e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2009
or
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
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Commission file number
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001-9106 (Brandywine Realty Trust) |
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000-24407 (Brandywine Operating Partnership, L.P.) |
Brandywine Realty Trust
Brandywine Operating Partnership, L.P.
(Exact name of registrant as specified in its charter)
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MARYLAND (Brandywine Realty Trust)
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23-2413352 |
DELAWARE (Brandywine Operating Partnership L.P.)
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23-2862640 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
Incorporation or organization) |
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555 East Lancaster Avenue |
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Radnor, Pennsylvania
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19087 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (610) 325-5600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
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Brandywine Realty Trust
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Yes þ No o |
Brandywine Operating Partnership, L.P.
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Yes þ No o |
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
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Brandywine Realty Trust
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Yes o No o |
Brandywine Operating Partnership, L.P.
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Yes o 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.
Brandywine Realty Trust:
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
Brandywine Operating Partnership, L.P.:
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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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 128,582,334 Common Shares of Beneficial Interest, par value $0.01 per share, were
outstanding as of August 4, 2009.
TABLE OF CONTENTS
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Page |
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PART I FINANCIAL INFORMATION |
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Brandywine Realty Trust |
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Financial Statements (unaudited) |
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Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
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3 |
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Consolidated Statements of Operations for the three- and six-month periods ended
June 30, 2009 and 2008
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4 |
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Consolidated Statements of Other Comprehensive Income for the three- and six-month
periods ended June 30, 2009 and 2008
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5 |
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Consolidated Statements of Equity for the six month periods ended June 30, 2009 and 2008
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6 |
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Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2009
and 2008
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7 |
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Notes to Unaudited Consolidated Financial Statements
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8 |
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Brandywine Operating Partnership, L.P. |
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Financial Statements (unaudited) |
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Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
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39 |
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Consolidated Statements of Operations for the three-and six- month periods ended
June 30, 2009 and 2008
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40 |
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Consolidated Statements of Other Comprehensive Income for the three- and six month
periods ended June 30, 2009 and 2008
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41 |
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Consolidated Statements of Cash Flows for the six month periods ended June 30, 2009
and 2008
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42 |
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Notes to Unaudited Consolidated Financial Statements
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43 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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73 |
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Quantitative and Qualitative Disclosures about Market Risk
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93 |
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Controls and Procedures
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93 |
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PART II OTHER INFORMATION |
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Legal Proceedings
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93 |
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Risk Factors
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93 |
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Unregistered Sales of Equity Securities and Use of Proceeds
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93 |
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Defaults Upon Senior Securities
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94 |
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Submission of Matters to a Vote of Security Holders
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94 |
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Other Information
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94 |
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Exhibits
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95 |
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Signatures
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96 |
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EX-31.1 |
EX-31.2 |
EX-31.3 |
EX-31.4 |
EX-32.1 |
EX-32.2 |
EX-32.3 |
EX-32.4 |
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
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Item 1. |
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Financial Statements |
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share information)
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June 30, |
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December 31, |
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2009 |
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2008 (as adjusted) |
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ASSETS |
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Real estate investments: |
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Rental properties |
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$ |
4,586,580 |
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$ |
4,608,320 |
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Accumulated depreciation |
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(690,490 |
) |
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(639,688 |
) |
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Operating real estate investments, net |
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3,896,090 |
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3,968,632 |
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Construction-in-progress |
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197,404 |
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122,219 |
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Land inventory |
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97,430 |
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100,516 |
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Total real estate investments, net |
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4,190,924 |
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4,191,367 |
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Cash and cash equivalents |
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3,936 |
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3,924 |
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Cash in escrow |
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31,385 |
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Accounts receivable, net |
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8,950 |
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11,762 |
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Accrued rent receivable, net |
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85,669 |
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86,362 |
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Investment in real estate ventures, at equity |
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75,688 |
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71,028 |
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Deferred costs, net |
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100,852 |
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89,327 |
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Intangible assets, net |
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124,106 |
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145,757 |
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Notes receivable |
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49,676 |
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48,048 |
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Other assets |
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47,831 |
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59,008 |
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Total assets |
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$ |
4,687,632 |
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$ |
4,737,968 |
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LIABILITIES AND BENEFICIARIES EQUITY |
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Mortgage notes payable |
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$ |
502,961 |
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$ |
487,525 |
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Borrowing under credit facilities |
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74,000 |
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153,000 |
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Unsecured term loan |
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183,000 |
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183,000 |
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Unsecured senior notes, net of discounts |
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1,724,582 |
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1,917,970 |
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Accounts payable and accrued expenses |
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85,474 |
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74,824 |
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Distributions payable |
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15,177 |
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29,288 |
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Tenant security deposits and deferred rents |
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54,595 |
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58,692 |
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Acquired below market leases, net |
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42,036 |
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47,626 |
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Other liabilities |
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53,696 |
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63,545 |
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Total liabilities |
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2,735,521 |
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3,015,470 |
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Commitments and contingencies (Note 15) |
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Brandywine Realty Trusts 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 2009 and 2008 |
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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 2008 |
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23 |
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23 |
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Common Shares of Brandywine Realty Trusts beneficial interest, $0.01 par value; shares
authorized 200,000,000; 128,850,253 and 88,610,053 issued in 2009 and 2008, respectively
and 128,583,411 and 88,158,937 outstanding in 2009 and 2008, respectively |
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1,286 |
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882 |
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Additional paid-in capital |
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2,607,919 |
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2,351,428 |
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Deferred compensation payable in common stock |
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5,858 |
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6,274 |
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Common shares in treasury, at cost, 266,842 and 451,116 in 2009 and 2008,
respectively |
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(7,893 |
) |
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(14,121 |
) |
Common shares in grantor trust, 264,794 in 2009 and 215,742 in 2008 |
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(5,858 |
) |
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(6,274 |
) |
Cumulative earnings |
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498,268 |
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498,716 |
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Accumulated other comprehensive loss |
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(10,652 |
) |
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(17,005 |
) |
Cumulative distributions |
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(1,176,422 |
) |
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(1,150,406 |
) |
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Total Brandywine Realty Trusts equity |
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1,912,549 |
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1,669,537 |
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Non-controlling interests |
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39,562 |
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52,961 |
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Total equity |
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1,952,111 |
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1,722,498 |
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Total liabilities and equity |
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$ |
4,687,632 |
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$ |
4,737,968 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share information)
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For the three-month periods ended |
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For the six-month periods ended |
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June 30, |
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June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenue: |
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Rents |
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$ |
121,598 |
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$ |
123,111 |
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$ |
244,208 |
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$ |
245,879 |
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Tenant reimbursements |
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18,636 |
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20,786 |
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41,069 |
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39,807 |
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Termination fees |
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963 |
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892 |
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1,076 |
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4,124 |
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Third Party management fees, labor reimbursement and leasing |
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4,097 |
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5,170 |
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8,861 |
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10,849 |
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Other |
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583 |
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807 |
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1,501 |
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1,589 |
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Total revenue |
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145,877 |
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150,766 |
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296,715 |
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302,248 |
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Operating Expenses: |
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Property operating expenses |
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40,595 |
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40,171 |
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85,460 |
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80,881 |
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Real estate taxes |
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14,517 |
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15,320 |
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29,887 |
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30,801 |
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Third party management expenses |
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1,968 |
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2,381 |
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|
4,083 |
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4,627 |
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Depreciation and amortization |
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53,308 |
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51,492 |
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105,461 |
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102,430 |
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General & administrative expenses |
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5,514 |
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6,127 |
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10,472 |
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11,039 |
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Total operating expenses |
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115,902 |
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115,491 |
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235,363 |
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229,778 |
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Operating income |
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29,975 |
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35,275 |
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61,352 |
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72,470 |
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Other Income (Expense): |
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Interest income |
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642 |
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179 |
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1,222 |
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|
382 |
|
Interest expense |
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(34,944 |
) |
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(36,742 |
) |
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(70,590 |
) |
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(73,785 |
) |
Amortization of deferred financing costs |
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(1,894 |
) |
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(1,198 |
) |
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(3,146 |
) |
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(2,706 |
) |
Recognized hedge activity |
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(305 |
) |
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(305 |
) |
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Equity in income of real estate ventures |
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1,533 |
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1,664 |
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|
2,119 |
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|
2,779 |
|
Net gain (loss) on dispostion of undepreciated real estate |
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(24 |
) |
Gain on early extinguishment of debt |
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12,013 |
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|
543 |
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|
18,651 |
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|
3,106 |
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Income (loss) from continuing operations |
|
|
7,020 |
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|
(279 |
) |
|
|
9,303 |
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|
2,222 |
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Discontinued operations: |
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Income from discontinued operations |
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(14 |
) |
|
|
1,922 |
|
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|
336 |
|
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|
5,037 |
|
Net gain (loss) on disposition of discontinued operations |
|
|
(1,225 |
) |
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|
13,420 |
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(1,031 |
) |
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|
21,401 |
|
Provision for impairment |
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(6,850 |
) |
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(3,700 |
) |
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|
(6,850 |
) |
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Total discontinued operations |
|
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(1,239 |
) |
|
|
8,492 |
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|
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(4,395 |
) |
|
|
19,588 |
|
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Net income |
|
|
5,781 |
|
|
|
8,213 |
|
|
|
4,908 |
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|
21,810 |
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Net (income) loss from discontinued operations attributable to non-controlling interests |
|
|
35 |
|
|
|
(324 |
) |
|
|
132 |
|
|
|
(791 |
) |
Net (income) loss from continuing operations attributable to non-controlling interests |
|
|
(202 |
) |
|
|
23 |
|
|
|
(205 |
) |
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|
(37 |
) |
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Net (income) attributable to non-controlling interests |
|
|
(167 |
) |
|
|
(301 |
) |
|
|
(73 |
) |
|
|
(828 |
) |
|
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|
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|
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|
|
|
Net income attributable to Brandywine Realty Trust |
|
|
5,614 |
|
|
|
7,912 |
|
|
|
4,835 |
|
|
|
20,982 |
|
Distribution to Preferred Shares |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
Amount allocated to unvested restricted shareholders |
|
|
(73 |
) |
|
|
(227 |
) |
|
|
(110 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to Common Shares |
|
$ |
3,543 |
|
|
$ |
5,687 |
|
|
$ |
729 |
|
|
$ |
16,592 |
|
|
|
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|
|
|
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|
|
Basic earnings (loss) per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.04 |
|
|
$ |
(0.03 |
) |
|
$ |
0.05 |
|
|
$ |
(0.03 |
) |
Discontinued operations |
|
|
(0.01 |
) |
|
|
0.09 |
|
|
|
(0.04 |
) |
|
|
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
$ |
0.01 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.04 |
|
|
$ |
(0.03 |
) |
|
$ |
0.05 |
|
|
$ |
(0.03 |
) |
Discontinued operations |
|
|
(0.01 |
) |
|
|
0.09 |
|
|
|
(0.04 |
) |
|
|
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
$ |
0.01 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per Common Share |
|
$ |
0.10 |
|
|
$ |
0.44 |
|
|
$ |
0.40 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
101,583,997 |
|
|
|
87,280,576 |
|
|
|
94,934,134 |
|
|
|
87,092,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
102,742,343 |
|
|
|
87,512,345 |
|
|
|
95,495,392 |
|
|
|
87,300,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Brandywine Realty Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
6,818 |
|
|
$ |
(256 |
) |
|
$ |
9,098 |
|
|
$ |
2,185 |
|
Income (loss) from discontinued operations |
|
|
(1,204 |
) |
|
|
8,168 |
|
|
|
(4,263 |
) |
|
|
18,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,614 |
|
|
$ |
7,912 |
|
|
$ |
4,835 |
|
|
$ |
20,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 ended |
|
|
For the six-month periods ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 (as adjusted) |
|
|
2009 |
|
|
2008 (as adjusted) |
|
Net income |
|
$ |
5,781 |
|
|
$ |
8,213 |
|
|
$ |
4,908 |
|
|
$ |
21,810 |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative financial instruments |
|
|
(4,217 |
) |
|
|
5,358 |
|
|
|
6,069 |
|
|
|
526 |
|
Reclassification of realized (gains) losses on derivative financial
instruments to operations, net |
|
|
(20 |
) |
|
|
(20 |
) |
|
|
(40 |
) |
|
|
(40 |
) |
Unrealized gain on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248 |
|
Total other comprehensive income (loss) |
|
|
(4,237 |
) |
|
|
5,338 |
|
|
|
6,029 |
|
|
|
734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
1,544 |
|
|
$ |
13,551 |
|
|
$ |
10,937 |
|
|
$ |
22,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (income) loss attributable to non-controlling interest |
|
|
(47 |
) |
|
|
(301 |
) |
|
|
251 |
|
|
|
(828 |
) |
|
Comprehensive income attributable to Brandywine Realty Trust |
|
$ |
1,497 |
|
|
$ |
13,250 |
|
|
$ |
11,188 |
|
|
$ |
21,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF EQUITY
For the Six-Month Periods Ended June 30, 2009 and 2008
(unaudited, in thousands, except number of shares)
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Rabbi |
|
|
Brandywine Realty |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Preferred |
|
|
Par Value of |
|
|
Number of Preferred |
|
|
Par Value of |
|
|
Number of Common |
|
|
Number of Treasury |
|
|
Trust/Deferred |
|
|
Trusts beneficial |
|
|
|
|
|
|
Common Shares in |
|
|
Compensation Payable |
|
|
Common Shares in Grantor |
|
|
|
|
|
|
Accumulated Other |
|
|
Cumulative |
|
|
Non-Controlling |
|
|
|
|
|
|
C Shares |
|
|
Preferred C Shares |
|
|
D Shares |
|
|
Preferred D Shares |
|
|
Shares |
|
|
Shares |
|
|
Compensation Shares |
|
|
interest |
|
|
Additional Paid-in Capital |
|
|
Treasury |
|
|
in Common Stock |
|
|
Trust |
|
|
Cumulative Earnings |
|
|
Comprehensive Loss |
|
|
Distributions |
|
|
Interests |
|
|
Total |
|
BALANCE, December 31, 2008 |
|
|
2,000,000 |
|
|
$ |
20 |
|
|
|
2,300,000 |
|
|
$ |
23 |
|
|
|
88,610,053 |
|
|
|
451,116 |
|
|
|
215,742 |
|
|
$ |
882 |
|
|
$ |
2,351,428 |
|
|
$ |
(14,121 |
) |
|
$ |
6,274 |
|
|
$ |
(6,274 |
) |
|
$ |
498,716 |
|
|
$ |
(17,005 |
) |
|
$ |
(1,150,406 |
) |
|
$ |
52,961 |
|
|
$ |
1,722,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,835 |
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
4,908 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,353 |
|
|
|
|
|
|
|
(324 |
) |
|
|
6,029 |
|
Issuance of Common Shares of Beneficial Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,250,000 |
|
|
|
|
|
|
|
|
|
|
|
402 |
|
|
|
242,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,445 |
|
Bonus Share Issuance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,826 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,228 |
|
|
|
|
|
|
|
|
|
|
|
(1,105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123 |
|
Vesting of Restricted Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,607 |
) |
|
|
8,971 |
|
|
|
2 |
|
|
|
(778 |
) |
|
|
2,704 |
|
|
|
56 |
|
|
|
(56 |
) |
|
|
(2,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214 |
) |
Restricted Stock Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,643 |
|
Restricted Performance Units Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
Share Issuance from Deferred Compensation Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,719 |
) |
|
|
(54,854 |
) |
|
|
35,186 |
|
|
|
|
|
|
|
(21 |
) |
|
|
1,830 |
|
|
|
(507 |
) |
|
|
507 |
|
|
|
(1,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139 |
|
Share Choice Plan Issuance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46 |
) |
Stock Option Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227 |
|
Outperformance Plan Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615 |
|
Trustee Fees Paid in Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,987 |
) |
|
|
4,895 |
|
|
|
|
|
|
|
|
|
|
|
466 |
|
|
|
35 |
|
|
|
(35 |
) |
|
|
(366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
Other consolidated real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
124 |
|
Preferred Share distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,996 |
) |
|
|
|
|
|
|
(3,996 |
) |
Adjustment for Non-Controlling Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,709 |
) |
|
|
|
|
Distributions declared ($0.10 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,020 |
) |
|
|
(563 |
) |
|
|
(22,583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2009 |
|
|
2,000,000 |
|
|
$ |
20 |
|
|
|
2,300,000 |
|
|
$ |
23 |
|
|
|
128,850,253 |
|
|
|
266,842 |
|
|
|
264,794 |
|
|
$ |
1,286 |
|
|
$ |
2,607,919 |
|
|
$ |
(7,893 |
) |
|
$ |
5,858 |
|
|
$ |
(5,858 |
) |
|
$ |
498,268 |
|
|
$ |
(10,652 |
) |
|
$ |
(1,176,422 |
) |
|
$ |
39,562 |
|
|
$ |
1,952,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Rabbi |
|
|
Brandywine Realty |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Preferred |
|
|
Par Value of |
|
|
Number of Preferred |
|
|
Par Value of |
|
|
Number of Common |
|
|
Number of Treasury |
|
|
Trust/Deferred |
|
|
Trusts beneficial |
|
|
|
|
|
|
Common Shares in |
|
|
Compensation Payable |
|
|
Common Shares in Grantor |
|
|
|
|
|
|
Accumulated Other |
|
|
Cumulative |
|
|
Non-Controlling |
|
|
|
|
|
|
C Shares |
|
|
Preferred C Shares |
|
|
D Shares |
|
|
Preferred D Shares |
|
|
Shares |
|
|
Shares |
|
|
Compensation Shares |
|
|
interest |
|
|
Additional Paid-in Capital |
|
|
Treasury |
|
|
in Common Stock |
|
|
Trust |
|
|
Cumulative Earnings |
|
|
Comprehensive Loss |
|
|
Distributions |
|
|
Interests |
|
|
Total |
|
BALANCE, December 31, 2007 |
|
|
2,000,000 |
|
|
$ |
20 |
|
|
|
2,300,000 |
|
|
$ |
23 |
|
|
|
88,614,322 |
|
|
|
1,599,637 |
|
|
|
171,650 |
|
|
$ |
870 |
|
|
$ |
2,348,153 |
|
|
$ |
(53,449 |
) |
|
$ |
5,651 |
|
|
$ |
(5,651 |
) |
|
$ |
471,902 |
|
|
$ |
(1,885 |
) |
|
$ |
(999,654 |
) |
|
$ |
84,076 |
|
|
$ |
1,850,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,982 |
|
|
|
|
|
|
|
|
|
|
|
828 |
|
|
|
21,810 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
734 |
|
|
|
|
|
|
|
|
|
|
|
734 |
|
Vesting of Restricted Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,741 |
) |
|
|
9,895 |
|
|
|
3 |
|
|
|
(1,012 |
) |
|
|
2,370 |
|
|
|
167 |
|
|
|
(167 |
) |
|
|
(1,068 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293 |
|
Restricted Stock Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,273 |
|
Conversion of LP units to Common Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(561,568 |
) |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
21,348 |
|
|
|
|
|
|
|
|
|
|
|
(6,533 |
) |
|
|
|
|
|
|
|
|
|
|
(14,821 |
) |
|
|
(0 |
) |
Share Cancellation/Forfeiture |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(308 |
) |
|
|
|
|
|
|
(308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Issuance from Deferred Compensation Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,691 |
) |
|
|
33,413 |
|
|
|
|
|
|
|
|
|
|
|
767 |
|
|
|
491 |
|
|
|
(491 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
767 |
|
Share Choice Plan Issuance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27 |
) |
Stock Option Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78 |
|
Deferred Compensation Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,445 |
) |
|
|
4,445 |
|
|
|
|
|
|
|
|
|
|
|
228 |
|
|
|
77 |
|
|
|
(77 |
) |
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77 |
|
Outperformance Plan Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
741 |
|
Trustee Fees Paid in Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,586 |
) |
|
|
2,058 |
|
|
|
|
|
|
|
60 |
|
|
|
35 |
|
|
|
35 |
|
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
Preferred Share distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,996 |
) |
|
|
|
|
|
|
(3,996 |
) |
Distributions declared ($0.44 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,231 |
) |
|
|
(3,210 |
) |
|
|
(80,441 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2008 |
|
|
2,000,000 |
|
|
$ |
20 |
|
|
|
2,300,000 |
|
|
$ |
23 |
|
|
|
88,612,439 |
|
|
|
914,606 |
|
|
|
221,153 |
|
|
$ |
879 |
|
|
$ |
2,349,266 |
|
|
$ |
(28,701 |
) |
|
$ |
6,411 |
|
|
$ |
(6,411 |
) |
|
$ |
485,132 |
|
|
$ |
(1,151 |
) |
|
$ |
(1,080,881 |
) |
|
$ |
66,873 |
|
|
$ |
1,791,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six-month periods |
|
|
|
ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,908 |
|
|
$ |
21,810 |
|
Adjustments to reconcile net income (loss) to net cash from
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
80,109 |
|
|
|
81,948 |
|
Amortization: |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
3,146 |
|
|
|
2,706 |
|
Amortization of debt discount |
|
|
1,215 |
|
|
|
3,418 |
|
Deferred leasing costs |
|
|
8,928 |
|
|
|
8,152 |
|
Acquired above (below) market leases, net |
|
|
(3,487 |
) |
|
|
(4,673 |
) |
Acquired lease intangibles |
|
|
17,051 |
|
|
|
22,333 |
|
Deferred compensation costs |
|
|
2,288 |
|
|
|
2,574 |
|
Recognized hedge activity |
|
|
305 |
|
|
|
|
|
Straight-line rent |
|
|
(4,094 |
) |
|
|
(11,233 |
) |
Provision for doubtful accounts |
|
|
3,907 |
|
|
|
2,650 |
|
Provision for impairment |
|
|
3,700 |
|
|
|
6,850 |
|
Real estate venture income in excess of distributions |
|
|
(1,026 |
) |
|
|
(569 |
) |
Net loss (gain) on sale of interests in real estate |
|
|
1,031 |
|
|
|
(21,377 |
) |
Gain on early extinguishment of debt |
|
|
(18,651 |
) |
|
|
(3,106 |
) |
Cumulative interest accretion on repayment of unsecured notes |
|
|
(1,955 |
) |
|
|
(435 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
2,671 |
|
|
|
3,324 |
|
Other assets |
|
|
9,412 |
|
|
|
7,168 |
|
Accounts payable and accrued expenses |
|
|
2,611 |
|
|
|
(7,430 |
) |
Tenant security deposits and deferred rents |
|
|
(2,707 |
) |
|
|
(2,883 |
) |
Other liabilities |
|
|
(4,264 |
) |
|
|
(6,395 |
) |
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
105,098 |
|
|
|
104,832 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Sales of properties, net |
|
|
33,354 |
|
|
|
53,601 |
|
Capital expenditures |
|
|
(94,810 |
) |
|
|
(89,239 |
) |
Investment in unconsolidated real estate ventures |
|
|
(14,980 |
) |
|
|
(469 |
) |
Escrowed cash |
|
|
31,385 |
|
|
|
|
|
Cash distributions from unconsolidated real estate ventures
in excess of cumulative equity in income |
|
|
11,346 |
|
|
|
1,558 |
|
Leasing costs |
|
|
(14,286 |
) |
|
|
(5,468 |
) |
|
|
|
|
|
|
|
Net cash (used in) from investing activities |
|
|
(47,991 |
) |
|
|
(40,017 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
347,000 |
|
|
|
258,000 |
|
Repayments of Credit Facility borrowings |
|
|
(426,000 |
) |
|
|
(192,727 |
) |
Proceeds from mortgage notes payable |
|
|
89,800 |
|
|
|
|
|
Repayments of mortgage notes payable |
|
|
(73,576 |
) |
|
|
(18,650 |
) |
Repayments of unsecured notes |
|
|
(174,823 |
) |
|
|
(27,725 |
) |
Debt financing costs |
|
|
(21,525 |
) |
|
|
(209 |
) |
Net proceeds from issuance of common shares |
|
|
242,455 |
|
|
|
|
|
Distributions paid to shareholders |
|
|
(39,299 |
) |
|
|
(80,935 |
) |
Distributions to noncontrolling interest |
|
|
(1,127 |
) |
|
|
(3,379 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(57,095 |
) |
|
|
(65,625 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
12 |
|
|
|
(810 |
) |
Cash and cash equivalents at beginning of period |
|
|
3,924 |
|
|
|
5,600 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,936 |
|
|
$ |
4,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest |
|
$ |
74,584 |
|
|
$ |
109,355 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
|
|
|
|
Note receivable issued in a property sale transaction |
|
|
950 |
|
|
|
|
|
Change in capital expenditures financed through accounts payable |
|
|
8,300 |
|
|
|
(2,920 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
7
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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, or REIT, that provides leasing, property management,
development, redevelopment, acquisition and other tenant-related services for a portfolio of office
and industrial properties. Brandywine Realty Trust owns its assets and conducts its operations
through Brandywine Operating Partnership, L.P. a Delaware limited partnership (the Operating
Partnership) and subsidiaries of the Operating Partnership. Brandywine Realty Trust, the
Operating Partnership and their consolidated subsidiaries are collectively referred to below as the
Company. The Companys common shares of beneficial interest are publicly traded on the New York
Stock Exchange under the ticker symbol BDN.
As of June 30, 2009, the Company owned 210 office properties, 22 industrial facilities and three
mixed-use property (collectively, the Properties) containing an aggregate of approximately 23.4
million net rentable square feet. The Company also has two properties under development and seven
properties under redevelopment containing an aggregate 2.3 million net rentable square feet. As of
June 30, 2009, the Company consolidates three office properties owned by real estate ventures
containing 0.4 million net rentable square feet. Therefore, the Company owns and consolidates 247
properties with an aggregate of 26.1 million net rentable square feet. As of June 30, 2009, the
Company owned economic interests in 13 unconsolidated real estate ventures that contain
approximately 4.3 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, Pennsylvania, Metropolitan Washington, D.C., Southern and Central New Jersey,
Richmond, Virginia, Wilmington, Delaware, Austin, Texas and Oakland, Carlsbad and Rancho Bernardo,
California.
Brandywine Realty Trust is the sole general partner of the Operating Partnership and, as of June
30, 2009, owned a 97.9% interest in the Operating Partnership. The Company conducts its
third-party real estate management services business primarily through wholly-owned management
company subsidiaries.
As of June 30, 2009, the management company subsidiaries were managing properties containing an
aggregate of approximately 36.5 million net rentable square feet, of which approximately 25.7
million net rentable square feet related to Properties owned by the Company and approximately 10.8
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 (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. In the opinion of management, all adjustments
(consisting solely of normal recurring matters) for a fair statement of the financial position of
the Company as of June 30, 2009, the results of its operations for the six-month periods ended June
30, 2009 and 2008 and its cash flows for the six-month periods ended June 30, 2009 and 2008 have
been included. The results of operations for such interim periods are not necessarily indicative
of the results for a full year. These consolidated financial statements should be read in
conjunction with the Companys consolidated financial statements and footnotes included in the
Companys 2008 Annual Report on Form 10-K filed with the SEC on March 2, 2009.
Reclassifications and Revisions
During the year ended December 31, 2008 the Company identified certain instances dating back to
1998 in which the Company canceled, upon the vesting of restricted shares, a portion of such shares
in settlement of employee tax
withholdings in excess of minimum statutory rates. As a result, the Company has changed the
classification of the affected 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.
8
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
During the year ended December 31, 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 13) 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 year ended December 31, 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.
The details of these adjustments as noted above are included in our Annual Report on Form 10-K
filed on March 2, 2009.
Certain other prior period amounts have been reclassified in prior years to conform to the current
year presentation. The reclassifications are primarily due to the treatment of sold properties as
discontinued operations on the statement of operations for all periods presented and the adoption
of new accounting pronouncements. During the second quarter of 2009, two surface parking lots with
a total basis of $12.2 million were reclassed from land inventory to operating properties in the
Companys consolidated balance sheet. Accordingly, the December 31, 2008 balances were also
reclassified to conform to the current year presentation.
See Accounting Pronouncements Adopted January 1, 2009 on a Retrospective Basis for details
pertaining to the changes to prior periods resulting from the adoption of new accounting
pronouncements.
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, valuation of real estate and related intangible assets and
liabilities, impairment of long-lived assets, allowance for doubtful accounts and deferred costs.
Operating Properties
Operating properties are carried at historical cost less accumulated depreciation and impairment
losses. The cost of operating properties reflects their purchase price or development cost. Costs
incurred for the acquisition and renovation of an operating property are capitalized to the
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.
9
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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 (includes the below market fixed renewal period).
Capitalized above-market lease values are amortized as a reduction of rental income over the
remaining non-cancelable terms of the respective leases. Capitalized below-market lease values are
amortized as an increase to rental income over the remaining non-cancelable terms of the respective
leases, including any below market fixed-rate renewal periods.
Other intangible assets also include amounts representing the value of tenant relationships and
in-place leases based on the Companys evaluation of the specific characteristics of each tenants
lease and the Companys overall relationship with the respective tenant. The Company estimates the
cost to execute leases with terms similar to the remaining lease terms of the in-place leases,
including leasing commissions, legal and other related expenses. This intangible asset is amortized
to expense over the remaining term of the respective leases. Company estimates of value are made
using methods similar to those used by independent appraisers or by using independent appraisals.
Factors considered by the Company in this analysis include an estimate of the carrying costs during
the expected lease-up periods considering current market conditions and costs to execute similar
leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other
operating expenses and estimates of lost rentals at market rates during the expected lease-up
periods, which primarily range from three to twelve months. The Company also considers information
obtained about each property as a result of its pre-acquisition due diligence, marketing and
leasing activities in estimating the fair value of the tangible and intangible assets acquired.
The Company also uses the information obtained as a result of its pre-acquisition due diligence as
part of its consideration of FIN 47 Accounting for Conditional Asset Retirement Obligations (FIN
47), and when necessary, will record a conditional asset retirement obligation as part of its
purchase price.
Characteristics considered by the Company in allocating value to its tenant relationships include
the nature and extent of the Companys business relationship with the tenant, growth prospects for
developing new business with the tenant, the tenants credit quality and expectations of lease
renewals, among other factors. The value of tenant relationship intangibles is amortized over the
remaining initial lease term and expected renewals, but in no event longer than the remaining
depreciable life of the building. The value of in-place leases is amortized over the remaining
non-cancelable term of the respective leases and any fixed-rate renewal periods.
In the event that a tenant terminates its lease, the unamortized portion of each intangible,
including in-place lease values and tenant relationship values, would be charged to expense and
market rate adjustments (above or below) would be recorded to revenue.
Impairment or Disposal of Long-Lived Assets
Statement of Financial Accounting Standard No. 144 (SFAS 144), Accounting for the Impairment or
Disposal of Long-Lived Assets, provides a single accounting model for long-lived assets as
held-for-sale, broadens the scope of businesses to be disposed of that qualify for reporting as
discontinued operations and changes the timing of recognizing losses on such operations.
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The review of recoverability is based on an
estimate of the future undiscounted cash flows (excluding interest charges) expected to result from
the long-lived assets use and eventual disposition. These cash flows consider factors such as
expected future operating income, trends and prospects, as well as the effects of leasing demand,
competition and other factors. If impairment exists due to the inability to recover the carrying
value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value
exceeds the estimated fair-value of the
10
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
property. The Company is required to make subjective
assessments as to whether there are impairments in the values of the investments in long-lived
assets. These assessments have a direct impact on its net income because recording an impairment
loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash
flows is highly subjective and is based in part on assumptions regarding future occupancy, rental
rates and capital
requirements that could differ materially from actual results in future periods. Although the
Companys strategy is generally to hold its properties over the long-term, the Company will dispose
of properties to meet its liquidity needs or for other strategic needs. If the Companys strategy
changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be
recognized to reduce the property to the lower of the carrying amount or fair value less costs to
sell, and such loss could be material. If the Company determines that impairment has occurred and
the assets are classified as held and used, the affected assets must be reduced to their
fair-value.
Where properties have been identified as having a potential for sale, additional judgments are
required related to the determination as to the appropriate period over which the undiscounted cash
flows should include the operating cash flows and the amount included as the estimated residual
value. Management determines the amounts to be included based on a probability weighted cash flow.
This requires significant judgment. In some cases, the results of whether an impairment is
indicated are sensitive to changes in assumptions input into the estimates, including the hold
period until expected sale.
For the six month period ending June 30, 2009, during the Companys impairment review, it
determined that one of the properties tested for impairment under the held and used model had a
historical cost greater than the probability weighted undiscounted cash flows. This property was
subsequently sold during the three month period ending June 30, 2009. Accordingly, the recorded
amount was reduced to an amount based on managements estimate of the current fair value. During
the Companys impairment review for the three-month period ending June 30, 2009, it was determined
that no additional impairment charges were necessary.
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 straight-line rent adjustment
increased revenue by approximately $1.6 million and $2.6 million for the three-and six month
periods ended June 30, 2009 and approximately $3.8 million and $9.9 million for the three- and six
month ended June 30, 2008. 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 as the Companys property at the end of the tenants lease term.
The amortization of the amounts paid by the tenant for such improvements is calculated on a
straight-line basis over the term of the tenants lease and is a component of straight-line rental
income and increased revenue by $0.6 million and $1.4 million for the three-and six month periods
ended June 30, 2009 and $0.9 million and $1.4 million for the three-and six month periods ended
June 30, 2008. Lease incentives, which are included as reductions of rental revenue in the
accompanying consolidated statements of operations, are recognized on a straight-line basis over
the term of lease. Lease incentives decreased revenue by $0.2 million and $0.4 million for the
three-and six month periods ended June 30, 2009 and $0.2 million and $0.4 million for the three-and
six month periods ended June 30, 2008.
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 that the tenant has a lease on a triple net basis.
Termination fees received from tenants, bankruptcy settlement fees, third party management fees,
labor reimbursement and leasing income are recorded when earned.
Stock-Based Compensation Plans
The Company maintains a shareholder-approved equity-incentive plan known as the Amended and
Restated 1997 Long-Term Incentive Plan (the 1997 Plan). The 1997 Plan is administered by the
Compensation Committee of the Companys Board of Trustees. Under the 1997 Plan, the Compensation
Committee is authorized to award equity and equity-based awards, including incentive stock options,
non-qualified stock options, restricted shares and performance-
11
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
based shares. As of June 30, 2009,
1.8 million common shares remained available for future awards under the 1997 Plan. Through June
30, 2009, all options awarded under the 1997 Plan had a one to ten-year term.
The Company incurred stock-based compensation expense of $1.3 million and $2.3 million during the
three-and six month periods ended June 30, 2009, of which $0.2 million and $0.5 million,
respectively, were capitalized as part of the Companys review of employee salaries eligible for
capitalization. The Company recognized stock-based compensation expense of $1.4 million and $2.6
million during the three-and six month periods ended June 30, 2008, respectively.
The expensed amounts are 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 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 and during the three months ended June 30, 2009 the Company
recognized $0.3 million for the ineffective portion of its forward starting swaps. The
ineffectiveness resulted from the change in the forecasted debt transaction issuance date to March
2010 from December 2009 (See Note 9).
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.
Fair Value Measurements
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. Accordingly, the Company adopted SFAS 157 for non-financial assets
effective January 1, 2009.
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 are categorized based on the inputs to the
valuation techniques as follows:
12
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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 and to all non-financial assets and non-financial liabilities effective January 1,
2009.
The following table sets forth the Companys financial assets and liabilities that were accounted
for at fair value on a recurring basis as of June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
June 30, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
348 |
|
|
$ |
348 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
9,514 |
|
|
$ |
|
|
|
$ |
9,514 |
|
|
|
|
|
Forward Starting Interest Rate Swaps |
|
|
3,186 |
|
|
|
|
|
|
|
3,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,700 |
|
|
$ |
|
|
|
$ |
12,700 |
|
|
$ |
|
|
The following table sets forth the Companys financial assets and liabilities that were
accounted for at fair value on a recurring basis as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
December 31, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
423 |
|
|
$ |
423 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
10,985 |
|
|
$ |
|
|
|
$ |
10,985 |
|
|
$ |
|
|
Forward Starting Interest Rate Swaps |
|
|
7,481 |
|
|
|
|
|
|
|
7,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,466 |
|
|
$ |
|
|
|
$ |
18,466 |
|
|
$ |
|
|
The adoption of SFAS 157 under FSP FAS 157-2 did not have a material impact on the Companys
financial and non-financial assets and liabilities. Non-financial assets and liabilities recorded
at fair value on a non-recurring basis to which the Company would apply SFAS 157 where a
measurement was required under fair value would 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, |
13
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
|
|
|
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
and |
|
|
|
Asset retirement obligations initially measured at fair value under Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. |
There were no items that were accounted for at fair value on a non-recurring basis during the
second quarter of 2009.
Income Taxes
Brandywine Realty Trust has elected to be treated as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the Code). In order to continue to qualify as a REIT,
Brandywine Realty Trust is required to, among other things, distribute at least 90% of its annual
REIT taxable income to its stockholders and meet certain tests regarding the nature of its income
and assets. As a REIT, Brandywine Realty Trust is not subject to federal and state income taxes
with respect to the portion of its income that meets certain criteria and is distributed annually
to its stockholders. Accordingly, no provision for federal and state income taxes is included in
the accompanying consolidated financial statements with respect to the operations of Brandywine
Realty Trust. Brandywine Realty Trust intends to continue to operate in a manner that allows it to
meet the requirements for taxation as a REIT. If Brandywine Realty Trust fails to qualify as a
REIT in any taxable year, Brandywine Realty Trust will be subject to federal and state income taxes
and may not be able to qualify as a REIT for the four subsequent tax years. Brandywine Realty
Trust is subject to certain local income taxes. Provision for such taxes has been included in
general and administrative expenses in Brandywine Realty Trusts Consolidated Statements of
Operations and Comprehensive Income.
Brandywine Realty Trust has elected to treat several of its subsidiaries as REITs under Sections
856 through 860 of the Code. As a result, each subsidiary REIT generally is not subject to federal
and state income taxation at the corporate level to the extent it distributes annually at least
100% of its REIT taxable income to its stockholders and satisfies certain other organizational and
operational requirements. Each subsidiary REIT has met these requirements and, accordingly, no
provision has been made for federal and state income taxes in the accompanying consolidated
financial statements. If any subsidiary REIT fails to qualify as a REIT in any taxable year, that
subsidiary REIT will be subject to federal and state income taxes and may not be able to qualify as
a REIT for the four subsequent taxable years. In addition, this may adversely impact Brandywine
Realty Trusts ability to qualify as a REIT. Also, each subsidiary REIT may be subject to local
income taxes.
Brandywine Realty Trust has elected to treat several of its subsidiaries as taxable REIT
subsidiaries (each a TRS). A TRS is subject to federal, state and local income tax. In general,
a TRS may perform additional non-customary services for tenants and generally may engage in any
real estate or non-real estate related businesses that are not permitted REIT activities.
Accounting Pronouncements Adopted January 1, 2009 on a Retrospective Basis
Effective January 1, 2009, the Company adopted the FASB Staff Position APB 14-1 Accounting for
Convertible Debt Instruments That May Be Settled Upon Conversion (Including Partial Cash
Settlement) (FSP APB 14-1). This new standard requires the initial proceeds from convertible
debt that may be settled in cash to be bifurcated between a liability component and an equity
component. The objective of the guidance is to require the liability and equity components of
convertible debt to be separately accounted for in a manner such that the interest expense recorded
on the convertible debt would not equal the contractual rate of interest on the convertible debt,
but instead would be recorded at a rate that would reflect the issuers conventional debt borrowing
rate. This is accomplished through the creation of a
discount on the debt that would be accreted using the effective interest method as additional
non-cash interest expense over the period the debt is expected to remain outstanding (i.e. through
the first optional redemption date). The provisions of FSP APB 14-1 were adopted on January 1,
2009 and applied retrospectively.
FSP APB 14-1 impacted the Companys accounting for its 3.875% Exchangeable Notes and has a material
impact on the Companys consolidated financial statements and results of operations. The principal
amount outstanding was $205.7
14
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
million at June 30, 2009 and $282.3 million at December 31, 2008. At
certain times and upon certain events, the notes are exchangeable for cash up to their principal
amount and, with respect to the remainder, if any, of the exchange value in excess of such
principal amount, cash or common shares. The initial exchange rate is 25.4065 shares per $1,000
principal amount of notes (which is equivalent to an initial exchange price of $39.36 per share).
The carrying amount of the equity component was $24.4 million. The unamortized debt discount was
$8.0 million at June 30, 2009 and $12.2 million at December 31, 2008. The debt discount of the
liability will be amortized through October 15, 2011. The effective interest rate at June 30, 2009
and 2008 was 5.5%. The Company recognized $2.4 million and $5.4 million of contractual coupon
interest during the three-and six-month periods ended June 30, 2009 and $3.3 million and $6.4
million for the three-and six-month periods ended June 30, 2008, respectively. In addition, the
Company recognized $1.0 million and $1.3 million of interest on amortization of the debt discount,
during the three-and six-month periods ended June 30, 2009 and $1.1 million and $2.2 million for
the three-and six-month periods ended June 30, 2008. The application of FSP APB 14-1 resulted in
an aggregate of approximately $3.9 million (net of incremental capitalized interest) of additional
non-cash interest expense retrospectively applied for fiscal 2008. Excluding the impact of
capitalized interest, the additional non-cash interest expense was approximately $4.3 million for
fiscal 2008. The application of FSP APB 14-1 required the Company to reduce the amount of gain
recognized on early extinguishment of debt in the twelve-months ended December 31, 2008 by
approximately $2.6 million.
Accordingly, in accordance with the Companys retrospective adoption of FSP APB 14-1, the December
31, 2008 balance sheet herein has been revised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APB 14-1 |
|
|
|
|
As Reported |
|
Adjustment |
|
As Revised |
Construction-in-progress |
|
$ |
121,402 |
|
|
$ |
817 |
|
|
$ |
122,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred costs, net |
|
|
89,866 |
|
|
|
(539 |
) |
|
|
89,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured bonds, net of discount |
|
|
1,930,147 |
|
|
|
(12,177 |
) |
|
|
1,917,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
2,327,617 |
|
|
|
23,811 |
|
|
|
2,351,428 |
|
Cumulative earnings |
|
|
509,834 |
|
|
|
(11,118 |
) |
|
|
498,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interests |
|
|
53,199 |
|
|
|
(238 |
) |
|
|
52,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
$ |
1,710,043 |
|
|
$ |
12,455 |
|
|
$ |
1,722,498 |
|
Effective January 1, 2009, the Company adopted the 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 non-vested 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.
FSP EITF 03-6-1 was applied retrospectively to all periods presented. FSP EITF 03-6-1 required
the Company to include the impact of its unvested restricted shares in earnings per share using
this more dilutive methodology. The face of the Companys consolidated statement of operations and
earnings per share disclosure (See Note 11) has been updated to reflect the adoption of FSP EITF
03-6-1 and are presented as amounts allocated to unvested restricted shareholders. FSP EITF 03-6-1
did not have a material impact on the Companys consolidated financial position or results of
operations.
Effective January 1, 2009, the Company adopted the FASB issued SFAS No. 160, Accounting for
Non-controlling Interests (SFAS No. 160). Under this statement, non-controlling interests are
presented as a component of consolidated shareholders equity unless these interests are considered
redeemable. Also, under SFAS No. 160, net income will encompass the total income of all
consolidated subsidiaries and there will be separate disclosure on the face of the income statement
of the attribution of that income between controlling and non-controlling interests. Lastly,
increases and decreases in non-controlling interests will be treated as equity transactions. The
face of the Companys consolidated balance sheet, statement of operations and statements of other comprehensive income has been updated to
15
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
reflect the adoption of SFAS No. 160. SFAS No. 160 did
not have material impact on the Companys financial position or results of operations. The Company
also adopted the recent revisions of EITF Topic D-98, Classification and Measurement of Redeemable
Securities, which became effective upon its adoption of SFAS 160. As a result of the Companys
adoption of these standards, amounts reported prior to adoption as minority interests in
consolidated real estate ventures on its balance sheets are now presented as non-controlling
interests within equity. There has been no change in the measurement of this line item from
amounts previously reported other than those discussed above relating to FSP APB 14-1. During the
six months ended June 30, 2009, the Company allocated $0.5 million to non-controlling interests,
which relates to the accumulated other comprehensive income balance as of December 31, 2008
attributable to the non-controlling interests. The Company determined the out of period adjustment
was not material to prior periods or to the current period.
Accounting Pronouncements Adopted During 2009 on a Prospective Basis
In May 2009, the FASB issued Statement No. 165Subsequent Events (FAS 165). FAS 165 establish
principles and requirements for evaluating and reporting subsequent events and distinguishes which
subsequent events should be recognized in the financial statements versus which subsequent events
should be disclosed in the financial statements. FAS 165 also requires disclosure of the date
through which subsequent events are evaluated by management (see Note 17). The Companys adoption
of FAS 165 did not have a material impact on its consolidated financial position or results of
operations.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments (FSP FAS 107-1). FSP FAS 107-1 amends SFAS No. 107 to require disclosures
about fair value of financial instruments for interim reporting periods of publicly traded
companies in addition to the annual financial statements. FSP FAS 107-1 also amends APB No. 28 to
require those disclosures in summarized financial information at interim reporting periods. FSP
FAS 107-1 is effective for interim periods ending after June 15, 2009. Prior period presentation
is not required for comparative purposes at initial adoption.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
are Not Orderly ( FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair
value in accordance with SFAS No. 157 when the volume and level of activity for both financial and
non-financial assets or liabilities have significantly decreased. FSP FAS 157-4 is effective for
fiscal years and interim periods ending after June 15, 2009 and shall be applied prospectively.
Early adoption for periods ending before March 15, 2009, is not permitted. The Companys adoption
of FSP FAS 157-4 did not have a material impact on its consolidated financial position or results
of operations.
In April 2009, the FASB issued FSP Financial Accounting Standard 115-2 and FAS 124-2, Recognition
and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). FSP FAS
115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt
securities to make the guidance more operational and to improve the presentation and disclosure of
other-than temporary impairments on debt and equity securities in the financial statements. FSP
FAS 115-2 and FAS 124-2 are effective for fiscal years and interim periods ending after June 15,
2009. The Companys adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on its
consolidated financial position or results of operations.
Effective January 1, 2009, the Company adopted 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. See Note 9 for further discussion.
16
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
In April 2008, the 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. The Company has not entered into any acquisition transactions during the
quarter ended June 30, 2009, therefore the adoption of FSP 142-3 did not have a material impact on
the Companys consolidated financial statements.
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
non-controlling 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. The
Company did not complete any acquisitions during the six months ended June 30, 2009, therefore
adoption of SFAS 141(R) has not had a material impact on the Company.
New Pronouncements
In June 2009, the FASB issued FAS 166, Accounting for Transfers of Financials Assets, an amendment
to FAS 140 (FAS 166), and FAS 167, Amendment to FASB Interpretation No. 46R (FAS 167). These
statements will change the way entities account for transfers of financial assets and determine
what entities must be consolidated. FAS 166 is in response to the FASBs concerns about how
practice has developed under FAS 140, which provides the accounting framework for determining
whether a transfer of financial assets constitutes a sale or a secured borrowing and, if the
transfer constitutes a sale, the determination of any resulting gain or loss. The most significant
amendment resulting from FAS 166 consists of the removal of the concept of a Qualifying
Special-Purpose Entity (QSPE) from Statement 140. While FAS 167 addresses the effects of
eliminating the QSPE concept from FAS 140 it also responds to concerns about the application of
certain key provisions of FASB Interpretation No. 46(R), Consolidation of Variable Interest
Entities (FIN 46(R)), including concerns over the transparency of enterprises involvement with
Variable Interest Entities (VIEs). Both Statements 166 and 167 will be effective on January 1,
2010. The Company is currently evaluating the impact of adopting both Statements 166 and 167 on
its consolidated financial position or results of operations.
3. REAL ESTATE INVESTMENTS
As of June 30, 2009 and December 31, 2008 the gross carrying value of the Companys operating
properties was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
Land |
|
$ |
701,856 |
|
|
$ |
707,591 |
|
Building and improvements |
|
|
3,455,973 |
|
|
|
3,481,289 |
|
Tenant improvements |
|
|
428,751 |
|
|
|
419,440 |
|
|
|
|
|
|
|
|
|
|
$ |
4,586,580 |
|
|
$ |
4,608,320 |
|
|
|
|
|
|
|
|
Acquisitions and Dispositions
The Company did not complete any acquisitions during the periods covered in these financial
statements.
On April 29, 2009, the Company sold 7735 Old Georgetown Road, a 122,543 net rentable square feet
office property located in Bethesda, Maryland, for a sales price of $26.5 million.
On March 16, 2009, the Company sold 305 Harper Drive, a 14,980 net rentable square feet office
property located in Moorestown, New Jersey, for a sales price of $1.1 million.
On February 4, 2009, the Company sold two office properties, totaling 66,664 net rentable square
feet in Exton, Pennsylvania, for an aggregate sales price of $9.0 million.
17
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
All sales presented above are included within discontinued operations.
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of June 30, 2009, the Company had an aggregate investment of approximately $75.7 million in its
11 actively operating unconsolidated Real Estate Ventures. 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 45
office buildings that contain an aggregate of approximately 4.3 million net rentable square feet
and one Real Estate Venture developed a hotel property that contains 137 rooms in Conshohocken, PA.
The Company accounts for its unconsolidated interests in its Real Estate Ventures using the equity
method. Unconsolidated interests range from 3% to 50%, subject to specified priority allocations in
certain of the Real Estate Ventures.
The amounts reflected in the following tables (except for the Companys share of equity and income)
are based on the historical financial information of the individual Real Estate Ventures. One of
the Real Estate Ventures, acquired in connection with the Prentiss Properties Trust merger in 2006,
had a negative equity balance on a historical cost basis as a result of historical depreciation and
distribution of excess financing proceeds. The Company reflected its acquisition of this Real
Estate Venture interest at its relative fair value as of the date of the purchase of Prentiss. The
difference between allocated cost and the underlying equity in the net assets of the investee is
accounted for as if the entity were consolidated (i.e., allocated to the Companys relative share
of assets and liabilities with an adjustment to recognize equity in earnings for the appropriate
additional depreciation/amortization). The Company does not record operating losses of the Real
Estate Ventures in excess of its investment balance unless the Company is liable for the
obligations of the Real Estate Venture or is otherwise committed to provide financial support to
the Real Estate Venture.
The following is a summary of the financial position of the Real Estate Ventures as of June 30,
2009 and December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Net property |
|
$ |
548,785 |
|
|
$ |
554,424 |
|
Other assets |
|
|
91,002 |
|
|
|
96,278 |
|
Other Liabilities |
|
|
54,115 |
|
|
|
39,388 |
|
Debt |
|
|
475,809 |
|
|
|
514,308 |
|
Equity |
|
|
109,863 |
|
|
|
97,006 |
|
Companys share of equity (Companys basis) |
|
|
75,688 |
|
|
|
71,028 |
|
The following is a summary of results of operations of the Real Estate Ventures for the
three-month and six-month periods ended June 30, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
Six-month periods |
|
|
ended June 30, |
|
ended June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Revenue |
|
$ |
27,125 |
|
|
$ |
25,863 |
|
|
$ |
53,689 |
|
|
$ |
52,896 |
|
Operating expenses |
|
|
9,109 |
|
|
|
8,875 |
|
|
|
18,675 |
|
|
|
17,797 |
|
Interest expense, net |
|
|
6,845 |
|
|
|
7,956 |
|
|
|
13,997 |
|
|
|
15,753 |
|
Depreciation and amortization |
|
|
8,859 |
|
|
|
9,472 |
|
|
|
17,681 |
|
|
|
18,624 |
|
Net income (loss) |
|
|
2,312 |
|
|
|
(440 |
) |
|
|
3,336 |
|
|
|
722 |
|
Companys share of income (Company basis) |
|
|
1,533 |
|
|
|
1,664 |
|
|
|
2,119 |
|
|
|
2,779 |
|
18
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
As of June 30, 2009, the Company had guaranteed repayment of approximately $2.2 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.
5. DEFERRED COSTS
As of June 30, 2009 and December 31, 2008, the Companys deferred costs were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
114,689 |
|
|
$ |
(45,467 |
) |
|
$ |
69,222 |
|
Financing Costs |
|
|
43,651 |
|
|
|
(12,021 |
) |
|
|
31,630 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
158,340 |
|
|
$ |
(57,488 |
) |
|
$ |
100,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
115,262 |
|
|
$ |
(39,528 |
) |
|
$ |
75,734 |
|
Financing Costs |
|
|
25,170 |
|
|
|
(11,577 |
) |
|
|
13,593 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
140,432 |
|
|
$ |
(51,105 |
) |
|
$ |
89,327 |
|
|
|
|
|
|
|
|
|
|
|
6. INTANGIBLE ASSETS
As of June 30, 2009 and December 31, 2008, the Companys intangible assets were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
Intangible Assets, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
In-place lease value |
|
$ |
134,881 |
|
|
$ |
(72,730 |
) |
|
$ |
62,151 |
|
Tenant relationship value |
|
|
101,087 |
|
|
|
(45,824 |
) |
|
|
55,263 |
|
Above market leases acquired |
|
|
20,058 |
|
|
|
(13,366 |
) |
|
|
6,692 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
256,026 |
|
|
$ |
(131,920 |
) |
|
$ |
124,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
77,945 |
|
|
$ |
(35,909 |
) |
|
$ |
42,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
Intangible Assets, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
In-place lease value |
|
$ |
145,518 |
|
|
$ |
(71,138 |
) |
|
$ |
74,380 |
|
Tenant relationship value |
|
|
103,485 |
|
|
|
(40,835 |
) |
|
|
62,650 |
|
Above market leases acquired |
|
|
23,351 |
|
|
|
(14,624 |
) |
|
|
8,727 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
272,354 |
|
|
$ |
(126,597 |
) |
|
$ |
145,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
82,950 |
|
|
$ |
(35,324 |
) |
|
$ |
47,626 |
|
|
|
|
|
|
|
|
|
|
|
19
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
As of June 30, 2009, the Companys annual amortization for its intangible assets/liabilities is as
follows (in thousands, and assuming no early lease terminations):
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
Liabilities |
|
2009 |
|
$ |
15,729 |
|
|
$ |
4,776 |
|
2010 |
|
|
29,499 |
|
|
|
8,345 |
|
2011 |
|
|
22,772 |
|
|
|
7,051 |
|
2012 |
|
|
17,430 |
|
|
|
6,314 |
|
2013 |
|
|
12,636 |
|
|
|
5,874 |
|
Thereafter |
|
|
26,040 |
|
|
|
9,676 |
|
|
|
|
|
|
|
|
Total |
|
$ |
124,106 |
|
|
$ |
42,036 |
|
|
|
|
|
|
|
|
7. DEBT OBLIGATIONS
The following table sets forth information regarding the Companys debt obligations outstanding at
June 30, 2009 and December 31, 2008 (in thousands):
MORTGAGE DEBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Interest |
|
|
Maturity |
Property / Location |
|
2009 |
|
|
2008 |
|
|
Rate |
|
|
Date |
200 Commerce Drive |
|
$ |
5,639 |
|
|
$ |
5,684 |
|
|
|
7.12% |
(a) |
|
Jan-10 |
Plymouth Meeting Exec. |
|
|
42,421 |
|
|
|
42,785 |
|
|
|
7.00% |
(a) |
|
Dec-10 |
Four Tower Bridge |
|
|
10,284 |
|
|
|
10,404 |
|
|
|
6.62% |
|
|
Feb-11 |
Arboretum I, II, III & V |
|
|
21,357 |
|
|
|
21,657 |
|
|
|
7.59% |
|
|
Jul-11 |
Midlantic Drive/Lenox Drive/DCC I |
|
|
59,016 |
|
|
|
59,784 |
|
|
|
8.05% |
|
|
Oct-11 |
Research Office Center |
|
|
40,403 |
|
|
|
40,791 |
|
|
|
5.30% |
(a) |
|
Oct-11 |
Concord Airport Plaza |
|
|
36,115 |
|
|
|
36,617 |
|
|
|
5.55% |
(a) |
|
Jan-12 |
Six Tower Bridge |
|
|
13,880 |
|
|
|
14,185 |
|
|
|
7.79% |
|
|
Aug-12 |
Newtown Square/Berwyn Park/Libertyview |
|
|
60,245 |
|
|
|
60,910 |
|
|
|
7.25% |
|
|
May-13 |
Coppell Associates |
|
|
2,995 |
|
|
|
3,273 |
|
|
|
6.89% |
|
|
Dec-13 |
Southpoint III |
|
|
3,565 |
|
|
|
3,863 |
|
|
|
7.75% |
|
|
Apr-14 |
Tysons Corner |
|
|
98,795 |
|
|
|
99,529 |
|
|
|
5.36% |
(a) |
|
Aug-15 |
Coppell Associates |
|
|
16,600 |
|
|
|
16,600 |
|
|
|
5.75% |
|
|
Feb-16 |
Two Logan Square |
|
|
89,800 |
|
|
|
68,808 |
|
|
|
7.57% |
(b) |
|
Apr-16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
501,115 |
|
|
|
484,890 |
|
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt premiums, net |
|
|
1,846 |
|
|
|
2,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
502,961 |
|
|
$ |
487,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNSECURED DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$275.0M 4.500% Guaranteed Notes due 2009 |
|
|
150,151 |
|
|
|
196,680 |
|
|
|
4.62% |
|
|
Nov-09 |
Bank Term Loan |
|
|
183,000 |
|
|
|
183,000 |
|
|
|
LIBOR + 0.80% |
|
|
Oct-10 (c) |
$300.0M 5.625% Guaranteed Notes due 2010 |
|
|
210,546 |
|
|
|
275,545 |
|
|
|
5.61% |
|
|
Dec-10 |
Credit Facility |
|
|
74,000 |
|
|
|
153,000 |
|
|
|
LIBOR + 0.725% |
|
|
Jun-11(c) |
$320.7M 3.875% Guaranteed Exchangeable Notes due 2026 |
|
|
205,740 |
|
|
|
282,030 |
|
|
|
5.50% |
|
|
Oct-11 |
$300.0M 5.750% Guaranteed Notes due 2012 |
|
|
290,035 |
|
|
|
300,000 |
|
|
|
5.77% |
|
|
Apr-12 |
$250.0M 5.400% Guaranteed Notes due 2014 |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
5.53% |
|
|
Nov-14 |
$250.0M 6.000% Guaranteed Notes due 2016 |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
5.95% |
|
|
Apr-16 |
$300.0M 5.700% Guaranteed Notes due 2017 |
|
|
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 |
|
|
1,992,082 |
|
|
|
2,268,865 |
|
|
|
|
|
|
|
|
|
less: unamortized exchangeable debt discount |
|
|
(8,063 |
) |
|
|
(12,177 |
) |
|
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt discounts, net |
|
|
(2,437 |
) |
|
|
(2,718 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unsecured indebtedness |
|
$ |
1,981,582 |
|
|
$ |
2,253,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Obligations |
|
$ |
2,484,543 |
|
|
$ |
2,741,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
|
|
|
(a) |
|
Loans were assumed upon acquisition of the related property. Interest rates presented
above reflect the market rate at the time of acquisition. |
|
(b) |
|
The Two Logan Square mortgage loan was re-financed in the amount of $89.8 million on April 1,
2009. The new loan features a 7.57% rate and a seven year term with three years interest only
payments followed by a thirty year amortization schedule. |
|
(c) |
|
These loans may be extended to June 29, 2012 at the Companys discretion. |
On June 29, 2009, the Company entered into a forward financing commitment to borrow up to
$256.5 million under two separate loans which are secured by mortgages on the 30th
Street Post Office (the Post Office project), the Cira South Garage (the garage project) and by
the leases of space at these facilities upon the completion of these projects. Of the total
borrowings, $209.7 million and $46.8 million will be allocated to the Post Office project and to
the garage project, respectively. The Company paid a $17.7 million commitment fee, which includes
a $1.5 million arrangement fee, in connection with this commitment. The total loan amount together
with the net commitment fee was deposited in an escrow account to be administered by The Bank of
New York Mellon (the trustee). In accordance with the trust agreement between the lender and the
trustee, the lender assigned its rights under the loans to the Trust. The Trust issued
certificates to third parties in an amount equal to the funding commitment. Upon investment of the
escrow account in a portfolio of U.S. Government treasuries, the net commitment fee of $16.2
million will be used together with the interest earned on the escrow account to pay interest costs
of the loans through August 26, 2010 which is also the anticipated completion date of the projects
and the expected funding date. In order for funding to occur certain conditions must be met by the
Company which primarily relate to the completion of the projects and the commencement of the rental
payments from the respective leases with the IRS on these properties. The loans will bear interest
at 5.93% and require principal and interest payments based on a twenty year amortization schedule.
The Company intends to use the loan proceeds to reduce borrowings under its credit facility and for
general corporate purposes. As of June 30, 2009, the commitment fee is included as part of the
deferred costs in the Companys consolidated balance sheet as it believes the funding is probable
of occurring. The Company will amortize this cost over the term of the loan starting on the date
the funding of the loans has occurred. In the event that the Company believes the funding will not
occur, this cost will be written off in the period that such determination was made. In addition,
should the funding not occur either because the Company does not meet the conditions or the Company
decides not to proceed with the funding, a termination fee is payable (see Note 16).
During the six-month periods ended June 30, 2009 and 2008, the Companys weighted-average effective
interest rate on its mortgage notes payable was 6.70% and 6.41%, respectively.
During the six-months ended June 30, 2009, the Company repurchased $197.8 million of its existing
Notes in a series of transactions which are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase |
|
|
|
|
|
|
|
|
|
|
Deferred Financing |
|
Notes |
|
Amount |
|
|
Principal |
|
|
Gain |
|
|
Amortization |
|
2009 Notes |
|
$ |
44,945 |
|
|
$ |
46,529 |
|
|
$ |
1,584 |
|
|
$ |
62 |
|
2010 Notes |
|
|
59,257 |
|
|
|
64,999 |
|
|
|
5,735 |
|
|
|
190 |
|
2012 Notes |
|
|
9,061 |
|
|
|
9,965 |
|
|
|
904 |
|
|
|
35 |
|
3.875% Notes |
|
|
63,514 |
|
|
|
76,290 |
|
|
|
10,428 |
|
|
|
796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
176,777 |
|
|
$ |
197,783 |
|
|
$ |
18,651 |
|
|
$ |
1,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company utilizes credit facility borrowings for general business purposes, including the
acquisition, development and redevelopment of properties and the repayment of other debt. The
maturity date of the $600.0 million Credit Facility (the Credit Facility) is 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 per annum
variable interest rate on outstanding balances is LIBOR plus 0.725%. The interest rate and
facility fee are subject to adjustment upon a change in the Companys unsecured debt ratings. The
Company has the option to increase the Credit Facility to $800.0 million subject to the absence of
any defaults and the Companys ability to acquire additional commitments from its existing lenders
or new lenders. As of June 30, 2009, the Company had $74.0 million of borrowings, $15.2 million of
letters of credit outstanding under the Credit Facility, and a $15.3 million holdback in connection
with our historic tax credit transaction leaving $495.5 million of unused availability. During the
six-month periods ended June 30, 2009 and
21
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
2008, the weighted-average interest rate on the Credit
Facility was 1.87% and 4.62% respectively. As of June 30, 2009 and 2008, the weighted average
interest rate on the Credit Facility was 1.42% and 3.17% 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. The Company was in
compliance with all financial covenants as of June 30, 2009.
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%. The Sweep Agreement ended in April 2009 at which point the agreement
was not renewed.
As of June 30, 2009, the Companys aggregate scheduled principal payments of debt obligations,
excluding amortization of discounts and premiums, are as follows (in thousands):
|
|
|
|
|
2009 |
|
$ |
154,928 |
|
2010 |
|
|
450,405 |
|
2011 |
|
|
412,035 |
|
2012 |
|
|
341,474 |
|
2013 |
|
|
59,184 |
|
Thereafter |
|
|
1,075,171 |
|
|
|
|
|
Total principal payments |
|
|
2,493,197 |
|
Net unamortized premiums/discounts |
|
|
(8,654 |
) |
|
|
|
|
Outstanding indebtedness |
|
$ |
2,484,543 |
|
|
|
|
|
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value disclosure was determined by the Company using available market
information and discounted cash flow analyses as of June 30, 2009 and December 31, 2008,
respectively. The discount rate used in calculating fair value is the sum of the current risk free
rate and the risk premium on the date of measurement of the instruments or obligations.
Considerable judgment is necessary to interpret market data and to develop the related estimates of
fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts
that the Company could realize upon disposition. The use of different estimation methodologies may
have a material effect on the estimated fair value amounts. The Company believes that the carrying
amounts reflected in the Consolidated Balance Sheets at June 30, 2009 and December 31, 2008
approximate the fair values for cash and cash equivalents, accounts receivable, other assets,
accounts payable and accrued expenses.
The following are financial instruments for which the Company estimates of fair value differ from
the carrying amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
Mortgage payable, net of premiums |
|
$ |
502,961 |
|
|
$ |
485,472 |
|
|
$ |
484,890 |
|
|
$ |
487,525 |
|
Unsecured notes payable, net of
discounts |
|
$ |
1,645,972 |
|
|
$ |
1,379,098 |
|
|
$ |
1,854,186 |
|
|
$ |
1,152,056 |
|
Variable Rate Debt Instruments |
|
$ |
335,610 |
|
|
$ |
331,421 |
|
|
$ |
414,610 |
|
|
$ |
398,748 |
|
Notes Receivable |
|
$ |
49,676 |
|
|
$ |
48,488 |
|
|
$ |
48,048 |
|
|
$ |
46,227 |
|
9. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
22
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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.
Risks and Uncertainties
Deteriorating economic conditions have resulted in a reduction of the availability of financing and
higher borrowing costs. These factors, coupled with a slowing economy, have reduced the volume of
real estate transactions and created credit stresses on most businesses. The Company believes that
vacancy rates will increase through 2009 and possibly beyond as the current economic climate
negatively impacts tenants in the Properties. The current financial markets also have an adverse
effect on the Companys other counter parties such as the
counter parties in its derivative contracts.
The Company expects that the impact of the current state of the economy, including rising
unemployment and the unprecedented volatility and illiquidity in the financial and credit markets,
will continue to have a dampening effect on the fundamentals of its business, including increases
in past due accounts, tenant defaults, lower occupancy and reduced effective rents. These
conditions would negatively affect the Companys future net income and cash flows and could have a
material adverse effect on its financial condition. In addition to the financial constraints on
our tenants, many of the debt capital markets that the Company and other real estate companies
frequently access, such as the unsecured bond market and the convertible debt market, are not
currently available on terms that management believes are economically attractive or at all.
Although management believes that the quality of the Companys assets and its strong balance sheet
will enable the Company to raise debt capital from other sources such as traditional term or
secured loans from banks, pension funds and life insurance companies, these sources are lending
fewer dollars, under stricter terms and at higher borrowing rates. As of June 30, 2009, the
Company has maturing debt of $154.9 million in 2009 and $450.4 million in 2010 (Note 7). These
amounts do not include the Credit Facility or the Bank Term Loan as those loans can be extended
until 2012 at the Companys discretion. Management is focused on continuing to enhance the
Companys liquidity and strengthening its balance sheet through capital retention, targeted sales
activity and management of existing and prospective liabilities.
The Companys Credit Facility, Bank Term Loan and the indenture governing the unsecured public debt
securities (Note 7) contain restrictions, requirements and other limitations on the ability to
incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt
service coverage ratios and minimum ratios of unencumbered assets to unsecured debt which it must
maintain. The ability to borrow under the Credit Facility is subject to compliance with such
financial and other covenants. In the event that the Company fails to satisfy these covenants, it
would be in default under the Credit Facility, the Bank Term Loan and the indenture and may be
required to repay such debt with capital from other sources. Under such circumstances, other
sources of capital may not be available, or may be available only on unattractive terms.
Availability of borrowings under the Credit Facility is subject to a traditional material adverse
effect clause. Each time the Company borrows it must represent to the lenders that there have been
no events of a nature which would have a material adverse effect on the business, assets,
operations, condition (financial or otherwise) or prospects of the Company taken as a whole or
which could negatively effect the ability of the Company to perform its obligations under the
Credit Facility. While the Company believes that there are currently no material adverse effect
events, the Company is operating in unprecedented economic times and it is possible that such
events could arise which would limit the Companys borrowings under the Credit Facility. If an
event occurs which is considered to have a material adverse effect, the lenders could consider the
Company in default under the terms of the Credit Facility and the borrowings under the Credit
Facility would become due and payable. If the Company is unable to obtain a waiver, this would have
a material adverse effect on the Companys financial position and results of operations.
23
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
The Company was in compliance with all financial covenants as of June 30, 2009. Management
continuously monitors the Companys compliance with and anticipated compliance with the covenants.
Certain of the covenants restrict managements ability to obtain alternative sources of capital.
While the Company currently believes it will remain in compliance with its covenants, in the event
of a continued slow-down and continued crisis in the credit markets, the Company may not be able to
remain in compliance with such covenants and if the lender would not provide a waiver, it could
result in an event of default.
Use of Derivative Financial Instruments
The Companys use of derivative instruments is limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposures and not for speculative
purposes. The principal objective of such arrangements is to minimize the risks and/or costs
associated with the Companys operating and financial structure, as well as to hedge specific
transactions. The counterparties to these arrangements are major financial institutions with which
the Company and its affiliates may also have other financial relationships. The Company is
potentially exposed to credit loss in the event of non-performance by these counterparties.
However, because of the high credit ratings of the counterparties, the Company does not anticipate
that any of the counterparties will fail to meet these obligations as they come due. The Company
does not hedge credit or property value market risks through derivative financial instruments.
The Company formally assesses, both at inception of the hedge and on an on-going basis, whether
each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If
management determines that a derivative is not highly-effective as a hedge or if a derivative
ceases to be a highly-effective hedge, the Company will discontinue hedge accounting prospectively.
The related ineffectiveness would be charged to the Statement of Operations.
The valuation of these instruments is determined using widely accepted valuation techniques
including discounted cash flow analysis on the expected cash flows of each derivative. This
analysis reflects the contractual terms of the derivatives, including the period to maturity, and
uses observable market-based inputs, including interest rate curves and implied volatilities. The
fair values of interest rate swaps are determined using the market standard methodology of netting
the discounted future fixed cash receipts (or payments) and the discounted expected variable cash
payments (or receipts). The variable cash payments (or receipts) are based on an expectation of
future interest rates (forward curves) derived from observable market interest rate curves.
To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation
adjustments to appropriately reflect both its own nonperformance risk and the respective
counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of
its derivative contracts for the effect of nonperformance risk, the Company has considered the
impact of netting and any applicable credit enhancements, such as collateral postings, thresholds,
mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives
fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with
its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the
likelihood of default by itself and its counterparties. However, as of June 30, 2009, the Company
has assessed the significance of the impact of the credit valuation adjustments on the overall
valuation of its derivative positions and has determined that the credit valuation adjustments are
not significant to the overall valuation of its derivatives. As a result, the Company has
determined that its derivative valuations in their entirety are classified in Level 2 of the fair
value hierarchy.
The following table summarizes the terms and fair values of the Companys derivative financial
instruments at June 30, 2009. The notional amounts at June 30, 2009 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 value of the hedges at June 30, 2009 and December 31, 2008 is included in other
liabilities and accumulated other comprehensive income in the accompanying balance sheet, except
for the $0.3 million of ineffectiveness charged to the consolidated statements of operations during
the three months ended June 30, 2009 relating to the two forward starting swaps.
24
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge |
|
Hedge |
|
|
|
Notional Amount |
|
|
|
|
|
|
Trade |
|
|
Maturity |
|
|
Fair Value |
|
Product |
|
Type |
|
Designation |
|
6/30/2009 |
|
|
12/31/2008 |
|
|
Strike |
|
Date |
|
|
Date |
|
|
6/30/2009 |
|
|
12/31/2008 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
$ |
91,700 |
|
|
$ |
78,000 |
(a) |
|
|
4.709 |
% |
|
|
9/20/07 |
|
|
|
10/18/10 |
|
|
$ |
6,452 |
|
|
$ |
7,204 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
4.415 |
% |
|
|
10/19/07 |
|
|
|
10/18/10 |
|
|
|
1,173 |
|
|
|
1,439 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
3.747 |
% |
|
|
11/26/07 |
|
|
|
10/18/10 |
|
|
|
915 |
|
|
|
1,111 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
3.338 |
% |
|
|
9/23/07 |
|
|
|
12/18/09 |
|
|
|
354 |
|
|
|
603 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,774 |
|
|
|
25,774 |
|
|
|
2.975 |
% |
|
|
10/16/08 |
|
|
|
10/30/10 |
|
|
|
620 |
|
|
|
628 |
|
Forward Starting
Swap |
|
Interest Rate |
|
Cash Flow (c) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
4.770 |
% |
|
|
1/4/08 |
|
|
|
12/18/19 |
|
|
|
1,949 |
|
|
|
4,079 |
|
Forward Starting
Swap |
|
Interest Rate |
|
Cash Flow (c) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
4.423 |
% |
|
|
3/19/08 |
|
|
|
12/18/19 |
|
|
|
1,237 |
|
|
|
3,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
242,474 |
|
|
$ |
228,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,700 |
|
|
$ |
18,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 March 2010. |
Concentration of Credit Risk
Concentrations of credit risk arise when a number of tenants related to the Companys investments
or rental operations are engaged in similar business activities, or are located in the same
geographic region, or have similar economic features that would cause their inability to meet
contractual obligations, including those to the Company, to be similarly affected. The Company
regularly monitors its tenant base to assess potential concentrations of credit risk. Management
believes the current credit risk portfolio is reasonably well diversified and does not contain any
unusual concentration of credit risk. No tenant accounted for 5% or more of the Companys rents
during the three and six-month periods ended June 30, 2009 and 2008. Recent developments in the
general economy and the global credit markets have had a significant adverse effect on companies in
numerous industries. The Company has tenants concentrated in various industries that may be
experiencing adverse effects from the current economic conditions and the Company could be
adversely affected if such tenants go into default under their leases.
10. DISCONTINUED OPERATIONS
For the three-and six-month periods ended June 30, 2009, income from discontinued operations
relates to the four properties that the company sold during 2009. The following table summarizes
the revenue and expense information for the properties classified as discontinued operations for
the three-and six-month periods ended June 30, 2009 (in thousands):
25
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Six-month period |
|
|
|
ended June 30, 2009 |
|
|
ended June 30, 2009 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
311 |
|
|
$ |
1,511 |
|
Tenant reimbursements |
|
|
(4 |
) |
|
|
43 |
|
Other |
|
|
3 |
|
|
|
71 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
310 |
|
|
|
1,625 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
165 |
|
|
|
546 |
|
Real estate taxes |
|
|
17 |
|
|
|
127 |
|
Depreciation and amortization |
|
|
142 |
|
|
|
615 |
|
Provision for impairment of discontinued
operations |
|
|
|
|
|
|
3,700 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
324 |
|
|
|
4,988 |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before gain
on sale of interests in real estate |
|
|
(14 |
) |
|
|
(3,364 |
) |
|
|
|
|
|
|
|
|
|
Net loss on sale of interests in real estate |
|
|
(1,225 |
) |
|
|
(1,031 |
) |
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
(1,239 |
) |
|
|
(4,395 |
) |
Loss from discontinued operations
attributable to non-controlling interest |
|
|
35 |
|
|
|
132 |
|
|
|
|
|
|
|
|
Loss from discontinued operations
attributable to Brandywine Realty Trust |
|
$ |
(1,204 |
) |
|
$ |
(4,263 |
) |
|
|
|
|
|
|
|
For the three-and six-month periods ended June 30, 2008, income from discontinued operations
relates to properties that the Company sold from January 1, 2008 through June 30, 2009. The
following table summarizes the revenue and expense information for properties classified as
discontinued operations for the three-and six-month periods ended June 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Six-month period |
|
|
|
ended June 30, 2008 |
|
|
ended June 30, 2008 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
14,175 |
|
|
$ |
29,273 |
|
Tenant reimbursements |
|
|
498 |
|
|
|
1,093 |
|
Other |
|
|
58 |
|
|
|
183 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
14,731 |
|
|
|
30,549 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
5,301 |
|
|
|
10,172 |
|
Real estate taxes |
|
|
1,172 |
|
|
|
2,656 |
|
Depreciation and amortization |
|
|
4,999 |
|
|
|
10,001 |
|
Provision for impairment of discontinued
operations |
|
|
6,850 |
|
|
|
6,850 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
18,322 |
|
|
|
29,679 |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
5 |
|
|
|
11 |
|
Interest expense |
|
|
(1,342 |
) |
|
|
(2,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before gain
on sale of interests in real estate |
|
|
(4,928 |
) |
|
|
(1,813 |
) |
|
|
|
|
|
|
|
|
|
Net gain on sale of interests in real estate |
|
|
13,420 |
|
|
|
21,401 |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
8,492 |
|
|
|
19,588 |
|
Income from discontinued operations
attributable to non-controlling interest |
|
|
(324 |
) |
|
|
(791 |
) |
|
|
|
|
|
|
|
Income from discontinued operations
attributable to Brandywine Realty Trust |
|
$ |
8,168 |
|
|
$ |
18,797 |
|
|
|
|
|
|
|
|
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.
11. |
|
NON-CONTROLLING INTERESTS IN OPERATING PARTNERSHIP AND CONSOLIDATED REAL ESTATE
VENTURES |
26
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Operating Partnership
As of June 30, 2009 and December 31, 2008, the aggregate book value of the non-controlling
interests associated with these units in the accompanying consolidated balance sheet was $39.5
million and $53.0 million, respectively and the Company believes that the aggregate settlement
value of these interests was approximately $20.9 million and $21.7 million, respectively. This
amount is based on the number of units outstanding and the closing share price on the balance sheet
date.
Non-Controlling Interest Partners Share of Consolidated Real Estate Ventures
As of June 30, 2009 and December 31, 2008, the Company owned interests in three consolidated real
estate ventures that own three office properties containing approximately 0.4 million net rentable
square feet. The Company is the primary beneficiary and these consolidated real estate ventures
are variable interest entities under FIN 46R.
The non-controlling 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. The aggregate amount related to these non-controlling interests classified
within equity is $0.1 million at June 30, 2009 and a nominal amount as of December 31, 2008. The
Company believes that the aggregate settlement value of these interests was approximately $8.4
million and $9.1 million at June 30, 2009 and December 31, 2008, respectively. This amount is
based on the estimated liquidation 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 non-controlling interest partners would be entitled to in the event of
liquidation of the assets and liabilities and dissolution of the respective partnerships.
12. 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):
27
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
7,020 |
|
|
$ |
7,020 |
|
|
$ |
(279 |
) |
|
$ |
(279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to non-controlling interests |
|
|
(202 |
) |
|
|
(202 |
) |
|
|
23 |
|
|
|
23 |
|
Amount allocable to unvested restricted shareholders |
|
|
(73 |
) |
|
|
(73 |
) |
|
|
(227 |
) |
|
|
(227 |
) |
Preferred share dividends |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations available to common shareholders |
|
|
4,747 |
|
|
|
4,747 |
|
|
|
(2,481 |
) |
|
|
(2,481 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
(1,239 |
) |
|
|
(1,239 |
) |
|
|
8,492 |
|
|
|
8,492 |
|
Net income (loss) from discontinued operations attributable to
non-controlling interests |
|
|
35 |
|
|
|
35 |
|
|
|
(324 |
) |
|
|
(324 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common shareholders |
|
|
(1,204 |
) |
|
|
(1,204 |
) |
|
|
8,168 |
|
|
|
8,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
3,543 |
|
|
$ |
3,543 |
|
|
$ |
5,687 |
|
|
$ |
5,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
101,583,997 |
|
|
|
101,583,997 |
|
|
|
87,280,576 |
|
|
|
87,280,576 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
1,158,346 |
|
|
|
|
|
|
|
231,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
101,583,997 |
|
|
|
102,742,343 |
|
|
|
87,280,576 |
|
|
|
87,512,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common shareholders |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
Discontinued operations attributable to common shareholders |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
0.09 |
|
|
|
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month periods ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
9,303 |
|
|
$ |
9,303 |
|
|
$ |
2,222 |
|
|
$ |
2,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to non-controlling interests |
|
|
(205 |
) |
|
|
(205 |
) |
|
|
(37 |
) |
|
|
(37 |
) |
Amount allocable to unvested restricted shareholders |
|
|
(110 |
) |
|
|
(110 |
) |
|
|
(394 |
) |
|
|
(394 |
) |
Preferred share dividends |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations available to common shareholders |
|
|
4,992 |
|
|
|
4,992 |
|
|
|
(2,205 |
) |
|
|
(2,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
(4,395 |
) |
|
|
(4,395 |
) |
|
|
19,588 |
|
|
|
19,588 |
|
Net income (loss) from discontinued operations attributable to
non-controlling interests |
|
|
132 |
|
|
|
132 |
|
|
|
(791 |
) |
|
|
(791 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common shareholders |
|
|
(4,263 |
) |
|
|
(4,263 |
) |
|
|
18,797 |
|
|
|
18,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
729 |
|
|
$ |
729 |
|
|
$ |
16,592 |
|
|
$ |
16,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
94,934,134 |
|
|
|
94,934,134 |
|
|
|
87,092,271 |
|
|
|
87,092,271 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
561,258 |
|
|
|
|
|
|
|
207,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
94,934,134 |
|
|
|
95,495,392 |
|
|
|
87,092,271 |
|
|
|
87,300,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common shareholders |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
Discontinued operations attributable to common shareholders |
|
|
(0.04 |
) |
|
|
(0.04 |
) |
|
|
0.22 |
|
|
|
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.19 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities totaling 2,816,621 and 3,276,662 as of June 30, 2009 and 2008, respectively, were
excluded from the earnings per share computations because their effect would have been
anti-dilutive.
28
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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.
Unvested restricted shares are considered participating securities which require the use of the
two-class method for the computation of basic and diluted earnings per share. For the six months
ended June 30, 2009 and 2008, earnings representing nonforfeitable dividends as noted in the table
above were allocated to the unvested restricted shares.
Common and Preferred Shares
On June 2, 2009, the Company completed its public offering (the offering) of 40,250,000 of its
common shares, par value $0.01 per share. The common shares were issued and sold by the Company to
the underwriters at a public offering price of $6.30 per common share in accordance with an
underwriting agreement. The common shares sold include 5,250,000 shares issued and sold pursuant
to the underwriters exercise in full of their over-allotment option under the underwriting
agreement. The Company received net proceeds of approximately $242.5 million from the offering net
of underwriting discounts, commissions and expenses. The Company used the net proceeds from the
offering to repay outstanding borrowings under its $600.0 million unsecured revolving credit
facility amounting to $242.0 million and for general corporate purposes.
On June 2, 2009, the Company declared a distribution of $0.10 per Common Share, totaling $12.9
million, which was paid on July 17, 2009 to shareholders of record as of July 3, 2009. On June 2,
2009, the Company declared distributions on its Series C Preferred Shares and Series D Preferred
Shares to holders of record as of June 30, 2009. These shares are entitled to a preferential
return of 7.50% and 7.375%, respectively. Distributions paid on July 15, 2009 to holders of Series
C Preferred Shares and Series D Preferred Shares totaled $0.9 million and $1.1 million,
respectively.
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 in 2003. The Series C Preferred Shares are
perpetual. 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, which is equivalent to its
liquidation preference, plus accrued but unpaid dividends.
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 in 2004. The Series D Preferred Shares are
perpetual. 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, which is equivalent to its
liquidation preference, plus accrued but unpaid dividends. The Company could not redeem Series D
Preferred Shares before February 27, 2009 except to preserve its REIT status.
Common Share Repurchases
The
Company maintains a share repurchase program under which the Board
has authorized the Company to
repurchase its common shares from time to time. The Board initially authorized this program in
1998 and has periodically replenished capacity under the program. On May 2, 2006 the Companys
Board restored capacity to 3.5 million common shares.
The Company did not repurchase any shares during the three-and six-month periods ended June 30,
2009. As of June 30, 2009, the Company may purchase an additional 0.5 million shares under the
plan.
Repurchases may be made from time to time in the open market or in privately negotiated
transactions, subject to market conditions and compliance with legal requirements. The share
repurchase program does not contain any time limitation and does not obligate the Company to
repurchase any shares. The Company may discontinue the program at any time.
13. SHARE BASED AND DEFERRED COMPENSATION
29
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Stock Options
At June 30, 2009, the Company had 2,431,139 options outstanding under its shareholder approved
equity incentive plan. There were 1,806,163 options unvested as of June 30, 2009 and $0.8 million
of unrecognized compensation expense associated with these options recognized over a weighted
average of 2.1 years. During the six months ended June 30, 2009 the Company recognized $0.2
million of compensation expense, included in general and administrative expense related to unvested
options.
Option activity as of June 30, 2009 and changes during the six months ended June 30, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining Contractual |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Value (in 000s) |
|
Outstanding at January 1, 2009 |
|
|
1,754,648 |
|
|
$ |
20.41 |
|
|
|
8.77 |
|
|
$ |
(30,093 |
) |
Granted |
|
|
676,491 |
|
|
|
2.91 |
|
|
|
9.76 |
|
|
|
3,071,267 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 |
|
|
2,431,139 |
|
|
$ |
15.54 |
|
|
|
8.90 |
|
|
$ |
(19,664,394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested/Exercisable at June 30, 2009 |
|
|
624,976 |
|
|
$ |
20.04 |
|
|
|
8.05 |
|
|
$ |
(7,795,586 |
) |
Restricted Share Awards
As of June 30, 2009, 734,057 restricted shares were outstanding and vest over three to seven
years from the initial grant date. The remaining compensation expense to be recognized at June 30,
2009 was approximately $7.04 million. That expense is expected to be recognized over a weighted
average remaining vesting period of 2.6 years. The Company recognized compensation expense related
to outstanding restricted shares of $1.6 million during the six months ended June 30, 2009, of
which $0.5 million was capitalized as part of the Companys review of employee salaries eligible
for capitalization. The Company recognized $1.7 million of compensation expense during the six
months period ended June 30, 2008. The expensed amounts are included in general and administrative
expense on the Companys consolidated income statement in the respective periods.
The following table summarizes the Companys restricted share activity for the six-months ended
June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair value |
|
Non-vested at January 1, 2009 |
|
|
475,496 |
|
|
$ |
26.21 |
|
Granted |
|
|
372,586 |
|
|
|
3.36 |
|
Vested |
|
|
(111,703 |
) |
|
|
22.85 |
|
Forfeited |
|
|
(2,322 |
) |
|
|
22.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2009 |
|
|
734,057 |
|
|
$ |
9.78 |
|
|
|
|
|
|
|
|
Restricted Performance Share Units Plan
On April 1, 2009 the Compensation Committee granted stock options referred to in the 1997 Plan as
Restricted Performance Share Units (RPSU) to its executive participants. The awards are
contingent upon the Companys total shareholder return as compared to its industry peers and the
employment status of the participants through the performance period. The performance period
commenced on January 1, 2009 and will end on the earlier of December 31, 2011 or the date of a
change in control.
30
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
If the total shareholder return during the measurement period places the Company at or above a
certain percentile as compared to its peers based on an industry-based index at the end of the
measurement period then the number of shares that will be delivered shall equal a certain
percentage of the participants base units.
The participants will also receive dividend equivalent rights (DER) based on the initial number
of the units awarded. The DER will be calculated throughout the vesting period and the dollar
value of the DER will be used to purchase additional RPSU. All shares due to the participants will
be delivered on March 1, 2012. On April 1, 2009, the Company awarded 488,292 RPSU to its officers.
The shares awarded have a three year cliff vesting period which is the period the $1.1 million
fair value of the awards will be amortized. On the date of the grant, the awards were valued using
a Monte Carlo simulation. For the three month period ended June 30, 2009, the Company recognized
compensation expense of $0.1 million related to this plan.
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 5 year period. On the date of each grant, the awards
were valued using a Monte Carlo simulation.
For the three-and six-month periods ended June 30, 2009, the Company recognized $0.3 million and
$0.6 million, respectively, of compensation expenses related to the outperformance program. For the
three-and six-month periods ended June 30, 2008, the Company recognized $0.4 million and $0.7
million, respectively, of compensation expense related to the outperformance program.
Employee Share Purchase Plan
On May 9, 2007, the Companys shareholders approved the 2007 Non-Qualified Employee Share Purchase
Plan (the ESPP). The ESPP is intended to provide eligible employees with a convenient means to
purchase common shares of the Company through payroll deductions and voluntary cash purchases at an
amount equal to 85% of the average closing price per share for a specified period. Under the plan
document, the maximum participant contribution for the 2009 plan year is limited to the lesser of
20% of compensation or $25,000. The number of shares reserved for issuance under the ESPP is 1.25
million. During the three-and six-month periods ended June 30, 2009, employees made purchases of
$0.1 million and $0.2 million, respectively, under the ESPP and the Company recognized $0.1 million
of compensation expense related to the ESPP. During the three-and six-month periods ended June 30,
2008, employees made purchases of $0.2 million and $0.3 million, respectively under the ESPP and
the Company recognized $0.1 million of compensation expense related to the ESPP. The Board of
Directors of the Company may terminate the ESPP at its sole discretion at anytime.
31
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Deferred Compensation
In January 2005, the Company adopted a Deferred Compensation Plan (the Plan) that allows
directors and certain key employees to voluntarily defer compensation. Compensation expense is
recorded for the deferred compensation and a related liability is recognized. Participants may
elect designated benchmark investment options for the notational investment of their deferred
compensation. The deferred compensation obligation is adjusted for deemed income or loss related
to the investments selected. At the time the participants defer compensation, the Company records
a liability, which is included in the Companys consolidated balance sheet. The liability is
adjusted for changes in the market value of the participants selected investments at the end of
each accounting period, and the impact of adjusting the liability is recorded as an increase or
decrease to compensation cost. As of June 30, 2009 and 2008, the Company recorded a net increase
in compensation costs of $0.5 million and a reduction of $0.7 million, respectively, in connection
with the Plan due to the decline in market value of the participant investments in the Plan.
The deferred compensation obligations are unfunded, but the Company has purchased company-owned
life insurance policies which can be utilized as a future funding source for the obligations
related to the Plan. Participants in the Plan have no interest in any assets set aside by the
Company to meet its obligations under the deferral plan.
Participants in the Plan may elect to have all or a portion of their deferred compensation invested
in the Companys common shares. The Company holds these shares in a rabbi trust, which is subject
to the claims of the Companys creditors in the event of the Companys bankruptcy or insolvency.
The Plan does not provide for diversification of a participants deferral allocated to the Company
common share and deferrals allocated to Company common share can only be settled with a fixed
number of shares. In accordance with Emerging Issues Task Force Issue 97-14, Accounting for
Deferred Compensation Arrangements Where Amounts Earned Are Held in A Rabbi Trust and Invested, the
deferred compensation obligation associated with Company common share is classified as a component
of shareholders equity and the related shares are treated as shares to be issued and are included
in total shares outstanding. At June 30, 2009 and 2008, there were 0.3 million and $0.2 million
shares, respectively, to be issued included in total shares outstanding. Subsequent changes in the
fair value of the common shares are not reflected in operations or shareholders equity of the
Company.
14. TAX CREDIT TRANSACTIONS
Historic Tax Credit Transaction
On November 17, 2008, the Company closed a transaction with US Bancorp (USB) related to the
historic rehabilitation of the 30th Street Post Office in Philadelphia, Pennsylvania (Project),
an 862,692 square foot office building which is 100% pre-leased to the Internal Revenue Service
(expected commencement of the IRS lease is August 2010). USB has agreed to contribute approximately
$67.9 million of Project costs and advanced $10.2 million of that contemporaneously with the
closing of the transaction. The remaining funds will be advanced in 2009 and 2010 subject to the
Companys achievement of certain construction milestones and its compliance with the federal
rehabilitation regulations. In return for the investment, USB will, upon completion of the Project
in 2010, receive substantially all of the rehabilitation credits available under section 47 of the
Internal Revenue Code.
In exchange for its contributions into the Project, USB is entitled to substantially all of the
benefits derived from the tax credit, but does not have a material interest in the underlying
economics of the property. This transaction also includes a put/call provision whereby the Company
may be obligated or entitled to repurchase USBs interest in the Project. The Company believes the
put will be exercised and an amount attributed to that obligation is included in other liabilities.
Based on the contractual arrangements that obligate the Company to deliver tax benefits and provide
other guarantees to USB and that entitle the Company through fee arrangements to receive
substantially all available cash flow from the Project, the Company concluded that the Project
should be consolidated in accordance with FIN 46R. The Company also concluded that capital
contributions received from USB, in substance, are consideration that the Company receives in
exchange for its obligation to deliver tax credits and other tax benefits to USB. These receipts
will be recognized as revenue in the consolidated financial statements beginning when the
obligation to USB is relieved upon delivery of the
32
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
expected tax benefits net of any associated
costs. The USB contribution made during 2008 of $10.2 million is included in other liabilities on
the Companys consolidated balance sheet at June 30, 2009 and December 31, 2008. The Company
anticipates that upon completion of the Project in 2010 it will begin to recognize the cash
received as revenue as the five year credit recapture period expires as defined in the Internal
Revenue Code.
Direct and incremental costs incurred in structuring the arrangement are deferred and amortized in
proportion to the recognition of the related revenue. The deferred cost at June 30, 2009 is $2.3
million and is included in other assets on the Companys consolidated balance sheet.
New Markets Tax Credit Transaction
On December 30, 2008, the Company entered into a transaction with USB related to the Cira Garage
Project (garage project) in Philadelphia, Pennsylvania and expects to receive a net benefit of
$7.8 million under a qualified New Markets Tax Credit Program (NMTC). The NMTC was provided for
in the Community Renewal Tax Relief Act of 2000 (the Act) and is intended to induce investment
capital in underserved and impoverished areas of the United States. The Act permits taxpayers
(whether companies or individuals) to claim credits against their Federal income taxes for up to
39% of qualified investments in qualified, active low-income businesses or ventures.
USB contributed $13.3 million into the garage project and as such they are entitled to
substantially all of the benefits derived from the tax credit, but they do not have a material
interest in the underlying economics of the garage project. This transaction also includes a
put/call provision whereby the Company may be obligated or entitled to repurchase USBs interest.
The Company believes the put will be exercised and an amount attributed to that obligation is
included in other liabilities.
Based on the contractual arrangements that obligate the Company to deliver tax benefits and provide
various other guarantees to USB, the Company concluded that the project should be consolidated in
accordance with FIN 46R. Proceeds received in exchange for the transfer of the tax credits will be
recognized when the tax benefits are delivered without risk of recapture to the tax credit
investors and the Companys obligation is relieved. Accordingly, the USB contribution of $13.3
million is included in other liabilities on the Companys consolidated balance sheet at June 30,
2009 and December 31, 2008.
Direct and incremental costs incurred in structuring the arrangement are deferred and amortized
over the expected duration of the arrangement in proportion to the recognition of the related
revenue. The deferred asset at June 30, 2009 is $5.2 million and is included in other assets on
the Companys consolidated balance sheet.
The Company anticipates that it will recognize the net cash received as revenue in the year ended
December 31, 2014. The NMTC is subject to 100% recapture for a period of seven years.
15. SEGMENT INFORMATION
As of June 30, 2009, the Company manages its portfolio within six segments: (1) Pennsylvania, (2)
Metropolitan Washington D.C, (3) New Jersey/Delaware, (4) Richmond, Virginia, (5) California and
(6) Austin, Texas. The Pennsylvania segment includes properties in Chester, Delaware, Bucks, and
Montgomery counties in the Philadelphia suburbs and the City of Philadelphia in Pennsylvania. The
Metropolitan Washington, D.C. segment includes properties in Northern Virginia and suburban
Maryland. 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 in the state of
Delaware. The Richmond, Virginia segment includes properties primarily in Albemarle, Chesterfield
and Henrico counties, the City of Richmond and Durham, North Carolina. The California segment
includes properties in Oakland, Concord, Carlsbad and Rancho Bernardo. The Austin, Texas segment
includes properties in Coppell and Austin. 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.
33
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
The Austin, Texas segment was previously known as the Southwest segment. In order to provide
specificity and to reflect the disposition of properties in Dallas, Texas in 2007, the Company now
considers this segment to be Austin, Texas. The California segment was previously broken out into
California North and California South. Upon the completion of the Northern California
transaction in 2008, the Company owns three properties and two land parcels in Northern California.
As a result, the California North and the California South segments, effective as of the
fourth quarter of 2008, are combined into the California segment. The Company has restated the
corresponding items of segment information for the three and six month periods ended June 30, 2008
to conform to the new presentation.
34
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Segment information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
Metropolitan, D.C. |
|
|
/Delaware |
|
|
Virginia |
|
|
California |
|
|
Austin, Texas |
|
|
Corporate |
|
|
Total |
|
As of June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,729,472 |
|
|
$ |
1,356,842 |
|
|
$ |
677,252 |
|
|
$ |
297,678 |
|
|
$ |
248,570 |
|
|
$ |
276,766 |
|
|
$ |
|
|
|
$ |
4,586,580 |
|
Construction-in-progress |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
197,404 |
|
|
$ |
197,404 |
|
Land inventory |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
97,430 |
|
|
$ |
97,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,734,948 |
|
|
$ |
1,371,997 |
|
|
$ |
674,503 |
|
|
$ |
297,171 |
|
|
$ |
248,876 |
|
|
$ |
280,825 |
|
|
$ |
|
|
|
$ |
4,608,320 |
|
Construction-in-progress |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
122,219 |
|
|
$ |
122,219 |
|
Land inventory |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
100,516 |
|
|
$ |
100,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
58,606 |
|
|
$ |
34,637 |
|
|
$ |
29,190 |
|
|
$ |
8,948 |
|
|
$ |
6,158 |
|
|
$ |
8,825 |
|
|
$ |
(487 |
) |
|
$ |
145,877 |
|
Property operating expenses, real estate
taxes and
third party management expenses |
|
|
21,038 |
|
|
|
12,762 |
|
|
|
12,792 |
|
|
|
3,374 |
|
|
|
3,392 |
|
|
|
3,997 |
|
|
|
(275 |
) |
|
|
57,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
37,568 |
|
|
$ |
21,875 |
|
|
$ |
16,398 |
|
|
$ |
5,574 |
|
|
$ |
2,766 |
|
|
$ |
4,828 |
|
|
$ |
(212 |
) |
|
$ |
88,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
60,704 |
|
|
$ |
34,288 |
|
|
$ |
29,377 |
|
|
$ |
9,593 |
|
|
$ |
7,310 |
|
|
$ |
9,914 |
|
|
$ |
(420 |
) |
|
$ |
150,766 |
|
Property operating expenses, real estate
taxes and
third party management expenses |
|
|
21,282 |
|
|
|
11,929 |
|
|
|
12,837 |
|
|
|
3,161 |
|
|
|
3,102 |
|
|
|
4,375 |
|
|
|
1,186 |
|
|
|
57,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
39,422 |
|
|
$ |
22,359 |
|
|
$ |
16,540 |
|
|
$ |
6,432 |
|
|
$ |
4,208 |
|
|
$ |
5,539 |
|
|
$ |
(1,606 |
) |
|
$ |
92,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-months ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
119,059 |
|
|
$ |
69,811 |
|
|
$ |
58,639 |
|
|
$ |
18,450 |
|
|
$ |
13,532 |
|
|
$ |
17,918 |
|
|
$ |
(694 |
) |
|
$ |
296,715 |
|
Property operating expenses, real estate
taxes and
third party management expenses |
|
|
46,278 |
|
|
|
26,640 |
|
|
|
26,911 |
|
|
|
7,257 |
|
|
|
6,737 |
|
|
|
7,978 |
|
|
|
(2,371 |
) |
|
|
119,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
72,781 |
|
|
$ |
43,171 |
|
|
$ |
31,728 |
|
|
$ |
11,193 |
|
|
$ |
6,795 |
|
|
$ |
9,940 |
|
|
$ |
1,677 |
|
|
$ |
177,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
124,346 |
|
|
$ |
68,489 |
|
|
$ |
57,968 |
|
|
$ |
18,820 |
|
|
$ |
14,639 |
|
|
$ |
18,981 |
|
|
$ |
(995 |
) |
|
$ |
302,248 |
|
Property operating expenses, real estate
taxes and
third party management expenses |
|
|
43,131 |
|
|
|
24,061 |
|
|
|
25,235 |
|
|
|
6,138 |
|
|
|
6,011 |
|
|
|
8,449 |
|
|
|
3,284 |
|
|
|
116,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
81,215 |
|
|
$ |
44,428 |
|
|
$ |
32,733 |
|
|
$ |
12,682 |
|
|
$ |
8,628 |
|
|
$ |
10,532 |
|
|
$ |
(4,279 |
) |
|
$ |
185,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Net operating income is defined as total revenue less property operating expenses, real estate
taxes and third party management expenses. Segment net operating income includes revenue, real
estate taxes and property operating expenses directly related to operation and management of the
properties owned and managed within the respective geographical region. Segment net operating
income excludes property level depreciation and amortization, revenue and expenses directly
associated with third party real estate management services, expenses associated with corporate
administrative support services, and inter-company eliminations. Below is a reconciliation of
consolidated net operating income to consolidated income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
Six-month periods |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Consolidated net operating income |
|
$ |
88,797 |
|
|
$ |
92,894 |
|
|
$ |
177,285 |
|
|
$ |
185,939 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(34,944 |
) |
|
|
(36,742 |
) |
|
|
(70,590 |
) |
|
|
(73,785 |
) |
Deferred financing costs |
|
|
(1,894 |
) |
|
|
(1,198 |
) |
|
|
(3,146 |
) |
|
|
(2,706 |
) |
Recognized hedge activity |
|
|
(305 |
) |
|
|
|
|
|
|
(305 |
) |
|
|
|
|
Depreciation and amortization |
|
|
(53,308 |
) |
|
|
(51,492 |
) |
|
|
(105,461 |
) |
|
|
(102,430 |
) |
General & administrative expenses |
|
|
(5,514 |
) |
|
|
(6,127 |
) |
|
|
(10,472 |
) |
|
|
(11,039 |
) |
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
642 |
|
|
|
179 |
|
|
|
1,222 |
|
|
|
382 |
|
Equity in income of real estate ventures |
|
|
1,533 |
|
|
|
1,664 |
|
|
|
2,119 |
|
|
|
2,779 |
|
Net loss on sales of interests in
undepreciated real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
Gain on early extinguishment of debt |
|
|
12,013 |
|
|
|
543 |
|
|
|
18,651 |
|
|
|
3,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
7,020 |
|
|
|
(279 |
) |
|
|
9,303 |
|
|
|
2,222 |
|
Income (loss) from discontinued operations |
|
|
(1,239 |
) |
|
|
8,492 |
|
|
|
(4,395 |
) |
|
|
19,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,781 |
|
|
$ |
8,213 |
|
|
$ |
4,908 |
|
|
$ |
21,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. 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.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state,
and local governments. The Companys compliance with existing laws has not had a material adverse
effect on its financial condition and results of operations, and the Company does not believe it
will have a material adverse effect in the future. However, the Company cannot predict the impact
of unforeseen environmental contingencies or new or changed laws or regulations on its current
Properties or on properties that the Company may acquire.
Ground Rent
Future minimum rental payments under the terms of all non-cancelable ground leases under which the
Company is the lessee are expensed on a straight-line basis regardless of when payments are due.
Minimum future rental payments on non-cancelable leases at June 30, 2009 are as follows (in
thousands):
36
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
|
|
|
|
|
2009 |
|
$ |
993 |
|
2010 |
|
|
2,236 |
|
2011 |
|
|
2,318 |
|
2012 |
|
|
2,318 |
|
2013 |
|
|
2,318 |
|
Thereafter |
|
|
290,541 |
|
Certain of the land leases provide for prepayment of rent on a present value basis using a
fixed discount rate. Further, one of the land leases for a property (currently under development)
provides 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 702,006 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 taxes 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 TRC 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 date of the TRC acquisition as follows at June 30, 2009; 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. 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 may be required to make significant payments to the parties who
sold it the applicable property on account of tax liabilities attributed to them.
The Company invests in its properties and regularly incurs capital expenditures in the ordinary
course to maintain the properties. The Company believes that such expenditures enhance our
competitiveness. The Company also enters into construction, utility and service contracts in the
ordinary course of business which may extend beyond one year. These contracts typically provide
for cancellation with insignificant or no cancellation penalties.
During 2008, in connection with our development of the PO Box/IRS and Cira Garage projects, we
entered into a historic tax credit and new market tax credit arrangement, respectively (see Note
13). The Company is required to be
37
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
in compliance with various laws, regulations and contractual
provisions that apply to its historic and new market tax credit arrangements. Non-compliance with
applicable requirements could result in projected tax benefits not being realized and require a
refund or reduction of investor capital contributions, which are reported as deferred income in the
Companys consolidated balance sheet, until such time as its obligation to deliver tax benefits is
relieved. The remaining compliance periods for its tax credit arrangements runs through 2015. The
Company does not anticipate that any material refunds or reductions of investor capital
contributions will be required in connection with these arrangements.
On June 29, 2009, the Company entered into a forward financing commitment to borrow up to $256.5
million under two separate loans which are secured by mortgages on the 30th Street Post
Office (the Post Office project), the Cira South Garage (the garage project) and by the leases
of space at these facilities upon the completion of these projects (See Note 7). In order for
funding to occur certain conditions must be met by the Company and primarily relate to the
completion of the projects and the commencement of the rental payments from the respective leases
on these properties. The expected funding date is scheduled on August 26, 2010 which is also the
anticipated completion date of the projects. In the event the said conditions were not met, the
Company has the right to extend the funding date by paying an extension fee amounting to $1.8
million for each 30 day extension within the allowed two year extension period. In addition, the
Company can also voluntarily elect to terminate the loans during the forward period including the
extension period by paying a termination fee. The Company is also subject to the termination fee
if the conditions were not met on the final advance date. The termination fee is calculated as the
greater of the 0.5% of the total available principal to be funded or the difference between the
present value of the scheduled interest (based on the principal amount to be funded and the 20-year
treasury rate) and principal payments from the funding date through the loans maturity date and
the amount to be funded. In addition, deferred financing costs related to these loans will be
accelerated if the Company chose to terminate the forward financing commitment.
17. SUBSEQUENT EVENTS
On July 8, 2009, the Company closed a $60.0 million first mortgage on One Logan Square, a 594,361
square foot office property located in Philadelphia, Pennsylvania. The new loan accrues interest at
a rate of LIBOR plus 3.5% with a minimum LIBOR rate of 1% over a seven-year term with three years
of interest only payments and interest and principal payments based on a thirty-year amortization
schedule. The loan proceeds were used for general corporate purposes including repayment of
existing indebtedness.
The Company has evaluated subsequent events through August 7, 2009, the date the financial
statements were issued.
38
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except unit and per unit information)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 (as adjusted) |
|
ASSETS |
|
|
|
|
|
|
|
|
Real estate investments: |
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
4,586,580 |
|
|
$ |
4,608,320 |
|
Accumulated depreciation |
|
|
(690,490 |
) |
|
|
(639,688 |
) |
|
|
|
|
|
|
|
Operating real estate investments, net |
|
|
3,896,090 |
|
|
|
3,968,632 |
|
Construction-in-progress |
|
|
197,404 |
|
|
|
122,219 |
|
Land inventory |
|
|
97,430 |
|
|
|
100,516 |
|
|
|
|
|
|
|
|
Total real estate investments, net |
|
|
4,190,924 |
|
|
|
4,191,367 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
3,936 |
|
|
|
3,924 |
|
Cash in escrow |
|
|
|
|
|
|
31,385 |
|
Accounts receivable, net |
|
|
8,950 |
|
|
|
11,762 |
|
Accrued rent receivable, net |
|
|
85,669 |
|
|
|
86,362 |
|
Investment in real estate ventures, at equity |
|
|
75,688 |
|
|
|
71,028 |
|
Deferred costs, net |
|
|
100,852 |
|
|
|
89,327 |
|
Intangible assets, net |
|
|
124,106 |
|
|
|
145,757 |
|
Notes receivable |
|
|
49,676 |
|
|
|
48,048 |
|
Other assets |
|
|
47,831 |
|
|
|
59,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,687,632 |
|
|
$ |
4,737,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
502,961 |
|
|
$ |
487,525 |
|
Borrowing under credit facilities |
|
|
74,000 |
|
|
|
153,000 |
|
Unsecured term loan |
|
|
183,000 |
|
|
|
183,000 |
|
Unsecured senior notes, net of discounts |
|
|
1,724,582 |
|
|
|
1,917,970 |
|
Accounts payable and accrued expenses |
|
|
85,474 |
|
|
|
74,824 |
|
Distributions payable |
|
|
15,177 |
|
|
|
29,288 |
|
Tenant security deposits and deferred rents |
|
|
54,595 |
|
|
|
58,692 |
|
Acquired below market leases, net |
|
|
42,036 |
|
|
|
47,626 |
|
Other liabilities |
|
|
53,696 |
|
|
|
63,545 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,735,521 |
|
|
|
3,015,470 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable limited partnership units
2,816,621 and 2,816,621 issued and outstanding in 2009 and 2008, respectively |
|
|
53,308 |
|
|
|
54,166 |
|
|
|
|
|
|
|
|
|
|
Brandywine Operating Partnerships equity: |
|
|
|
|
|
|
|
|
7.50% Series D Preferred Mirror Units; 2,000,000 issued and outstanding in 2009
and 2008 |
|
|
47,912 |
|
|
|
47,912 |
|
7.375% Series E Preferred Mirror Units; 2,300,000 issued and outstanding in
2009
and 2008 |
|
|
55,538 |
|
|
|
55,538 |
|
General Partnership Capital, 128,850,253 and 88,610,053 units issued in 2009
and
2008, respectively and 128,583,411 and
88,158,937 units outstanding in
2009 and 2008, respectively |
|
|
1,806,196 |
|
|
|
1,581,887 |
|
Accumulated other comprehensive loss |
|
|
(10,976 |
) |
|
|
(17,005 |
) |
|
|
|
|
|
|
|
Total Brandywine Operating Partnerships equity |
|
|
1,898,670 |
|
|
|
1,668,332 |
|
|
|
|
|
|
|
|
|
|
Non-controlling interest consolidated real estate ventures |
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
1,898,803 |
|
|
|
1,668,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
4,687,632 |
|
|
$ |
4,737,968 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
39
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods ended |
|
|
For the six-month periods ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rents |
|
$ |
121,598 |
|
|
$ |
123,111 |
|
|
$ |
244,208 |
|
|
$ |
245,879 |
|
Tenant reimbursements |
|
|
18,636 |
|
|
|
20,786 |
|
|
|
41,069 |
|
|
|
39,807 |
|
Termination fees |
|
|
963 |
|
|
|
892 |
|
|
|
1,076 |
|
|
|
4,124 |
|
Third party management fees, labor reimbursement and leasing |
|
|
4,097 |
|
|
|
5,170 |
|
|
|
8,861 |
|
|
|
10,849 |
|
Other |
|
|
583 |
|
|
|
807 |
|
|
|
1,501 |
|
|
|
1,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
145,877 |
|
|
|
150,766 |
|
|
|
296,715 |
|
|
|
302,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
40,595 |
|
|
|
40,171 |
|
|
|
85,460 |
|
|
|
80,881 |
|
Real estate taxes |
|
|
14,517 |
|
|
|
15,320 |
|
|
|
29,887 |
|
|
|
30,801 |
|
Third party management expenses |
|
|
1,968 |
|
|
|
2,381 |
|
|
|
4,083 |
|
|
|
4,627 |
|
Depreciation and amortization |
|
|
53,308 |
|
|
|
51,492 |
|
|
|
105,461 |
|
|
|
102,430 |
|
General & administrative expenses |
|
|
5,514 |
|
|
|
6,127 |
|
|
|
10,472 |
|
|
|
11,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
115,902 |
|
|
|
115,491 |
|
|
|
235,363 |
|
|
|
229,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
29,975 |
|
|
|
35,275 |
|
|
|
61,352 |
|
|
|
72,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
642 |
|
|
|
179 |
|
|
|
1,222 |
|
|
|
382 |
|
Interest expense |
|
|
(34,944 |
) |
|
|
(36,742 |
) |
|
|
(70,590 |
) |
|
|
(73,785 |
) |
Interest expense Deferred financing costs |
|
|
(1,894 |
) |
|
|
(1,198 |
) |
|
|
(3,146 |
) |
|
|
(2,706 |
) |
Recognized hedge activity |
|
|
(305 |
) |
|
|
|
|
|
|
(305 |
) |
|
|
|
|
Equity in income of real estate ventures |
|
|
1,533 |
|
|
|
1,664 |
|
|
|
2,119 |
|
|
|
2,779 |
|
Net loss on disposition of undepreciated real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
Gain on early extinguishment of debt |
|
|
12,013 |
|
|
|
543 |
|
|
|
18,651 |
|
|
|
3,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
7,020 |
|
|
|
(279 |
) |
|
|
9,303 |
|
|
|
2,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
(14 |
) |
|
|
1,922 |
|
|
|
336 |
|
|
|
5,037 |
|
Net gain on disposition of discontinued operations |
|
|
(1,225 |
) |
|
|
13,420 |
|
|
|
(1,031 |
) |
|
|
21,401 |
|
Provision for impairment |
|
|
|
|
|
|
(6,850 |
) |
|
|
(3,700 |
) |
|
|
(6,850 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,239 |
) |
|
|
8,492 |
|
|
|
(4,395 |
) |
|
|
19,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
5,781 |
|
|
|
8,213 |
|
|
|
4,908 |
|
|
|
21,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to non-controlling interests |
|
|
(28 |
) |
|
|
(38 |
) |
|
|
(22 |
) |
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
Brandywine Operating Partnership |
|
|
5,753 |
|
|
|
8,175 |
|
|
|
4,886 |
|
|
|
21,732 |
|
Preferred share dividends |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
Amount allocated to unvested restricted shareholders |
|
|
(73 |
) |
|
|
(227 |
) |
|
|
(110 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income allocated to Common Partnership Units |
|
$ |
3,682 |
|
|
$ |
5,950 |
|
|
$ |
780 |
|
|
$ |
17,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.05 |
|
|
$ |
(0.03 |
) |
|
$ |
0.05 |
|
|
$ |
(0.02 |
) |
Discontinued operations |
|
|
(0.01 |
) |
|
|
0.10 |
|
|
|
(0.04 |
) |
|
|
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.04 |
|
|
$ |
0.07 |
|
|
$ |
0.01 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.05 |
|
|
$ |
(0.03 |
) |
|
$ |
0.05 |
|
|
$ |
(0.02 |
) |
Discontinued operations |
|
|
(0.01 |
) |
|
|
0.10 |
|
|
|
(0.04 |
) |
|
|
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.04 |
|
|
$ |
0.07 |
|
|
$ |
0.01 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common partnership units outstanding |
|
|
104,400,618 |
|
|
|
90,747,434 |
|
|
|
97,750,755 |
|
|
|
90,736,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common partnership units outstanding |
|
|
105,558,964 |
|
|
|
90,979,203 |
|
|
|
98,312,013 |
|
|
|
90,944,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to
Brandywine Operating Partnership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
6,992 |
|
|
$ |
(317 |
) |
|
$ |
9,281 |
|
|
$ |
2,144 |
|
Income (loss) from discontinued operations |
|
|
(1,239 |
) |
|
|
8,492 |
|
|
|
(4,395 |
) |
|
|
19,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,753 |
|
|
$ |
8,175 |
|
|
$ |
4,886 |
|
|
$ |
21,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
40
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods |
|
|
For the six-month periods ended |
|
|
|
ended June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 (as adjusted) |
|
|
2009 |
|
|
2008 (as adjusted) |
|
Net income |
|
$ |
5,781 |
|
|
$ |
8,213 |
|
|
$ |
4,908 |
|
|
$ |
21,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative financial instruments |
|
|
(4,217 |
) |
|
|
5,358 |
|
|
|
6,069 |
|
|
|
526 |
|
Reclassification of realized (gains) on derivative financial
instruments to operations, net |
|
|
(20 |
) |
|
|
(20 |
) |
|
|
(40 |
) |
|
|
(40 |
) |
Unrealized gain on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(4,237 |
) |
|
|
5,338 |
|
|
|
6,029 |
|
|
|
734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
1,544 |
|
|
$ |
13,551 |
|
|
$ |
10,937 |
|
|
$ |
22,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to non-controlling interests |
|
|
(28 |
) |
|
|
(38 |
) |
|
|
(22 |
) |
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Brandywine Operating Partnership |
|
$ |
1,516 |
|
|
$ |
13,513 |
|
|
$ |
10,915 |
|
|
$ |
22,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
41
BRANDYWINE OPERATING PARTNERSHIP L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six-month periods |
|
|
|
ended June 30, |
|
|
|
2009 |
|
|
2008 (as adjusted) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,908 |
|
|
$ |
21,810 |
|
Adjustments to reconcile net income to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
80,109 |
|
|
|
81,948 |
|
Amortization: |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
3,146 |
|
|
|
2,706 |
|
Amortization of debt discount |
|
|
1,215 |
|
|
|
3,418 |
|
Deferred leasing costs |
|
|
8,928 |
|
|
|
8,152 |
|
Acquired above (below) market leases, net |
|
|
(3,487 |
) |
|
|
(4,673 |
) |
Acquired lease intangibles |
|
|
17,051 |
|
|
|
22,333 |
|
Deferred compensation costs |
|
|
2,288 |
|
|
|
2,574 |
|
Recognized hedge activity |
|
|
305 |
|
|
|
|
|
Straight-line rent |
|
|
(4,094 |
) |
|
|
(11,233 |
) |
Provision for doubtful accounts |
|
|
3,907 |
|
|
|
2,650 |
|
Provision for impairment in real estate |
|
|
3,700 |
|
|
|
6,850 |
|
Real estate venture income in excess of distributions |
|
|
(1,026 |
) |
|
|
(569 |
) |
Net gain on sale of interests in real estate |
|
|
1,031 |
|
|
|
(21,377 |
) |
Gain on early extinguishment of debt |
|
|
(18,651 |
) |
|
|
(3,106 |
) |
Cummulative interest accretion on repayments of unsecured notes |
|
|
(1,955 |
) |
|
|
(435 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
2,671 |
|
|
|
3,324 |
|
Other assets |
|
|
9,412 |
|
|
|
7,168 |
|
Accounts payable and accrued expenses |
|
|
2,611 |
|
|
|
(7,430 |
) |
Tenant security deposits and deferred rents |
|
|
(2,707 |
) |
|
|
(2,883 |
) |
Other liabilities |
|
|
(4,264 |
) |
|
|
(6,395 |
) |
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
105,098 |
|
|
|
104,832 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Sales of properties, net |
|
|
33,354 |
|
|
|
53,601 |
|
Capital expenditures |
|
|
(94,810 |
) |
|
|
(89,239 |
) |
Investment in unconsolidated real estate ventures |
|
|
(14,980 |
) |
|
|
(469 |
) |
Escrowed cash |
|
|
31,385 |
|
|
|
|
|
Cash distributions from unconsolidated real estate ventures in excess of equity in income |
|
|
11,346 |
|
|
|
1,558 |
|
Leasing costs |
|
|
(14,286 |
) |
|
|
(5,468 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(47,991 |
) |
|
|
(40,017 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
347,000 |
|
|
|
258,000 |
|
Repayments of Credit Facility borrowings |
|
|
(426,000 |
) |
|
|
(192,727 |
) |
Proceeds from mortgage notes payable |
|
|
89,800 |
|
|
|
|
|
Repayments of mortgage notes payable |
|
|
(73,576 |
) |
|
|
(18,650 |
) |
Repayments of unsecured notes |
|
|
(174,823 |
) |
|
|
(27,725 |
) |
Debt financing costs |
|
|
(21,525 |
) |
|
|
(209 |
) |
Net proceeds from Issuance of Common Partnership Units |
|
|
242,455 |
|
|
|
|
|
Distributions paid to preferred and common partnership unitholders |
|
|
(40,426 |
) |
|
|
(84,314 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(57,095 |
) |
|
|
(65,625 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
12 |
|
|
|
(810 |
) |
Cash and cash equivalents at beginning of period |
|
|
3,924 |
|
|
|
5,600 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,936 |
|
|
$ |
4,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest |
|
$ |
74,584 |
|
|
$ |
109,355 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
|
|
|
|
Note receivable issued in a property sale transaction |
|
|
950 |
|
|
|
|
|
Change in capital expenditures financed through accounts payable |
|
|
8,300 |
|
|
|
(2,920 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
42
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
1. ORGANIZATION AND NATURE OF OPERATIONS
Brandywine Operating Partnership, L.P. (the Partnership) is the entity through which Brandywine
Realty Trust, a Maryland real estate investment trust (the Company), a self-administered and
self-managed real estate investment trust, conducts its business and own its assets. The
Partnerships activities include acquiring, developing, redeveloping, leasing and managing office
and industrial properties. The Companys common shares of beneficial interest are publicly traded
on the New York Stock Exchange under the ticker symbol BDN.
As of June 30, 2009, the Partnership owned 210 office properties, 22 industrial facilities and
three mixed-use property (collectively, the Properties) containing an aggregate of approximately
23.4 million net rentable square feet. The Partnership also has two properties under development
and seven properties under redevelopment containing an aggregate 2.3 million net rentable square
feet. As of June 30, 2009, the Partnership consolidates three office properties owned by real
estate ventures containing 0.4 million net rentable square feet. Therefore, the Company owns and
consolidates 247 properties with an aggregate of 26.1 million net rentable square feet. As of June
30, 2009, the Company owned economic interests in 13 unconsolidated real estate ventures that
contain approximately 4.3 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, Pennsylvania, Metropolitan Washington, D.C., Southern and Central New Jersey,
Richmond, Virginia, Wilmington, Delaware, Austin, Texas and Oakland, Carlsbad and Rancho Bernardo,
California. The Company is the sole general partner of the Operating Partnership and, as of June
30, 2009, owned a 97.9% interest in the Operating Partnership. The Partnership conducts its
third-party real estate management services business primarily through wholly-owned management
company subsidiaries.
As of June 30, 2009, the management company subsidiaries were managing properties containing an
aggregate of approximately 36.5 million net rentable square feet, of which approximately 25.7
million net rentable square feet related to Properties owned by the Partnership and approximately
10.8 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 (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. In the opinion of management, all adjustments
(consisting solely of normal recurring matters) for a fair statement of the financial position of
the Partnership as of June 30, 2009, the results of its operations for the three-and six-month
periods ended June 30, 2009 and 2008 and its cash flows for the six-month periods ended June 30,
2009 and 2008 have been included. The results of operations for such interim periods are not
necessarily indicative of the results for a full year. These consolidated financial statements
should be read in conjunction with the Partnerships consolidated financial statements and
footnotes included in the Partnerships 2008 Annual Report on Form 10-K filed with the SEC on March
2, 2009.
Reclassifications and Revisions
During the year ended December 31, 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 adjustment) in accordance with FASB Statement No.
123(R), Share-Based Payment (FAS 123(R)), and its predecessors.
During the year ended December 31, 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 Companys share
43
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
based awards which are equity
classified (see Note 13) 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.
During the year ended December 31, 2008, the Partnership determined that it would correct the
presentation of common shares held in a Rabbi Trust (the Rabbi Trust adjustment) as part of the
Partnerships 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.
The details of these adjustments as noted above are included in our Annual Report on Form 10-K
filed on March 2, 2009.
Certain other prior period amounts have been reclassified in prior years to conform to the current
year presentation. The reclassifications are primarily due to the treatment of sold properties as
discontinued operations on the statement of operations for all periods presented and the adoption
of new accounting pronouncements. During the second quarter of 2009, two surface parking lots with
a total basis of $12.2 million were reclassed from land inventory to operating properties in the
Companys consolidated balance sheet. Accordingly, the December 31, 2008 balances were also
reclassified to conform to the current year presentation.
See Accounting Pronouncements Adopted January 1, 2009 on a Retrospective Basis for details
pertaining to the changes to prior periods resulting from the adoption of new accounting
pronouncements.
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 non-controlling interest as of and during the periods
consolidated. All intercompany accounts and transactions have been eliminated in consolidation.
44
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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, valuation of real estate and related intangible assets and
liabilities, impairment of long-lived assets, allowance for doubtful accounts and deferred costs.
Operating Properties
Operating properties are carried at historical cost less accumulated depreciation and impairment
losses. The cost of operating properties reflects their purchase price or development cost. Costs
incurred for the acquisition and renovation of an operating property are capitalized to the
Partnerships investment in that property. Ordinary repairs and maintenance are expensed as
incurred; major replacements and betterments, which improve or extend the life of the asset, are
capitalized and depreciated over their estimated useful lives. Fully-depreciated assets are
removed from the accounts.
Purchase Price Allocation
The Partnership allocates the purchase price of properties to net tangible and identified
intangible assets acquired based on fair values. Above-market and below-market in-place lease
values for acquired properties are recorded based on the present value (using an interest rate
which reflects the risks associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases and (ii) the Partnerships estimate
of the fair market lease rates for the corresponding in-place leases, measured over a period equal
to the remaining non-cancelable term of the lease. 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 Partnerships overall relationship with the respective tenant. The
Partnership estimates the cost to execute leases with terms similar to the remaining lease terms of
the in-place leases, including leasing commissions, legal and other related expenses. This
intangible asset is amortized to expense over the remaining term of the respective leases.
Partnership estimates of value are made using methods similar to those used by independent
appraisers or by using independent appraisals. Factors considered by the Partnership in this
analysis include an estimate of the carrying costs during the expected lease-up periods considering
current market conditions and costs to execute similar leases. In estimating carrying costs, the
Partnership includes real estate taxes, insurance and other operating expenses and estimates of
lost rentals at market rates during the expected lease-up periods, which primarily range from three
to twelve months. The Partnership also considers information obtained about each property as a
result of its pre-acquisition due diligence, marketing and leasing activities in estimating the
fair value of the tangible and intangible assets acquired. The Partnership also uses the
information obtained as a result of its pre-acquisition due diligence as part of its consideration
of FIN 47 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.
45
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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.
Impairment or Disposal of Long-Lived Assets
Statement of Financial Accounting Standard No. 144 (SFAS 144), Accounting for the Impairment or
Disposal of Long-Lived Assets, provides a single accounting model for long-lived assets as
held-for-sale, broadens the scope of businesses to be disposed of that qualify for reporting as
discontinued operations and changes the timing of recognizing losses on such operations.
The Partnership reviews long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The review of recoverability is based on
an estimate of the future undiscounted cash flows (excluding interest charges) expected to result
from the long-lived assets use and eventual disposition. These cash
flows consider factors such as expected future operating income, trends and prospects, as well as
the effects of leasing demand, competition and other factors. If impairment exists due to the
inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to
the extent that the carrying value exceeds the estimated fair-value of the property. The
Partnership is required to make subjective assessments as to whether there are impairments in the
values of the investments in long-lived assets. These assessments have a direct impact on its net
income because recording an impairment loss results in an immediate negative adjustment to net
income. The evaluation of anticipated cash flows is highly subjective and is based in part on
assumptions regarding future occupancy, rental rates and capital requirements that could differ
materially from actual results in future periods. Although the Partnerships strategy is generally
to hold its properties over the long-term, the Partnership will dispose of properties to meet its
liquidity needs or for other strategic needs. If the Companys strategy changes or market
conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce
the property to the lower of the carrying amount or fair value less costs to sell, and such loss
could be material. If the Partnership determines that impairment has occurred and the assets are
classified as held and used, the affected assets must be reduced to their fair-value.
Where properties have been identified as having a potential for sale, additional judgments are
required related to the determination as to the appropriate period over which the undiscounted cash
flows should include the operating cash flows and the amount included as the estimated residual
value. Management determines the amounts to be included based on a probability weighted cash flow.
This requires significant judgment. In some cases, the results of whether an impairment is
indicated are sensitive to changes in assumptions input into the estimates, including the hold
period until expected sale.
For the six month period ending June 30, 2009, during the Partnerships impairment review, it
determined that one of the properties tested for impairment under the held and used model had a
historical cost greater than the probability weighted undiscounted cash flows. This property was
subsequently sold during the three month period ending June 30, 2009. Accordingly, the recorded
amount was reduced to an amount based on managements estimate of the current fair value. During
the Partnerships impairment review for the three-month period ending June 30, 2009, it was
determined that no additional impairment charges were necessary.
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 straight-line rent adjustment
increased revenue by approximately $1.6 million and $2.6 million for the three-and six-month
periods ended June 30, 2009 and approximately $3.8 million and $9.9 million for the three-and six
month periods ended June 30, 2008. 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
46
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
and increased revenue by $0.6 million and $1.4 million for the
three-and six-month periods ended June 30, 2009 and $0.9 million and $1.4 million for the three-
and six-month periods ended June 30, 2008. Lease incentives, which are included as reductions of
rental revenue in the accompanying consolidated statements of operations, are recognized on a
straight-line basis over the term of lease. Lease incentives decreased revenue by $0.2 million
and $0.4 million for the three-and six month periods ended June 30, 2009 and $0.2 million and $0.4
million for the three-and six month periods ended June 30, 2008.
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 that the tenant has a lease on a triple net basis.
Termination fees received from tenants, bankruptcy settlement fees, third party management fees,
labor reimbursement and leasing income are recorded when earned.
Stock-Based Compensation Plans
The Partnership maintains a shareholder-approved equity-incentive plan known as the Amended and
Restated 1997 Long-Term Incentive Plan (the 1997 Plan). The 1997 Plan is administered by the
Compensation Committee of the Companys Board of Trustees. Under the 1997 Plan, the Compensation
Committee is authorized to award equity and equity-based awards, including incentive stock options,
non-qualified stock options, restricted shares and performance-based shares. As of June 30, 2009,
1.8 million common shares remained available for future awards under the 1997 Plan. Through June
30, 2009, all options awarded under the 1997 Plan had a one to ten-year term.
The Partnership incurred stock-based compensation expense of $1.3 million and $2.3 million during
the three-and six month periods ended June 30, 2009, of which $0.2 million and $0.5 million,
respectively, were capitalized as part of the Partnerships review of employee salaries eligible
for capitalization. The Partnership recognized stock-based compensation expense of $1.4 million
and $2.6 million during the three-and six month periods ended June 30, 2008, respectively. The
expensed amounts are 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 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 and during the three months ended June 30, 2009 the Partnership
recognized $0.3 million for the ineffective portion of its forward starting swaps. The
ineffectiveness resulted from the change in the forecasted debt transaction issuance date to March
2010 from December 2009 (See Note 9).
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.
Fair Value Measurements
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
47
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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. Accordingly, the Partnership
adopted SFAS 157 for non-financial assets effective January 1, 2009.
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 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
and to all non-financial assets and non-financial liabilities effective January 1, 2009.
The following table sets forth the Partnerships financial assets and liabilities that were
accounted for at fair value on a recurring basis as of June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
June 30, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities |
|
$ |
348 |
|
|
$ |
348 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
9,514 |
|
|
$ |
|
|
|
$ |
9,514 |
|
|
$ |
|
|
Forward Starting Interest
Rate Swaps |
|
|
3,186 |
|
|
|
|
|
|
|
3,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,700 |
|
|
$ |
|
|
|
$ |
12,700 |
|
|
$ |
|
|
The following table sets forth the Partnerships financial assets and liabilities that were
accounted for at fair value on a recurring basis as of December 31, 2008:
48
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
December 31, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities |
|
$ |
423 |
|
|
$ |
423 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
10,985 |
|
|
$ |
|
|
|
$ |
10,985 |
|
|
$ |
|
|
Forward Starting
Interest Rate
Swaps |
|
|
7,481 |
|
|
|
|
|
|
|
7,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,466 |
|
|
$ |
|
|
|
$ |
18,466 |
|
|
$ |
|
|
The adoption of SFAS 157 under FSP FAS 157-2 did not have a material impact on the
Partnerships financial and non-financial assets and liabilities. Non-financial assets and
liabilities recorded at fair value on a non-recurring basis to which the Partnership would apply
SFAS 157 where a measurement was required under fair value would include:
|
|
|
Non-financial assets and liabilities initially measured at fair value in an acquisition
or business combination that are not re-measured 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 and |
|
|
|
|
Asset retirement obligations initially measured at fair value under Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. |
There were no items that were accounted for at fair value on a non-recurring basis during the
second quarter of 2009.
Income Taxes
In general, the Partnership is not subject to federal and state income taxes, and accordingly, no
provision for income taxes has been made in the accompanying consolidated financial statements. The
partners of the Partnership are required to include their respective share of the Partnerships
profits or losses in their respective tax returns. The Partnerships tax returns and the amount of
allocable Partnership profits and losses are subject to examination by federal and state taxing
authorities. If such examination results in changes to Partnership profits or losses, then the tax
liability of the partners would be changed accordingly.
The Partnership has elected to treat several of its subsidiaries as real estate investment trusts
(each a REIT) under Sections 856 through 860 of the Code. As a result, each subsidiary REIT
generally is not subject to federal and state income taxation at the corporate level to the extent
it distributes annually at least 100% of its REIT taxable income to its stockholders and satisfies
certain other organizational and operational requirements. Each subsidiary REIT has met these
requirements and, accordingly, no provision has been made for federal and state income taxes in the
accompanying consolidated financial statements. If any subsidiary REIT fails to qualify as a REIT
in any taxable year, that subsidiary REIT will be subject to federal and state income taxes and may
not be able to qualify as a REIT for the four subsequent taxable years. Also, each subsidiary REIT
may be subject to certain local income taxes.
The Partnership has elected to treat several of its subsidiaries as taxable REIT subsidiaries (each
a TRS). A TRS is subject to federal, state and local income tax.
Accounting Pronouncements Adopted January 1, 2009 on a Retrospective Basis
Effective January 1, 2009, the Partnership adopted the 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
49
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
standard requires the initial proceeds from convertible
debt that may be settled in cash to be bifurcated between a liability component and an equity
component. The objective of the guidance is to require the liability and equity components of
convertible debt to be separately accounted for in a manner such that the interest expense recorded
on the convertible debt would not equal the contractual rate of interest on the convertible debt,
but instead would be recorded at a rate that would reflect the issuers conventional debt borrowing
rate. This is accomplished through the creation of a discount on the debt that would be accreted
using the effective interest method as additional non-cash interest expense over the period the
debt is expected to remain outstanding (i.e. through the first optional redemption date). The
provisions of FSP APB 14-1 were adopted on January 1, 2009 and applied retrospectively.
FSP APB 14-1 impacted the Partnerships accounting for its 3.875% Exchangeable Notes and has a
material impact on the Partnerships consolidated financial statements and results of operations.
The principal amount outstanding was $205.7 million at June 30, 2009 and $282.3 million at December
31, 2008. At certain times and upon certain events, the notes are exchangeable for cash up to
their principal amount and, with respect to the remainder, if any, of the exchange value in excess
of such principal amount, cash or common shares. The initial exchange rate is 25.4065 shares per
$1,000 principal amount of notes (which is equivalent to an initial exchange price of $39.36 per
share). The carrying amount of the equity component was $24.4 million. The unamortized debt
discount was $8.0 million at June 30, 2009 and $12.2 million at December 31, 2008. The debt
discount of the liability will be amortized through October 15, 2011. The effective interest rate
at June 30, 2009 and 2008 was 5.5%. The Partnership recognized $2.4 million and $5.4 million of
contractual coupon interest during the three-and six-month periods ended June 30, 2009 and $3.3
million and $6.4 million during the three-and six-month periods ended June 30, 2008, respectively.
In addition, the Partnership recognized $1.0 million and $1.3 of interest on amortization of the
debt discount during the three-and six-month periods ended June 30, 2009, respectively and $1.1
million and $2.2 million during the three-and six-month periods ended June 30, 2008, respectively,
The application of FSP APB 14-1 resulted in an aggregate of approximately $3.9 million (net of
incremental capitalized interest) of additional non-cash interest expense retrospectively applied
for fiscal 2008. Excluding the impact of capitalized interest, the additional non-cash interest
expense was approximately $4.3 million 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 required the
Partnership to reduce the amount of gain recognized on early extinguishment of debt in the
twelve-months ended December 31, 2008 by approximately $2.6 million.
Effective January 1, 2009, the Partnership adopted the 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 non-vested 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. FSP EITF 03-6-1 was applied
retrospectively to all periods presented for fiscal years beginning after December 15, 2008. FSP
EITF 03-6-1 required the Partnership to include the impact of its unvested restricted shares in
earnings per share using this more dilutive methodology. The face of the Partnerships
consolidated statement of operations and earnings per share disclosure (See Note 12) has been
updated to reflect the adoption of FSP EITF 03-6-1 and are presented as amounts allocated to
unvested restricted shareholders.
Effective January 1, 2009, the Partnership adopted the FASB issued SFAS No. 160, Accounting for
Non-controlling Interests (SFAS No. 160). Under this statement, non-controlling interests are
presented as a component of consolidated shareholders equity unless these interests are considered
redeemable. Also, under SFAS No. 160, net income will encompass the total income of all
consolidated subsidiaries and there will be separate disclosure on the face of the income statement
of the attribution of that income between controlling and non-controlling interests. Lastly,
increases and decreases in non-controlling interests will be treated as equity transactions. The
face of the Partnerships consolidated balance sheet, statement of operations and statements of
other comprehensive income has been updated to reflect the adoption of SFAS No. 160. SFAS No. 160
did not have material impact on the Partnerships financial position or results of operations. The
Partnership also adopted the recent revisions of EITF Topic D-98, Classification and Measurement
of Redeemable Securities, which became effective upon its adoption of SFAS 160. As a result of
the Partnerships adoption of these standards, amounts are now presented as non-controlling
interests in consolidated real estate ventures within equity (amounts were nominal as December 31,
2008). There has been no change in the measurement of this line item from amounts previously
reported. Limited partnership units have been included in the
50
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
mezzanine section (between liability
and equity) on the accompanying consolidated balance sheets. These units are redeemable by the
holders for the cash equivalent thereof, or at the Companys option, a like number of unregistered
common shares of the Company. Historically we have recorded the redeemable partnership units at
their redemption amount (fair value) as of the balance sheet date. In accordance with Topic D-98
the redeemable partnership units should be adjusted to the maximum redemption amount at each
balance sheet date, however it is not appropriate to reduce the amounts below a certain floor. The
units should not be recorded at less than the original issue value of the units adjusted for income
allocation and distributions. The revised presentation and floor measurement required by SFAS 160
and D-98 have been adopted retrospectively.
In accordance with the Partnerships retrospective adoption of FSP APB 14-1 and D-98, the December
31, 2008 balance sheet herein has been revised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APB 14-1 |
|
D-98 |
|
|
|
|
As Reported |
|
Adjustment |
|
Adjustment |
|
As Revised |
Construction-in-progress |
|
$ |
121,402 |
|
|
$ |
817 |
|
|
$ |
|
|
|
$ |
122,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred costs, net |
|
|
89,866 |
|
|
|
(539 |
) |
|
|
|
|
|
|
89,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured bonds, net of discount |
|
|
1,930,147 |
|
|
|
(12,177 |
) |
|
|
|
|
|
|
1,917,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable limited partnership |
|
|
21,716 |
|
|
|
|
|
|
|
32,450 |
|
|
|
54,166 |
|
units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partnership capital |
|
|
1,601,882 |
|
|
|
12,455 |
|
|
|
(32,450 |
) |
|
|
1,581,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
$ |
1,688,327 |
|
|
$ |
12,455 |
|
|
$ |
(32,450 |
) |
|
$ |
1,668,332 |
|
Accounting Pronouncements Adopted During 2009 on a Prospective Basis
In May 2009, the FASB issued Statement No. 165Subsequent Events (FAS 165). FAS 165 establish
principles and requirements for evaluating and reporting subsequent events and distinguishes which
subsequent events should be recognized in the financial statements versus which subsequent events
should be disclosed in the financial statements. FAS 165 also requires disclosure of the date
through which subsequent events are evaluated by management (see Note 17). The Partnerships
adoption of FAS 165 did not have a material impact on its consolidated financial position or
results of operations.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments (FSP FAS 107-1). FSP FAS 107-1 amends SFAS No. 107 to require disclosures
about fair value of financial instruments for interim reporting periods of publicly traded
companies in addition to the annual financial statements. FSP FAS 107-1 also amends APB No. 28 to
require those disclosures in summarized financial information at interim reporting periods. FSP
FAS 107-1 is effective for interim periods ending after June 15, 2009. Prior period presentation
is not required for comparative purposes at initial adoption.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
are Not Orderly ( FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair
value in accordance with SFAS No. 157 when the volume and level of activity for both financial and
non-financial assets or liabilities have significantly decreased. FSP FAS 157-4 is effective for
fiscal years and interim periods ending after June 15, 2009 and shall be applied prospectively.
Early adoption for periods ending before March 15, 2009, is not permitted. The Partnerships
adoption of FSP FAS 157-4 on April 1, 2009 did not have a material impact on its consolidated
financial position or results of operations.
In April 2009, the FASB issued FSP Financial Accounting Standard 115-2 and FAS 124-2, Recognition
and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS
51
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
124-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt
securities to make the guidance more operational and to improve the presentation and disclosure of
other-than temporary impairments on debt and equity securities in the financial statements. FSP
FAS 115-2 and FAS 124-2 are effective for fiscal years and interim periods ending after June 15,
2009. The Partnerships adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on
its consolidated financial position or results of operations.
Effective January 1, 2009, the Partnership adopted 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. See Note 9 for further discussion.
In April 2008, the 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. The Partnership has not entered into any acquisition transactions during the
quarter ended June 30, 2009, therefore the adoption of FSP 142-3 did not have a material impact on
the Partnerships consolidated financial statements.
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
non-controlling 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. The
Partnership did not complete any acquisitions during the six months ended June 30, 2009, therefore
adoption of SFAS 141(R) has not had a material impact on the Partnership.
New Pronouncements
In June 2009, the FASB issued FAS 166, Accounting for Transfers of Financials Assets, an amendment
to FAS 140 (FAS 166), and FAS 167, Amendment to FASB Interpretation No. 46R (FAS 167). These
statements will change the way entities account for transfers of financial assets and determine
what entities must be consolidated. FAS 166 is in response to the FASBs concerns about how
practice has developed under FAS 140, which provides the accounting
framework for determining whether a transfer of financial assets constitutes a sale or a secured
borrowing and, if the transfer constitutes a sale, the determination of any resulting gain or loss.
The most significant amendment resulting from FAS 166 consists of the removal of the concept of a
Qualifying Special-Purpose Entity (QSPE) from Statement 140. While FAS 167 addresses the effects
of eliminating the QSPE concept from FAS 140 it also responds to concerns about the application of
certain key provisions of FASB Interpretation No. 46(R), Consolidation of Variable Interest
Entities (FIN 46(R)), including concerns over the transparency of enterprises involvement with
Variable Interest Entities (VIEs). Both Statements 166 and 167 will be effective on January 1,
2010. The Partnership is currently evaluating the impact of adopting both Statements 166 and 167
on its consolidated financial position or results of operations.
3. REAL ESTATE INVESTMENTS
As of June 30, 2009 and December 31, 2008 the gross carrying value of the Partnerships operating
properties was as follows (amounts in thousands):
52
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
Land |
|
$ |
701,856 |
|
|
$ |
707,591 |
|
Building and improvements |
|
|
3,455,973 |
|
|
|
3,481,289 |
|
Tenant improvements |
|
|
428,751 |
|
|
|
419,440 |
|
|
|
|
|
|
|
|
|
|
$ |
4,586,580 |
|
|
$ |
4,608,320 |
|
|
|
|
|
|
|
|
Acquisitions and Dispositions
The Partnership did not complete any acquisitions during the periods covered in these financial
statements.
On April 29, 2009, the Partnership sold 7735 Old Georgetown Road, a 122,543 net rentable square
feet office property located in Bethesda, Maryland, for a sales price of $26.5 million.
On March 16, 2009, the Partnership sold 305 Harper Drive, a 14,980 net rentable square feet office
property located in Moorestown, New Jersey, for a sales price of $1.1 million.
On February 4, 2009, the Partnership sold two office properties, totaling 66,664 net rentable
square feet in Exton, Pennsylvania, for an aggregate sales price of $9.0 million.
All sales above are included within discontinued operations.
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of June 30, 2009, the Partnership had an aggregate investment of approximately $75.7 million in
its 11 actively operating unconsolidated Real Estate Ventures. 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 45 office buildings that contain an aggregate of approximately 4.3 million net
rentable square feet and one Real Estate Venture developed a hotel property that contains 137 rooms
in Conshohocken, PA.
The Partnership accounts for its unconsolidated interests in its Real Estate Ventures using the
equity method. Unconsolidated interests range from 3% 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 additional depreciation/amortization). The Partnership does not
record operating losses of
the Real Estate Ventures in excess of its investment balance unless the Partnership is liable for
the obligations of the Real Estate Venture or is otherwise committed to provide financial support
to the Real Estate Venture.
The following is a summary of the financial position of the Real Estate Ventures as of June 30,
2009 and December 31, 2008 (in thousands):
53
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2009 |
|
2008 |
Net property |
|
$ |
548,785 |
|
|
$ |
554,424 |
|
Other assets |
|
|
91,002 |
|
|
|
96,278 |
|
Other Liabilities |
|
|
54,115 |
|
|
|
39,388 |
|
Debt |
|
|
475,809 |
|
|
|
514,308 |
|
Equity |
|
|
109,863 |
|
|
|
97,006 |
|
Partnerships share of equity (Partnerships basis) |
|
|
75,688 |
|
|
|
71,028 |
|
The following is a summary of results of operations of the Real Estate Ventures for the three-and
six-month periods ended June 30, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
Six-month periods |
|
|
ended June 30, |
|
ended March 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Revenue |
|
$ |
27,125 |
|
|
$ |
25,863 |
|
|
$ |
53,689 |
|
|
$ |
52,896 |
|
Operating expenses |
|
|
9,109 |
|
|
|
8,875 |
|
|
|
18,675 |
|
|
|
17,797 |
|
Interest expense, net |
|
|
6,845 |
|
|
|
7,956 |
|
|
|
13,997 |
|
|
|
15,753 |
|
Depreciation and amortization |
|
|
8,859 |
|
|
|
9,472 |
|
|
|
17,681 |
|
|
|
18,624 |
|
Net income |
|
|
2,312 |
|
|
|
(440 |
) |
|
|
3,336 |
|
|
|
722 |
|
Partnerships share of income (Partnerships basis) |
|
|
1,533 |
|
|
|
1,664 |
|
|
|
2,119 |
|
|
|
2,779 |
|
As of June 30, 2009, the Partnership had guaranteed repayment of approximately $2.2 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.
5. DEFERRED COSTS
As of June 30, 2009 and December 31, 2008, the Partnerships deferred costs were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
114,689 |
|
|
$ |
(45,467 |
) |
|
$ |
69,222 |
|
Financing Costs |
|
|
43,651 |
|
|
|
(12,021 |
) |
|
|
31,630 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
158,340 |
|
|
$ |
(57,488 |
) |
|
$ |
100,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
Leasing Costs |
|
$ |
115,262 |
|
|
$ |
(39,528 |
) |
|
$ |
75,734 |
|
Financing Costs |
|
|
25,170 |
|
|
|
(11,577 |
) |
|
|
13,593 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
140,432 |
|
|
$ |
(51,105 |
) |
|
$ |
89,327 |
|
|
|
|
|
|
|
|
|
|
|
54
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
6. INTANGIBLE ASSETS
As of June 30, 2009 and December 31, 2008, the Partnerships intangible assets were comprised of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
Intangible Assets, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
In-place lease value |
|
$ |
134,881 |
|
|
$ |
(72,730 |
) |
|
$ |
62,151 |
|
Tenant relationship value |
|
|
101,087 |
|
|
|
(45,824 |
) |
|
|
55,263 |
|
Above market leases acquired |
|
|
20,058 |
|
|
|
(13,366 |
) |
|
|
6,692 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
256,026 |
|
|
$ |
(131,920 |
) |
|
$ |
124,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
77,945 |
|
|
$ |
(35,909 |
) |
|
$ |
42,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
Intangible Assets, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
In-place lease value |
|
$ |
145,518 |
|
|
$ |
(71,138 |
) |
|
$ |
74,380 |
|
Tenant relationship value |
|
|
103,485 |
|
|
|
(40,835 |
) |
|
|
62,650 |
|
Above market leases acquired |
|
|
23,351 |
|
|
|
(14,624 |
) |
|
|
8,727 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
272,354 |
|
|
$ |
(126,597 |
) |
|
$ |
145,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
82,950 |
|
|
$ |
(35,324 |
) |
|
$ |
47,626 |
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, the Partnerships annual amortization for its intangible assets/liabilities is
as follows (in thousands and assuming no early lease terminations):
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
Liabilities |
|
2009 |
|
$ |
15,729 |
|
|
$ |
4,776 |
|
2010 |
|
|
29,499 |
|
|
|
8,345 |
|
2011 |
|
|
22,772 |
|
|
|
7,051 |
|
2012 |
|
|
17,430 |
|
|
|
6,314 |
|
2013 |
|
|
12,636 |
|
|
|
5,874 |
|
Thereafter |
|
|
26,040 |
|
|
|
9,676 |
|
|
|
|
|
|
|
|
Total |
|
$ |
124,106 |
|
|
$ |
42,036 |
|
|
|
|
|
|
|
|
7. DEBT OBLIGATIONS
The following table sets forth information regarding the Partnerships debt obligations outstanding
at June 30, 2009 and December 31, 2008 (in thousands):
55
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
MORTGAGE DEBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
June 30 |
|
|
December 31, |
|
|
Interest |
|
Maturity |
Property / Location |
|
2009 |
|
|
2008 |
|
|
Rate |
|
Date |
200 Commerce Drive |
|
$ |
5,639 |
|
|
$ |
5,684 |
|
|
7.12% |
(a) |
Jan-10 |
Plymouth Meeting Exec. |
|
|
42,421 |
|
|
|
42,785 |
|
|
7.00% |
(a) |
Dec-10 |
Four Tower Bridge |
|
|
10,284 |
|
|
|
10,404 |
|
|
6.62% |
|
Feb-11 |
Arboretum I, II, III & V |
|
|
21,357 |
|
|
|
21,657 |
|
|
7.59% |
|
Jul-11 |
Midlantic Drive/Lenox Drive/DCC I |
|
|
59,016 |
|
|
|
59,784 |
|
|
8.05% |
|
Oct-11 |
Research Office Center |
|
|
40,403 |
|
|
|
40,791 |
|
|
5.30% |
(a) |
Oct-11 |
Concord Airport Plaza |
|
|
36,115 |
|
|
|
36,617 |
|
|
5.55% |
(a) |
Jan-12 |
Six Tower Bridge |
|
|
13,880 |
|
|
|
14,185 |
|
|
7.79% |
|
Aug-12 |
Newtown Square/Berwyn Park/Libertyview |
|
|
60,245 |
|
|
|
60,910 |
|
|
7.25% |
|
May-13 |
Coppell Associates |
|
|
2,995 |
|
|
|
3,273 |
|
|
6.89% |
|
Dec-13 |
Southpoint III |
|
|
3,565 |
|
|
|
3,863 |
|
|
7.75% |
|
Apr-14 |
Tysons Corner |
|
|
98,795 |
|
|
|
99,529 |
|
|
5.36% |
(a) |
Aug-15 |
Coppell Associates |
|
|
16,600 |
|
|
|
16,600 |
|
|
5.75% |
|
Feb-16 |
Two Logan Square |
|
|
89,800 |
|
|
|
68,808 |
|
|
7.57% |
(b) |
Apr-16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
501,115 |
|
|
|
484,890 |
|
|
|
|
|
Plus: unamortized fixed-rate debt premiums, net |
|
|
1,846 |
|
|
|
2,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
502,961 |
|
|
$ |
487,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNSECURED DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
$275.0M 4.500% Guaranteed Notes due 2009 |
|
|
150,151 |
|
|
|
196,680 |
|
|
4.62% |
|
Nov-09 |
Bank Term Loan |
|
|
183,000 |
|
|
|
183,000 |
|
|
LIBOR + 0.80% |
|
Oct-10 (c) |
$300.0M 5.625% Guaranteed Notes due 2010 |
|
|
210,546 |
|
|
|
275,545 |
|
|
5.61% |
|
Dec-10 |
Credit Facility |
|
|
74,000 |
|
|
|
153,000 |
|
|
LIBOR + 0.725% |
|
Jun-11 (c) |
$320.7M 3.875% Guaranteed Exchangeable Notes
due 2026 |
|
|
205,740 |
|
|
|
282,030 |
|
|
5.50% |
|
Oct-11 |
$300.0M 5.750% Guaranteed Notes due 2012 |
|
|
290,035 |
|
|
|
300,000 |
|
|
5.77% |
|
Apr-12 |
$250.0M 5.400% Guaranteed Notes due 2014 |
|
|
250,000 |
|
|
|
250,000 |
|
|
5.53% |
|
Nov-14 |
$250.0M 6.000% Guaranteed Notes due 2016 |
|
|
250,000 |
|
|
|
250,000 |
|
|
5.95% |
|
Apr-16 |
$300.0M 5.700% Guaranteed Notes due 2017 |
|
|
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 |
|
|
1,992,082 |
|
|
|
2,268,865 |
|
|
|
|
|
|
less: unamortized exchangeable debt discount |
|
|
(8,063 |
) |
|
|
(12,177 |
) |
|
|
|
|
|
Plus: unamortized fixed-rate debt discounts, net |
|
|
(2,437 |
) |
|
|
(2,718 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unsecured indebtedness |
|
$ |
1,981,582 |
|
|
$ |
2,253,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Obligations |
|
$ |
2,484,543 |
|
|
$ |
2,741,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Loans were assumed upon acquisition of the related property. Interest rates presented
above reflect the market rate at the time of acquisition. |
|
(b) |
|
The Two Logan Square mortgage was refinanced in the amount of 89.8 million on April 1, 2009.
The new loan features a 7.57% rate and a seven-year term with three years of interest only
payments followed by a thirty-year amortization schedule. |
|
(c) |
|
These loans may be extended to June 29, 2012 at the Partnerships discretion. |
On June 29, 2009, the Partnership entered into a forward financing commitment to borrow up to
$256.5 million under two separate loans which are secured by mortgages on the 30th
Street Post Office (the Post Office project), the Cira South Garage (the garage project) and by
the leases of space at these facilities upon the completion of these projects. Of the total
borrowings, $209.7 million and $46.8 million of the total borrowings will be allocated to the Post
Office project and to the garage project, respectively. The Partnership paid a $17.7 million
commitment fee, which includes a $1.5 million arrangement fee, in connection with this commitment.
The total loan amount together with the net commitment fee was deposited in an escrow account to be
administered by The Bank of New York Mellon (the trustee). In accordance with the trust
agreement between the lender and the trustee, the lender assigned its rights under the loans to the
Trust. The Trust issued certificates to third parties in an amount equal to the funding
commitment. Upon investment of the escrow account in a portfolio of U.S. Government treasuries,
the net commitment of $16.2 million will be used together with the interest earned on the escrow
account to pay interest costs of the loans through August 26, 2010 which is also the anticipated
completion date of the projects and the expected funding date. In order for funding to
56
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
occur
certain conditions must be met by the Partnership which primarily relate to the completion of the
projects and the commencement of the rental payments from the respective leases with the IRS on
these properties. The loans will bear interest at 5.93% and require principal and interest
payments based on a twenty year amortization schedule. The Partnership intends to use the loan
proceeds to reduce borrowings under its credit facility and for general corporate purposes. As of
June 30, 2009, the commitment fee is included as part of the deferred costs in the Partnerships
consolidated balance sheet as it believes the funding is probable of occurring. The Partnership
will amortize this cost over the term of the loan starting on the date the funding of the loans has
occurred. In the event that the Partnership believes the funding will not occur, this cost will be
written off in the period that such determination was made. In addition, should the funding not
occur either because the Partnership does not meet the conditions or the Company decides not to
proceed with the funding, a termination fee is payable (see Note 16).
During the six-month periods ended June 30, 2009 and 2008, the Partnerships weighted-average
effective interest rate on its mortgage notes payable was 6.70% and 6.41%, respectively.
During the six-months ended June 30, 2009, the Partnership repurchased $197.8 million of its
existing Notes in a series of transactions which are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase |
|
|
|
|
|
|
|
|
|
|
Deferred Financing |
|
Notes |
|
Amount |
|
|
Principal |
|
|
Gain |
|
|
Amortization |
|
2009 Notes |
|
$ |
44,945 |
|
|
$ |
46,529 |
|
|
$ |
1,584 |
|
|
$ |
62 |
|
2010 Notes |
|
|
59,257 |
|
|
|
64,999 |
|
|
|
5,735 |
|
|
|
190 |
|
2012 Notes |
|
|
9,061 |
|
|
|
9,965 |
|
|
|
904 |
|
|
|
35 |
|
3.875% Notes |
|
|
63,514 |
|
|
|
76,290 |
|
|
|
10,428 |
|
|
|
796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
176,777 |
|
|
$ |
197,783 |
|
|
$ |
18,651 |
|
|
$ |
1,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Partnership utilizes credit facility borrowings for general business purposes, including the
acquisition, development and redevelopment of properties and the repayment of other debt. The
maturity date of the $600 million Credit Facility (the Credit Facility) is 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 per annum
variable interest rate on outstanding balances is LIBOR plus 0.725%. The interest rate and
facility fee are subject to adjustment upon a change in the Partnerships unsecured debt ratings.
The Partnership has the option to increase the Credit Facility to $800.0 million subject to the
absence of any defaults and the Partnerships ability to acquire additional commitments from its
existing lenders or new lenders. As of June 30, 2009, the Partnership had $74.0 million of
borrowings, $15.2 million of letters of credit outstanding under the Credit Facility, and a
$15.3 million holdback in connection with our historic tax credit transaction leaving $495.5 million
of unused availability. During the six-month periods ended June 30,
2009 and 2008, the weighted-average interest rate on the Credit Facility was 1.87% and 4.62%
respectively. As of June 30, 2009 and 2008, the weighted average interest rate on the Credit
Facility was 1.42% and 3.17% 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. The Partnership was
in compliance with all financial covenants as of June 30, 2009.
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%. The Sweep Agreement ended in April 2009 at which point the agreement was not renewed.
As of June 30, 2009, the Partnerships aggregate scheduled principal payments of debt obligations,
excluding amortization of discounts and premiums, are as follows (in thousands):
57
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
|
|
|
|
|
2009 |
|
$ |
154,928 |
|
2010 |
|
|
450,405 |
|
2011 |
|
|
412,035 |
|
2012 |
|
|
341,474 |
|
2013 |
|
|
59,184 |
|
Thereafter |
|
|
1,075,171 |
|
|
|
|
|
Total principal payments |
|
|
2,493,197 |
|
Net unamortized premiums/discounts |
|
|
(8,654 |
) |
|
|
|
|
Outstanding indebtedness |
|
$ |
2,484,543 |
|
|
|
|
|
8. FAIR VALUE OF FINANCIAL STATEMENTS
The following fair value disclosure was determined by the Partnership using available market
information and discounted cash flow analyses as of June 30, 2009 and December 31, 2008,
respectively. The discount rate used in calculating fair value is the sum of the current risk free
rate and the risk premium on the date of measurement of the instruments or obligations.
Considerable judgment is necessary to interpret market data and to develop the related estimates of
fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts
that the Partnership could realize upon disposition. The use of different estimation methodologies
may have a material effect on the estimated fair value amounts. The Partnership believes that the
carrying amounts reflected in the Consolidated Balance Sheets at June 30, 2009 and December 31,
2008 approximate the fair values for cash and cash equivalents, accounts receivable, other assets,
accounts payable and accrued expenses.
The following are financial instruments for which the Partnership estimates of fair value differ
from the carrying amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
Mortgage payable, net of premiums |
|
$ |
502,961 |
|
|
$ |
485,472 |
|
|
$ |
484,890 |
|
|
$ |
487,525 |
|
Unsecured notes payable, net of discounts |
|
$ |
1,645,972 |
|
|
$ |
1,379,098 |
|
|
$ |
1,854,186 |
|
|
$ |
1,152,056 |
|
Variable Rate Debt Instruments |
|
$ |
335,610 |
|
|
$ |
331,421 |
|
|
$ |
414,610 |
|
|
$ |
398,748 |
|
Notes Receivable |
|
$ |
49,676 |
|
|
$ |
48,488 |
|
|
$ |
48,048 |
|
|
$ |
46,227 |
|
9. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
Risk Management
Deteriorating economic conditions have resulted in a reduction of the availability of financing and
higher borrowing costs. These factors, coupled with a slowing economy, have reduced the volume of
real estate transactions and created credit stresses on most businesses. The Partnership believes
that vacancy rates may increase through 2009 and possibly beyond as the current economic climate
negatively impacts tenants in the Properties. The current financial markets also have an adverse
effect on the Partnerships other counter parties such as the
counter parties in its derivative contracts.
The Partnership expects that the impact of the current state of the economy, including rising
unemployment and the unprecedented volatility and illiquidity in the financial and credit markets,
will continue to have a dampening effect on the fundamentals of its business, including increases
in past due accounts, tenant defaults, lower occupancy and reduced effective rents. These
conditions would negatively affect the Partnerships future net income and cash flows and could
have a material adverse effect on its financial condition. In addition to the financial
constraints on our tenants, many of the debt capital markets that the Partnership and other real
estate companies frequently access, such as the unsecured
58
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 200
bond market and the convertible debt
market, are not currently available on terms that management believes are economically attractive
or at all. Although management believes that the quality of the Partnerships assets and its
strong balance sheet will enable the Partnership to raise debt capital from other sources such as
traditional term or secured loans from banks, pension funds and life insurance companies, these
sources are lending fewer dollars, under stricter terms and at higher borrowing rates. As of June
30, 2009, the Partnership has maturing debt of $154.9 million in 2009 and $450.4 million in 2010
(Note 7). These amounts do not include the Credit Facility or the Bank Term Loan as those loans
can be extended until 2012 at the Partnerships discretion. Management is focused on continuing to
enhance the Partnerships liquidity and strengthening its balance sheet through capital retention,
targeted sales activity and management of existing and prospective liabilities.
The Partnerships Credit Facility, Bank Term Loan and the indenture governing the unsecured public
debt securities (Note 7) contain restrictions, requirements and other limitations on the ability to
incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt
service coverage ratios and minimum ratios of unencumbered assets to unsecured debt which it must
maintain. The ability to borrow under the Credit Facility is subject to compliance with such
financial and other covenants. In the event that the Partnership fails to satisfy these covenants,
it would be in default under the Credit Facility, the Bank Term Loan and the indenture and may be
required to repay such debt with capital from other sources. Under such circumstances, other
sources of capital may not be available, or may be available only on unattractive terms.
Availability of borrowings under the Credit Facility is subject to a traditional material adverse
effect clause. Each time the Partnership borrows it must represent to the lenders that there have
been no events of a nature which would have a material adverse effect on the business, assets,
operations, condition (financial or otherwise) or prospects of the Partnership taken as a whole or
which could negatively effect the ability of the Partnership to perform its obligations under the
Credit Facility. While the Partnership believes that there are currently no material adverse
effect events, the Partnership is operating in unprecedented economic times and it is possible that
such events could arise which would limit the Partnerships borrowings under the Credit Facility.
If an event occurs which is considered to have a material adverse effect, the lenders could
consider the Partnership in default under the terms of the Credit Facility and the borrowings under
the Credit Facility would become due and payable. If the Partnership is unable to obtain a waiver,
this would have a material adverse effect on the Partnerships financial position and results of
operations.
The Partnership was in compliance with all financial covenants as of June 30, 2009. Management
continuously monitors the Partnerships compliance with and anticipated compliance with the
covenants. Certain of the covenants restrict managements ability to obtain alternative sources of
capital. While the Partnership currently believes it will remain in compliance with its covenants,
in the event of a continued slow-down and continued crisis in the credit markets, the Partnership
may not be able to remain in compliance with such covenants and if the lender would not provide a
waiver, it could result in an event of default.
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 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.
59
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
The valuation of these instruments is determined using widely accepted valuation techniques
including discounted cash flow analysis on the expected cash flows of each derivative. This
analysis reflects the contractual terms of the derivatives, including the period to maturity, and
uses observable market-based inputs, including interest rate curves and implied volatilities. The
fair values of interest rate swaps are determined using the market standard methodology of netting
the discounted future fixed cash receipts (or payments) and the discounted expected variable cash
payments (or receipts). The variable cash payments (or receipts) are based on an expectation of
future interest rates (forward curves) derived from observable market interest rate curves.
To comply with the provisions of SFAS No. 157, the Partnership incorporates credit valuation
adjustments to appropriately reflect both its own nonperformance risk and the respective
counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of
its derivative contracts for the effect of nonperformance risk, the Partnership has considered the
impact of netting and any applicable credit enhancements, such as collateral postings, thresholds,
mutual puts, and guarantees.
Although the Partnership has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads
to evaluate the likelihood of default by itself and its counterparties. However, as of June 30,
2009, the Partnership has assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions and has determined that the credit
valuation adjustments are not significant to the overall valuation of its derivatives. As a
result, the Partnership has determined that its derivative valuations in their entirety are
classified in Level 2 of the fair value hierarchy.
The following table summarizes the terms and fair values of the Partnerships derivative financial
instruments at June 30, 2009. The notional amounts at June 30, 2009 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 value of the hedges at June 30, 2009 and December 31, 2008 is included in other
liabilities and accumulated other comprehensive income in the accompanying balance sheet, except
for the $0.3 million of ineffectiveness charged to the consolidated statements of operations during
the three months ended June 30, 2009 relating to the forward starting swaps.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge |
|
Hedge |
|
|
|
Notional Amount |
|
|
|
|
|
|
Trade |
|
|
Maturity |
|
|
Fair Value |
|
Product |
|
Type |
|
Designation |
|
6/30/2009 |
|
|
12/31/2008 |
|
|
Strike |
|
Date |
|
|
Date |
|
|
6/30/2009 |
|
|
12/31/2008 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
$ |
91,700 |
|
|
$ |
78,000 |
(a) |
|
|
4.709 |
% |
|
|
9/20/07 |
|
|
|
10/18/10 |
|
|
$ |
6,452 |
|
|
$ |
7,204 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
4.415 |
% |
|
|
10/19/07 |
|
|
|
10/18/10 |
|
|
|
1,173 |
|
|
|
1,439 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
3.747 |
% |
|
|
11/26/07 |
|
|
|
10/18/10 |
|
|
|
915 |
|
|
|
1,111 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
3.338 |
% |
|
|
9/23/07 |
|
|
|
12/18/09 |
|
|
|
354 |
|
|
|
603 |
|
Swap |
|
Interest Rate |
|
Cash Flow (b) |
|
|
25,774 |
|
|
|
25,774 |
|
|
|
2.975 |
% |
|
|
10/16/08 |
|
|
|
10/30/10 |
|
|
|
620 |
|
|
|
628 |
|
Forward Starting Swap |
|
Interest Rate |
|
Cash Flow (c) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
4.770 |
% |
|
|
1/4/08 |
|
|
|
12/18/19 |
|
|
|
1,949 |
|
|
|
4,079 |
|
Forward Starting Swap |
|
Interest Rate |
|
Cash Flow (c) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
4.423 |
% |
|
|
3/19/08 |
|
|
|
12/18/19 |
|
|
|
1,237 |
|
|
|
3,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
242,474 |
|
|
$ |
228,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,700 |
|
|
$ |
18,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 March 2010. |
Concentration of Credit Risk
Concentrations of credit risk arise when a number of tenants related to the Partnerships
investments or rental operations are engaged in similar business activities, or are located in the
same geographic region, or have similar economic features that would cause their inability to meet
contractual obligations, including those to the Partnership, to be similarly affected. The
Partnership regularly monitors its tenant base to assess potential concentrations of credit risk.
Management believes the current credit risk portfolio is reasonably well diversified and does not
contain any unusual concentration of credit risk. No tenant accounted for 5% or more of the
Partnerships rents during the three-and six-month periods ended June 30, 2009 and 2008. Recent
developments in the general economy and the global credit markets have had a significant adverse
effect on companies in numerous industries. The Partnership has tenants
60
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
concentrated in various
industries that may be experiencing adverse effects from the current economic conditions and the
Partnership could be adversely affected if such tenants go into default under their leases.
10. DISCONTINUED OPERATIONS
For the three-and six-month period ended June 30, 2009, income from discontinued operations relates
to the four properties that the Partnership sold during 2009. The following table summarizes the
revenue and expense information for the properties classified as discontinued operations for the
three-and six-month periods ended June 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Six-month period |
|
|
|
ended June 30, 2009 |
|
|
ended June 30, 2009 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
311 |
|
|
$ |
1,511 |
|
Tenant reimbursements |
|
|
(4 |
) |
|
|
43 |
|
Other |
|
|
3 |
|
|
|
71 |
|
Total revenue |
|
|
310 |
|
|
|
1,625 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
165 |
|
|
|
546 |
|
Real estate taxes |
|
|
17 |
|
|
|
127 |
|
Depreciation and amortization |
|
|
142 |
|
|
|
615 |
|
Provision for impairment of discontinued operations |
|
|
|
|
|
|
3,700 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
324 |
|
|
|
4,988 |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before gain on
sale of interests in real estate |
|
|
(14 |
) |
|
|
(3,364 |
) |
|
|
|
|
|
|
|
|
|
Net loss on sale of interests in real estate |
|
|
(1,225 |
) |
|
|
(1,031 |
) |
|
|
|
|
|
|
|
Loss from discontinued operations attributable to Brandywine Operating Partnership |
|
$ |
(1,239 |
) |
|
$ |
(4,395 |
) |
|
|
|
|
|
|
|
For the three-and six-month period ended June 30, 2008, income from discontinued operations relates
to properties that the Partnership sold through June 30, 2009. The following table summarizes the
revenue and expense information for properties classified as discontinued operations for the
three-and six-month period ended June 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Six-month period |
|
|
|
ended June 30, 2008 |
|
|
ended June 30, 2008 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
14,175 |
|
|
$ |
29,273 |
|
Tenant reimbursements |
|
|
498 |
|
|
|
1,093 |
|
Other |
|
|
58 |
|
|
|
183 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
14,731 |
|
|
|
30,549 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
5,301 |
|
|
|
10,172 |
|
Real estate taxes |
|
|
1,172 |
|
|
|
2,656 |
|
Depreciation and amortization |
|
|
4,999 |
|
|
|
10,001 |
|
Provision for impairment of discontinued operations |
|
|
6,850 |
|
|
|
6,850 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
18,322 |
|
|
|
29,679 |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
5 |
|
|
|
11 |
|
Interest expense |
|
|
(1,342 |
) |
|
|
(2,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before gain on
sale of interests in real estate |
|
|
(4,928 |
) |
|
|
(1,813 |
) |
|
|
|
|
|
|
|
|
|
Net gain on sale of interests in real estate |
|
|
13,420 |
|
|
|
21,401 |
|
|
|
|
|
|
|
|
Income from discontinued operations attributable to Brandywine Operating Partnership |
|
$ |
8,492 |
|
|
$ |
19,588 |
|
|
|
|
|
|
|
|
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.
61
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
11. NON-CONTROLLING INTEREST PARTNERS SHARE OF CONSOLIDATED REAL ESTATE VENTURES
As of June 30, 2009 and December 31, 2008, the Partnership owned interests in three consolidated
real estate ventures that own three office properties containing approximately 0.4 million net
rentable square feet. The Partnership is the primary beneficiary and these consolidated real
estate ventures are variable interest entities under FIN 46R.
The non-controlling 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. The aggregate amount related to these non-controlling interests classified
within equity is $0.1 million at June 30, 2009 and a nominal amount as of December 31, 2008. The
Partnership believes that the aggregate settlement value of these interests was approximately $8.4
million and $9.1 million as of June 30, 2009 and December 31, 2008, respectively. This amount is
based on the estimated liquidation 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.
12. PARTNERS EQUITY
Earnings per Common Partnership Unit
The following table details the number of units and net income used to calculate basic and diluted
earnings per common partnership unit (in thousands, except unit and per unit amounts; results may
not add due to rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
7,020 |
|
|
$ |
7,020 |
|
|
$ |
(279 |
) |
|
$ |
(279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to non-controlling interests |
|
|
(28 |
) |
|
|
(28 |
) |
|
|
(38 |
) |
|
|
(38 |
) |
Amount allocable to unvested restricted shareholders |
|
|
(73 |
) |
|
|
(73 |
) |
|
|
(227 |
) |
|
|
(227 |
) |
Preferred share dividends |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations available to common unitholders |
|
|
4,921 |
|
|
|
4,921 |
|
|
|
(2,542 |
) |
|
|
(2,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common unitholders |
|
|
(1,239 |
) |
|
|
(1,239 |
) |
|
|
8,492 |
|
|
|
8,492 |
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders |
|
$ |
3,682 |
|
|
$ |
3,682 |
|
|
$ |
5,950 |
|
|
$ |
5,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average units outstanding |
|
|
104,400,618 |
|
|
|
104,400,618 |
|
|
|
90,747,434 |
|
|
|
90,747,434 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
1,158,346 |
|
|
|
|
|
|
|
231,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average common partnership units outstanding |
|
|
104,400,618 |
|
|
|
105,558,964 |
|
|
|
90,747,434 |
|
|
|
90,979,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common unitholders |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
Discontinued operations attributable to common unitholders |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
0.10 |
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common unitholders |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month periods ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
9,303 |
|
|
$ |
9,303 |
|
|
$ |
2,222 |
|
|
$ |
2,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to non-controlling interests |
|
|
(22 |
) |
|
|
(22 |
) |
|
|
(78 |
) |
|
|
(78 |
) |
Amount allocable to unvested restricted shareholders |
|
|
(110 |
) |
|
|
(110 |
) |
|
|
(394 |
) |
|
|
(394 |
) |
Preferred share dividends |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
(3,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations available to common unitholders |
|
|
5,175 |
|
|
|
5,175 |
|
|
|
(2,246 |
) |
|
|
(2,246 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common unitholders |
|
|
(4,395 |
) |
|
|
(4,395 |
) |
|
|
19,588 |
|
|
|
19,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders |
|
$ |
780 |
|
|
$ |
780 |
|
|
$ |
17,342 |
|
|
$ |
17,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average units outstanding |
|
|
97,750,755 |
|
|
|
97,750,755 |
|
|
|
90,736,342 |
|
|
|
90,736,342 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
561,258 |
|
|
|
|
|
|
|
207,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average common partnership units outstanding |
|
|
97,750,755 |
|
|
|
98,312,013 |
|
|
|
90,736,342 |
|
|
|
90,944,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common unitholders |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
Discontinued operations attributable to common unitholders |
|
|
(0.04 |
) |
|
|
(0.04 |
) |
|
|
0.21 |
|
|
|
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common unitholders |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.19 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted shares are considered participating securities which require the use of the
two-class method for the computation of basic and diluted earnings per share. For the three-and
six months ended June 30, 2009 and 2008, earnings representing nonforfeitable dividends as noted in
the table above were allocated to the unvested restricted shares.
Common Partnership Unit and Preferred Mirror Units
On June 2, 2009, the Company completed its public offering (the offering) of 40,250,000 of its
common shares, par value $0.01 per share. The common shares were issued and sold by the Company to
the underwriters at a public offering price of $6.30 per common share in accordance with an
underwriting agreement. The common shares sold include 5,250,000 shares issued and sold pursuant
to the underwriters exercise in full of their over-allotment option under the underwriting
agreement. The Company received net proceeds of approximately $242.5 million from the offering net
of underwriting discounts, commissions and expenses. The Company used the net proceeds from the
offering to repay outstanding borrowings under its $600.0 million unsecured revolving credit
facility amounting to $242.0 million and for general corporate purposes. The Company contributed
the proceeds received from the sale of its shares to the Partnership and the Partnership then
issued 40,250,000 common partnership units to the Company.
On June 2, 2009, the Partnership declared a distribution of $0.10 per Common Partnership Unit,
totaling $12.9 million, which was paid on July 17, 2009 to unitholders of record as of July 3,
2009.
On
June 2, 2009, the Partnership declared distributions on its Series C Preferred Mirror Units and
Series D Preferred Mirror Units to holders of record as of June 30, 2009. These units are entitled
to a preferential return of 7.50% and 7.375%, respectively. Distributions paid on July 15, 2009 to
holders of Series C Preferred Mirror Units and Series D Preferred Mirror Units totaled $0.9 million
and $1.1 million, respectively.
Common Share Repurchases
63
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
The
Partnership maintains a share repurchase program under which the
Board has authorized the Partnership to
repurchase its common shares from time to time. The Board initially authorized this program in
1998 and has periodically replenished capacity under the program. On May 2, 2006 the Companys
Board restored capacity to 3.5 million common shares.
The Partnership did not repurchase any shares during the three-and six month periods ended June 30,
2009. As of June 30, 2009, the Partnership may purchase an additional 0.5 million shares under the
plan.
Repurchases may be made from time to time in the open market or in privately negotiated
transactions, subject to market conditions and compliance with legal requirements. The share
repurchase program does not contain any time limitation and does not obligate the Partnership to
repurchase any shares. The Partnership may discontinue the program at any time.
13. SHARE BASED AND DEFERRED COMPENSATION
Stock Options
At
June 30, 2009, the Partnership had 2,431,139 options outstanding under its shareholder approved
equity incentive plan. There were 1,806,163 options unvested as of June 30, 2009 and $0.8 million
of unrecognized compensation expense associated with these options recognized over a weighted
average of 2.1 years. During the three-and six months ended June 30, 2009 the Partnership
recognized $0.2 million of compensation expense, included in general and administrative expense
related to unvested options.
Option activity as of June 30, 2009 and changes during the six months ended June 30, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining Contractual |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Value (in 000s) |
|
Outstanding at January 1, 2009 |
|
|
1,754,648 |
|
|
$ |
20.41 |
|
|
|
8.77 |
|
|
$ |
(30,093 |
) |
Granted |
|
|
676,491 |
|
|
|
2.91 |
|
|
|
9.76 |
|
|
|
3,071,267 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 |
|
|
2,431,139 |
|
|
$ |
15.54 |
|
|
|
8.90 |
|
|
$ |
(19,664,394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested/Exercisable at June 30, 2009 |
|
|
624,976 |
|
|
$ |
20.04 |
|
|
|
8.05 |
|
|
$ |
(7,795,586 |
) |
Restricted Share Awards
As of June 30, 2009, 734,057 restricted shares were outstanding and vest over three to seven years
from the initial grant date. The remaining compensation expense to be recognized at June 30, 2009
was approximately $7.04 million. That expense is expected to be recognized over a weighted average
remaining vesting period of 2.6 years. The Partnership recognized compensation expense related to
outstanding restricted shares of $1.6 million during the six-month periods ended June 30, 2009, of
which $0.5 million of the current year expense was capitalized
as part of the Partnerships review of
employee salaries eligible for capitalization. The Partnership recognized $1.7 million of compensation
expense during the six months period ended June 30, 2008. The expensed amounts are included in
general and administrative expense on the Partnerships
consolidated statements of operations in the respective
periods.
The following table summarizes the Partnerships restricted share activity for the six-months ended
June 30, 2009:
64
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair value |
|
Non-vested at January 1, 2009 |
|
|
475,496 |
|
|
$ |
26.21 |
|
Granted |
|
|
372,586 |
|
|
|
3.36 |
|
Vested |
|
|
(111,703 |
) |
|
|
22.85 |
|
Forfeited |
|
|
(2,322 |
) |
|
|
22.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2009 |
|
|
734,057 |
|
|
$ |
9.78 |
|
|
|
|
|
|
|
|
Restricted Performance Share Units Plan
On April 1, 2009 the Compensation Committee granted stock options referred to in the 1997 Plan as
Restricted Performance Share Units (RPSU) to its executive participants. The awards are
contingent upon the Partnerships total shareholder return as compared to its industry peers and
the employment status of the participants through the performance period. The performance period
commenced on January 1, 2009 and will end on the earlier of December 31, 2011 or the date of a
change in control.
If the total shareholder return during the measurement period places the Partnership at or above a
certain percentile as compared to its peers based on an industry-based index at the end of the
measurement period then the number of shares that will be delivered shall equal a certain
percentage of the participants base units.
The participants will also receive dividend equivalent rights (DER) based on the initial
number of the units awarded. The DER will be calculated throughout the vesting period and the
dollar value of the DER will be used to purchase additional RPSU. All shares due to the
participants will be delivered on March 1, 2012. On April 1, 2009, the Partnership awarded 488,292
RPSU to its officers. The shares awarded have a 3 year cliff vesting period which is the period
the $1.1 million fair value of the awards will be amortized. On the date of the grant, the awards
were valued using a Monte Carlo simulation. For the three month period ended June 30, 2009, the
Partnership recognized compensation expense of $0.1 million related to this plan.
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 Partnership will make
payments (in the form of common shares) to executive-participants under the outperformance program
only if the Partnerships total shareholder return
exceeds percentage hurdles established under the outperformance program. The dollar value of any
payments will depend on the extent to which our performance exceeds the hurdles. The Partnership
established the outperformance program under the 1997 Plan.
If the total shareholder return (share price appreciation plus cash dividends) during a three-year
measurement period exceeds either of two hurdles (with one hurdle keyed to the greater of a fixed
percentage and an industry-based index, and the other hurdle keyed to a fixed percentage), then the
Partnership will fund an incentive compensation pool in accordance with a formula and make pay-outs
from the compensation pool in the form of vested and restricted common shares. The awards issued
are accounted for in accordance with SFAS 123(R). The fair value of the awards on August 28, 2006,
as adjusted for estimated forfeitures, was approximately $5.6 million and will be amortized into
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 5 year period. On the date of each grant, the awards
were valued using a Monte Carlo simulation.
65
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
For the three-and six-month periods ended June 30, 2009, the Partnership recognized $0.3 million
and $0.6 million, respectively, of compensation expenses related to the outperformance program. For
the three-and six-month periods ended June 30, 2008, the Partnership recognized $0.4 million and
$0.7 million, respectively, of compensation expense related to the outperformance program.
Employee Share Purchase Plan
On May 9, 2007, the Companys shareholders approved the 2007 Non-Qualified Employee Share Purchase
Plan (the ESPP). The ESPP is intended to provide eligible employees with a convenient means to
purchase common shares of the 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, the maximum participant contribution for the 2009 plan year is limited to the lesser
of 20% of compensation or $25,000. The number of shares reserved for issuance under the ESPP is
1.25 million. During the three-and six-month periods ended June 30, 2009, employees made purchases
of $0.1 million and $0.2 million, respectively, under the ESPP and the Partnership recognized $0.1
million of compensation expense related to the ESPP. During the three-and six-month periods ended
June 30, 2008, employees made purchases of $0.2 million and 0.3 million, respectively under the
ESPP and the Partnership recognized $0.1 million of compensation expense related to the ESPP. The
Board of Directors of the Company may terminate the ESPP at its sole discretion at anytime.
Deferred Compensation
In January 2005, the Company adopted a Deferred Compensation Plan (the Plan) that allows
directors and certain key employees to voluntarily defer compensation. Compensation expense is
recorded for the deferred compensation and a related liability is recognized. Participants may
elect designated benchmark investment options for the notational investment of their deferred
compensation. The deferred compensation obligation is adjusted for deemed income or loss related
to the investments selected. At the time the participants defer compensation, the Partnership records
a liability, which is included in the Partnerships consolidated balance sheet. The liability is
adjusted for changes in the market value of the participants selected investments at the end of
each accounting period, and the impact of adjusting the liability is recorded as an increase or
decrease to compensation cost. As of June 30, 2009 and 2008, the Partnership recorded a net increase
in compensation costs of $0.5 million and a reduction of $0.7 million, respectively, in connection
with the Plan due to the decline in market value of the participant investments in the Plan.
The deferred compensation obligations are unfunded, but the Partnership has purchased company-owned
life insurance policies which can be utilized as a future funding source for the obligations
related to the Plan. Participants in the Plan have no interest in any assets set aside by the
Partnership to meet its obligations under the deferral plan.
Participants in the Deferred Compensation Plan may elect to have all or a portion of their deferred
compensation invested in the Companys common shares. The Company holds these shares in a rabbi
trust, which is subject to the claims of the Companys creditors in the event of the Companys
bankruptcy or insolvency. The Plan does not provide for diversification of a participants
deferral allocated to the Company common share and deferrals allocated to Company common share can
only be settled with a fixed number of shares. In accordance with Emerging Issues Task Force Issue
97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in A Rabbi
Trust and Invested, the deferred compensation obligation associated with Company common share is
classified as a component of shareholders equity and the related shares are treated as shares to
be issued and are included in total shares outstanding. At June 30, 2009 and 2008, there were 0.3
million and $0.2 million shares, respectively, to be issued included in total shares outstanding.
Subsequent changes in the fair value of the common shares are not reflected in operations or
shareholders equity of the Company.
66
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
14. TAX CREDIT TRANSACTIONS
Historic Tax Credit Transaction
On November 17, 2008, the Partnership closed a transaction with US Bancorp (USB) related to the
historic rehabilitation of the 30th Street Post Office in Philadelphia, Pennsylvania (Project),
an 862,692 square foot office building which is 100% pre-leased to the Internal Revenue Service
(expected commencement of the IRS lease is August 2010). USB has agreed to contribute approximately
$67.9 million of Project costs and advanced $10.2 million of that contemporaneously with the
closing of the transaction. The remaining funds will be advanced in 2009 and 2010 subject to the
Partnerships achievement of certain construction milestones and its compliance with the federal
rehabilitation regulations. In return for the investment, USB will, upon completion of the Project
in 2010, receive substantially all of the rehabilitation credits available under section 47 of the
Internal Revenue Code.
In exchange for its contributions into the Project, USB is entitled to substantially all of the
benefits derived from the tax credit, but does not have a material interest in the underlying
economics of the property. This transaction also includes a put/call provision whereby the
Partnership may be obligated or entitled to repurchase USBs interest in the Project. The
Partnership believes the put will be exercised and an amount attributed to that obligation is
included in other liabilities.
Based on the contractual arrangements that obligate the Partnership to deliver tax benefits and
provide other guarantees to USB and that entitle the Partnership through fee arrangements to
receive substantially all available cash flow from the Project, the Partnership concluded that the
Project should be consolidated in accordance with FIN 46R. The Partnership also concluded that
capital contributions received from USB, in substance, are consideration that the Partnership
receives in exchange for its obligation to deliver tax credits and other tax benefits to USB.
These receipts will be recognized as revenue in the consolidated financial statements beginning
when the obligation to USB is relieved upon delivery of the expected tax benefits net of any
associated costs. The USB contribution made during 2008 of $10.2 million is included in other
liabilities on the Partnerships consolidated balance sheet at June 30, 2009 and December 31, 2008.
The Partnership anticipates that upon completion of the Project in 2010 it will begin to recognize
the cash received as revenue as the five year credit recapture period expires as defined in the
Internal Revenue Code.
Direct and incremental costs incurred in structuring the arrangement are deferred and amortized in
proportion to the recognition of the related revenue. The deferred cost at June 30, 2009 is $2.3
million and is included in other assets on the Partnerships consolidated balance sheet.
New Markets Tax Credit Transaction
On December 30, 2008, the Partnership entered into a transaction with USB related to the Cira
Garage Project (garage project) in Philadelphia, Pennsylvania and expects to receive a net
benefit of $7.8 million under a qualified New Markets Tax Credit Program (NMTC). The NMTC was
provided for in the Community Renewal Tax Relief Act of 2000 (the Act) and is intended to induce
investment capital in underserved and impoverished areas of the United States. The Act permits
taxpayers (whether companies or individuals) to claim credits against their Federal income taxes
for up to 39% of qualified investments in qualified, active low-income businesses or ventures.
USB contributed $13.3 million into the garage project and as such they are entitled to
substantially all of the benefits derived from the tax credit, but they do not have a material
interest in the underlying economics of the garage project. This transaction also includes a
put/call provision whereby the Partnership may be obligated or entitled to repurchase USBs
interest. The Partnership believes the put will be exercised and an amount attributed to that
obligation is included in other liabilities.
Based on the contractual arrangements that obligate the Partnership to deliver tax benefits and
provide various other guarantees to USB, the Partnership concluded that the project should be
consolidated in accordance with FIN 46R. Proceeds received in exchange for the transfer of the tax
credits will be recognized when the tax benefits are delivered without risk of recapture to the tax
credit investors and the Partnerships obligation is relieved. Accordingly, the USB
67
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
contribution of $13.3 million is included in other liabilities on the Partnerships consolidated
balance sheet at June 30, 2009 and December 31, 2008.
Direct and incremental costs incurred in structuring the arrangement are deferred and amortized
over the expected duration of the arrangement in proportion to the recognition of the related
revenue. The deferred asset at June 30, 2009 is $5.2 million and is included in other assets on
the Partnerships consolidated balance sheet.
The Partnership anticipates that it will recognize the net cash received as revenue in the year
ended December 31, 2014. The NMTC is subject to 100% recapture for a period of seven years.
15. SEGMENT INFORMATION
As of June 30, 2009, the Partnership manages its portfolio within six segments: (1) Pennsylvania,
(2) Metropolitan Washington D.C, (3) New Jersey/Delaware, (4) Richmond, Virginia, (5) California
and (6) Austin, Texas. The Pennsylvania segment includes properties in Chester, Delaware, Bucks,
and Montgomery counties in the Philadelphia suburbs and the City of Philadelphia in Pennsylvania.
The Metropolitan Washington, D.C. segment includes properties in Northern Virginia and suburban
Maryland. 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 in the state of
Delaware. The Richmond, Virginia segment includes properties primarily in Albemarle, Chesterfield
and Henrico counties, the City of Richmond and Durham, North Carolina. The California segment
includes properties in Oakland, Concord, Carlsbad and Rancho Bernardo. The Austin, Texas segment
includes properties in Coppell and Austin. 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.
The Austin, Texas segment was previously known as the Southwest segment. In order to provide
specificity and to reflect the disposition of properties in Dallas, Texas in 2007, the Partnership
now considers this segment to be Austin, Texas. The California segment was previously broken out
into California North and California South. Upon the completion of the Northern California
transaction in 2008, the Partnership owns three properties and two land parcels in Northern
California. As a result, the California North and the California South segments are now
combined into the California segment. The Partnership has restated the corresponding items of
segment information for the three and six month periods to conform to the new presentation.
68
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Segment information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
Metropolitan, D.C. |
|
|
/Delaware |
|
|
Virginia |
|
|
California |
|
|
Austin, Texas |
|
|
Corporate |
|
|
Total |
|
As of June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,729,472 |
|
|
$ |
1,356,842 |
|
|
$ |
677,252 |
|
|
$ |
297,678 |
|
|
$ |
248,570 |
|
|
$ |
276,766 |
|
|
$ |
|
|
|
$ |
4,586,580 |
|
Construction-in-progress |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
197,404 |
|
|
$ |
197,404 |
|
Land inventory |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
97,430 |
|
|
$ |
97,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,734,948 |
|
|
$ |
1,371,997 |
|
|
$ |
674,503 |
|
|
$ |
297,171 |
|
|
$ |
248,876 |
|
|
$ |
280,825 |
|
|
$ |
|
|
|
$ |
4,608,320 |
|
Construction-in-progress |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
122,219 |
|
|
$ |
122,219 |
|
Land inventory |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
100,516 |
|
|
$ |
100,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
58,606 |
|
|
$ |
34,637 |
|
|
$ |
29,190 |
|
|
$ |
8,948 |
|
|
$ |
6,158 |
|
|
$ |
8,825 |
|
|
$ |
(487 |
) |
|
$ |
145,877 |
|
Property operating expenses, real estate
taxes and third party management expenses |
|
|
21,038 |
|
|
|
12,762 |
|
|
|
12,792 |
|
|
|
3,374 |
|
|
|
3,392 |
|
|
|
3,997 |
|
|
|
(275 |
) |
|
|
57,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
37,568 |
|
|
$ |
21,875 |
|
|
$ |
16,398 |
|
|
$ |
5,574 |
|
|
$ |
2,766 |
|
|
$ |
4,828 |
|
|
$ |
(212 |
) |
|
$ |
88,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
60,704 |
|
|
$ |
34,288 |
|
|
$ |
29,377 |
|
|
$ |
9,593 |
|
|
$ |
7,310 |
|
|
$ |
9,914 |
|
|
$ |
(420 |
) |
|
$ |
150,766 |
|
Property operating expenses, real estate
taxes and third party management expenses |
|
|
21,282 |
|
|
|
11,929 |
|
|
|
12,837 |
|
|
|
3,161 |
|
|
|
3,102 |
|
|
|
4,375 |
|
|
|
1,186 |
|
|
|
57,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
39,422 |
|
|
$ |
22,359 |
|
|
$ |
16,540 |
|
|
$ |
6,432 |
|
|
$ |
4,208 |
|
|
$ |
5,539 |
|
|
$ |
(1,606 |
) |
|
$ |
92,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-months ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
119,059 |
|
|
$ |
69,811 |
|
|
$ |
58,639 |
|
|
$ |
18,450 |
|
|
$ |
13,532 |
|
|
$ |
17,918 |
|
|
$ |
(694 |
) |
|
$ |
296,715 |
|
Property operating expenses, real estate
taxes and third party management expenses |
|
|
46,278 |
|
|
|
26,640 |
|
|
|
26,911 |
|
|
|
7,257 |
|
|
|
6,737 |
|
|
|
7,978 |
|
|
|
(2,371 |
) |
|
|
119,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
72,781 |
|
|
$ |
43,171 |
|
|
$ |
31,728 |
|
|
$ |
11,193 |
|
|
$ |
6,795 |
|
|
$ |
9,940 |
|
|
$ |
1,677 |
|
|
$ |
177,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
124,346 |
|
|
$ |
68,489 |
|
|
$ |
57,968 |
|
|
$ |
18,820 |
|
|
$ |
14,639 |
|
|
$ |
18,981 |
|
|
$ |
(995 |
) |
|
$ |
302,248 |
|
Property operating expenses, real estate
taxes and third party management expenses |
|
|
43,131 |
|
|
|
24,061 |
|
|
|
25,235 |
|
|
|
6,138 |
|
|
|
6,011 |
|
|
|
8,449 |
|
|
|
3,284 |
|
|
|
116,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
81,215 |
|
|
$ |
44,428 |
|
|
$ |
32,733 |
|
|
$ |
12,682 |
|
|
$ |
8,628 |
|
|
$ |
10,532 |
|
|
$ |
(4,279 |
) |
|
$ |
185,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Net operating income is defined as total revenue less property operating expenses, real estate
taxes and third party management expenses. Segment net operating income includes revenue, real
estate taxes and property operating expenses directly related to operation and management of the
properties owned and managed within the respective geographical region. Segment net operating
income excludes property level depreciation and amortization, revenue and expenses directly
associated with third party real estate management services, expenses associated with corporate
administrative support services, and inter-company eliminations. Below is a reconciliation of
consolidated net operating income to consolidated income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
Six-month periods |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Consolidated net operating income |
|
$ |
88,797 |
|
|
$ |
92,894 |
|
|
$ |
177,285 |
|
|
$ |
185,939 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(34,944 |
) |
|
|
(36,742 |
) |
|
|
(70,590 |
) |
|
|
(73,785 |
) |
Deferred financing costs |
|
|
(1,894 |
) |
|
|
(1,198 |
) |
|
|
(3,146 |
) |
|
|
(2,706 |
) |
Recognized hedge activity |
|
|
(305 |
) |
|
|
|
|
|
|
(305 |
) |
|
|
|
|
Depreciation and amortization |
|
|
(53,308 |
) |
|
|
(51,492 |
) |
|
|
(105,461 |
) |
|
|
(102,430 |
) |
General & administrative expenses |
|
|
(5,514 |
) |
|
|
(6,127 |
) |
|
|
(10,472 |
) |
|
|
(11,039 |
) |
Provision for impairment of real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
642 |
|
|
|
179 |
|
|
|
1,222 |
|
|
|
382 |
|
Equity in income of real estate ventures |
|
|
1,533 |
|
|
|
1,664 |
|
|
|
2,119 |
|
|
|
2,779 |
|
Net loss on sales of interests in
undepreciated real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|