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 September 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)
000-24407 (Brandywine Operating Partnership, L.P.) |
Brandywine Realty Trust
Brandywine Operating Partnership, L.P.
(Exact name of registrant as specified in its charter)
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MARYLAND (Brandywine Realty Trust)
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23-2413352 |
DELAWARE (Brandywine Operating Partnership L.P.)
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23-2862640 |
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(State or other jurisdiction of
Incorporation or organization)
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(I.R.S. Employer Identification No.) |
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555 East Lancaster Avenue
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 88,155,487 Common Shares of Beneficial Interest, par value $0.01 per share, were
outstanding as of November 4, 2008.
TABLE OF CONTENTS
Filing Format
This combined Form 10-Q is being filed separately by Brandywine Realty Trust and Brandywine
Operating Partnership, L.P.
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share information)
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September 30, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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Real estate investments: |
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Rental properties |
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$ |
4,467,405 |
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$ |
4,813,563 |
|
Accumulated depreciation |
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|
(609,566 |
) |
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(558,908 |
) |
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Operating real estate investments, net |
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3,857,839 |
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4,254,655 |
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Development land and construction-in-progress |
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353,904 |
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402,270 |
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Total real estate invesmtents, net |
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4,211,743 |
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4,656,925 |
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Cash and cash equivalents |
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2,674 |
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|
5,600 |
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Accounts receivable, net |
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8,018 |
|
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|
17,057 |
|
Accrued rent receivable, net |
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87,783 |
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|
83,098 |
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Asset held for sale, net |
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459,197 |
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Investment in real estate ventures, at equity |
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71,036 |
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71,598 |
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Deferred costs, net |
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83,133 |
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|
87,123 |
|
Intangible assets, net |
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|
156,109 |
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218,149 |
|
Other assets |
|
|
73,584 |
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|
74,549 |
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Total assets |
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$ |
5,153,277 |
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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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$ |
490,593 |
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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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175,000 |
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130,727 |
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Unsecured senior notes, net of discounts |
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2,177,255 |
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2,208,344 |
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Accounts payable and accrued expenses |
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99,368 |
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76,919 |
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Distributions payable |
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42,124 |
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42,368 |
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Tenant security deposits and deferred rents |
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57,194 |
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65,241 |
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Acquired below market leases, net |
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|
50,446 |
|
|
|
67,281 |
|
Other liabilities |
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31,075 |
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30,154 |
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Mortgage notes payable and other liabilities held for sale |
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111,230 |
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|
|
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|
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Total liabilities |
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3,417,285 |
|
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3,382,932 |
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Minority interest |
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65,521 |
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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, $0.01 par value; shares authorized
200,000,000; 88,610,053 and 88,623,635 issued in 2008 and 2007, respectively
and 87,479,705 and 87,015,600 outstanding in 2008 and 2007, respectively |
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|
877 |
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|
870 |
|
Additional paid-in capital |
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2,326,988 |
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2,324,342 |
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Deferred compensation payable in common stock |
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6,272 |
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5,651 |
|
Common shares in treasury, at cost, 914,606 and 1,599,637 in 2008 and 2007,
respectively |
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(29,949 |
) |
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(53,449 |
) |
Common shares in grantor trust, 215,742 in 2008 and 171,650 in 2007 |
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|
(6,272 |
) |
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(5,651 |
) |
Cumulative earnings |
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497,038 |
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|
476,910 |
|
Accumulated other comprehensive loss |
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|
(2,836 |
) |
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(1,885 |
) |
Cumulative distributions |
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(1,121,690 |
) |
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(999,654 |
) |
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Total beneficiaries equity |
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1,670,471 |
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1,747,177 |
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Total liabilities, minority interest and beneficiaries equity |
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$ |
5,153,277 |
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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 nine-month periods ended |
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September 30, |
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September 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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|
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|
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|
|
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Rents |
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$ |
123,571 |
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|
$ |
128,277 |
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$ |
371,605 |
|
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$ |
375,933 |
|
Tenant reimbursements |
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19,732 |
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|
20,525 |
|
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59,676 |
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|
|
59,255 |
|
Termination fees |
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|
338 |
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|
7,649 |
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|
4,462 |
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|
9,418 |
|
Third Party management fees, labor reimbursement and leasing |
|
|
4,390 |
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4,415 |
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|
15,239 |
|
|
|
14,119 |
|
Other |
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|
784 |
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|
|
2,274 |
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|
2,378 |
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4,711 |
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Total revenue |
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|
148,815 |
|
|
|
163,140 |
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|
453,360 |
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|
463,436 |
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Operating Expenses: |
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Property operating expenses |
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|
40,978 |
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|
|
43,410 |
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|
|
122,531 |
|
|
|
124,316 |
|
Real estate taxes |
|
|
15,148 |
|
|
|
15,232 |
|
|
|
46,179 |
|
|
|
44,886 |
|
Third party management expenses |
|
|
1,790 |
|
|
|
2,508 |
|
|
|
6,417 |
|
|
|
7,499 |
|
Depreciation and amortization |
|
|
51,060 |
|
|
|
56,876 |
|
|
|
154,527 |
|
|
|
167,315 |
|
General & administrative expenses |
|
|
6,863 |
|
|
|
7,402 |
|
|
|
17,902 |
|
|
|
21,819 |
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses |
|
|
115,839 |
|
|
|
125,428 |
|
|
|
347,556 |
|
|
|
365,835 |
|
|
|
|
|
|
|
|
|
|
|
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Operating income |
|
|
32,976 |
|
|
|
37,712 |
|
|
|
105,804 |
|
|
|
97,601 |
|
Other Income (Expense): |
|
|
|
|
|
|
|
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|
|
|
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|
|
Interest income |
|
|
221 |
|
|
|
1,054 |
|
|
|
603 |
|
|
|
3,432 |
|
Interest expense |
|
|
(35,039 |
) |
|
|
(39,496 |
) |
|
|
(106,846 |
) |
|
|
(117,892 |
) |
Deferred financing costs |
|
|
(1,092 |
) |
|
|
(1,058 |
) |
|
|
(3,798 |
) |
|
|
(3,381 |
) |
Equity in income of real estate ventures |
|
|
1,059 |
|
|
|
763 |
|
|
|
3,838 |
|
|
|
6,021 |
|
Net gain (loss) on dispostion of undepreciated real estate |
|
|
|
|
|
|
421 |
|
|
|
(24 |
) |
|
|
421 |
|
Gain on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
4,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
(1,875 |
) |
|
|
(604 |
) |
|
|
3,919 |
|
|
|
(13,798 |
) |
Minority interest partners share of consolidated real estate ventures |
|
|
(39 |
) |
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|
5 |
|
|
|
(117 |
) |
|
|
(103 |
) |
Minority interest attributable to continuing operations LP units |
|
|
141 |
|
|
|
116 |
|
|
|
84 |
|
|
|
843 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) from continuing operations |
|
|
(1,773 |
) |
|
|
(483 |
) |
|
|
3,886 |
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(13,058 |
) |
|
|
|
|
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|
|
|
|
|
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|
|
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Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
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Income from discontinued operations |
|
|
4,619 |
|
|
|
2,694 |
|
|
|
9,298 |
|
|
|
12,003 |
|
Net gain (loss) on disposition of discontinued operations |
|
|
|
|
|
|
338 |
|
|
|
21,401 |
|
|
|
25,491 |
|
Provision for impairment |
|
|
|
|
|
|
|
|
|
|
(6,850 |
) |
|
|
|
|
Minority interest attributable to discontinued operations LP units |
|
|
(167 |
) |
|
|
(130 |
) |
|
|
(944 |
) |
|
|
(1,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
4,452 |
|
|
|
2,902 |
|
|
|
22,905 |
|
|
|
35,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2,679 |
|
|
|
2,419 |
|
|
|
26,791 |
|
|
|
22,833 |
|
Income allocated to Preferred Shares |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to Common Shares |
|
$ |
681 |
|
|
$ |
421 |
|
|
$ |
20,797 |
|
|
$ |
16,839 |
|
|
|
|
|
|
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|
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Basic earnings (loss) per Common Share: |
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|
|
|
|
|
|
|
|
|
|
|
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|
Continuing operations |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.22 |
) |
Discontinued operations |
|
|
0.05 |
|
|
|
0.03 |
|
|
|
0.26 |
|
|
|
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.24 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.22 |
) |
Discontinued operations |
|
|
0.05 |
|
|
|
0.03 |
|
|
|
0.26 |
|
|
|
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.24 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per Common Share |
|
$ |
0.44 |
|
|
$ |
0.44 |
|
|
$ |
1.32 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
87,695,892 |
|
|
|
86,897,335 |
|
|
|
87,423,108 |
|
|
|
87,416,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
87,695,892 |
|
|
|
87,114,598 |
|
|
|
87,437,133 |
|
|
|
87,882,401 |
|
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 nine-month periods |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
2,679 |
|
|
$ |
2,419 |
|
|
$ |
26,792 |
|
|
$ |
22,833 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative financial instruments |
|
|
(1,664 |
) |
|
|
(461 |
) |
|
|
(1,138 |
) |
|
|
(883 |
) |
Settlement of treasury locks |
|
|
|
|
|
|
(3,860 |
) |
|
|
|
|
|
|
(3,860 |
) |
Settlement of forward starting swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,148 |
|
Reclassification of realized (gains)/losses on derivative
financial
instruments to operations, net |
|
|
(20 |
) |
|
|
171 |
|
|
|
(60 |
) |
|
|
(214 |
) |
Unrealized gain (loss) on available-for-sale securities |
|
|
|
|
|
|
(37 |
) |
|
|
248 |
|
|
|
(632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(1,684 |
) |
|
|
(4,187 |
) |
|
|
(950 |
) |
|
|
(4,441 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
995 |
|
|
$ |
(1,768 |
) |
|
$ |
25,842 |
|
|
$ |
18,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine-month periods |
|
|
|
ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
26,791 |
|
|
$ |
22,833 |
|
Adjustments to reconcile net income (loss) to net cash from
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
120,185 |
|
|
|
135,354 |
|
Amortization: |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
3,799 |
|
|
|
3,381 |
|
Deferred leasing costs |
|
|
12,306 |
|
|
|
11,570 |
|
Acquired above (below) market leases, net |
|
|
(6,493 |
) |
|
|
(9,311 |
) |
Acquired lease intangibles |
|
|
31,589 |
|
|
|
39,463 |
|
Deferred compensation costs |
|
|
3,952 |
|
|
|
3,590 |
|
Straight-line rent |
|
|
(13,730 |
) |
|
|
(20,260 |
) |
Provision for doubtful accounts |
|
|
3,150 |
|
|
|
1,000 |
|
Provision for impairment |
|
|
6,850 |
|
|
|
|
|
Real estate venture income in excess of distributions |
|
|
(569 |
) |
|
|
(20 |
) |
Net gain on sale of interests in real estate |
|
|
(21,377 |
) |
|
|
(25,912 |
) |
Gain on early extinguishment of debt |
|
|
(4,342 |
) |
|
|
|
|
Minority interest income |
|
|
977 |
|
|
|
863 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
7,046 |
|
|
|
4,607 |
|
Other assets |
|
|
(7,145 |
) |
|
|
(5,812 |
) |
Accounts payable and accrued expenses |
|
|
24,497 |
|
|
|
27,449 |
|
Tenant security deposits and deferred rents |
|
|
(4,851 |
) |
|
|
5,989 |
|
Other liabilities |
|
|
(3,592 |
) |
|
|
(5,346 |
) |
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
179,043 |
|
|
|
189,438 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of properties |
|
|
|
|
|
|
(88,890 |
) |
Acquisition of minority interest partners share of consolidated real estate venture |
|
|
|
|
|
|
(63,732 |
) |
Sales of properties, net |
|
|
53,601 |
|
|
|
234,428 |
|
Capital expenditures |
|
|
(130,410 |
) |
|
|
(194,009 |
) |
Investment in unconsolidated real estate ventures |
|
|
(853 |
) |
|
|
(809 |
) |
Cash distributions from unconsolidated real estate ventures
in excess of equity in income |
|
|
1,984 |
|
|
|
2,917 |
|
Leasing costs |
|
|
(7,302 |
) |
|
|
(13,854 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(82,980 |
) |
|
|
(123,949 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
302,000 |
|
|
|
886,539 |
|
Repayments of Credit Facility borrowings |
|
|
(257,727 |
) |
|
|
(503,875 |
) |
Repayments of mortgage notes payable |
|
|
(21,946 |
) |
|
|
(266,280 |
) |
Proceeds from term loan |
|
|
33,000 |
|
|
|
|
|
Proceeds from unsecured notes |
|
|
|
|
|
|
299,784 |
|
Repayments and repurchases of unsecured notes |
|
|
(27,158 |
) |
|
|
(299,866 |
) |
Settlement of forward starting swaps |
|
|
|
|
|
|
(2,712 |
) |
Debt financing costs |
|
|
(273 |
) |
|
|
(3,822 |
) |
Exercise of stock options |
|
|
|
|
|
|
6,278 |
|
Repurchases of Common Shares |
|
|
|
|
|
|
(59,426 |
) |
Distributions paid to shareholders |
|
|
(121,936 |
) |
|
|
(122,074 |
) |
Distributions to minority interest holders |
|
|
(4,949 |
) |
|
|
(7,753 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(98,989 |
) |
|
|
(73,207 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(2,926 |
) |
|
|
(7,718 |
) |
Cash and cash equivalents at beginning of period |
|
|
5,600 |
|
|
|
25,379 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,674 |
|
|
$ |
17,661 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest |
|
$ |
110,121 |
|
|
$ |
118,766 |
|
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
September 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 September 30, 2008, the Company owned 211 office properties, 22 industrial facilities and one
mixed-use property (collectively, the Properties) containing an aggregate of approximately 23.0
million net rentable square feet. The Company also had five properties under development and six
properties under redevelopment containing an aggregate 3.1 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 September 30, 2008, the Company owned three office
properties, one property under redevelopment, one property under development, located in Oakland,
CA and one office property located in Richmond, VA totaling approximately 2.1 million net rentable
square feet, that were all designated as held for sale assets. Therefore, as of September 30,
2008, the Company owned and consolidated 254 properties containing an aggregate of 28.6 million net
rentable square feet. As of September 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
September 30, 2008, owned a 96.4% 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 September 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 September 30, 2008, the results of its operations for
the three- and nine-month periods ended September 30, 2008 and 2007 and its cash flows for the
nine-month periods ended September 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 notes 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 nine-months ended September 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
7
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
classification of the affected
restricted share grants from equity to liability awards (the tax withholding adjustment) in
accordance with FASB Statement No. 123(R), Share-Based Payment (FAS 123(R)), 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 awards
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 nine-months ended September 30, 2008, and therefore, has not recorded
a single period cumulative adjustment.
During the quarter ended September 30, 2008, the Company determined that it would correct the
presentation of certain amounts included in accounts payable and accrued expenses to additional
paid in capital (Reclassification adjustment). This change is also pursuant to FAS 123 (R), as
amounts recognized as expense in connection with the Companys share based awards which are equity
classified (see Note 12) should be included in additional paid in capital prior to vesting of such
awards. The awards subject to this adjustment are the Outperformance Plan shares and certain other
restricted share awards. Previously, the Company had incorrectly included the amortization of
these share based awards in accounts payable and accrued expenses and transferred the amount to
additional-paid-in-capital in the periods that the awards vested. Liability classified awards as
described in the previous paragraph were not part of the reclassification adjustment. Stock option
awards were already historically classified in additional-paid-in -capital.
During the quarter ended September 30, 2008, the Company determined that it would correct the
presentation of common shares held in a Rabbi Trust (the Rabbi Trust adjustment) as part of the
Companys deferred compensation plan in order to present shares and the corresponding deferred
compensation liability in accordance with EITF 97-14, Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested. In prior periods, the
net amounts of these components were incorrectly included in additional paid in capital on the
consolidated balance sheet.
The Reclassification adjustment and the Rabbi Trust adjustment are not considered material to the
prior financial statements but the adjustment to prior periods provides for a more meaningful
presentation.
Accordingly, in accordance with SAB No. 108, the December 31, 2007 balance sheet herein has been
revised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Withholding |
|
Reclassification |
|
Rabbi Trust |
|
|
|
|
As Reported |
|
Adjustment |
|
Adjustment |
|
Adjustment |
|
As Revised |
Accounts payable and accrued expenses |
|
$ |
80,732 |
|
|
$ |
(568 |
) |
|
$ |
(3,245 |
) |
|
$ |
|
|
|
$ |
76,919 |
|
|
|
Minority interest |
|
|
84,119 |
|
|
|
(129 |
) |
|
|
|
|
|
|
|
|
|
|
83,990 |
|
|
|
Additional paid-in capital |
|
|
2,319,410 |
|
|
|
1,447 |
|
|
|
3,485 |
|
|
|
|
|
|
|
2,324,342 |
|
Cumulative earnings |
|
|
480,217 |
|
|
|
(3,067 |
) |
|
|
(240 |
)(a) |
|
|
|
|
|
|
476,910 |
|
Cumulative distributions |
|
|
(1,001,971 |
) |
|
|
2,317 |
|
|
|
|
|
|
|
|
|
|
|
(999,654 |
) |
Deferred compensation payable in common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,651 |
|
|
|
5,651 |
|
Common shares in grantor trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,651 |
) |
|
|
(5,651 |
) |
|
|
Total beneficiaries equity |
|
$ |
1,743,235 |
|
|
$ |
697 |
|
|
$ |
3,245 |
|
|
$ |
|
|
|
$ |
1,747,177 |
|
|
|
|
(a) |
|
Represents the correction to cumulative earnings in respect of issuance of treasury shares in
settlement of restricted share awards for an amount less than their cost. |
8
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
The tax withholding adjustment above is 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 $(0.1) million decrease
for the three-months ended September 30, 2007 and a $0.1 million increase for the nine-months ended
September 30, 2007.
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 and on July 28, 2008, such
awards were accounted for as equity classified awards.
The Company will make corresponding adjustments as described above to other prior periods as
appropriate the next time those financial statements are filed.
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,
capitalization of internal costs 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
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.
9
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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 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 $1.7 and $11.6 million for the three- and nine-month periods ended
September 30, 2008 and approximately $4.8 million and $17.4 million for the three- and nine-month
periods ended September 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. This increased revenue by $0.7 million and $2.1 million for the three- and
nine-month periods ended September 30, 2008 and $0.7 million and $2.8 million for the three- and
nine-month periods ended September 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 or to the
extent the tenant has a lease on a triple net basis. 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
10
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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 September 30,
2008, 3.0 million common shares remained available for future awards under the 1997 Plan. Through
September 30, 2008, all options awarded under the 1997 Plan 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 $1.3 million and $4.0 million during the
three- and nine-month periods ended September 30, 2008 and $0.9 million and $3.6 million during the
three- and nine-month periods ended September 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 nine-month periods ended September 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.
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
11
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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 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 September 30, 2008:
12
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
September 30, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
774 |
|
|
$ |
774 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
4,066 |
|
|
|
|
|
|
$ |
4,066 |
|
|
|
|
|
Forward Starting Interest Rate Swaps |
|
|
71 |
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,137 |
|
|
$ |
|
|
|
$ |
4,137 |
|
|
$ |
|
|
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 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
13
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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 (i.e. through the first optional redemption date). The provisions of FSP APB 14-1 will
be applied retrospectively to all periods presented for fiscal years beginning after December 31,
2008 and early adoption is not permitted. 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. The Company has estimated
that the application of FSP APB 14-1 will result in an aggregate of approximately $0.06 per share
(net of incremental capitalized interest) of additional non-cash interest expense retroactively
applied for fiscal 2008. Excluding the impact of capitalized interest, the additional non-cash
interest expense will be approximately $0.07 per share for fiscal 2008, and this amount (before
netting) will increase in subsequent reporting periods through the first optional redemption dates
as the debt accretes to its par value over the same period. The application of FSP APB 14-1 will
also require the Company to reduce the amount of gain recognized in the nine-months ended September
30, 2008 on extinguishment of debt by approximately $0.02.
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 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. The Company is currently
assessing the potential impact that the adoption of SFAS 160 will have on its financial position
and results of operations.
14
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
3. REAL ESTATE INVESTMENTS
As of September 30, 2008 and December 31, 2007 the gross carrying value of the Companys operating
properties was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Land |
|
$ |
677,175 |
|
|
$ |
727,979 |
|
Building and improvements |
|
|
3,385,932 |
|
|
|
3,672,638 |
|
Tenant improvements |
|
|
404,298 |
|
|
|
412,946 |
|
|
|
|
|
|
|
|
|
|
$ |
4,467,405 |
|
|
$ |
4,813,563 |
|
|
|
|
|
|
|
|
2008 Dispositions
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.
The sales price above does not include transaction costs for respective sales.
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of September 30, 2008, the Company had an aggregate investment of approximately $71.0 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
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 September
30, 2008 and December 31, 2007 (in thousands):
15
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2008 |
|
2007 |
Operating property, net of accumulated depreciation |
|
$ |
598,726 |
|
|
$ |
587,537 |
|
Other assets |
|
|
102,372 |
|
|
|
113,268 |
|
Liabilities |
|
|
38,259 |
|
|
|
41,459 |
|
Debt |
|
|
545,236 |
|
|
|
538,766 |
|
Equity |
|
|
117,603 |
|
|
|
120,581 |
|
Companys share of equity (Companys basis) |
|
|
71,036 |
|
|
|
71,598 |
|
The following is a summary of results of operations of the Real Estate Ventures for the three- and
nine-month periods ended September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
Nine-month periods |
|
|
ended September 30, |
|
ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Revenue |
|
$ |
27,358 |
|
|
$ |
19,374 |
|
|
$ |
80,254 |
|
|
$ |
56,674 |
|
Operating expenses |
|
|
10,931 |
|
|
|
6,793 |
|
|
|
28,727 |
|
|
|
19,733 |
|
Interest expense, net |
|
|
8,042 |
|
|
|
5,421 |
|
|
|
23,795 |
|
|
|
16,069 |
|
Depreciation and amortization |
|
|
9,794 |
|
|
|
3,970 |
|
|
|
28,418 |
|
|
|
11,974 |
|
Net (loss) income |
|
|
(1,409 |
) |
|
|
3,191 |
|
|
|
(687 |
) |
|
|
8,898 |
|
Companys share of income (Company basis) |
|
|
1,059 |
|
|
|
763 |
|
|
|
3,838 |
|
|
|
2,149 |
|
Equity in income of real estate ventures in the Companys consolidated statement of operations for
the nine- months ended September 30, 2007 includes a $3.9 million distribution on account of a
residual profits interest that is not included in the table above.
As of September 30, 2008, the Company had guaranteed repayment of approximately $1.8 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 September 30, 2008 and December 31, 2007, the Companys deferred costs were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
104,296 |
|
|
$ |
(36,941 |
) |
|
$ |
67,355 |
|
Financing Costs |
|
|
27,170 |
|
|
|
(11,392 |
) |
|
|
15,778 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
131,466 |
|
|
$ |
(48,333 |
) |
|
$ |
83,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
16
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
6. INTANGIBLE ASSETS
As of September 30, 2008 and December 31, 2007, the Companys intangible assets were comprised of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
In-place lease value |
|
$ |
146,943 |
|
|
$ |
(66,714 |
) |
|
$ |
80,229 |
|
Tenant relationship value |
|
|
103,709 |
|
|
|
(37,765 |
) |
|
|
65,944 |
|
Above market leases acquired |
|
|
23,489 |
|
|
|
(13,553 |
) |
|
|
9,936 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
274,141 |
|
|
$ |
(118,032 |
) |
|
$ |
156,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
83,566 |
|
|
$ |
(33,120 |
) |
|
$ |
50,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 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 |
|
$ |
10,082 |
|
|
$ |
2,809 |
|
2009 |
|
|
36,882 |
|
|
|
10,175 |
|
2010 |
|
|
30,260 |
|
|
|
8,416 |
|
2011 |
|
|
23,277 |
|
|
|
7,086 |
|
2012 |
|
|
17,798 |
|
|
|
6,336 |
|
Thereafter |
|
|
37,810 |
|
|
|
15,624 |
|
|
|
|
|
|
|
|
Total |
|
$ |
156,109 |
|
|
$ |
50,446 |
|
|
|
|
|
|
|
|
7. DEBT OBLIGATIONS
The following table sets forth information regarding the Companys debt obligations outstanding at
September 30, 2008 and December 31, 2007 (in thousands):
17
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
September 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 |
|
|
69,148 |
|
|
|
70,124 |
|
|
|
5.78 |
%(a) |
|
Jul-09 |
200 Commerce Drive |
|
|
5,706 |
|
|
|
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. |
|
|
42,962 |
|
|
|
43,470 |
|
|
|
7.00 |
%(a) |
|
Dec-10 |
Four Tower Bridge |
|
|
10,403 |
|
|
|
10,518 |
|
|
|
6.62 |
% |
|
Feb-11 |
Arboretum I, II, III & V |
|
|
21,803 |
|
|
|
22,225 |
|
|
|
7.59 |
% |
|
Jul-11 |
Midlantic Drive/Lenox Drive/DCC I |
|
|
60,157 |
|
|
|
61,276 |
|
|
|
8.05 |
% |
|
Oct-11 |
Research Office Center |
|
|
40,980 |
|
|
|
41,527 |
|
|
|
5.30 |
%(a) |
|
Oct-11 |
Concord Airport Plaza |
|
|
36,862 |
|
|
|
37,570 |
|
|
|
5.55 |
%(a) |
|
Jan-12 |
Six Tower Bridge |
|
|
14,185 |
|
|
|
14,472 |
|
|
|
7.79 |
% |
|
Aug-12 |
Newtown Square/Berwyn Park/Libertyview |
|
|
61,233 |
|
|
|
62,125 |
|
|
|
7.25 |
% |
|
May-13 |
Coppell Associates |
|
|
3,336 |
|
|
|
3,512 |
|
|
|
6.89 |
% |
|
Dec-13 |
Southpoint III |
|
|
4,008 |
|
|
|
4,426 |
|
|
|
7.75 |
% |
|
Apr-14 |
Tysons Corner |
|
|
99,890 |
|
|
|
100,000 |
|
|
|
5.36 |
%(a) |
|
Aug-15 |
Coppell Associates |
|
|
16,600 |
|
|
|
16,600 |
|
|
|
5.75 |
% |
|
Feb-16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
487,273 |
|
|
|
601,833 |
|
|
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt premiums, net |
|
|
3,320 |
|
|
|
10,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
490,593 |
|
|
$ |
611,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNSECURED DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sweep Agreement Line |
|
|
|
|
|
|
10,727 |
|
|
Libor +1.60 |
% |
|
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 |
|
|
175,000 |
|
|
|
120,000 |
|
|
Libor + 0.725 |
5 |
|
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 |
|
|
2,538,110 |
|
|
|
2,492,337 |
|
|
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt discounts, net |
|
|
(2,855 |
) |
|
|
(3,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unsecured indebtedness |
|
$ |
2,535,255 |
|
|
$ |
2,489,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Obligations |
|
$ |
3,025,848 |
|
|
$ |
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 $95.5 million with net unamortized fixed-rate debt
premiums of $3.9 million for 1333 Broadway, 1 Kaiser Plaza and 1901 Harrison Street, as of
September 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 nine-month periods ended September 30, 2008 and 2007, the Companys weighted-average
effective interest rate on its mortgage notes payable was 6.41% and 6.75%, respectively.
During the nine-month period ended September 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. See Note 2
18
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
for the expected impact of FSP 14-1 on the gain on
early extinguishment of debt which will be applied on a retroactive basis beginning in 2009.
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 September 30, 2008, the Company
had $175.0 million of borrowings and $14.7 million of letters of credit outstanding under the
Credit Facility, leaving $410.3 million of unused availability. For the nine-month periods ended
September 30, 2008 and 2007, the weighted-
19
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
average interest rate on the Credit Facility, including
the effect of interest rate hedges, was 4.37% and 5.83%, respectively.
The Credit Facility requires the maintenance of ratios related to minimum net worth, debt-to-total
capitalization and fixed charge coverage and includes non-financial covenants.
In April 2007, the Company entered into a $20.0 million Sweep Agreement (the Sweep Agreement) to
be used for cash management purposes. Borrowings under the Sweep Agreement bear interest at
one-month LIBOR plus 0.75%. As of September 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 September 30, 2008, the Companys aggregate scheduled principal payments of debt obligations,
net of amortization of discounts and premiums, are as follows (in thousands):
|
|
|
|
|
2008 |
|
$ |
115,660 |
|
2009 |
|
|
353,226 |
|
2010 |
|
|
539,852 |
|
2011 |
|
|
620,755 |
|
2012 |
|
|
351,046 |
|
Thereafter |
|
|
1,044,844 |
|
|
|
|
|
Total principal payments |
|
|
3,025,383 |
|
Net unamortized premiums/discounts |
|
|
465 |
|
|
|
|
|
Outstanding indebtedness |
|
$ |
3,025,848 |
|
|
|
|
|
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.
20
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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 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 September 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 September 30, 2008. The notional amounts at September 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
September 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) |
|
$ |
75,000 |
(a) |
|
|
4.709 |
% |
|
|
9/20/07 |
|
|
|
10/18/10 |
|
|
$ |
(3,302 |
) |
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
4.415 |
% |
|
|
10/19/07 |
|
|
|
10/18/10 |
|
|
|
(621 |
) |
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
3.747 |
% |
|
|
11/26/07 |
|
|
|
10/18/10 |
|
|
|
(244 |
) |
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
3.338 |
% |
|
|
1/4/08 |
|
|
|
12/18/09 |
|
|
|
(78 |
) |
Forward Starting Swap |
|
Interest Rate |
|
Cash Flow (c) |
|
|
25,000 |
|
|
|
4.770 |
% |
|
|
1/4/08 |
|
|
|
12/18/19 |
|
|
|
(359 |
) |
Forward Starting Swap |
|
Interest Rate |
|
Cash Flow (c) |
|
|
25,000 |
|
|
|
4.423 |
% |
|
|
3/19/08 |
|
|
|
12/18/19 |
|
|
|
287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 nine-month periods ended September 30, 2008 or 2007.
9. DISCONTINUED OPERATIONS
For the three- and nine-month periods ended September 30, 2008, income from discontinued operations
relates to three properties that the Company sold during 2008 and six properties designated as held
for sale at September 30, 2008. At September 30, 2008, the Company determined that five Northern
California properties and one property in Richmond, VA, respectively, 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. The Northern California properties and the one Richmond, VA are two separate
disposal groups. Each disposal group is required to be measured at the lower of its estimated fair
value less costs to sell or its recorded amount. On June 27, 2008, the Company entered into a
binding purchase and sale agreement for the sale of the Northern California operations to a single
purchaser.
21
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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
for the five Northern California properties during the second quarter of 2008 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 sale closed on October 8, 2008.
The Company determined that no adjustment to the provision for impairment was necessary for the
third quarter of 2008.
The following table summarizes the revenue and expense information for properties classified as
discontinued operations in the three- and nine-month periods ended September 30, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Nine-month period |
|
|
|
ended September 30, 2008 |
|
|
ended September 30, 2008 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
12,373 |
|
|
$ |
39,491 |
|
Tenant reimbursements |
|
|
685 |
|
|
|
1,641 |
|
Termination fees |
|
|
|
|
|
|
25 |
|
Other |
|
|
42 |
|
|
|
195 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
13,100 |
|
|
|
41,352 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
4,898 |
|
|
|
14,398 |
|
Real estate taxes |
|
|
1,234 |
|
|
|
3,660 |
|
Depreciation and amortization |
|
|
586 |
|
|
|
9,550 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
6,718 |
|
|
|
27,608 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
6,382 |
|
|
|
13,744 |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
4 |
|
|
|
15 |
|
Interest expense |
|
|
(1,767 |
) |
|
|
(4,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before gain
on sale of interests in real estate and minority interest |
|
|
4,619 |
|
|
|
9,298 |
|
|
|
|
|
|
|
|
|
|
Net gain on sale of interests in real estate |
|
|
|
|
|
|
21,401 |
|
Provision for impairment |
|
|
|
|
|
|
(6,850 |
) |
Minority interest attributable to discontinued
operations LP units |
|
|
(167 |
) |
|
|
(944 |
) |
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
4,452 |
|
|
$ |
22,905 |
|
|
|
|
|
|
|
|
For the three- and nine-month periods ended September 30, 2007, income from discontinued operations
relates to the properties sold during 2008 and 2007 and the six properties designated as held for
sale at September 30, 2008. The following table summarizes the revenue and expense information for
the properties classified as discontinued operations in the three- and nine-month periods ended
September 30, 2007 (in thousands):
22
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Nine-month period |
|
|
|
ended September 30, 2007 |
|
|
ended September 30, 2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
13,812 |
|
|
$ |
55,090 |
|
Tenant reimbursements |
|
|
890 |
|
|
|
5,245 |
|
Termination fees |
|
|
|
|
|
|
58 |
|
Other |
|
|
70 |
|
|
|
334 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
14,772 |
|
|
|
60,727 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
5,456 |
|
|
|
20,563 |
|
Real estate taxes |
|
|
616 |
|
|
|
4,973 |
|
Depreciation and amortization |
|
|
4,640 |
|
|
|
19,069 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
10,712 |
|
|
|
44,605 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
4,060 |
|
|
|
16,122 |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
6 |
|
|
|
18 |
|
Interest expense |
|
|
(1,372 |
) |
|
|
(4,137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before gain
on sale of interests in real estate and minority interest |
|
|
2,694 |
|
|
|
12,003 |
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on sale of interests in real estate |
|
|
338 |
|
|
|
25,491 |
|
Minority interest partners share of consolidated
real estate venture |
|
|
|
|
|
|
|
|
Minority interest attributable to discontinued
operations LP units |
|
|
(130 |
) |
|
|
(1,603 |
) |
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
2,902 |
|
|
$ |
35,891 |
|
|
|
|
|
|
|
|
The following table summarizes the balance sheet information for the six properties identified as
held for sale at September 30, 2008 (in thousands):
|
|
|
|
|
Real Estate Investments: |
|
|
|
|
Operating property, development land and construction-in-progress |
|
$ |
466,924 |
|
Accumulated depreciation |
|
|
(37,004 |
) |
|
|
|
|
|
|
|
429,920 |
|
|
|
|
|
|
Other assets |
|
|
36,127 |
|
Provision for impairment |
|
|
(6,850 |
) |
|
|
|
|
Total Assets Held for Sale, net |
|
$ |
459,197 |
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable and other liabilities held for sale |
|
$ |
111,230 |
|
|
|
|
|
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 September 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 $65.5 million and
$84.0 million, respectively and the Company believes that the aggregate settlement value of these
interests was approximately $52.5 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 September 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
23
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
consolidated real estate ventures are variable interest
entities under FIN 46R of which the Company is the primary 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 nine- month period ended September 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 September 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 $7.7 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 September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Income (loss) from continuing operations |
|
$ |
(1,773 |
) |
|
$ |
(1,773 |
) |
|
$ |
(483 |
) |
|
$ |
(483 |
) |
Income allocated to Preferred Shares |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to common shareholders |
|
|
(3,771 |
) |
|
|
(3,771 |
) |
|
|
(2,481 |
) |
|
|
(2,481 |
) |
Income from discontinued operations |
|
|
4,452 |
|
|
|
4,452 |
|
|
|
2,902 |
|
|
|
2,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income allocated to common shareholders |
|
$ |
681 |
|
|
$ |
681 |
|
|
$ |
421 |
|
|
$ |
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
87,695,862 |
|
|
|
87,695,862 |
|
|
|
86,897,335 |
|
|
|
86,897,335 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
87,695,862 |
|
|
|
87,695,862 |
|
|
|
86,897,335 |
|
|
|
87,114,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.04 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
Discontinued operations |
|
|
0.05 |
|
|
|
0.05 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month periods ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Income (loss) from continuing operations |
|
$ |
3,886 |
|
|
$ |
3,886 |
|
|
$ |
(13,058 |
) |
|
$ |
(13,058 |
) |
Income allocated to Preferred Shares |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to common shareholders |
|
|
(2,108 |
) |
|
|
(2,108 |
) |
|
|
(19,052 |
) |
|
|
(19,052 |
) |
Income from discontinued operations |
|
|
22,905 |
|
|
|
22,905 |
|
|
|
35,891 |
|
|
|
35,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income allocated to common shareholders |
|
$ |
20,797 |
|
|
$ |
20,797 |
|
|
$ |
16,839 |
|
|
$ |
16,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
87,423,108 |
|
|
|
87,423,108 |
|
|
|
87,416,757 |
|
|
|
87,416,757 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
14,025 |
|
|
|
|
|
|
|
456,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
87,423,108 |
|
|
|
87,437,133 |
|
|
|
87,416,757 |
|
|
|
87,873,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.22 |
) |
Discontinued operations |
|
|
0.26 |
|
|
|
0.26 |
|
|
|
0.41 |
|
|
|
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.24 |
|
|
$ |
0.24 |
|
|
$ |
0.19 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities (including Class A Units of the Operating Partnership) totaling 3,276,662 and 3,939,284
as of September 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 September 17, 2008, the Company declared a distribution of $0.44 per Common Share, totaling
$38.8 million, which was paid on October 17, 2008 to shareholders of record as of October 3, 2008.
On September 17, 2008, the Company declared distributions on its Series C Preferred Shares and
Series D Preferred Shares to holders of record as of September 30, 2008. These shares are entitled
to a preferential return of 7.50% and 7.375%, respectively. Distributions paid on October 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 1.8 million shares during the nine-month period ended September 30, 2007
for an aggregate consideration of $59.4 million under its share repurchase program. As of
September 30, 2008, 0.9 million
25
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
shares remain in treasury. 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 September 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.
Rabbi Trust
The Company follows the provisions of EITF 97-14 Accounting for Deferred Compensation Arrangements
Where the Amounts Are Held in a Rabbi Trust and Invested regarding the accounting for the rabbi
trust. As a result, the assets of the rabbi trust are consolidated into its financial statements.
Shares held by the trust are classified in equity similar to the manner in which treasury shares
are accounted for. Subsequent changes in the fair value of the shares are not recognized. The
deferred compensation obligation is classified in equity and changes in fair value of the amount
owed to the participant are not recognized since the obligation must be settled by delivery of a
fixed number of shares. At September 30, 2008 and December 31, 2007, approximately 0.2 million
share awards were held in the rabbit trust.
12. SHARE BASED COMPENSATION
Stock Options
At September 30, 2008, the Company had 1,991,384 options outstanding under its shareholder approved
equity incentive plan. There were 1,778,081 options unvested as of September 30, 2008 and $1.2
million of unrecognized compensation expense associated with these options. For the nine-months
ended September 30, 2008, the Company recognized $0.2 million of compensation expense included in
general and administrative expense related to unvested options. Option activity as of September
30, 2008 and changes during the nine months ended September 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 |
|
|
|
9.28 |
|
|
|
(8,356 |
) |
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(903,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
|
1,991,384 |
|
|
$ |
20.75 |
|
|
|
8.70 |
|
|
$ |
(9,613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2008 |
|
|
213,303 |
|
|
$ |
21.93 |
|
|
|
1.90 |
|
|
$ |
(1,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2008 |
|
|
213,303 |
|
|
$ |
21.93 |
|
|
|
1.90 |
|
|
$ |
(1,258 |
) |
Restricted Share Awards
As of September 30, 2008, 514,402 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
514,402 restricted shares outstanding at September 30, 2008 was approximately $8.9 million. That
expense is expected to be recognized over a weighted average remaining vesting period of 3.0 years.
For the nine-month periods ended September 30, 2008 and 2007, the Company recognized $2.4 million
and $2.5 million of compensation expense included in general and administrative expense in the
respective period related to outstanding restricted shares. See Note 2 for the Companys
determination that restricted share awards previously classified as a liability will be accounted
for as equity classified awards starting in the three-months ended September 30, 2008.
26
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
The following table summarizes the Companys restricted share activity for the nine-months ended
September 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 |
|
|
(9,870 |
) |
|
|
26.77 |
|
|
|
|
|
|
|
|
Non-vested at September 30, 2008 |
|
|
514,402 |
|
|
$ |
25.89 |
|
|
|
|
|
|
|
|
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 nine- month period ended
September 30, 2008, the Company recognized $0.4 million and $1.1 million of compensation expense
related to the outperformance program.
For the three- and nine-month periods ended September 30, 2007, the Company recognized $0.2 million
and $1.0 million of compensation expenses related to the outperformance program.
Employee Share Purchase Plan
On May 9, 2007, the Companys shareholders approved the 2007 Non-Qualified Employee Share Purchase
Plan (the ESPP). The ESPP is intended to provide eligible employees with a convenient means to
purchase common shares of the Company through payroll deductions and voluntary cash purchases at an
amount equal to 85% of the average closing price per share for a specified period. 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 nine-month period ended September 30, 2008, employees made purchases of $0.5
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.
27
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
13. SEGMENT INFORMATION
As of September 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
September 30, 2008
Segment information related to continuing operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
California |
|
|
California |
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
/Delaware |
|
|
Virginia |
|
|
North |
|
|
South |
|
|
D.C. |
|
|
Southwest |
|
|
Corporate |
|
|
Total |
|
As of September 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,721,116 |
|
|
$ |
651,601 |
|
|
$ |
296,978 |
|
|
$ |
131,085 |
|
|
$ |
105,992 |
|
|
$ |
1,311,989 |
|
|
$ |
248,644 |
|
|
$ |
|
|
|
$ |
4,467,405 |
|
Development land and
construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353,904 |
|
|
|
353,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
59,646 |
|
|
$ |
28,586 |
|
|
$ |
9,400 |
|
|
$ |
4,565 |
|
|
$ |
2,735 |
|
|
$ |
35,019 |
|
|
$ |
9,339 |
|
|
$ |
(475 |
) |
|
$ |
148,815 |
|
Property operating expenses, real estate
taxes and third party management expenses |
|
|
21,124 |
|
|
|
15,010 |
|
|
|
3,177 |
|
|
|
1,247 |
|
|
|
1,119 |
|
|
|
12,704 |
|
|
|
3,983 |
|
|
|
(448 |
) |
|
|
57,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
38,522 |
|
|
$ |
13,576 |
|
|
$ |
6,223 |
|
|
$ |
3,318 |
|
|
$ |
1,616 |
|
|
$ |
22,315 |
|
|
$ |
5,356 |
|
|
$ |
(27 |
) |
|
$ |
90,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended September 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
74,992 |
|
|
$ |
28,496 |
|
|
$ |
8,815 |
|
|
$ |
4,775 |
|
|
$ |
3,266 |
|
|
$ |
33,657 |
|
|
$ |
9,184 |
|
|
$ |
(45 |
) |
|
$ |
163,140 |
|
Property operating expenses, real estate
taxes and third party management expenses |
|
|
26,917 |
|
|
|
14,763 |
|
|
|
2,973 |
|
|
|
1,796 |
|
|
|
1,503 |
|
|
|
12,118 |
|
|
|
3,600 |
|
|
|
(2,520 |
) |
|
|
61,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
48,075 |
|
|
$ |
13,733 |
|
|
$ |
5,842 |
|
|
$ |
2,979 |
|
|
$ |
1,763 |
|
|
$ |
21,539 |
|
|
$ |
5,584 |
|
|
$ |
2,475 |
|
|
$ |
101,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
California - |
|
|
California - |
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
/Delaware |
|
|
Virginia |
|
|
North |
|
|
South |
|
|
D.C. |
|
|
Southwest |
|
|
Corporate |
|
|
Total |
|
For the nine-months
ended September 30,
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
185,671 |
|
|
$ |
85,553 |
|
|
$ |
28,221 |
|
|
$ |
13,275 |
|
|
$ |
8,659 |
|
|
$ |
105,128 |
|
|
$ |
28,320 |
|
|
$ |
(1,467 |
) |
|
$ |
453,360 |
|
Property operating
expenses, real
estate taxes and
thrid party
management expenses |
|
|
66,664 |
|
|
|
40,581 |
|
|
|
9,510 |
|
|
|
5,234 |
|
|
|
3,531 |
|
|
|
38,318 |
|
|
|
12,693 |
|
|
|
(1,404 |
) |
|
|
175,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
119,007 |
|
|
$ |
44,972 |
|
|
$ |
18,711 |
|
|
$ |
8,041 |
|
|
$ |
5,128 |
|
|
$ |
66,810 |
|
|
$ |
15,627 |
|
|
$ |
(63 |
) |
|
$ |
278,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine-months
ended September 30,
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
206,148 |
|
|
$ |
85,305 |
|
|
$ |
22,303 |
|
|
$ |
11,753 |
|
|
$ |
9,913 |
|
|
$ |
100,851 |
|
|
$ |
28,245 |
|
|
$ |
(1,082 |
) |
|
$ |
463,436 |
|
Property operating
expenses, real
estate taxes and
third party
management expenses |
|
|
79,949 |
|
|
|
40,670 |
|
|
|
7,613 |
|
|
|
4,433 |
|
|
|
4,172 |
|
|
|
35,744 |
|
|
|
11,460 |
|
|
|
(7,340 |
) |
|
|
176,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
126,199 |
|
|
$ |
44,635 |
|
|
$ |
14,690 |
|
|
$ |
7,320 |
|
|
$ |
5,741 |
|
|
$ |
65,107 |
|
|
$ |
16,785 |
|
|
$ |
6,258 |
|
|
$ |
286,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 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 of the properties 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 |
|
|
Nine-month periods |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Consolidated net operating income |
|
$ |
90,899 |
|
|
$ |
101,990 |
|
|
$ |
278,233 |
|
|
$ |
286,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
221 |
|
|
|
1,054 |
|
|
|
603 |
|
|
|
3,432 |
|
Interest expense |
|
|
(35,039 |
) |
|
|
(39,496 |
) |
|
|
(106,846 |
) |
|
|
(117,892 |
) |
Deferred financing costs |
|
|
(1,092 |
) |
|
|
(1,058 |
) |
|
|
(3,798 |
) |
|
|
(3,381 |
) |
Depreciation and amortization |
|
|
(51,060 |
) |
|
|
(56,876 |
) |
|
|
(154,527 |
) |
|
|
(167,315 |
) |
General & administrative expenses |
|
|
(6,863 |
) |
|
|
(7,402 |
) |
|
|
(17,902 |
) |
|
|
(21,819 |
) |
Minority interest partners share of consolidated
real estate ventures |
|
|
(39 |
) |
|
|
5 |
|
|
|
(117 |
) |
|
|
(103 |
) |
Minority interest attributable to continuing
operations LP units |
|
|
141 |
|
|
|
116 |
|
|
|
84 |
|
|
|
843 |
|
Equity in income of real estate ventures |
|
|
1,059 |
|
|
|
763 |
|
|
|
3,838 |
|
|
|
6,021 |
|
Net (loss) gain on disposition of undepreciated real estate |
|
|
|
|
|
|
421 |
|
|
|
(24 |
) |
|
|
421 |
|
Gain on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
4,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(1,773 |
) |
|
|
(483 |
) |
|
|
3,886 |
|
|
|
(13,058 |
) |
Income from discontinued operations |
|
|
4,452 |
|
|
|
2,902 |
|
|
|
22,905 |
|
|
|
35,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,679 |
|
|
$ |
2,419 |
|
|
$ |
26,791 |
|
|
$ |
22,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 resolved the previously disclosed lawsuit in the
State of New Jersey that alleged personal injury as a result of the presence of mold and the case
has been dismissed. The Company was not required to make any out-of-pocket payment in connection
with the resolution of the aforesaid lawsuit.
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
September 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 September 30, 2008 are as follows (in
thousands):
|
|
|
|
|
2008 |
|
$ |
434 |
|
2009 |
|
|
1,986 |
|
2010 |
|
|
2,318 |
|
2011 |
|
|
2,318 |
|
2012 |
|
|
2,318 |
|
Thereafter |
|
|
292,037 |
|
Certain of the land leases provide for prepayment of rent on a present value basis using a fixed
discount rate. Further, two of the land leases for properties (one currently under development and
one operational) 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).
The Company is currently being audited by the Internal Revenue Service for its 2004 tax year. The
audit concerns the tax treatment of the transaction in
September 2004 in which the Company
acquired a portfolio of properties through the acquisition of a
limited partnership. At this time it does not appear that an adjustment would result in a material tax
liability for the Company. However, an adjustment could raise a
question as to whether a contributor of partnership interests in
the 2004 transaction could assert a claim against the Company under the tax protection agreement
entered into as part of the transaction.
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.
32
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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.
15. SUBSEQUENT EVENTS
On October 1, 2008, the Company sold Main Street Centre, a 0.4 million net rentable square feet
office property located in Richmond, Virginia, for a sales price of $48.8 million.
On October 8, 2008, the Company completed the sale of five office properties totaling 1.7 million
net rentable square feet located in Oakland, California, for an aggregate sales price of $412.5
million (including assumed debt).
33
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)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Real estate investments: |
|
|
|
|
|
|
|
|
Rental properties |
|
$ |
4,467,405 |
|
|
$ |
4,813,563 |
|
Accumulated depreciation |
|
|
(609,566 |
) |
|
|
(558,908 |
) |
|
|
|
|
|
|
|
Operating real estate investments, net |
|
|
3,857,839 |
|
|
|
4,254,655 |
|
Development land and construction-in-progress |
|
|
353,904 |
|
|
|
402,270 |
|
|
|
|
|
|
|
|
Total real estate invesmtents, net |
|
|
4,211,743 |
|
|
|
4,656,925 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
2,674 |
|
|
|
5,600 |
|
Accounts receivable, net |
|
|
8,018 |
|
|
|
17,057 |
|
Accrued rent receivable, net |
|
|
87,783 |
|
|
|
83,098 |
|
Asset held for sale, net |
|
|
459,197 |
|
|
|
|
|
Investment in real estate ventures, at equity |
|
|
71,036 |
|
|
|
71,598 |
|
Deferred costs, net |
|
|
83,133 |
|
|
|
87,123 |
|
Intangible assets, net |
|
|
156,109 |
|
|
|
218,149 |
|
Other assets |
|
|
73,584 |
|
|
|
74,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,153,277 |
|
|
$ |
5,214,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND BENEFICIARIES EQUITY |
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
490,593 |
|
|
$ |
611,898 |
|
Unsecured term loan |
|
|
183,000 |
|
|
|
150,000 |
|
Borrowing under credit facilities |
|
|
175,000 |
|
|
|
130,727 |
|
Unsecured senior notes, net of discounts |
|
|
2,177,255 |
|
|
|
2,208,344 |
|
Accounts payable and accrued expenses |
|
|
99,368 |
|
|
|
76,919 |
|
Distributions payable |
|
|
42,124 |
|
|
|
42,368 |
|
Tenant security deposits and deferred rents |
|
|
57,194 |
|
|
|
65,241 |
|
Acquired below market leases, net |
|
|
50,446 |
|
|
|
67,281 |
|
Other liabilities |
|
|
31,075 |
|
|
|
30,154 |
|
Mortgage notes payable and other liabilities held for sale |
|
|
111,230 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,417,285 |
|
|
|
3,382,932 |
|
|
|
|
|
|
|
|
|
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, 87,695,447 and 87,015,600 units issued and
outstanding in 2008 and 2007, respectively |
|
|
1,583,738 |
|
|
|
1,660,783 |
|
Accumulated other comprehensive loss |
|
|
(2,836 |
) |
|
|
(1,885 |
) |
|
|
|
|
|
|
|
Total partners equity |
|
|
1,684,352 |
|
|
|
1,762,348 |
|
|
|
|
|
|
|
|
Total liabilities, minority interest, and partners equity |
|
$ |
5,153,277 |
|
|
$ |
5,214,099 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
34
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods |
|
|
For the nine-month periods |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rents |
|
$ |
123,571 |
|
|
$ |
128,277 |
|
|
$ |
371,605 |
|
|
$ |
375,933 |
|
Tenant reimbursements |
|
|
19,732 |
|
|
|
20,525 |
|
|
|
59,676 |
|
|
|
59,255 |
|
Termination fees |
|
|
338 |
|
|
|
7,649 |
|
|
|
4,462 |
|
|
|
9,418 |
|
Third Party management fees, labor reimbursement and leasing |
|
|
4,390 |
|
|
|
4,415 |
|
|
|
15,239 |
|
|
|
14,119 |
|
Other |
|
|
784 |
|
|
|
2,274 |
|
|
|
2,378 |
|
|
|
4,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
148,815 |
|
|
|
163,140 |
|
|
|
453,360 |
|
|
|
463,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
40,978 |
|
|
|
43,410 |
|
|
|
122,531 |
|
|
|
124,316 |
|
Real estate taxes |
|
|
15,148 |
|
|
|
15,232 |
|
|
|
46,179 |
|
|
|
44,886 |
|
Third party management expenses |
|
|
1,790 |
|
|
|
2,508 |
|
|
|
6,417 |
|
|
|
7,499 |
|
Depreciation and amortization |
|
|
51,060 |
|
|
|
56,876 |
|
|
|
154,527 |
|
|
|
167,315 |
|
General & administrative expenses |
|
|
6,863 |
|
|
|
7,402 |
|
|
|
17,902 |
|
|
|
21,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
115,839 |
|
|
|
125,428 |
|
|
|
347,556 |
|
|
|
365,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
32,976 |
|
|
|
37,712 |
|
|
|
105,804 |
|
|
|
97,601 |
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
221 |
|
|
|
1,054 |
|
|
|
603 |
|
|
|
3,432 |
|
Interest expense |
|
|
(35,039 |
) |
|
|
(39,496 |
) |
|
|
(106,846 |
) |
|
|
(117,892 |
) |
Deferred financing costs |
|
|
(1,092 |
) |
|
|
(1,058 |
) |
|
|
(3,798 |
) |
|
|
(3,381 |
) |
Equity in income of real estate ventures |
|
|
1,059 |
|
|
|
763 |
|
|
|
3,838 |
|
|
|
6,021 |
|
Net gain (loss) on dispostion of undepreciated real estate |
|
|
|
|
|
|
421 |
|
|
|
(24 |
) |
|
|
421 |
|
Gain on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
4,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
(1,875 |
) |
|
|
(604 |
) |
|
|
3,919 |
|
|
|
(13,798 |
) |
Minority interest partners share of consolidated real estate ventures |
|
|
(39 |
) |
|
|
5 |
|
|
|
(117 |
) |
|
|
(103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(1,914 |
) |
|
|
(599 |
) |
|
|
3,802 |
|
|
|
(13,901 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
4,619 |
|
|
|
2,694 |
|
|
|
9,298 |
|
|
|
12,003 |
|
Net gain (loss) on disposition of discontinued operations |
|
|
|
|
|
|
338 |
|
|
|
21,401 |
|
|
|
25,491 |
|
Provision for impairment |
|
|
|
|
|
|
|
|
|
|
(6,850 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
4,619 |
|
|
|
3,032 |
|
|
|
23,849 |
|
|
|
37,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
2,705 |
|
|
|
2,433 |
|
|
|
27,651 |
|
|
|
23,593 |
|
Income allocated to Preferred Units |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to Common Partnership Units |
|
$ |
707 |
|
|
$ |
435 |
|
|
$ |
21,657 |
|
|
$ |
17,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.22 |
) |
Discontinued operations |
|
|
0.05 |
|
|
|
0.03 |
|
|
|
0.26 |
|
|
|
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.24 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.22 |
) |
Discontinued operations |
|
|
0.05 |
|
|
|
0.03 |
|
|
|
0.26 |
|
|
|
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.24 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average Common Partnership Unit |
|
|
90,972,553 |
|
|
|
90,772,197 |
|
|
|
90,943,815 |
|
|
|
91,334,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average Common Partnership Unit |
|
|
90,972,553 |
|
|
|
90,989,460 |
|
|
|
90,957,841 |
|
|
|
91,800,082 |
|
The accompanying notes are an integral part of these consolidated financial statements.
35
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods |
|
|
For the nine-month periods |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
2,705 |
|
|
$ |
2,433 |
|
|
$ |
27,651 |
|
|
$ |
23,593 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative financial instruments |
|
|
(1,664 |
) |
|
|
(461 |
) |
|
|
(1,138 |
) |
|
|
(883 |
) |
Settlement of forward starting swaps |
|
|
|
|
|
|
(3,860 |
) |
|
|
|
|
|
|
(3,860 |
) |
Settlement of forward starting swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,148 |
|
Reclassification of realized (gains)/losses on derivative financial
instruments to operations, net |
|
|
(20 |
) |
|
|
171 |
|
|
|
(60 |
) |
|
|
(214 |
) |
Unrealized gain (loss) on available-for-sale securities |
|
|
|
|
|
|
(37 |
) |
|
|
248 |
|
|
|
(632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(1,684 |
) |
|
|
(4,187 |
) |
|
|
(950 |
) |
|
|
(4,441 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
1,021 |
|
|
$ |
(1,754 |
) |
|
$ |
26,701 |
|
|
$ |
19,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
36
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine-month periods |
|
|
|
ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
27,651 |
|
|
$ |
23,593 |
|
Adjustments to reconcile net income (loss) to net cash from
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
120,185 |
|
|
|
135,354 |
|
Amortization: |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
3,799 |
|
|
|
3,381 |
|
Deferred leasing costs |
|
|
12,306 |
|
|
|
11,570 |
|
Acquired above (below) market leases, net |
|
|
(6,493 |
) |
|
|
(9,311 |
) |
Acquired lease intangibles |
|
|
31,589 |
|
|
|
39,463 |
|
Deferred compensation costs |
|
|
3,952 |
|
|
|
3,590 |
|
Straight-line rent |
|
|
(13,730 |
) |
|
|
(20,260 |
) |
Provision for doubtful accounts |
|
|
3,150 |
|
|
|
1,000 |
|
Provision for impairment |
|
|
6,850 |
|
|
|
|
|
Real estate venture income in excess of distributions |
|
|
(569 |
) |
|
|
(20 |
) |
Net gain on sale of interests in real estate |
|
|
(21,377 |
) |
|
|
(25,912 |
) |
Gain on early extinguishment of debt |
|
|
(4,342 |
) |
|
|
|
|
Minority interest income |
|
|
117 |
|
|
|
103 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
7,046 |
|
|
|
4,607 |
|
Other assets |
|
|
(7,145 |
) |
|
|
(5,812 |
) |
Accounts payable and accrued expenses |
|
|
24,497 |
|
|
|
27,449 |
|
Tenant security deposits and deferred rents |
|
|
(4,851 |
) |
|
|
5,989 |
|
Other liabilities |
|
|
(3,592 |
) |
|
|
(5,346 |
) |
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
179,043 |
|
|
|
189,438 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of properties |
|
|
|
|
|
|
(88,890 |
) |
Acquisition of minority interest partners share of consolidated real estate venture |
|
|
|
|
|
|
(63,732 |
) |
Sales of properties, net |
|
|
53,601 |
|
|
|
234,428 |
|
Capital expenditures |
|
|
(130,410 |
) |
|
|
(194,009 |
) |
Investment in unconsolidated real estate ventures |
|
|
(853 |
) |
|
|
(809 |
) |
Cash distributions from unconsolidated real estate ventures
in excess of equity in income |
|
|
1,984 |
|
|
|
2,917 |
|
Leasing costs |
|
|
(7,302 |
) |
|
|
(13,854 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(82,980 |
) |
|
|
(123,949 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
302,000 |
|
|
|
886,539 |
|
Repayments of Credit Facility borrowings |
|
|
(257,727 |
) |
|
|
(503,875 |
) |
Repayments of mortgage notes payable |
|
|
(21,946 |
) |
|
|
(266,280 |
) |
Proceeds
from term loan |
|
|
33,000 |
|
|
|
|
|
Proceeds from unsecured notes |
|
|
|
|
|
|
299,784 |
|
Repayments and repurchase of unsecured notes |
|
|
(27,158 |
) |
|
|
(299,866 |
) |
Settlement of forward starting swaps |
|
|
|
|
|
|
(2,712 |
) |
Debt financing costs |
|
|
(273 |
) |
|
|
(3,822 |
) |
Exercise of stock options |
|
|
|
|
|
|
6,278 |
|
Repurchases of Common Partnership Units |
|
|
|
|
|
|
(59,426 |
) |
Distributions paid to preferred and common partnership unitholders |
|
|
(126,885 |
) |
|
|
(129,827 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(98,989 |
) |
|
|
(73,207 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(2,926 |
) |
|
|
(7,718 |
) |
Cash and cash equivalents at beginning of period |
|
|
5,600 |
|
|
|
25,379 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,674 |
|
|
$ |
17,661 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest |
|
$ |
110,121 |
|
|
$ |
118,766 |
|
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.
37
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2008, the Partnership owned 211 office properties, 22 industrial facilities and
one mixed-use property (collectively, the Properties) containing an aggregate of approximately
23.0 million net rentable square feet. The Partnership also had five properties under development
and six properties under redevelopment containing an aggregate 3.1 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 September 30, 2008, the
Partnership owned three office properties, one property under redevelopment, one property under
development, located in Oakland, CA and one office property in Richmond, VA totaling approximately
2.1 million net rentable square feet, that were all designated as held for sale assets. Therefore,
As of September 30, 2008, the Partnership owned and consolidated 254 properties containing an
aggregate of 28.6 million net rentable square feet. As of September 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 September 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 September 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 September 30, 2008, the results of its operations
for the three- and nine-month periods ended September 30, 2008 and 2007 and its cash flows for the
nine-month periods ended September 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 notes 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 nine-months ended September 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 (the tax withholding
awards) in accordance with FASB Statement No. 123(R), Share-Based Payment, and its predecessors.
When an award is
38
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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 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 nine-months ended September 30, 2008,
and therefore, has not recorded a single period cumulative adjustment.
During the quarter ended September 30, 2008, the Partnership determined that it would correct the
presentation of certain amounts included in accounts payable and accrued expenses to additional
paid in capital (Reclassification adjustment). This change is also pursuant to FAS 123 (R), as
amounts recognized as expense in connection with the Partnerships share based awards which are
equity classified (see Note 12) should be included in additional paid in capital prior to vesting
of such awards. The awards subject to this adjustment are the Outperformance Plan shares and
certain other restricted share awards. Previously, the Partnership had incorrectly included the
amortization of these share based awards in accounts payable and accrued expenses and transferred
the amount to additional-paid-in-capital in the periods that the awards vested. Liability
classified awards as described in the previous paragraph were not part of the reclassification
adjustment. Stock option awards were already historically classified in
additional-paid-in-capital. The Reclassification adjustment is not considered material to the
prior financial statements but the adjustment to prior periods provides for a more meaningful
presentation.
Accordingly, in accordance with SAB No. 108, the December 31, 2007 balance sheet herein has been
revised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Withholding |
|
Reclassification |
|
|
|
|
As Reported |
|
Adjustment |
|
Adjustment |
|
As Revised |
Accounts payable and accrued expenses |
|
$ |
80,732 |
|
|
$ |
(568 |
) |
|
$ |
(3,245 |
) |
|
$ |
76,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation payable in common
partnership units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common partnership units in grantor trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Partnership Capital |
|
$ |
1,656,970 |
|
|
$ |
568 |
|
|
$ |
3,245 |
|
|
$ |
1,660,783 |
|
The tax withholding adjustment above is 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 $(0.1) million decrease
for the three-months ended September 30, 2007 and a $0.1 million increase for the nine-month ended
September 30, 2007.
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 Partnership 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 and on July 28,
2008, such awards were accounted for as equity classified awards.
39
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
The Partnership will make corresponding adjustments as described above to other prior periods as
appropriate the next time those financial statements are filed.
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 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,
capitalization of internal costs 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
40
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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 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 $1.7 and $11.6 million for the three- and nine-month periods ended
September 30, 2008 and approximately $4.8 million and $17.4 million for the three- and nine-month
periods ended September 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. This increased revenue by $0.7 million and $2.1 million for the three-
and nine-month periods ended September 30, 2008 and $0.7 million and $2.8 million for the three-
and nine-month periods ended September 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 or to the
extent the tenant has a lease on a triple net basis. Termination fees, third party management
fees, labor reimbursement and leasing income are recorded when earned.
41
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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
September 30, 2008, 3.0 million common shares remained available for future awards under the 1997
Plan. Through September 30, 2008, all options awarded under the 1997 Plan 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 $1.3 million and $4.0 million during
the three- and nine-month periods ended September 30, 2008 and $0.9 million and $3.6 million during
the three- and nine-month periods ended September 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 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 nine-month periods ended September 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.
42
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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 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.
43
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
September 30, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
774 |
|
|
$ |
774 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
4,066 |
|
|
$ |
|
|
|
$ |
4,066 |
|
|
$ |
|
|
Forward Starting Interest Rate Swaps |
|
|
71 |
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,137 |
|
|
$ |
|
|
|
$ |
4,137 |
|
|
$ |
|
|
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 |
|
|
|
|
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
44
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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 (i.e. through the first optional redemption date). The provisions of FSP APB 14-1 will
be applied retrospectively to all periods presented for fiscal years beginning after December 31,
2008 and early adoption is not permitted. 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. The Partnership has
estimated that the application of FSP APB 14-1 will result in an aggregate of approximately $0.06
per share (net of incremental capitalized interest) of additional non-cash interest expense
retroactively applied for fiscal 2008. Excluding the impact of capitalized interest, the
additional non-cash interest expense will be approximately $0.07 per share for fiscal 2008, and
this amount (before netting) will increase in subsequent reporting periods through the first
optional redemption dates as the debt accretes to its par value over the same period. The
application of FSP APB 14-1 will also require the Partnership to reduce the amount of gain
recognized in the nine-months ended September 30, 2008 on extinguishment of debt by approximately
$0.02.
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 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. The Partnership is currently
assessing the potential impact that the adoption of SFAS 160 will have on its financial position
and results of operations.
45
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
3. REAL ESTATE INVESTMENTS
As of September 30, 2008 and December 31, 2007 the gross carrying value of the Partnerships
operating properties was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Land |
|
$ |
677,175 |
|
|
$ |
727,979 |
|
Building and improvements |
|
|
3,385,932 |
|
|
|
3,672,638 |
|
Tenant improvements |
|
|
404,298 |
|
|
|
412,946 |
|
|
|
|
|
|
|
|
|
|
$ |
4,467,405 |
|
|
$ |
4,813,563 |
|
|
|
|
|
|
|
|
2008 Dispositions
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.
The sales price above does not include transaction costs for respective sales.
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of September 30, 2008, the Partnership had an aggregate investment of approximately $71.0
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 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 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.
46
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
The following is a summary of the financial position of the Real Estate Ventures As of September
30, 2008 and December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2008 |
|
2007 |
Operating property, net of accumulated depreciation |
|
$ |
598,726 |
|
|
$ |
587,537 |
|
Other assets |
|
|
102,372 |
|
|
|
113,268 |
|
Liabilities |
|
|
38,259 |
|
|
|
41,459 |
|
Debt |
|
|
545,236 |
|
|
|
538,766 |
|
Equity |
|
|
117,603 |
|
|
|
120,581 |
|
Partnerships share of equity (Partnerships basis) |
|
|
71,036 |
|
|
|
71,598 |
|
The following is a summary of results of operations of the Real Estate Ventures for the three- and
nine-month periods ended September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
Nine-month periods |
|
|
ended September 30, |
|
ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Revenue |
|
$ |
27,358 |
|
|
$ |
19,374 |
|
|
$ |
80,254 |
|
|
$ |
56,674 |
|
Operating expenses |
|
|
10,931 |
|
|
|
6,793 |
|
|
|
28,727 |
|
|
|
19,733 |
|
Interest expense, net |
|
|
8,042 |
|
|
|
5,421 |
|
|
|
23,795 |
|
|
|
16,069 |
|
Depreciation and amortization |
|
|
9,794 |
|
|
|
3,970 |
|
|
|
28,418 |
|
|
|
11,974 |
|
Net (loss) income |
|
|
(1,409 |
) |
|
|
3,191 |
|
|
|
(687 |
) |
|
|
8,898 |
|
Partnerships share of income (Partnership basis) |
|
|
1,059 |
|
|
|
763 |
|
|
|
3,838 |
|
|
|
2,149 |
|
Equity in income of real estate ventures in the Partnerships consolidated statement of operations
for the nine- months ended September 30, 2007 includes a $3.9 million distribution on account of a
residual profits interest that is not included in the table above.
As of September 30, 2008, the Partnership had guaranteed repayment of approximately $1.8 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 September 30, 2008 and December 31, 2007, the Partnerships deferred costs were comprised of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
104,296 |
|
|
$ |
(36,941 |
) |
|
$ |
67,355 |
|
Financing Costs |
|
|
27,170 |
|
|
|
(11,392 |
) |
|
|
15,778 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
131,466 |
|
|
$ |
(48,333 |
) |
|
$ |
83,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
47
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
6. INTANGIBLE ASSETS
As of September 30, 2008 and December 31, 2007, the Companys intangible assets were comprised of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Total Cost |
|
|
Amortization |
|
|
Deferred Costs, net |
|
In-place lease value |
|
$ |
146,943 |
|
|
$ |
(66,714 |
) |
|
$ |
80,229 |
|
Tenant relationship value |
|
|
103,709 |
|
|
|
(37,765 |
) |
|
|
65,944 |
|
Above market leases acquired |
|
|
23,489 |
|
|
|
(13,553 |
) |
|
|
9,936 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
274,141 |
|
|
$ |
(118,032 |
) |
|
$ |
156,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
83,566 |
|
|
$ |
(33,120 |
) |
|
$ |
50,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 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 |
|
$ |
10,082 |
|
|
$ |
2,809 |
|
2009 |
|
|
36,882 |
|
|
|
10,175 |
|
2010 |
|
|
30,260 |
|
|
|
8,416 |
|
2011 |
|
|
23,277 |
|
|
|
7,086 |
|
2012 |
|
|
17,798 |
|
|
|
6,336 |
|
Thereafter |
|
|
37,810 |
|
|
|
15,624 |
|
|
|
|
|
|
|
|
Total |
|
$ |
156,109 |
|
|
$ |
50,446 |
|
|
|
|
|
|
|
|
48
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
7. DEBT OBLIGATIONS
The following table sets forth information regarding the Partnerships debt obligations outstanding
at September 30, 2008 and December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
September 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 |
|
|
69,148 |
|
|
|
70,124 |
|
|
|
5.78% |
(a) |
|
Jul-09 |
200 Commerce Drive |
|
|
5,706 |
|
|
|
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. |
|
|
42,962 |
|
|
|
43,470 |
|
|
|
7.00% |
(a) |
|
Dec-10 |
Four Tower Bridge |
|
|
10,403 |
|
|
|
10,518 |
|
|
|
6.62% |
|
|
Feb-11 |
Arboretum I, II, III & V |
|
|
21,803 |
|
|
|
22,225 |
|
|
|
7.59% |
|
|
Jul-11 |
Midlantic Drive/Lenox Drive/DCC I |
|
|
60,157 |
|
|
|
61,276 |
|
|
|
8.05% |
|
|
Oct-11 |
Research Office Center |
|
|
40,980 |
|
|
|
41,527 |
|
|
|
5.30% |
(a) |
|
Oct-11 |
Concord Airport Plaza |
|
|
36,862 |
|
|
|
37,570 |
|
|
|
5.55% |
(a) |
|
Jan-12 |
Six Tower Bridge |
|
|
14,185 |
|
|
|
14,472 |
|
|
|
7.79% |
|
|
Aug-12 |
Newtown Square/Berwyn Park/Libertyview |
|
|
61,233 |
|
|
|
62,125 |
|
|
|
7.25% |
|
|
May-13 |
Coppell Associates |
|
|
3,336 |
|
|
|
3,512 |
|
|
|
6.89% |
|
|
Dec-13 |
Southpoint III |
|
|
4,008 |
|
|
|
4,426 |
|
|
|
7.75% |
|
|
Apr-14 |
Tysons Corner |
|
|
99,890 |
|
|
|
100,000 |
|
|
|
5.36% |
(a) |
|
Aug-15 |
Coppell Associates |
|
|
16,600 |
|
|
|
16,600 |
|
|
|
5.75% |
|
|
Feb-16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
487,273 |
|
|
|
601,833 |
|
|
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt premiums, net |
|
|
3,320 |
|
|
|
10,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
490,593 |
|
|
$ |
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 |
|
|
175,000 |
|
|
|
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 |
|
|
2,538,110 |
|
|
|
2,492,337 |
|
|
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt discounts, net |
|
|
(2,855 |
) |
|
|
(3,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unsecured indebtedness |
|
$ |
2,535,255 |
|
|
$ |
2,489,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Obligations |
|
$ |
3,025,848 |
|
|
$ |
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 $95.5 million with net unamortized fixed-rate debt
premiums of $3.9 million for 1333 Broadway, 1 Kaiser Plaza and 1901 Harrison Street, As of
September 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 nine-month periods ended September 30, 2008 and 2007, the Partnerships weighted-average
effective interest rate on its mortgage notes payable was 6.41% and 6.75%, respectively.
49
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
During the nine-month period ended September 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. See Note 2 for the expected impact of FSP 14-1 on the gain on early extinguishment
of debt which will be applied on a retroactive basis beginning in 2009.
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 ability to
acquire additional commitments from its existing lenders or new lenders. As of September 30, 2008,
the
50
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
Partnership had $175.0 million of borrowings and $12.7 million of letters of credit outstanding
under the Credit Facility, leaving $410.3 million of unused availability. For the nine-month
periods ended September 30, 2008 and 2007, the weighted-average interest rate on the Credit
Facility, including the effect of interest rate hedges, was 4.37% and 5.83%, 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 September 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 September 30, 2008, the Partnerships aggregate scheduled principal payments of debt
obligations, net of amortization of discounts and premiums, are as follows (in thousands):
|
|
|
|
|
2008 |
|
$ |
115,660 |
|
2009 |
|
|
353,226 |
|
2010 |
|
|
539,852 |
|
2011 |
|
|
620,755 |
|
2012 |
|
|
351,046 |
|
Thereafter |
|
|
1,044,844 |
|
|
|
|
|
Total principal payments |
|
|
3,025,383 |
|
Net unamortized premiums/discounts |
|
|
465 |
|
|
|
|
|
Outstanding indebtedness |
|
$ |
3,025,848 |
|
|
|
|
|
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
September 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 September
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 September 30, 2008. The notional amounts at September 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
September 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) |
$ |
75,000 |
(a) |
|
|
4.709 |
% |
|
|
9/20/07 |
|
|
|
10/18/10 |
|
|
$ |
(3,302 |
) |
Swap |
|
Interest Rate |
|
Cash Flow |
(b) |
|
25,000 |
|
|
|
4.415 |
% |
|
|
10/19/07 |
|
|
|
10/18/10 |
|
|
|
(621 |
) |
Swap |
|
Interest Rate |
|
Cash Flow |
(b) |
|
25,000 |
|
|
|
3.747 |
% |
|
|
11/26/07 |
|
|
|
10/18/10 |
|
|
|
(244 |
) |
Swap |
|
Interest Rate |
|
Cash Flow |
(b) |
|
25,000 |
|
|
|
3.338 |
% |
|
|
1/4/08 |
|
|
|
12/18/09 |
|
|
|
(78 |
) |
Forward Starting Swap |
|
Interest Rate |
|
Cash Flow |
(c) |
|
25,000 |
|
|
|
4.770 |
% |
|
|
1/4/08 |
|
|
|
12/18/19 |
|
|
|
(359 |
) |
Forward Starting Swap |
|
Interest Rate |
|
Cash Flow |
(c) |
|
25,000 |
|
|
|
4.423 |
% |
|
|
3/19/08 |
|
|
|
12/18/19 |
|
|
|
287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
nine-month periods ended September 30, 2008 or 2007.
52
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
9. DISCONTINUED OPERATIONS
For the three- and nine-month periods ended September 30, 2008, income from discontinued operations
relates to three properties that the Partnership sold during 2008 and six properties designated as
held for sale at September 30, 2008. At September 30, 2008, the Partnership determined that five
Northern California properties and one property in Richmond, VA, respectively, 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. The Northern California properties and the one property in Richmond, VA are
two separate disposal groups. Each of the disposal group is required to be measured at the lower
of its estimated fair value less costs to sell or its recorded amount. On June 27, 2008, the
Partnership entered into a binding purchase and sale agreement for the sale of the Northern
California operations to a single purchaser. In connection with the reclassification of the
related assets and liabilities from assets held in use to held for sale, the Partnership recorded a
$6.85 million provision for impairment for the five Northern California properties during the
second quarter of 2008 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 sale closed on October 8, 2008. The Partnership determined that no adjustment to
the provision for impairment was necessary for the third quarter of 2008.
The following table summarizes the revenue and expense information for properties classified as
discontinued operations in the three- and nine-month periods ended September 30, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Nine-month period |
|
|
|
ended September 30, 2008 |
|
|
ended September 30, 2008 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
12,373 |
|
|
$ |
39,491 |
|
Tenant reimbursements |
|
|
685 |
|
|
|
1,641 |
|
Termination fees |
|
|
|
|
|
|
25 |
|
Other |
|
|
42 |
|
|
|
195 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
13,100 |
|
|
|
41,352 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
4,898 |
|
|
|
14,398 |
|
Real estate taxes |
|
|
1,234 |
|
|
|
3,660 |
|
Depreciation and amortization |
|
|
586 |
|
|
|
9,550 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
6,718 |
|
|
|
27,608 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
6,382 |
|
|
|
13,744 |
|
Interest income |
|
|
4 |
|
|
|
15 |
|
Interest expense |
|
|
(1,767 |
) |
|
|
(4,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before gain on
sale of interests in real estate and minority interest |
|
|
4,619 |
|
|
|
9,298 |
|
|
|
|
|
|
|
|
|
|
Net gain on sale of interests in real estate |
|
|
|
|
|
|
21,401 |
|
Provision for impairment |
|
|
|
|
|
|
(6,850 |
) |
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
4,619 |
|
|
$ |
23,849 |
|
|
|
|
|
|
|
|
For the three- and nine-month periods ended September 30, 2007, income from discontinued operations
relates to the properties sold during 2008 and 2007 and the six properties designated as held for
sale at September 30, 2008. The following table summarizes the revenue and expense information for
the properties classified as discontinued operations in the three- and nine-month periods ended
September 30, 2007 (in thousands):
53
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Nine-month period |
|
|
|
ended September 30, 2007 |
|
|
ended September 30, 2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
13,812 |
|
|
$ |
55,090 |
|
Tenant reimbursements |
|
|
890 |
|
|
|
5,245 |
|
Termination fees |
|
|
|
|
|
|
58 |
|
Other |
|
|
70 |
|
|
|
334 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
14,772 |
|
|
|
60,727 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
5,456 |
|
|
|
20,563 |
|
Real estate taxes |
|
|
616 |
|
|
|
4,973 |
|
Depreciation and amortization |
|
|
4,640 |
|
|
|
19,069 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
10,712 |
|
|
|
44,605 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
4,060 |
|
|
|
16,122 |
|
Interest income |
|
|
6 |
|
|
|
18 |
|
Interest expense |
|
|
(1,372 |
) |
|
|
(4,137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before (loss) gain
on sale of interests in real estate and minority interest |
|
|
2,694 |
|
|
|
12,003 |
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on sale of interests in real estate |
|
|
338 |
|
|
|
25,491 |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
3,032 |
|
|
$ |
37,494 |
|
|
|
|
|
|
|
|
The following table summarizes the balance sheet information for the five properties identified as
held for sale at September 30, 2008 (in thousands):
|
|
|
|
|
Real Estate Investments: |
|
|
|
|
Operating property, development land and construction-in-progress |
|
$ |
466,924 |
|
Accumulated depreciation |
|
|
(37,004 |
) |
|
|
|
|
|
|
|
429,920 |
|
|
|
|
|
|
Other assets |
|
|
36,127 |
|
Provision for impairment |
|
|
(6,850 |
) |
|
|
|
|
Total Assets Held for Sale, net |
|
$ |
459,197 |
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable and other liabilities held for sale |
|
$ |
111,230 |
|
|
|
|
|
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 September 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.
On March 1, 2007, 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 September 30, 2008 and December 31, 2007, the aggregate book value of these
minority interests in the accompanying consolidated
54
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
balance sheet was $0 and the Company believes
that the aggregate settlement value of these interests was approximately $7.7 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 September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Income (loss) from continuing operations |
|
$ |
(1,914 |
) |
|
$ |
(1,914 |
) |
|
$ |
(599 |
) |
|
$ |
(599 |
) |
Income allocated to Preferred Units |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income afrom continuing operations available to
common unitholders |
|
|
(3,912 |
) |
|
|
(3,912 |
) |
|
|
(2,597 |
) |
|
|
(2,597 |
) |
Income from discontinued operations |
|
|
4,619 |
|
|
|
4,619 |
|
|
|
3,032 |
|
|
|
3,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders |
|
$ |
707 |
|
|
$ |
707 |
|
|
$ |
435 |
|
|
$ |
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common partnership units outstanding |
|
|
90,972,553 |
|
|
|
90,972,553 |
|
|
|
90,772,197 |
|
|
|
90,772,197 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average partnership units outstanding |
|
|
90,972,553 |
|
|
|
90,972,553 |
|
|
|
90,772,197 |
|
|
|
90,989,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.04 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
Discontinued operations |
|
|
0.05 |
|
|
|
0.05 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month periods ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Income (loss) from continuing operations |
|
$ |
3,802 |
|
|
$ |
3,802 |
|
|
$ |
(13,901 |
) |
|
$ |
(13,901 |
) |
Income allocated to Preferred Units |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to common unitholders |
|
|
(2,192 |
) |
|
|
(2,192 |
) |
|
|
(19,895 |
) |
|
|
(19,895 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
23,849 |
|
|
|
23,849 |
|
|
|
37,494 |
|
|
|
37,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders |
|
$ |
21,657 |
|
|
$ |
21,657 |
|
|
$ |
17,599 |
|
|
$ |
17,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common partnership units outstanding |
|
|
90,943,815 |
|
|
|
90,943,815 |
|
|
|
91,334,438 |
|
|
|
91,334,438 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
14,026 |
|
|
|
|
|
|
|
465,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average partnership units outstanding |
|
|
90,943,815 |
|
|
|
90,957,841 |
|
|
|
91,334,438 |
|
|
|
91,800,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.22 |
) |
Discontinued operations |
|
|
0.26 |
|
|
|
0.26 |
|
|
|
0.41 |
|
|
|
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.24 |
|
|
$ |
0.24 |
|
|
$ |
0.19 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Partnership Unit and Preferred Mirror Units
On September 17, 2008, the Partnership declared a $0.44 per unit cash distribution to holders of
Class A Units totaling $1.4 million.
On September 17, 2008, the Partnership declared a distribution of $0.44 per Common Partnership
Unit, totaling $38.8 million, which was paid on October 17, 2008 to unitholders of record as of
October 3, 2008. On September 17, 2008, the Partnership declared distributions on its Series D
Preferred Mirror Units and Series E Preferred Mirror Units to holders of record As of September 30,
2008. These units are entitled to a preferential return of 7.50% and 7.375%, respectively.
Distributions paid on October 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 Partnership repurchased 1.8 million shares during the nine-month period ended September 30,
2007 for an aggregate consideration of $59.4 million under its share repurchase program. As of
September 30, 2008, 0.9 million shares remain held in treasury. Additionally, 0.2 million of these
shares were repurchased as part of the Partnerships 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 September 30, 2008, the
Partnership 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 Partnership to repurchase
any shares. The Partnership may discontinue the program at any time.
Rabbi Trust
The Partnership follows the provisions of EITF 97-14 Accounting for Deferred Compensation
Arrangements Where the Amounts Are Held in a Rabbi Trust and Invested regarding the accounting for
the rabbi trust. As a result, the assets of the rabbi trust are consolidated into its financial
statements. Shares held by the trust are classified in equity
similar to the manner in which treasury shares are accounted for. Subsequent changes in the fair
value of the shares are not recognized. The deferred compensation obligation is classified in
equity and changes in fair value of the amount owed to the participant are not recognized since the
obligation must be settled by delivery of a fixed number of shares. At September 30, 2008 and
December 31, 2007, approximately 0.2 million share awards were held in the rabbit trust.
56
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
12. SHARE BASED COMPENSATION
Stock Options
At September 30, 2008, the Partnership had 1,991,384 options outstanding under its shareholder
approved equity incentive plan. There were 1,778,081 options unvested as of September 30, 2008 and
$1.2 million of unrecognized compensation expense associated with these options. For the
nine-months ended September 30, 2008, the Partnership recognized $0.2 million of compensation
expense included in general and administrative expense related to unvested options. Option
activity as of September 30, 2008 and changes during the nine-months ended September 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 |
|
|
|
9.28 |
|
|
|
(8,356 |
) |
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(903,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
|
1,991,384 |
|
|
$ |
20.75 |
|
|
|
8.70 |
|
|
$ |
(9,613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2008 |
|
|
213,303 |
|
|
$ |
21.93 |
|
|
|
1.90 |
|
|
$ |
(1,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2008 |
|
|
213,303 |
|
|
$ |
21.93 |
|
|
|
1.90 |
|
|
$ |
(1,258 |
) |
Restricted Share Awards
As of September 30, 2008, 514,402 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
514,402 restricted shares outstanding at September 30, 2008 was approximately $8.9 million. That
expense is expected to be recognized over a weighted average remaining vesting period of 3.0 years.
For the nine-month periods ended September 30, 2008 and 2007, the Partnership recognized $2.4
million and $2.5 million of compensation expense included in general and administrative expense in
each period related to outstanding restricted shares. See Note 2 for the Partnerships
determination that restricted share awards previously classified as a liability will be accounted
for as equity classified awards starting the three-months ended September 30, 2008. The following
table summarizes the Partnerships restricted share activity for the nine-month ended September 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 |
|
|
(9,870 |
) |
|
|
26.77 |
|
|
|
|
|
|
|
|
Non-vested at September 30, 2008 |
|
|
514,402 |
|
|
$ |
25.89 |
|
|
|
|
|
|
|
|
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
57
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
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
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 nine- month period ended
September 30, 2008, the Partnership recognized $0.4 million and $1.1 million of compensation
expense related to the outperformance program.
For the three- and nine-month periods ended September 30, 2007, the Partnership recognized
$0.2 million and $1.0 million of compensation expenses 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 nine-month period ended September 30, 2008, employees made
purchases of $0.5 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 September 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
September 30, 2008
Segment information related to continuing operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
California - |
|
|
California - |
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
/Delaware |
|
|
Virginia |
|
|
North |
|
|
South |
|
|
D.C. |
|
|
Southwest |
|
|
Corporate |
|
|
Total |
|
As of September 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,721,116 |
|
|
$ |
651,601 |
|
|
$ |
296,978 |
|
|
$ |
131,085 |
|
|
$ |
105,992 |
|
|
$ |
1,311,989 |
|
|
$ |
248,644 |
|
|
$ |
|
|
|
$ |
4,467,405 |
|
Development land and
construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353,904 |
|
|
|
353,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
59,646 |
|
|
$ |
28,586 |
|
|
$ |
9,400 |
|
|
$ |
4,565 |
|
|
$ |
2,735 |
|
|
$ |
35,019 |
|
|
$ |
9,339 |
|
|
$ |
(475 |
) |
|
$ |
148,815 |
|
Property operating expenses,
real estate taxes and third
party management expenses |
|
|
21,124 |
|
|
|
15,010 |
|
|
|
3,177 |
|
|
|
1,247 |
|
|
|
1,119 |
|
|
|
12,704 |
|
|
|
3,983 |
|
|
|
(448 |
) |
|
|
57,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
38,522 |
|
|
$ |
13,576 |
|
|
$ |
6,223 |
|
|
$ |
3,318 |
|
|
$ |
1,616 |
|
|
$ |
22,315 |
|
|
$ |
5,356 |
|
|
$ |
(27 |
) |
|
$ |
90,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended
September 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
74,992 |
|
|
$ |
28,496 |
|
|
$ |
8,815 |
|
|
$ |
4,775 |
|
|
$ |
3,266 |
|
|
$ |
33,657 |
|
|
$ |
9,184 |
|
|
$ |
(45 |
) |
|
$ |
163,140 |
|
Property operating expenses,
real estate taxes and third
party management expenses |
|
|
26,917 |
|
|
|
14,763 |
|
|
|
2,973 |
|
|
|
1,796 |
|
|
|
1,503 |
|
|
|
12,118 |
|
|
|
3,600 |
|
|
|
(2,520 |
) |
|
|
61,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
48,075 |
|
|
$ |
13,733 |
|
|
$ |
5,842 |
|
|
$ |
2,979 |
|
|
$ |
1,763 |
|
|
$ |
21,539 |
|
|
$ |
5,584 |
|
|
$ |
2,475 |
|
|
$ |
101,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
California - |
|
|
California - |
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
/Delaware |
|
|
Virginia |
|
|
North |
|
|
South |
|
|
D.C. |
|
|
Southwest |
|
|
Corporate |
|
|
Total |
|
For the nine-months ended
September 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
185,671 |
|
|
$ |
85,553 |
|
|
$ |
28,221 |
|
|
$ |
13,275 |
|
|
$ |
8,659 |
|
|
$ |
105,128 |
|
|
$ |
28,320 |
|
|
$ |
(1,467 |
) |
|
$ |
453,360 |
|
Property operating
expenses, real estate
taxes and thrid party
management expenses |
|
|
66,664 |
|
|
|
40,581 |
|
|
|
9,510 |
|
|
|
5,234 |
|
|
|
3,531 |
|
|
|
38,318 |
|
|
|
12,693 |
|
|
|
(1,404 |
) |
|
|
175,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
119,007 |
|
|
$ |
44,972 |
|
|
$ |
18,711 |
|
|
$ |
8,041 |
|
|
$ |
5,128 |
|
|
$ |
66,810 |
|
|
$ |
15,627 |
|
|
$ |
(63 |
) |
|
$ |
278,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine-months ended
September 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
206,148 |
|
|
$ |
85,305 |
|
|
$ |
22,303 |
|
|
$ |
11,753 |
|
|
$ |
9,913 |
|
|
$ |
100,851 |
|
|
$ |
28,245 |
|
|
$ |
(1,082 |
) |
|
$ |
463,436 |
|
Property operating
expenses, real estate
taxes and third party
management expenses |
|
|
79,949 |
|
|
|
40,670 |
|
|
|
7,613 |
|
|
|
4,433 |
|
|
|
4,172 |
|
|
|
35,744 |
|
|
|
11,460 |
|
|
|
(7,340 |
) |
|
|
176,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
126,199 |
|
|
$ |
44,635 |
|
|
$ |
14,690 |
|
|
$ |
7,320 |
|
|
$ |
5,741 |
|
|
$ |
65,107 |
|
|
$ |
16,785 |
|
|
$ |
6,258 |
|
|
$ |
286,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
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 of the properties 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 |
|
|
Nine-month periods |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Consolidated net operating income |
|
$ |
90,899 |
|
|
$ |
101,990 |
|
|
$ |
278,233 |
|
|
$ |
286,735 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
221 |
|
|
|
1,054 |
|
|
|
603 |
|
|
|
3,432 |
|
Interest expense |
|
|
(35,039 |
) |
|
|
(39,496 |
) |
|
|
(106,846 |
) |
|
|
(117,892 |
) |
Deferred financing costs |
|
|
(1,092 |
) |
|
|
(1,058 |
) |
|
|
(3,798 |
) |
|
|
(3,381 |
) |
Depreciation and amortization |
|
|
(51,060 |
) |
|
|
(56,876 |
) |
|
|
(154,527 |
) |
|
|
(167,315 |
) |
General & administrative expenses |
|
|
(6,863 |
) |
|
|
(7,402 |
) |
|
|
(17,902 |
) |
|
|
(21,819 |
) |
Minority interest partners share of consolidated
real estate ventures |
|
|
(39 |
) |
|
|
5 |
|
|
|
(117 |
) |
|
|
(103 |
) |
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of real estate ventures |
|
|
1,059 |
|
|
|
763 |
|
|
|
3,838 |
|
|
|
6,021 |
|
Net (loss) gain on disposition of undepreciated
real estate |
|
|
|
|
|
|
421 |
|
|
|
(24 |
) |
|
|
421 |
|
Gain on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
4,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(1,914 |
) |
|
|
(599 |
) |
|
|
3,802 |
|
|
|
(13,901 |
) |
Income from discontinued operations |
|
|
4,619 |
|
|
|
3,032 |
|
|
|
23,849 |
|
|
|
37,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,705 |
|
|
$ |
2,433 |
|
|
$ |
27,651 |
|
|
$ |
23,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 resolved the previously disclosed lawsuit in
the State of New Jersey that alleged personal injury as a result of the presence of mold and the
case has been dismissed. The Partnership was not required to make any out-of-pocket payment in
connection with the resolution of the aforesaid lawsuit.
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.
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 September 30, 2008 are as follows
(in thousands):
61
|
|
|
|
|
2008 |
|
$ |
434 |
|
2009 |
|
|
1,986 |
|
2010 |
|
|
2,318 |
|
2011 |
|
|
2,318 |
|
2012 |
|
|
2,318 |
|
Thereafter |
|
|
292,037 |
|
Certain of the land leases provide for prepayment of rent on a present value basis using a fixed
discount rate. Further, two of the land leases for properties (one currently under development and
one operational) 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).
The Partnership is currently being audited by the Internal Revenue Service for its 2004 tax year.
The audit concerns the tax treatment of the transaction in September 2004 in which the Partnership
acquired a portfolio of properties through the acquisition of a
limited partnership. At this time it does not appear that an adjustment would result in a material tax
liability for the Partnership. However, an adjustment could raise a
question as to whether a contributor of partnership interests in the
2004 transaction could assert a claim against the Partnership under the tax protection
agreement entered into as part of the transaction.
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 Partnership 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 incurs 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
15. SUBSEQUENT EVENTS
On October 1, 2008, the Partnership sold Main Street Centre, a 0.4 million net rentable square feet
office property located in Richmond, Virginia, for a sales price of $48.8 million.
On October 8, 2008, the Partnership completed the sale of five office properties totaling 1.7
million net rentable square feet located in Oakland, California, for an aggregate sales price of
$412.5 million (including assumed debt).
63
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. This Quarterly Report on Form 10-Q and other materials filed by us with the SEC (as
well as information included in oral or other written statements made by us) contain statements
that are forward-looking, including statements relating to business and real estate development
activities, acquisitions, dispositions, future capital expenditures, financing sources,
governmental regulation (including environmental regulation) and competition. The words
anticipate, believe, estimate, expect, intend, will, should and similar expressions,
as they relate to us, are intended to identify forward-looking statements. Although we believe
that the expectations reflected in such forward-looking statements are based on reasonable
assumptions, we can give no assurance that our expectations will be achieved. As forward-looking
statements, these statements involve important risks, uncertainties and other factors that could
cause actual results to differ materially from the expected results and, accordingly, such results
may differ from those expressed in any forward-looking statements made by us or on our behalf.
Factors that could cause actual results to differ materially from our expectations include, but are
not limited to:
|
|
|
our failure to lease unoccupied space in accordance with our projections; |
|
|
|
|
our failure to re-lease occupied space upon expiration of leases; |
|
|
|
|
tenant defaults and 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
September 30, 2008 and December 31, 2007 and for the three- and nine-months ended September 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 September 30, 2008, our portfolio consisted of 211 office properties, 22 industrial
facilities and one mixed-use property containing an aggregate of approximately 23.0 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 five properties under
development and six properties under redevelopment
containing an aggregate 3.1 million net rentable square feet. As of September 30, 2008, the
Company owned four office properties, one property under
64
redevelopment and one property under
development containing an aggregate of approximately 2.1 million net rentable square feet
designated as held for sale assets. Therefore, as of September 30, 2008, we consolidated 254
properties with an aggregate of 28.6 million net rentable square feet. As of September 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 September 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.
Deteriorating economic conditions have resulted in a reduction of the availability of financing and
overall higher borrowing rates. These factors, coupled with a slowing economy, have reduced the
volume of real estate transactions and created credit stresses on most businesses.
If economic conditions persist or deteriorate, we may experience increases in past due accounts,
defaults, lower occupancy and reduced effective rents. This condition would negatively affect our
future net income and cash flows and could have a material adverse effect on our financial
condition.
We seek revenue growth at our portfolio through an increase in occupancy and rental rates.
Occupancy at our core portfolio at September 30, 2008 was 92.1%. Our overall occupancy at
September 30, 2008, including our 11 properties under development or redevelopment, was 84.5%.
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 2.3% of our
aggregate annualized base rents as of September 30, 2008 (representing approximately 2.1% 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 nine-month period
ended September 30, 2008 was 71.4%. 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.
65
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 $12.5 million or 11.1% of total receivables
(including accrued rent receivable and amounts in assets held for sale, net) as of September 30,
2008 compared to $10.2 million or 9.2% of total receivables (including accrued rent receivable) as
of December 31, 2007.
Development Risk:
As of September 30, 2008, we had in development or redevelopment 11 sites aggregating approximately
3.1 million square feet. We estimate the total cost of these projects to be $608.7 million and we
had incurred $362.6 million of these costs as of September 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 September 30, 2008, we had entered into
leases covering 77.8% of the net rentable square feet at these projects. As of September 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 nine-month period ended September 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 continue to be designated as held for
sale at September 30, 2008 and we completed this sale in the fourth quarter. As noted in the
Results of Operations below we incurred an impairment charge of $6.85 million upon the
classification of these properties as held for sale.
On October 1, 2008, we sold Main Street Centre, a 0.4 million net rentable square feet office
property located in Richmond, Virginia, for a sales price of $48.8 million. This property is newly
designated as held for sale at September 30, 2008.
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 to the statement of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements Discussion and Analysis of Financial Condition and Results of Operations discuss 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
66
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 nine-month period ended September 30, 2008 set forth herein. Management
discusses our critical accounting policies and managements judgments and estimates with our Audit
Committee.
67
RESULTS OF OPERATIONS
Comparison of the Three-Month Periods Ended September 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 226 properties containing an
aggregate of approximately 21.9 million net rentable square feet that we owned for the entire
three-month periods ended September 30, 2008 and 2007, excluding the properties held for sale as of
September 30, 2008. 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 September 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 September 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 third 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.
68
Comparison of three-months ended September 30, 2008 to the three-months ended September 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 |
|
$ |
109,541 |
|
|
$ |
107,848 |
|
|
$ |
1,693 |
|
|
$ |
6,997 |
|
|
$ |
5,007 |
|
|
$ |
3,442 |
|
|
$ |
2,139 |
|
|
$ |
(578 |
) |
|
$ |
5,550 |
|
|
$ |
119,402 |
|
|
$ |
120,544 |
|
|
$ |
(1,142 |
) |
Straight-line rents |
|
|
1,006 |
|
|
|
3,785 |
|
|
|
(2,779 |
) |
|
|
865 |
|
|
|
1,570 |
|
|
|
491 |
|
|
|
(143 |
) |
|
|
|
|
|
|
41 |
|
|
|
2,362 |
|
|
|
5,253 |
|
|
|
(2,891 |
) |
Rents FAS 141 |
|
|
1,317 |
|
|
|
2,009 |
|
|
|
(692 |
) |
|
|
64 |
|
|
|
41 |
|
|
|
426 |
|
|
|
430 |
|
|
|
|
|
|
|
|
|
|
|
1,807 |
|
|
|
2,480 |
|
|
|
(673 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rents |
|
|
111,864 |
|
|
|
113,642 |
|
|
|
(1,778 |
) |
|
|
7,926 |
|
|
|
6,618 |
|
|
|
4,359 |
|
|
|
2,426 |
|
|
|
(578 |
) |
|
|
5,591 |
|
|
|
123,571 |
|
|
|
128,277 |
|
|
|
(4,706 |
) |
Tenant reimbursements |
|
|
17,963 |
|
|
|
18,380 |
|
|
|
(417 |
) |
|
|
372 |
|
|
|
416 |
|
|
|
997 |
|
|
|
711 |
|
|
|
400 |
|
|
|
1,018 |
|
|
|
19,732 |
|
|
|
20,525 |
|
|
|
(793 |
) |
Termination fees |
|
|
338 |
|
|
|
7,699 |
|
|
|
(7,361 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
(100 |
) |
|
|
338 |
|
|
|
7,649 |
|
|
|
(7,311 |
) |
Third party management fees, labor reimbursement and leasing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,390 |
|
|
|
4,415 |
|
|
|
4,390 |
|
|
|
4,415 |
|
|
|
(25 |
) |
Other |
|
|
529 |
|
|
|
842 |
|
|
|
(313 |
) |
|
|
12 |
|
|
|
2 |
|
|
|
13 |
|
|
|
3 |
|
|
|
230 |
|
|
|
1,427 |
|
|
|
784 |
|
|
|
2,274 |
|
|
|
(1,490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
130,694 |
|
|
|
140,563 |
|
|
|
(9,869 |
) |
|
|
8,310 |
|
|
|
7,036 |
|
|
|
5,369 |
|
|
|
3,190 |
|
|
|
4,442 |
|
|
|
12,351 |
|
|
|
148,815 |
|
|
|
163,140 |
|
|
|
(14,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
40,485 |
|
|
|
39,979 |
|
|
|
506 |
|
|
|
2,290 |
|
|
|
1,344 |
|
|
|
1,811 |
|
|
|
1,300 |
|
|
|
(3,608 |
) |
|
|
787 |
|
|
|
40,978 |
|
|
|
43,410 |
|
|
|
(2,432 |
) |
Real estate taxes |
|
|
13,269 |
|
|
|
13,095 |
|
|
|
174 |
|
|
|
781 |
|
|
|
775 |
|
|
|
907 |
|
|
|
473 |
|
|
|
191 |
|
|
|
889 |
|
|
|
15,148 |
|
|
|
15,232 |
|
|
|
(84 |
) |
Third party management expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,790 |
|
|
|
2,508 |
|
|
|
1,790 |
|
|
|
2,508 |
|
|
|
(718 |
) |
Subtotal |
|
|
76,940 |
|
|
|
87,489 |
|
|
|
(10,549 |
) |
|
|
5,239 |
|
|
|
4,917 |
|
|
|
2,651 |
|
|
|
1,417 |
|
|
|
6,069 |
|
|
|
8,167 |
|
|
|
90,899 |
|
|
|
101,990 |
|
|
|
(11,091 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,863 |
|
|
|
7,402 |
|
|
|
6,863 |
|
|
|
7,402 |
|
|
|
(539 |
) |
Depreciation and amortization |
|
|
45,205 |
|
|
|
48,845 |
|
|
|
(3,640 |
) |
|
|
2,982 |
|
|
|
2,396 |
|
|
|
1,785 |
|
|
|
1,768 |
|
|
|
1,088 |
|
|
|
3,867 |
|
|
|
51,060 |
|
|
|
56,876 |
|
|
|
(5,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss) |
|
$ |
31,735 |
|
|
$ |
38,644 |
|
|
$ |
(6,909 |
) |
|
$ |
2,257 |
|
|
$ |
2,521 |
|
|
$ |
866 |
|
|
$ |
(351 |
) |
|
$ |
(1,882 |
) |
|
$ |
(3,102 |
) |
|
$ |
32,976 |
|
|
$ |
37,712 |
|
|
$ |
(4,736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
|
226 |
|
|
|
226 |
|
|
|
|
|
|
|
11 |
|
|
|
11 |
|
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
248 |
|
|
|
248 |
|
|
|
|
|
Square feet |
|
|
21,939 |
|
|
|
21,939 |
|
|
|
|
|
|
|
1,436 |
|
|
|
1,436 |
|
|
|
3,085 |
|
|
|
3,085 |
|
|
|
|
|
|
|
|
|
|
|
26,460 |
|
|
|
26,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221 |
|
|
|
1,054 |
|
|
|
(833 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,039 |
) |
|
|
(39,496 |
) |
|
|
4,457 |
|
Interest expense Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,092 |
) |
|
|
(1,058 |
) |
|
|
(34 |
) |
Equity in income of real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,059 |
|
|
|
763 |
|
|
|
296 |
|
Net gain on disposition of undepreciated assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421 |
|
|
|
(421 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,875 |
) |
|
|
(604 |
) |
|
|
(1,271 |
) |
Minority interest partners share of consolidated real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39 |
) |
|
|
5 |
|
|
|
(44 |
) |
Minority interest attributable to continuing operations LP units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141 |
|
|
|
116 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,773 |
) |
|
|
(483 |
) |
|
|
(1,290 |
) |
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,452 |
|
|
|
2,902 |
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,679 |
|
|
$ |
2,419 |
|
|
$ |
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPLANATORY NOTES |
|
(a) |
- |
Results include: five 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. |
69
Total Revenue
Cash rents from the Total Portfolio decreased by $1.1 million from third quarter 2007 to third
quarter 2008, primarily reflecting:
|
1) |
|
An additional $1.7 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 $2.0 million from five properties that we acquired and six
development/redevelopment properties that we completed and placed in service subsequent
to the third quarter of 2007. |
|
|
3) |
|
An additional $1.3 million of rental income due to increased occupancy at 11
development/redevelopment properties in the third quarter of 2008 in comparison to
2007. |
|
|
4) |
|
The increase was offset by the decrease of $6.8 million of rental income earned
from our G&I properties in the third quarter of 2007. |
Tenant reimbursements for the Total Portfolio decreased by $0.8 million primarily as a result of
decreased operating expenses of $2.5 million (excluding third party management fees) as compared to
the third quarter of 2007.
Property Operating Expenses
Property operating expenses, including real estate taxes and third party management expenses, at
the Total Portfolio decreased by $3.2 million from third quarter 2007 to third quarter 2008,
primarily due to $3.1 million of such expenses for G&I properties in the third quarter of 2007.
Depreciation and Amortization Expense
Depreciation and amortization decreased by $5.8 million from third quarter 2007 to third quarter
2008, primarily due to $2.9 million of depreciation and amortization expense recorded on the G&I
properties during the third quarter of 2007 and a $3.6 million decrease at the Same Store Portfolio
due to assets within the Same Store Portfolio being fully amortized subsequent to September 30,
2007. The decrease was offset by an increase in depreciation and amortization from five properties
that we acquired and six development/redevelopment properties that we completed and placed in
service subsequent to the third quarter of 2007.
General & Administrative Expenses
General & administrative expenses decreased by approximately $0.5 million from third quarter 2007
to third quarter 2008, primarily as a result of a reduction in overhead costs from a Company
re-organization that occurred subsequent to the third quarter of 2007. The reduction in overhead
costs is offset by the incurrence of $1.0 million of severance costs in the quarter ended September
30, 2008.
Interest Income/ Expense
The decrease in interest income of approximately $0.8 million is due to lower cash balances during
the third quarter of 2008.
Interest expense decreased by $4.4 million primarily due to lower mortgage notes payable
outstanding at September 30, 2008 in comparison to September 30, 2007 as a result of certain
mortgage notes payable being paid off subsequent to the third quarter of 2007. The decrease is
also the result of a lower weighted average interest rate on Credit Facility borrowings in the
third quarter of 2008.
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 3.6% and 4.3% of the Operating Partnership as of September 30, 2008 and 2007,
respectively.
70
Discontinued Operations
During the third quarter of 2008, we continued to designate five properties in Oakland, CA and
newly designated one property in Richmond, VA as held for sale. These properties had total revenue
of $13.1 million, operating expenses of $6.1 million, depreciation and amortization expense of 0.6
million and minority interest attributable to discontinued operations of $0.2 million.
The September 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 third quarter of 2007
includes 23 properties that were sold and six properties that were designated as held for sale with
total revenue of $14.8 million, operating expenses of $6.1 million, depreciation and amortization
expense of $4.6 million and minority interest attributable to discontinued operations of $0.1
million.
Net Income
Net income increased by $0.3 million from the third 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 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 $0.01 for the third quarter of 2008 as compared to $0.00 for the third
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.
71
RESULTS OF OPERATIONS
Comparison of the Nine-Month Periods Ended September 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 224 properties containing an
aggregate of approximately 21.5 million net rentable square feet that we owned for the entire
nine-month period ended September 30, 2008 and substantially all of the period ended September 30,
2007, excluding the properties held for sale as of September 30, 2008. 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 nine-month periods ended September 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 nine-month
periods ended September 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 nine-months ended September 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.
72
Comparison of nine-months ended September 30, 2008 to the nine-months ended September 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 |
|
$ |
316,658 |
|
|
$ |
310,845 |
|
|
$ |
5,813 |
|
|
$ |
28,410 |
|
|
$ |
16,387 |
|
|
$ |
9,499 |
|
|
$ |
6,559 |
|
|
$ |
(1,830 |
) |
|
$ |
16,159 |
|
|
$ |
352,737 |
|
|
$ |
349,950 |
|
|
$ |
2,787 |
|
Straight-line rents |
|
|
8,309 |
|
|
|
13,131 |
|
|
|
(4,822 |
) |
|
|
3,867 |
|
|
|
5,344 |
|
|
|
986 |
|
|
|
(11 |
) |
|
|
|
|
|
|
516 |
|
|
|
13,162 |
|
|
|
18,980 |
|
|
|
(5,818 |
) |
Rents FAS 141 |
|
|
4,497 |
|
|
|
6,667 |
|
|
|
(2,170 |
) |
|
|
(73 |
) |
|
|
(211 |
) |
|
|
1,282 |
|
|
|
547 |
|
|
|
|
|
|
|
|
|
|
|
5,706 |
|
|
|
7,003 |
|
|
|
(1,297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rents |
|
|
329,464 |
|
|
|
330,643 |
|
|
|
(1,179 |
) |
|
|
32,204 |
|
|
|
21,520 |
|
|
|
11,767 |
|
|
|
7,095 |
|
|
|
(1,830 |
) |
|
|
16,675 |
|
|
|
371,605 |
|
|
|
375,933 |
|
|
|
(4,328 |
) |
Tenant reimbursements |
|
|
53,386 |
|
|
|
53,966 |
|
|
|
(580 |
) |
|
|
2,750 |
|
|
|
2,154 |
|
|
|
2,972 |
|
|
|
1,511 |
|
|
|
568 |
|
|
|
1,624 |
|
|
|
59,676 |
|
|
|
59,255 |
|
|
|
421 |
|
Termination fees |
|
|
4,362 |
|
|
|
9,320 |
|
|
|
(4,958 |
) |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
48 |
|
|
|
4,462 |
|
|
|
9,418 |
|
|
|
(4,956 |
) |
Third party management fees, labor reimbursement and leasing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,239 |
|
|
|
14,119 |
|
|
|
15,239 |
|
|
|
14,119 |
|
|
|
1,120 |
|
Other |
|
|
1,375 |
|
|
|
2,183 |
|
|
|
(808 |
) |
|
|
82 |
|
|
|
23 |
|
|
|
28 |
|
|
|
1 |
|
|
|
893 |
|
|
|
2,504 |
|
|
|
2,378 |
|
|
|
4,711 |
|
|
|
(2,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
388,587 |
|
|
|
396,112 |
|
|
|
(7,525 |
) |
|
|
35,136 |
|
|
|
23,697 |
|
|
|
14,767 |
|
|
|
8,657 |
|
|
|
14,870 |
|
|
|
34,970 |
|
|
|
453,360 |
|
|
|
463,436 |
|
|
|
(10,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
113,169 |
|
|
|
112,103 |
|
|
|
1,066 |
|
|
|
9,459 |
|
|
|
6,426 |
|
|
|
5,244 |
|
|
|
4,020 |
|
|
|
(5,341 |
) |
|
|
1,767 |
|
|
|
122,531 |
|
|
|
124,316 |
|
|
|
(1,785 |
) |
Real estate taxes |
|
|
39,651 |
|
|
|
37,823 |
|
|
|
1,828 |
|
|
|
3,617 |
|
|
|
2,819 |
|
|
|
2,467 |
|
|
|
1,315 |
|
|
|
444 |
|
|
|
2,929 |
|
|
|
46,179 |
|
|
|
44,886 |
|
|
|
1,293 |
|
Third party management expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,417 |
|
|
|
7,499 |
|
|
|
6,417 |
|
|
|
7,499 |
|
|
|
(1,082 |
) |
Subtotal |
|
|
235,767 |
|
|
|
246,186 |
|
|
|
(10,419 |
) |
|
|
22,060 |
|
|
|
14,452 |
|
|
|
7,056 |
|
|
|
3,322 |
|
|
|
13,350 |
|
|
|
22,775 |
|
|
|
278,233 |
|
|
|
286,735 |
|
|
|
(9,584 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,902 |
|
|
|
21,819 |
|
|
|
17,902 |
|
|
|
21,819 |
|
|
|
(3,917 |
) |
Depreciation and amortization |
|
|
132,687 |
|
|
|
137,524 |
|
|
|
(4,837 |
) |
|
|
13,904 |
|
|
|
11,392 |
|
|
|
5,041 |
|
|
|
7,143 |
|
|
|
2,895 |
|
|
|
11,256 |
|
|
|
154,527 |
|
|
|
167,315 |
|
|
|
(12,788 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss) |
|
$ |
103,080 |
|
|
$ |
108,662 |
|
|
$ |
(5,582 |
) |
|
$ |
8,156 |
|
|
$ |
3,060 |
|
|
$ |
2,015 |
|
|
$ |
(3,821 |
) |
|
$ |
(7,447 |
) |
|
$ |
(10,300 |
) |
|
$ |
105,804 |
|
|
$ |
97,601 |
|
|
$ |
8,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
|
224 |
|
|
|
224 |
|
|
|
|
|
|
|
13 |
|
|
|
13 |
|
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
248 |
|
|
|
248 |
|
|
|
|
|
Square feet |
|
|
21,493 |
|
|
|
21,493 |
|
|
|
|
|
|
|
1,882 |
|
|
|
1,882 |
|
|
|
3,085 |
|
|
|
3,085 |
|
|
|
|
|
|
|
|
|
|
|
26,460 |
|
|
|
26,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
603 |
|
|
|
3,432 |
|
|
|
(2,829 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(106,846 |
) |
|
|
(117,892 |
) |
|
|
11,046 |
|
Interest expense Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,798 |
) |
|
|
(3,381 |
) |
|
|
(417 |
) |
Equity in income of real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,838 |
|
|
|
6,021 |
|
|
|
(2,183 |
) |
Net loss on disposition of undepreciated assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
421 |
|
|
|
(445 |
) |
Gain on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,342 |
|
|
|
|
|
|
|
4,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,919 |
|
|
|
(13,798 |
) |
|
|
17,717 |
|
Minority interest partners share of consolidated
real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117 |
) |
|
|
(103 |
) |
|
|
(14 |
) |
Minority interest attributable to continuing
operations LP units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
843 |
|
|
|
(759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,886 |
|
|
|
(13,058 |
) |
|
|
16,944 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,905 |
|
|
|
35,891 |
|
|
|
(12,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,791 |
|
|
$ |
22,833 |
|
|
$ |
3,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.24 |
|
|
$ |
0.19 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPLANATORY NOTES |
|
(a) |
- |
Results include: five 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. |
73
Total Revenue
Cash rents from the Total Portfolio increased by $2.8 million from the nine-month period ended
September 30, 2007 to the nine-month period ended September 30, 2008, primarily reflecting:
|
1) |
|
An additional $5.8 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 $12.0 million from six properties that we acquired and seven
development/redevelopment properties that we completed and placed in service subsequent
to the third quarter of 2007. |
|
|
3) |
|
An additional $2.9 million of rental income due to increased occupancy at 11
development/redevelopment properties in the nine-month period ended September 30, 2008
in comparison to the nine-month period ended September 30, 2007. |
|
|
4) |
|
The increase was offset by the decrease of $19.4 million of rental income
earned from our G&I properties during the nine-month period ended September 30, 2007. |
Third party management fees, labor reimbursement and leasing increased by $1.1 million from the
nine-month period ended September 30, 2007 to the nine-month period ended September 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
nine-month period ended September 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 third party management expenses, at
the Total Portfolio decreased by $1.6 million from the nine-month period ended September 30, 2007
to the nine-month period ended September 30, 2008, primarily due to $8.8 million of such expenses
for the G&I properties in the nine-month period ended September 30, 2007. The decrease was offset
by $3.8 million of property operating expenses, real estate taxes and third party management
expenses from seven properties that we acquired and six development/redevelopment properties that
we completed and placed in service subsequent to the third quarter of 2007. Property operating
expenses and real estate taxes at our Same Store Portfolio also increased by $2.9 million for the
nine-month period ended September 30, 2008 in comparison to the nine-month period ended September
30, 2007.
Depreciation and Amortization Expense
Depreciation and amortization decreased by $12.8 million from the nine-month period ended September
30, 2007 to the nine-month period ended September 30, 2008, primarily due to $8.6 million of
depreciation and amortization expense recorded on the G&I properties during the nine-month period
ended September 30, 2007. In addition, depreciation and amortization decreased by $4.8 million at
our Same Store Portfolio due to assets within the Same Store Portfolio being fully amortized
subsequent to September 30, 2007.
General & Administrative Expenses
General & administrative expenses decreased by $3.9 million from the nine-month period ended
September 30, 2007 to the nine-month period ended September 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 accrued during 2007. The
remainder of the decrease was due to lower overhead costs from a Company re-organization that
occurred subsequent to the third quarter of 2007. The reduction in overhead costs is offset by the
incurrence of $1.0 million of severance costs in the quarter ended September 30, 2008.
Interest Income/ Expense
The decrease in interest income by approximately $2.8 million is due to lower cash balances during
the period ending September 30, 2008.
74
Interest expense decreased by $11.0 million primarily due to lower mortgage notes payable
outstanding at September 30, 2008 in comparison to September 30, 2007 as a result of certain
mortgage notes payable being paid off subsequent to the third quarter of 2007. The decrease is
also the result of a lower outstanding balance and lower weighted average interest rate on Credit
Facility borrowings during the nine-month period ended September 30, 2008 in comparison the
nine-month period ended September 30, 2008.
Gain on early extinguishment of debt
During the nine-month period ended September 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 3.6% and 4.3% of the Operating Partnership as of September 30, 2008 and 2007,
respectively.
Discontinued Operations
During the nine-month period ended September 30, 2008, we sold one property in Allentown, PA, one
property in Mount Laurel, NJ, one property in Newtown, PA and designated five properties in
Oakland, CA and one property in Richmond, VA as held for sale. These properties had total revenue
of $41.4 million, operating expenses of $18.1 million, depreciation and amortization expenses of
$9.6 million and minority interest attributable to discontinued operations of $0.9 million. We
also recorded a $6.85 million loss provision in connection with the five held for sale properties
in Oakland, CA which reduced our income from discontinued operations.
The September 30, 2007 amount is reclassified to include the operations of the properties sold and
held for sale during the nine-month period ended September 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 nine-month period ended September 30, 2007 includes 23 sold properties and six held
for sale properties with total revenue of $60.7 million, operating expenses of $25.5 million,
depreciation and amortization expense of $19.1 million and minority interest attributable to
discontinued operations of $1.6 million.
Net Income
Net income increased by $4.0 million from the nine-month period ended September 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
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 $0.24 for the nine-month period ended September 30, 2008 as compared to
$0.19 for the nine-month period ended September 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.
75
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 liquidity management remains a top priority. We continue to proactively pursue new financing
opportunities to ensure an appropriate balance sheet position though the remainder of 2008 and
looking forward to 2009. As a result of these dedicated efforts, we are comfortable with our
ability to meet future debt maturities and development funding needs. By monitoring these needs
and raising capital proactively, our current balance sheet and outlook for 2009 are in an adequate
position at the date of this filing, despite the ongoing disruption in the credit markets.
Financial markets have recently experienced unusual volatility and uncertainty. Liquidity has
tightened in all financial markets, including the debt and equity markets. Our ability to fund
property acquisitions or development projects, as well as our ability to repay or refinance debt
maturities could be adversely affected by an inability to secure financing at reasonable terms, if
at all. While we currently do not expect any difficulties, it is possible, in these unusual and
uncertain times, that one or more lenders in our revolving credit facility could fail to fund a
borrowing request. Such an event could adversely affect our ability to access funds from its
revolving credit facility when needed.
If economic conditions persist or deteriorate, we may experience increases in past due accounts,
defaults, lower occupancy and reduced effective rents. This condition would negatively affect our
future net income and cash flows and could have a material adverse effect on our financial
condition.
Our unsecured Private Placement Notes totaling the $113.0 million are due in December 2008 and we
expect to use a combination of cash balances, our credit facility or proceeds from completed
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 currently have two forward
starting swaps aggregating $50.0 million which were entered into to hedge future interest rate
changes in a forecasted debt issuance to refinance the unsecured notes maturing in November 2009.
We currently believe that we will be able to
76
refinance these notes as anticipated. However, the instability of the current credit markets is
being monitored. If we determine it is no longer probable that such a borrowing is feasible, the
hedge instruments could no longer be effective, which could materially impact our financial
position and results of operations.
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 potential 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 filing of this Form 10-Q have also been a significant
source of cash. During the nine-months ended September 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.
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 September 30, 2008 and December 31, 2007, we maintained cash and cash equivalents of $2.7
million and $5.6 million, respectively, a decrease of $2.9 million. This decrease was the result
of the following changes in cash flow from our activities for the nine-month period ended September
30 (in thousands):
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Activity |
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2008 |
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2007 |
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Operating |
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$ |
179,043 |
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$ |
189,438 |
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Investing |
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(82,980 |
) |
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(123,949 |
) |
Financing |
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(98,989 |
) |
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(73,207 |
) |
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Net cash flows |
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$ |
(2,926 |
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$ |
(7,718 |
) |
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Our principal source of cash flows is from the operation of our properties. The decrease 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 decrease in cash flows used in investing activities is primarily attributable to the decrease
in proceeds that we received from property sales of $234.4 million in the nine-month period ended
September 30, 2007 to $53.6 million in the nine-month period ended September 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 nine-month period ended
September 30, 2007 in comparison to no property acquisitions in the nine-month period ended
September 30, 2008. In addition, our capital expenditures for tenant and building improvements and
leasing commissions decreased by $63.6 million in the nine-month period ended September 30, 2008
compared to the nine-month period ended September 30, 2007 as several of our developments are
either close to completion or have already been placed in service.
Increased cash used in financing activities is primarily attributable to the timing of the activity
in our credit facility offset by the repurchase of $59.4 million of our common shares in the
nine-month period ended September 30, 2007 in comparison to no common share repurchases in the
nine-month period ended September 30, 2008.
Capitalization
77
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 which remains in effect through maturity in
April 2009. Borrowings on the Sweep Agreement are short term and used for cash management
purposes.
As of September 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 September 30, 2008 and December 31, 2007:
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September 30, |
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December31, |
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2008 |
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2007 |
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&n |