2008, the Partnership manages its portfolio within seven segments: (1)
Pennsylvania, (2) New Jersey/Delaware, (3) Richmond, Virginia, (4) CaliforniaNorth, (5)
CaliforniaSouth, (6) Metropolitan Washington D.C and (7) Southwest. The Pennsylvania segment
includes properties in Chester, Delaware, Bucks, Lehigh and Montgomery counties in the Philadelphia
suburbs and the City of Philadelphia in Pennsylvania. The New Jersey/Delaware segment includes
properties in counties in the southern and central part of New Jersey including Burlington, Camden
and Mercer counties and the state of Delaware. The Richmond, Virginia segment includes properties
primarily in Chesterfield and Henrico counties, the City of Richmond and Durham, North Carolina.
The CaliforniaNorth segment includes properties in the City of Oakland and Concord. The
CaliforniaSouth segment includes properties in the City of Carlsbad and Rancho Bernardo. The
Metropolitan Washington, D.C. segment includes properties in Northern Virginia and suburban
Maryland. The Southwest segment includes properties in Travis county of Texas. The corporate
group is responsible for cash and investment management, development of certain real estate
properties during the construction period, and certain other general support functions. Land held
for development and construction in progress are transferred to operating properties by region upon
completion of the associated construction or project.
58
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
Segment information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
California - |
|
|
California - |
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
/Delaware |
|
|
Virginia |
|
|
North |
|
|
South |
|
|
D.C. |
|
|
Southwest |
|
|
Corporate |
|
|
Total |
|
As of June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at
cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,699,105 |
|
|
$ |
639,451 |
|
|
$ |
350,451 |
|
|
$ |
131,084 |
|
|
$ |
106,391 |
|
|
$ |
1,314,760 |
|
|
$ |
236,790 |
|
|
$ |
|
|
|
$ |
4,478,032 |
|
Development land and
construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
363,936 |
|
|
|
363,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at
cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,682,839 |
|
|
$ |
663,503 |
|
|
$ |
348,310 |
|
|
$ |
472,818 |
|
|
$ |
106,303 |
|
|
$ |
1,302,833 |
|
|
$ |
236,957 |
|
|
$ |
|
|
|
$ |
4,813,563 |
|
Developed land and
construction-in-progress |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
402,270 |
|
|
|
402,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended June
30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
61,459 |
|
|
$ |
28,971 |
|
|
$ |
11,407 |
|
|
$ |
4,352 |
|
|
$ |
2,957 |
|
|
$ |
35,145 |
|
|
$ |
9,913 |
|
|
$ |
(417 |
) |
|
$ |
153,787 |
|
Property operating expenses
and real estate taxes |
|
|
21,550 |
|
|
|
12,387 |
|
|
|
4,008 |
|
|
|
1,811 |
|
|
|
1,146 |
|
|
|
12,155 |
|
|
|
4,336 |
|
|
|
1,851 |
|
|
|
59,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
39,909 |
|
|
$ |
16,584 |
|
|
$ |
7,399 |
|
|
$ |
2,541 |
|
|
$ |
1,811 |
|
|
$ |
22,990 |
|
|
$ |
5,577 |
|
|
$ |
(2,268 |
) |
|
$ |
94,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended
June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
65,865 |
|
|
$ |
28,657 |
|
|
$ |
8,216 |
|
|
$ |
3,972 |
|
|
$ |
3,450 |
|
|
$ |
33,795 |
|
|
$ |
10,183 |
|
|
$ |
(1,918 |
) |
|
$ |
152,220 |
|
Property operating expenses
and real estate taxes |
|
|
26,291 |
|
|
|
12,707 |
|
|
|
3,130 |
|
|
|
1,254 |
|
|
|
1,233 |
|
|
|
11,201 |
|
|
|
4,050 |
|
|
|
(876 |
) |
|
|
58,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
39,574 |
|
|
$ |
15,950 |
|
|
$ |
5,086 |
|
|
$ |
2,718 |
|
|
$ |
2,217 |
|
|
$ |
22,594 |
|
|
$ |
6,133 |
|
|
$ |
(1,042 |
) |
|
$ |
93,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
California - |
|
|
California - |
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
/Delaware |
|
|
Virginia |
|
|
North |
|
|
South |
|
|
D.C. |
|
|
Southwest |
|
|
Corporate |
|
|
Total |
|
For the six-months
ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
126,025 |
|
|
$ |
56,967 |
|
|
$ |
22,469 |
|
|
$ |
8,708 |
|
|
$ |
5,924 |
|
|
$ |
70,108 |
|
|
$ |
18,981 |
|
|
$ |
(988 |
) |
|
$ |
308,194 |
|
Property operating
expenses and real
estate taxes |
|
|
43,792 |
|
|
|
24,519 |
|
|
|
7,721 |
|
|
|
3,426 |
|
|
|
2,337 |
|
|
|
24,573 |
|
|
|
8,411 |
|
|
|
4,080 |
|
|
|
118,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
82,233 |
|
|
$ |
32,448 |
|
|
$ |
14,748 |
|
|
$ |
5,282 |
|
|
$ |
3,587 |
|
|
$ |
45,535 |
|
|
$ |
10,570 |
|
|
$ |
(5,068 |
) |
|
$ |
189,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-months ended
June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
131,466 |
|
|
$ |
56,969 |
|
|
$ |
17,196 |
|
|
$ |
7,060 |
|
|
$ |
6,664 |
|
|
$ |
67,340 |
|
|
$ |
19,109 |
|
|
$ |
(1,838 |
) |
|
$ |
303,966 |
|
Property operating
expenses and real
estate taxes |
|
|
51,452 |
|
|
|
25,024 |
|
|
|
6,144 |
|
|
|
2,127 |
|
|
|
2,565 |
|
|
|
22,710 |
|
|
|
7,562 |
|
|
|
(338 |
) |
|
|
117,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
80,014 |
|
|
$ |
31,945 |
|
|
$ |
11,052 |
|
|
$ |
4,933 |
|
|
$ |
4,099 |
|
|
$ |
44,630 |
|
|
$ |
11,547 |
|
|
$ |
(1,500 |
) |
|
$ |
186,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
Net operating income is defined as total revenue less property operating expenses and real estate
taxes. Segment net operating income includes revenue, real estate taxes and property operating
expenses directly related to operation and management of the properties owned and managed within
the respective geographical region. Segment net operating income excludes property level
depreciation and amortization, revenue and expenses directly associated with third party real
estate management services, expenses associated with corporate administrative support services, and
inter-company eliminations. Below is a reconciliation of consolidated net operating income to
consolidated income (loss) from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
Six-month periods |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Consolidated net operating income |
|
$ |
94,543 |
|
|
$ |
93,230 |
|
|
$ |
189,335 |
|
|
$ |
186,720 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
179 |
|
|
|
1,597 |
|
|
|
382 |
|
|
|
2,378 |
|
Interest expense |
|
|
(35,709 |
) |
|
|
(39,423 |
) |
|
|
(71,807 |
) |
|
|
(78,396 |
) |
Deferred financing costs |
|
|
(1,198 |
) |
|
|
(1,065 |
) |
|
|
(2,706 |
) |
|
|
(2,323 |
) |
Depreciation and amortization |
|
|
(52,472 |
) |
|
|
(53,542 |
) |
|
|
(104,324 |
) |
|
|
(111,340 |
) |
General & administrative expenses |
|
|
(6,127 |
) |
|
|
(7,007 |
) |
|
|
(11,039 |
) |
|
|
(14,417 |
) |
Minority interest partners share of consolidated
real estate ventures |
|
|
(38 |
) |
|
|
8 |
|
|
|
(78 |
) |
|
|
(108 |
) |
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of real estate ventures |
|
|
1,664 |
|
|
|
4,504 |
|
|
|
2,779 |
|
|
|
5,258 |
|
Net (loss) gain on disposition of undepreciated real estate |
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
|
|
Gain on early extinguishment of debt |
|
|
986 |
|
|
|
|
|
|
|
4,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
1,828 |
|
|
|
(1,698 |
) |
|
|
6,860 |
|
|
|
(12,228 |
) |
Income from discontinued operations |
|
|
7,823 |
|
|
|
2,852 |
|
|
|
18,086 |
|
|
|
33,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,651 |
|
|
$ |
1,154 |
|
|
$ |
24,946 |
|
|
$ |
21,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 recent reports of 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. In 2005, 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 of the date of this Form 10-Q, the insurance carrier
continues to tender 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 PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
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 rental payments on non-cancelable leases at June 30, 2008 are as follows (in
thousands):
|
|
|
|
|
2008 |
|
$ |
868 |
|
2009 |
|
|
1,986 |
|
2010 |
|
|
2,318 |
|
2011 |
|
|
2,318 |
|
2012 |
|
|
2,318 |
|
Thereafter |
|
|
291,831 |
|
Certain of the land leases provide for prepayment of rent on a present value basis using a fixed
discount rate. Further, certain of the land leases for properties (currently under development)
provide for contingent rent participation by the lessor in certain capital transactions and net
operating cash flows of the property after certain returns are achieved by the Partnership. Such
amounts, if any, will be reflected as contingent rent when incurred. The leases also provide for
payment by the Partnership of certain operating costs relating to the land, primarily real estate
taxes. The above schedule of future minimum rental payments does not include any contingent rent
amounts nor any reimbursed expenses.
Other Commitments or Contingencies
As part of the Partnerships September 2004 acquisition of a portfolio of properties from The
Rubenstein Partnership (which the Partnership refers to as the TRC acquisition), the Partnership
acquired its interest in Two Logan Square, a 696,477 square foot office building in Philadelphia,
primarily through its ownership of a second and third mortgage secured by this property. This
property is consolidated as the borrower is a variable interest entity and the Partnership, through
its ownership of the second and third mortgages, is the primary beneficiary. The Partnership
currently does not expect to take title to Two Logan Square until, at the earliest, September 2019.
If the Partnership takes fee title to Two Logan Square upon a foreclosure of its mortgage, the
Partnership has agreed to pay an unaffiliated third party that holds a residual interest in the fee
owner of this property an amount equal to $0.6 million (if we must pay a state and local transfer
upon taking title) and $2.9 million (if no transfer tax is payable upon the transfer).
As part of the Partnerships 2006 acquisition of Prentiss Properties Trust, the TRC acquisition in
2004 and several of our other transactions, the Partnership agreed not to sell certain of the
properties it acquired in transactions that would trigger taxable income to the former owners. In
the case of the TRC acquisition, the Partnership agreed not to sell acquired properties for periods
up to 15 years from the acquisition date as follows: 201 King of Prussia Road, 555 East Lancaster
Avenue and 300 Delaware Avenue (January 2008); One Rodney Square and 130/150/170 Radnor Financial
Center (January 2015); and One Logan Square, Two Logan Square and Radnor Corporate Center (January
2020). In 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 v also agreed not
to sell 14 other properties that contain an aggregate of 1.2 million square feet for periods that
expire by the end of 2008. The Partnerships
agreements generally provide that it may dispose of the subject properties only in transactions
that qualify as tax-free exchanges under Section 1031 of the Internal Revenue Code or in other tax
deferred transactions. If the Partnership were to sell a restricted property before expiration of
the restricted period in a non-exempt transaction, the Partnership would be required to make
significant payments to the parties who sold it the applicable property on account of tax
liabilities attributed to them.
The Partnership invests in its properties and regularly incur capital expenditures in the ordinary
course to maintain the properties. The Partnership believes that such expenditures enhance our
competitiveness. The Partnership also enters into construction, utility and service contracts in
the ordinary course of business which may extend beyond one year. These contracts typically
provide for cancellation with insignificant or no cancellation penalties.
62
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 impact of unrealized hedging transactions; |
|
|
|
|
the unavailability of equity and debt financing; |
|
|
|
|
unanticipated costs associated with the acquisition, integration and operation of our
acquisitions; |
|
|
|
|
unanticipated costs to complete, lease-up and operate our developments and
redevelopments; |
|
|
|
|
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, 2007. |
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, 2008 and December 31, 2007 and for the three- and six-months ended June 30, 2008 and 2007 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, 2008, our portfolio consisted of 211 office properties, 22 industrial facilities and
one mixed-use property that contain an aggregate of approximately 23.3 million net rentable square
feet. In addition, we consolidate three office properties owned by real estate ventures containing
0.4 million net rentable square feet. These 237 properties make up our core portfolio. We also
had six properties under development and six properties under
redevelopment containing an aggregate 3.2 million net rentable square feet. As of June 30, 2008,
the Company owned
63
three office properties, one property under redevelopment and one property under
development containing an aggregate of approximately 1.7 million net rentable square feet
designated as held for sale assets. Therefore, as of June 30, 2008, we consolidated 254 properties
with an aggregate of 28.6 million net rentable square feet. As of June 30, 2008, we also held
economic interests in 14 unconsolidated real estate ventures (the Real Estate Ventures) that we
formed with third parties to develop or own commercial properties. The properties owned by these
Real Estate Ventures contain approximately 4.4 million net rentable square feet.
As of June 30, 2008 we managed our portfolio within seven geographic segments: (1) Pennsylvania,
(2) New Jersey/Delaware, (3) Richmond, Virginia, (4) CaliforniaNorth, (5) CaliforniaSouth, (6)
Metropolitan Washington, D.C. and (7) Southwest. The Pennsylvania segment includes properties in
Chester, Delaware, Bucks, Lehigh and Montgomery counties in the Philadelphia suburbs and the City
of Philadelphia in Pennsylvania. The New Jersey/Delaware segment includes properties in counties
in the southern and central part of New Jersey including Burlington, Camden and Mercer counties and
the state of Delaware. The Richmond, Virginia segment includes properties primarily in
Chesterfield and Henrico counties, the City of Richmond and Durham, North Carolina. The
CaliforniaNorth segment includes properties in the City of Oakland and Concord. The
CaliforniaSouth segment includes properties in the City of Carlsbad and Rancho Bernardo. 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.
Occupancy at our core portfolio at June 30, 2008 was 92.9%. Our overall occupancy at June 30,
2008, including our 12 properties under development or redevelopment, was 84.7%.
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 5.1% of our
aggregate annualized base rents as of June 30, 2008 (representing approximately 4.7% of the net
rentable square feet of the Properties) expire without penalty through the end of 2008. 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, 2008 was 75.4%. 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 allowance for accounts receivable in light of our tenant base and general and local economic
conditions. Our accounts receivable allowances were $12.3 million or 10.7% of total receivables
(including accrued rent receivable) as of June 30, 2008 compared to $10.2 million or 9.2% of total
receivables (including accrued rent receivable) as of December 31, 2007.
64
Development Risk:
As of June 30, 2008, we had in development or redevelopment 12 sites aggregating approximately 3.2
million square feet. We estimate the total cost of these projects to be $637.3 million and we had
incurred $367.1 million of these costs as of June 30, 2008. We are actively marketing space at
these projects to prospective tenants but can provide no assurance as to the timing or terms of any
leases of space at these projects. As of June 30, 2008, we had entered into leases covering 74.6%
of the net rentable square feet at these projects. As of June 30, 2008, we owned approximately 414
acres of undeveloped land. 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, 2008, we sold three properties, containing an aggregate
of 0.3 million net rentable square feet and one land parcel containing 3.24 acres. Specifically:
On January 14, 2008, we sold 7130 Ambassador Drive, an office property located in Allentown,
Pennsylvania containing 114,049 net rentable square feet, for a sales price of $5.8 million.
On February 14, 2008, we sold a parcel of land located in Henrico, Virginia containing 3.24
acres, for a sales price of $0.4 million.
On February 29, 2008, we sold 1400 Howard Boulevard, an office property located in Mount Laurel,
New Jersey containing 75,590 net rentable square feet, for a sales price of $22.0 million.
On April 25, 2008, we sold 100 Brandywine Boulevard, an office property located in Newtown,
Pennsylvania containing 102,000 net rentable square feet, for a sales price of $28.0 million.
On June 27, 2008, we entered into an agreement to sell five properties, totaling approximately
1.7 million net rentable square feet in Oakland, California for an aggregate sales price of $412.5
million (including debt assumption). These five properties are designated as held for sale at June
30, 2008 and we expect to complete this sale in the third quarter. As noted in the Results of
Operations below we incurred an impairment charge of $6.85 million upon entering into the agreement
of sale.
We continually reassess our portfolio to determine properties that may be in our best interest to
sell depending on strategic or economic factors. From time to time, the decision to sell
properties in the short term could result in an impairment or other loss being taken by the Company
and such losses could be material in the statement of operations.
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 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, 2007 contains a discussion of our
critical accounting policies. There have been no significant changes in our critical accounting
policies since December 31,
2007. See also Note 2 in our unaudited consolidated financial statements for the three-month
period ended June 30, 2008 set forth herein. Management discusses our critical accounting policies
and managements judgments and estimates with our Audit Committee.
65
RESULTS OF OPERATIONS
Comparison of the Three-Month Periods Ended June 30, 2008 and 2007
The table below shows selected operating information for the Same Store Property Portfolio and
the Total Portfolio. The Same Store Property Portfolio consists of 225 properties containing an
aggregate of approximately 21.9 million net rentable square feet that we owned for the entire
three-month periods ended June 30, 2008 and 2007. 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, 2008 and 2007) by providing information for the
properties which were acquired, under development (including lease-up assets) or placed into
service and administrative/elimination information for the three-month periods ended June 30, 2008
and 2007 (in thousands).
We have a significant continuing involvement in the G&I Interchange Office LLC joint venture
through our 20% ownership interest and the management and leasing services we provide for the
venture. Accordingly, under EITF 03-13, Applying the Conditions in Paragraph 42 of FASB Statement
No. 144 in Determining Whether to Report Discontinued Operations, we have determined that the
operations of the properties owned by the joint venture (the G&I properties) should not be
included in discontinued operations. This determination is reflected in the income statement
comparisons below as we recognized revenue and expenses during the second quarter of 2007 for our
100% ownership interest and such information related to the G&I properties is included in the Other
(Eliminations) column.
The Total Portfolio net income presented in the table is equal 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.
66
Comparison of three-months ended June 30, 2008 to the three-months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired/Completed |
|
|
Development/Redevelopment |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Same Store Property Portfolio |
|
|
Properties |
|
|
Properties (a) |
|
|
(Eliminations) (b) |
|
|
Total Portfolio |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash rents |
|
$ |
107,304 |
|
|
$ |
105,767 |
|
|
$ |
1,537 |
|
|
$ |
9,612 |
|
|
$ |
4,911 |
|
|
$ |
3,273 |
|
|
$ |
1,990 |
|
|
$ |
(550 |
) |
|
$ |
5,207 |
|
|
$ |
119,639 |
|
|
$ |
117,875 |
|
|
$ |
1,764 |
|
Straight-line rents |
|
|
3,264 |
|
|
|
4,242 |
|
|
|
(978 |
) |
|
|
1,034 |
|
|
|
1,087 |
|
|
|
82 |
|
|
|
45 |
|
|
|
|
|
|
|
348 |
|
|
|
4,380 |
|
|
|
5,722 |
|
|
|
(1,342 |
) |
Rents FAS 141 |
|
|
1,637 |
|
|
|
2,109 |
|
|
|
(472 |
) |
|
|
(31 |
) |
|
|
(113 |
) |
|
|
426 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
2,032 |
|
|
|
2,063 |
|
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rents |
|
|
112,205 |
|
|
|
112,118 |
|
|
|
87 |
|
|
|
10,615 |
|
|
|
5,885 |
|
|
|
3,781 |
|
|
|
2,102 |
|
|
|
(550 |
) |
|
|
5,555 |
|
|
|
126,051 |
|
|
|
125,660 |
|
|
|
391 |
|
Tenant reimbursements |
|
|
18,919 |
|
|
|
17,454 |
|
|
|
1,465 |
|
|
|
927 |
|
|
|
645 |
|
|
|
939 |
|
|
|
440 |
|
|
|
74 |
|
|
|
880 |
|
|
|
20,859 |
|
|
|
19,419 |
|
|
|
1,440 |
|
Termination fees |
|
|
792 |
|
|
|
1,123 |
|
|
|
(331 |
) |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(625 |
) |
|
|
892 |
|
|
|
498 |
|
|
|
394 |
|
Third party management fees, labor reimbursement and leasing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,170 |
|
|
|
5,369 |
|
|
|
5,170 |
|
|
|
5,369 |
|
|
|
(199 |
) |
Other |
|
|
347 |
|
|
|
652 |
|
|
|
(305 |
) |
|
|
43 |
|
|
|
9 |
|
|
|
12 |
|
|
|
(6 |
) |
|
|
413 |
|
|
|
619 |
|
|
|
815 |
|
|
|
1,274 |
|
|
|
(459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
132,263 |
|
|
|
131,347 |
|
|
|
916 |
|
|
|
11,685 |
|
|
|
6,539 |
|
|
|
4,732 |
|
|
|
2,536 |
|
|
|
5,107 |
|
|
|
11,798 |
|
|
|
153,787 |
|
|
|
152,220 |
|
|
|
1,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
38,135 |
|
|
|
36,745 |
|
|
|
1,390 |
|
|
|
3,188 |
|
|
|
2,181 |
|
|
|
1,607 |
|
|
|
1,331 |
|
|
|
(1,648 |
) |
|
|
1,023 |
|
|
|
41,282 |
|
|
|
41,280 |
|
|
|
2 |
|
Real estate taxes |
|
|
13,382 |
|
|
|
13,089 |
|
|
|
293 |
|
|
|
1,295 |
|
|
|
800 |
|
|
|
761 |
|
|
|
390 |
|
|
|
143 |
|
|
|
935 |
|
|
|
15,581 |
|
|
|
15,214 |
|
|
|
367 |
|
Management expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,381 |
|
|
|
2,496 |
|
|
|
2,381 |
|
|
|
2,496 |
|
|
|
(115 |
) |
Subtotal |
|
|
80,746 |
|
|
|
81,513 |
|
|
|
(767 |
) |
|
|
7,202 |
|
|
|
3,558 |
|
|
|
2,364 |
|
|
|
815 |
|
|
|
4,231 |
|
|
|
7,344 |
|
|
|
94,543 |
|
|
|
93,230 |
|
|
|
1,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,127 |
|
|
|
7,007 |
|
|
|
6,127 |
|
|
|
7,007 |
|
|
|
(880 |
) |
Depreciation and amortization |
|
|
44,766 |
|
|
|
45,885 |
|
|
|
(1,119 |
) |
|
|
5,104 |
|
|
|
2,907 |
|
|
|
1,661 |
|
|
|
1,237 |
|
|
|
941 |
|
|
|
3,513 |
|
|
|
52,472 |
|
|
|
53,542 |
|
|
|
(1,070 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss) |
|
$ |
35,980 |
|
|
$ |
35,628 |
|
|
$ |
352 |
|
|
$ |
2,098 |
|
|
$ |
651 |
|
|
$ |
703 |
|
|
$ |
(422 |
) |
|
$ |
(2,837 |
) |
|
$ |
(3,176 |
) |
|
$ |
35,944 |
|
|
$ |
32,681 |
|
|
$ |
3,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249 |
|
|
|
|
|
|
|
|
|
Square feet |
|
|
21,917 |
|
|
|
|
|
|
|
|
|
|
|
1,762 |
|
|
|
|
|
|
|
3,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179 |
|
|
|
1,597 |
|
|
|
(1,418 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,709 |
) |
|
|
(39,423 |
) |
|
|
3,714 |
|
Interest expense Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,198 |
) |
|
|
(1,065 |
) |
|
|
(133 |
) |
Equity in income of real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,664 |
|
|
|
4,504 |
|
|
|
(2,840 |
) |
Gain on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
986 |
|
|
|
|
|
|
|
986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,866 |
|
|
|
(1,706 |
) |
|
|
3,572 |
|
Minority interest partners share of consolidated real estate
ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38 |
) |
|
|
8 |
|
|
|
(46 |
) |
Minority interest attributable to continuing operations LP units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
158 |
|
|
|
(142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,844 |
|
|
|
(1,540 |
) |
|
|
3,384 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,524 |
|
|
|
2,729 |
|
|
|
4,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,368 |
|
|
$ |
1,189 |
|
|
$ |
8,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.08 |
|
|
$ |
(0.01 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPLANATORY NOTES |
|
(a) |
|
- Results include: six developments and six redevelopment properties. |
|
(b) |
|
- Represents certain revenues and expenses at the corporate level as well as various intercompany costs that are eliminated in consolidation and third-party management fees. Also
included are revenues and expenses from the29 DRA properties. |
67
Total Revenue
Cash rents from the Total Portfolio increased by $1.8 million from second quarter 2007 to second
quarter 2008, primarily reflecting:
|
1) |
|
An additional $1.5 million at the Same Store Portfolio from increased
occupancy, increased rents received on lease renewals and free rent periods converting
to cash rent subsequent to the second quarter of 2007. This free rent conversion is
the primary reason for the decrease in Total Portfolio straight-line rental income. |
|
|
2) |
|
An additional $4.7 million from six properties that we acquired and six
development/redevelopment properties that we completed and placed in service subsequent
to the second quarter of 2007. |
|
|
3) |
|
An additional $1.3 million of rental income due to increased occupancy at 12
development/redevelopment properties in the second quarter of 2008 in comparison to
2007. |
|
|
4) |
|
The increase was offset by the decrease of $5.7 million of rental income earned
from our G&I properties in the second quarter of 2007. |
Tenant reimbursements at the Same Store Portfolio increased by $1.4 million as a result of
increased operating expenses of $1.8 million in the second quarter of 2008 in comparison to 2007.
Property Operating Expenses
Property operating expenses, including real estate taxes and management fees, at the Total
Portfolio increased by $0.3 million from second quarter 2007 to second quarter 2008, primarily due
to $2.9 million of such expenses for G&I properties in the second quarter of 2007. The decrease
was offset by an increase of $1.6 million in our Same Store Portfolio and $1.4 million from six
properties we acquired and six development/redevelopment properties that we completed and placed in
service subsequent to the second quarter of 2007.
Depreciation and Amortization Expense
Depreciation and amortization decreased by $1.1 million from second quarter 2007 to second quarter
2008, primarily due to $2.7 million of depreciation and amortization expense recorded on the G&I
properties during the second quarter of 2007. The decrease was offset by an increase in
depreciation and amortization from six properties that we acquired and six
development/redevelopment properties that we completed and placed in service subsequent to the
second quarter of 2007.
General & Administrative Expenses
General & administrative expenses decreased by approximately $0.9 million from second quarter 2007
to second quarter 2008, primarily as a result of a reduction in overhead costs from a Company
re-organization that occurred subsequent to the second quarter of 2007.
Interest Income/ Expense
The decrease in interest income by approximately $1.4 million is due to lower cash balances during
the second quarter of 2008.
Interest expense decreased by $3.7 million primarily due to lower mortgage notes payable
outstanding at June 30, 2008 in comparison to June 30, 2007 as a result of certain mortgage notes
payable being paid off subsequent to the second quarter of 2007. The decrease is also the result
of a lower weighted average interest rate on Credit Facility borrowings in the second quarter of
2008.
Gain on early extinguishment of debt
During the second quarter of 2008, we repurchased $7.0 million of our $345.0 million 3.875%
Guaranteed Exchangeable Notes at an average price of 85.9107%% which resulted in a $1.0 million
gain we reported for the early extinguishment of debt.
68
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 3.8% and 4.6% of the Operating Partnership as of June 30, 2008 and 2007,
respectively.
Discontinued Operations
During the second quarter of 2008, we sold one property in Newtown, PA and designated five
properties in Oakland, CA as held for sale. These properties had total revenue of $11.7 million,
operating expenses of $5.1 million, depreciation and amortization expense of 4.0 million and
minority interest attributable to discontinued operations of $0.3 million. We also recorded a
$6.85 million loss provision in connection with the five held for sale properties which reduced our
net income from discontinued operations.
The June 30, 2007 amount is reclassified to include the operations of the properties sold and held
for sale during 2008, as well as the 20 properties that were sold during the year ended December
31, 2007. Therefore, the discontinued operations amount for the second quarter of 2007 includes 23
properties that were sold and five properties that were designated as held for sale with total
revenue of $16.7 million, operating expenses of $7.0 million, depreciation and amortization expense
of $4.7 million and minority interest attributable to discontinued operations of $0.1 million.
Net Income
Net income increased by $8.2 million from the second quarter of 2007 as a result of the factors
described above. Net income is significantly impacted by depreciation of operating properties and
amortization of acquired intangibles. These non-cash charges do not directly affect our ability to
pay dividends. 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 duration of the tenant relationship.
Earnings per Common Share
Earnings per share were $0.08 for the second quarter of 2008 as compared to $(0.01) for the second
quarter of 2007 as a result of the factors described above and an increase in the average number of
common shares outstanding. The increase in the average number of common shares outstanding is the
result of a partnership unit conversion to common shares during 2008 and the issuance of common
shares upon the vesting of restricted common shares.
69
RESULTS OF OPERATIONS
Comparison of the Six-Month Periods Ended June 30, 2008 and 2007
The table below shows selected operating information for the Same Store Property Portfolio and
the Total Portfolio. The Same Store Property Portfolio consists of 225 properties containing an
aggregate of approximately 21.9 million net rentable square feet that we owned for the entire
six-month period ended June 30, 2008 and substantially all of the period ended June 30, 2007. 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, 2008 and
2007) by providing information for the properties which were acquired, under development (including
lease-up assets) or placed into service and administrative/elimination information for the
three-month periods ended June 30, 2008 and 2007 (in thousands).
We have a significant continuing involvement in the G&I Interchange Office LLC joint venture
through our 20% ownership interest and the management and leasing services we provide for the
venture. Accordingly, under EITF 03-13, Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report Discontinued Operations, we have determined
that the operations of the properties owned by the joint venture (the G&I properties) should not
be included in discontinued operations. This determination is reflected in the income statement
comparisons below as we recognized revenue and expenses during the six-months ended June 30, 2007
for our 100% ownership interest and such information related to the G&I properties is included in
the Other (Eliminations) column.
The Total Portfolio net income presented in the table is equal 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.
70
Comparison of six-months ended June 30, 2008 to the six-months ended June 30, 2007
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Acquired/Completed |
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Development/Redevelopment |
|
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Other |
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Same Store Property Portfolio |
|
|
Properties |
|
|
Properties (a) |
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(Eliminations) (b) |
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Total Portfolio |
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Increase/ |
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Increase/ |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash rents |
|
$ |
213,659 |
|
|
$ |
209,693 |
|
|
$ |
3,966 |
|
|
$ |
18,410 |
|
|
$ |
8,335 |
|
|
$ |
6,174 |
|
|
$ |
4,418 |
|
|
$ |
(1,252 |
) |
|
$ |
10,618 |
|
|
$ |
236,991 |
|
|
$ |
233,064 |
|
|
$ |
3,927 |
|
Straight-line rents |
|
|
7,292 |
|
|
|
9,615 |
|
|
|
(2,323 |
) |
|
|
2,979 |
|
|
|
3,507 |
|
|
|
495 |
|
|
|
132 |
|
|
|
|
|
|
|
474 |
|
|
|
10,766 |
|
|
|
13,728 |
|
|
|
(2,962 |
) |
Rents FAS 141 |
|
|
3,107 |
|
|
|
4,581 |
|
|
|
(1,474 |
) |
|
|
(64 |
) |
|
|
(175 |
) |
|
|
856 |
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
3,899 |
|
|
|
4,523 |
|
|
|
(624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rents |
|
|
224,058 |
|
|
|
223,889 |
|
|
|
169 |
|
|
|
21,325 |
|
|
|
11,667 |
|
|
|
7,525 |
|
|
|
4,667 |
|
|
|
(1,252 |
) |
|
|
11,092 |
|
|
|
251,656 |
|
|
|
251,315 |
|
|
|
341 |
|
Tenant reimbursements |
|
|
35,753 |
|
|
|
34,859 |
|
|
|
894 |
|
|
|
2,045 |
|
|
|
1,239 |
|
|
|
2,003 |
|
|
|
800 |
|
|
|
165 |
|
|
|
1,846 |
|
|
|
39,966 |
|
|
|
38,744 |
|
|
|
1,222 |
|
Termination fees |
|
|
4,024 |
|
|
|
1,617 |
|
|
|
2,407 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147 |
|
|
|
4,124 |
|
|
|
1,764 |
|
|
|
2,360 |
|
Third party management fees, labor reimbursement and leasing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,849 |
|
|
|
9,704 |
|
|
|
10,849 |
|
|
|
9,704 |
|
|
|
1,145 |
|
Other |
|
|
858 |
|
|
|
1,347 |
|
|
|
(489 |
) |
|
|
63 |
|
|
|
14 |
|
|
|
15 |
|
|
|
(2 |
) |
|
|
663 |
|
|
|
1,080 |
|
|
|
1,599 |
|
|
|
2,439 |
|
|
|
(840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
264,693 |
|
|
|
261,712 |
|
|
|
2,981 |
|
|
|
23,533 |
|
|
|
12,920 |
|
|
|
9,543 |
|
|
|
5,465 |
|
|
|
10,425 |
|
|
|
23,869 |
|
|
|
308,194 |
|
|
|
303,966 |
|
|
|
4,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
74,778 |
|
|
|
74,421 |
|
|
|
357 |
|
|
|
6,468 |
|
|
|
4,106 |
|
|
|
3,391 |
|
|
|
2,730 |
|
|
|
(1,733 |
) |
|
|
1,042 |
|
|
|
82,904 |
|
|
|
82,299 |
|
|
|
605 |
|
Real estate taxes |
|
|
26,949 |
|
|
|
25,478 |
|
|
|
1,471 |
|
|
|
2,503 |
|
|
|
1,596 |
|
|
|
1,624 |
|
|
|
840 |
|
|
|
252 |
|
|
|
2,042 |
|
|
|
31,328 |
|
|
|
29,956 |
|
|
|
1,372 |
|
Management expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,627 |
|
|
|
4,991 |
|
|
|
4,627 |
|
|
|
4,991 |
|
|
|
(364 |
) |
Subtotal |
|
|
162,966 |
|
|
|
161,813 |
|
|
|
1,153 |
|
|
|
14,562 |
|
|
|
7,218 |
|
|
|
4,528 |
|
|
|
1,895 |
|
|
|
7,279 |
|
|
|
15,794 |
|
|
|
189,335 |
|
|
|
186,720 |
|
|
|
2,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,039 |
|
|
|
14,417 |
|
|
|
11,039 |
|
|
|
14,417 |
|
|
|
(3,378 |
) |
Depreciation and amortization |
|
|
89,741 |
|
|
|
91,204 |
|
|
|
(1,463 |
) |
|
|
9,483 |
|
|
|
6,919 |
|
|
|
3,271 |
|
|
|
5,374 |
|
|
|
1,829 |
|
|
|
7,843 |
|
|
|
104,324 |
|
|
|
111,340 |
|
|
|
(7,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss) |
|
$ |
73,225 |
|
|
$ |
70,609 |
|
|
$ |
2,616 |
|
|
$ |
5,079 |
|
|
$ |
299 |
|
|
$ |
1,257 |
|
|
$ |
(3,479 |
) |
|
$ |
(5,589 |
) |
|
$ |
(6,466 |
) |
|
$ |
73,972 |
|
|
$ |
60,963 |
|
|
$ |
13,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249 |
|
|
|
|
|
|
|
|
|
Square feet |
|
|
21,917 |
|
|
|
|
|
|
|
|
|
|
|
1,762 |
|
|
|
|
|
|
|
3,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
382 |
|
|
|
2,378 |
|
|
|
(1,996 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,807 |
) |
|
|
(78,396 |
) |
|
|
6,589 |
|
Interest expense Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,706 |
) |
|
|
(2,323 |
) |
|
|
(383 |
) |
Equity in income of real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,779 |
|
|
|
5,258 |
|
|
|
(2,479 |
) |
Net loss on disposition of undepreciated assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
|
|
|
|
(24 |
) |
Gain on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,342 |
|
|
|
|
|
|
|
4,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,938 |
|
|
|
(12,120 |
) |
|
|
19,058 |
|
Minority interest partners share of consolidated real estate
ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78 |
) |
|
|
(108 |
) |
|
|
30 |
|
Minority interest attributable to continuing operations LP units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103 |
) |
|
|
681 |
|
|
|
(784 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,757 |
|
|
|
(11,547 |
) |
|
|
18,304 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,355 |
|
|
|
31,961 |
|
|
|
(14,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,112 |
|
|
$ |
20,414 |
|
|
$ |
3,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Earnings per common share |
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$ |
0.23 |
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$ |
0.19 |
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$ |
0.04 |
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EXPLANATORY NOTES |
|
(a) |
|
- Results include: six developments and six redevelopment properties. |
|
(b) |
|
- Represents certain revenues and expenses at the corporate level as well as various intercompany costs that are eliminated in consolidation and third-party management fees. Also
included are revenues and expenses from the 29 DRA properties. |
71
Total Revenue
Cash rents from the Total Portfolio increased by $3.9 million from the six-month period ended June
30, 2007 to the six-month period ended June 30, 2008, primarily reflecting:
|
1) |
|
An additional $4.0 million at the Same Store Portfolio from increased
occupancy, increased rents received on lease renewals and free rent periods converting
to cash rent. This free rent conversion is the primary reason for the decrease in
Total Portfolio straight-line rental income. |
|
|
2) |
|
An additional $10.1 million from six properties that we acquired and six
development/redevelopment properties that we completed and placed in service subsequent
to the second quarter of 2007. |
|
|
3) |
|
An additional $1.7 million of rental income due to increased occupancy at 12
development/redevelopment properties in the six-month period ended June 30, 2008 in
comparison to the six-month period ended June 30, 2007. |
|
|
4) |
|
The increase was offset by the decrease of $11.9 million of rental income
earned from our G&I properties during the six-month period ended June 30, 2007. |
Tenant reimbursements at the Total Portfolio increased by $1.2 million as a result of increased
operating expenses of $1.6 million in the six-month period ended June 30, 2008 in comparison to the
six-month period ended June 30, 2007.
Third party management fees, labor reimbursement and leasing increased by $1.1 million from the
six-month period ended June 30, 2007 to the six-month period ended June 30, 2008 as a result of a
greater number of properties that we are managing for third parties. The 29 G&I properties make up
a significant portion of the increase in the number of properties that we manage for third parties.
In addition, our third party management fees increased by $0.8 million in the six-month period
ended June 30, 2008 as a result of the acceleration of a fair market value adjustment that was
ascribed to the management fee contract entered into when we sold the 10 office properties located
in Reading and Harrisburg, PA in the second quarter of 2007. This management fee contract was
terminated on March 31, 2008.
Property Operating Expenses
Property operating expenses, including real estate taxes and management fees, at the Total
Portfolio increased by $1.6 million from the six-month period ended June 30, 2007 to the six-month
period ended June 30, 2008, primarily due to an increase of $3.3 million from six properties that
we acquired and six development/redevelopment properties that we completed and placed in service
subsequent to the second quarter of 2007. Property operating expenses at our same store portfolio
also increased by $1.8 million for the six-month period ended June 30, 2008 in comparison to the
six-month period ended June 30, 2007. The increase was offset by $5.7 million of such expenses for
the G&I properties in the six-month period ended June 30, 2007.
Depreciation and Amortization Expense
Depreciation and amortization decreased by $7.0 million from the six-month period ended June 30,
2007 to the six-month period ended June 30, 2008, primarily due to $5.8 million of depreciation and
amortization expense recorded on the G&I properties during the six-month period ended June 30,
2007.
The remainder of the decrease is due to the incurrence of $2.8 million of accelerated amortization
in the second quarter of 2007 related to customer relationship and in-place lease intangible assets
for one of our properties now included in Development Properties. The value ascribed to these
intangibles considered renewal periods and when the renewals did not occur, the remaining value of
the intangibles was written off and the property was placed into development for future tenants.
The decrease was offset by an increase in depreciation and amortization from six properties that we
acquired and six development/redevelopment properties that we completed and placed in service
subsequent to the second quarter of 2007.
General & Administrative Expenses
General & administrative expenses decreased by $3.4 million from the six-month period ended June
30, 2007 to the six-month period ended June 30, 2008 of which approximately $2.3 million was a
result of the final determination of 2007 bonus awards to our executive management, thereby
resulting in a reduction to the estimated payout that was
72
accrued during 2007. The remainder of the decrease was due to lower overhead costs from a Company
re-organization that occurred subsequent to the second quarter of 2007.
Interest Income/ Expense
The decrease in interest income by approximately $2.0 million is due to lower cash balances during
the second quarter of 2008.
Interest expense decreased by $6.6 million primarily due to lower mortgage notes payable
outstanding at June 30, 2008 in comparison to June 30, 2007 as a result of certain mortgage notes
payable being paid off subsequent to the second quarter of 2007. The decrease is also the result
of a lower weighted average interest rate on Credit Facility borrowings in the second quarter of
2008.
Gain on early extinguishment of debt
During the six-month period ended June 30, 2008, we repurchased $31.5 million of our $345.0 million
3.875% Guaranteed Exchangeable Notes at an average price of 86.2163% which resulted in a $4.3
million gain we reported for the early extinguishment of debt. In addition, we accelerated
amortization of the related deferred financing costs of $0.4 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 3.8% and 4.5% of the Operating Partnership as of June 30, 2008 and 2007,
respectively.
Discontinued Operations
During the six-month period ended June 30, 2008, we sold one property in Plymouth Meeting, PA, one
property in Mount Laurel, NJ, one property in Newtown, PA and designated five properties in
Oakland, CA as held for sale. These properties had total revenue of $24.6 million, operating
expenses of $10.3 million, depreciation and amortization expenses of $8.1 million and minority
interest attributable to discontinued operations of $0.7 million. We also recorded a $6.85 million
loss provision in connection with the five held for sale properties which reduced our net income
from discontinued operations.
The June 30, 2007 amount is reclassified to include the operations of the properties sold and held
for sale during the six-month period ended June 30, 2008, as well as the 20 properties that were
sold during the year ended December 31, 2007. Therefore, the discontinued operations amount for
the six-month period ended June 30, 2007 includes 23 sold properties and five held for sale
properties with total revenue of $42.3 million, operating expenses of $17.8 million, depreciation
and amortization expense of $13.5 million and minority interest attributable to discontinued
operations of $1.4 million.
Net Income
Net income increased by $3.7 million from the six-month period ended June 30, 2007 as a result of
the factors described above. Net income is significantly impacted by depreciation of operating
properties and amortization of acquired intangibles. These non-cash charges do not directly affect
our ability to pay dividends. 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 duration of the tenant relationship.
Earnings per Common Share
Earnings per share were $0.23 for the six-month period ended June 30, 2008 as compared to $0.19 for
the six-month period ended June 30, 2007 as a result of the factors described above and an increase
in the average number of common shares outstanding. The increase in the average number of common
shares outstanding is the result of a partnership unit conversion to common shares during the 2008 and the issuance of common shares upon
the vesting of restricted common shares.
73
LIQUIDITY AND CAPITAL RESOURCES
General
Our principal liquidity needs for the next twelve months are as follows:
|
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fund normal recurring expenses, |
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fund capital expenditures, including capital and tenant improvements and leasing costs, |
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fund current development and redevelopment costs, and |
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fund distributions declared by our Board of Trustees. |
We believe that our liquidity needs will be satisfied through cash flows generated by operations
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 unsecured Private Placement Notes totaling the $113.0 million are due in December 2008 and we
expect to use our credit facility or proceeds from potential property sales to satisfy this
obligation.
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.
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.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases
and/or exchanges for equity securities, other debt securities or instruments, in open market
purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any,
will depend on prevailing market conditions, our liquidity requirements, contractual restrictions
and other factors. The amounts involved may be material.
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.
Asset sales during 2007 and through the second quarter of 2008 have also been a significant source
of cash. During the six-months ended June 30, 2008, we sold three properties, containing an
aggregate of 0.3 million net rentable square feet and a land parcel containing 3.24 acres for
aggregate proceeds of $56.1 million. We have several options for the use of proceeds from asset
sales, including acquiring assets in our core markets, repaying debt and repurchasing our shares.
74
Cash Flows
The following discussion of our cash flows is based on the consolidated statement of cash flows and
is not meant to be a comprehensive discussion of the changes in our cash flows for the periods
presented.
As of June 30, 2008 and December 31, 2007, we maintained cash and cash equivalents of $4.8 million
and $5.6 million, respectively, a decrease of $0.8 million. This decrease was the result of the
following changes in cash flow from our activities for the six-month period ended June 30 (in
thousands):
|
|
|
|
|
|
|
|
|
Activity |
|
2008 |
|
|
2007 |
|
Operating |
|
$ |
103,827 |
|
|
$ |
99,791 |
|
Investing |
|
|
(39,812 |
) |
|
|
15,301 |
|
Financing |
|
|
(64,824 |
) |
|
|
(111,949 |
) |
|
|
|
|
|
|
|
Net cash flows |
|
$ |
(809 |
) |
|
$ |
3,143 |
|
|
|
|
|
|
|
|
Our principal source of cash flows is from the operation of our properties. The increase in cash
flows from operating activities is primarily the result of the timing of cash receipts from our
tenants and cash expenditures in the normal course of operations.
The increase in cash flows used in investing activities is primarily attributable to the decrease
in proceeds that we received from property sales of $222.6 million in the six month period ended
June 30, 2007 to $53.6 million in the six month period ended June 30, 2008. This decrease was
offset by our acquisition of the 49% minority interest partners share in the Brandywine Office
Investors real estate venture of $64.2 million in the six-month period ended June 30, 2007 in
comparison to no property acquisitions in the six-month period ended June 30, 2008. In addition,
our capital expenditures for tenant and building improvements and leasing commissions decreased by
$50.3 million in the six-month period ended June 30, 2008 compared to the six-month period ended
June 30, 2007.
Decreased
cash used in financing activities is primarily attributable to the repurchase of $53.5
million of our common shares in the six month period ended June 30, 2007 in comparison to no
common share repurchases in the six-month period ended June 30, 2008. The decrease was also due to
the timing of the activity in our credit facility.
Capitalization
Indebtedness
During the first quarter of 2008, we repurchased $24.5 million of our $345.0 million 3.875%
Guaranteed Exchangeable Notes at an average price of 86.3036% which resulted in a $3.4 million gain
for the early extinguishment of debt. During the second quarter of 2008, we repurchased an
additional $7.0 million of these Notes at an average price of 85.9107% which resulted in a $1.0
million gain for the early extinguishment of debt. We funded these repurchases from a combination
of proceeds from asset sales, cash flow from operations and borrowings under our unsecured
revolving credit facilities.
During the second quarter of 2008, we exercised the accordion feature on our $150.0 million
unsecured term loan and funded an additional $33.0 million, bringing its total outstanding balance
to $183.0 million. All outstanding borrowings under the term loan bear interest at a periodic rate
of LIBOR plus 80 basis points. The net proceeds of the term loan increase were used to reduce
indebtedness under our unsecured revolving credit facilities.
During the second quarter of 2008, the borrowing rate on our Sweep Agreement increased from LIBOR
plus 75 basis points to LIBOR plus 160 basis points. Borrowings on the Sweep Agreement are short
term and used for cash management purposes.
As of June 30, 2008, we had approximately $3.0 billion of outstanding indebtedness. The table
below summarizes our mortgage notes payable, our unsecured notes and our revolving credit facility
at June 30, 2008 and December 31, 2007:
75
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June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in thousands) |
|
Balance: |
|
|
|
|
|
|
|
|
Fixed rate (includes
variable swapped to
fixed) |
|
$ |
2,738,413 |
|
|
$ |
2,855,332 |
|
Variable rate unhedged |
|
|
278,210 |
|
|
|
245,637 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,016,623 |
|
|
$ |
3,100,969 |
|
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< |