Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2010
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
Commission file number
001-9106 (Brandywine Realty Trust)
000-24407 (Brandywine Operating Partnership, L.P.)
Brandywine Realty Trust
Brandywine Operating Partnership, L.P.
(Exact name of registrant as specified in its charter)
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MARYLAND (Brandywine Realty Trust)
DELAWARE (Brandywine Operating Partnership L.P.)
(State or other jurisdiction of
Incorporation or organization)
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23-2413352
23-2862640
(I.R.S. Employer
Identification No.) |
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555 East Lancaster Avenue |
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Radnor, Pennsylvania
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19087 |
(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 þ No o |
Brandywine Operating Partnership, L.P.
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Yes þ No o |
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a
non-accelerated filer. See definitions of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act.
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Brandywine Realty Trust: |
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Large accelerated filer þ
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Accelerated filer o |
Non-accelerated filer o
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Smaller reporting company o |
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Brandywine Operating Partnership, L.P.: |
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Large accelerated filer o
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Accelerated filer o |
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 134,456,983 Common Shares of Beneficial Interest, par value $0.01 per share, were
outstanding as of October 31, 2010.
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2010 of
Brandywine Realty Trust (the Parent Company) and Brandywine Operating Partnership (the Operating
Partnership). The Parent Company is a Maryland real estate investment trust, or REIT that owns
its assets and conducts its operations through the Operating Partnership, a Delaware limited
partnership, and subsidiaries of the Operating Partnership. The Parent Company, the Operating
Partnership and their consolidated subsidiaries are collectively referred to in this report as the
Company.
The Parent Company is the sole general partner of the Operating Partnership and as of September 30,
2010, owned a 93.1% interest in the Operating Partnership. The remaining interest of approximately
6.9% pertains to common limited partnership interests owned by non-affiliated investors who
acquired their interests in exchange for contributions of properties or interests in properties to
the Operating Partnership. As the sole general partner of the Operating Partnership, the Parent
Company has full and complete responsibility for the Operating Partnerships day-to-day operations
and management.
The Company believes that combining the quarterly reports on Form 10-Q of the Parent Company and
the Operating Partnership into a single report will result in the following benefits:
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facilitate a better understanding by the investors of the Parent Company and the Operating
Partnership by enabling them to view the business as a whole in the same manner as management
views and operates the business; |
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remove duplicative disclosures and provide a more straightforward presentation in light of
the fact that a substantial portion of the Companys disclosure applies to both the Parent
Company and the Operating Partnership; and |
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create time and cost efficiencies through the preparation of one combined report instead of
two separate reports. |
Management operates the Parent Company and the Operating Partnership as one enterprise. The
management of the Parent Company consists of the same members as the management of the Operating
Partnership. These members are officers of both the Parent Company and of the Operating
Partnership.
There are few differences between the Parent Company and the Operating Partnership, which are
reflected in the footnote disclosures in this report. The Company believes it is important to
understand the differences between the Parent Company and the Operating Partnership in the context
of how these entities operate as an interrelated consolidated company. The Parent Company is a
REIT, whose only material asset is its ownership of the partnership interests of the Operating
Partnership. As a result, the Parent Company does not conduct business itself, other than acting
as the sole general partner of the Operating Partnership, issuing public equity from time to time
and guaranteeing the debt obligations of the Operating Partnership. The Operating Partnership holds
substantially all the assets of the Company and directly or indirectly holds the ownership
interests in the Companys joint ventures. The Operating Partnership conducts the operations of the
Companys business and is structured as a partnership with no publicly traded equity. Except for
net proceeds from public equity issuances by the Parent Company, which are contributed to the
Operating Partnership in exchange for partnership units, the Operating Partnership generates the
capital required by the Companys business through the Operating Partnerships operations, by the
Operating Partnerships direct or indirect incurrence of indebtedness or through the issuance of
partnership units of the Operating Partnership or its subsidiaries.
The equity and non-controlling interests in the Parent Company and the Operating Partnerships
equity are the main areas of difference between the consolidated financial statements of the Parent
Company and those of the Operating Partnership. The common limited partnership interests in the
Operating Partnership are accounted for as partners equity in the Operating Partnerships
financial statements while the redeemable common limited partnership interests held by parties
other than the Parent Company are presented as non-controlling interests in the Parent Companys
financial statements. The differences between the Parent Company and the Operating Partnerships
equity relate to the differences in the equity issued at the Parent Company and Operating
Partnership levels.
2
To help investors understand the significant differences between the Parent Company and the
Operating Partnership, this report presents the following as separate notes or sections for each of
the Parent Company and the Operating Partnership:
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consolidated financial statements; |
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the following notes to the consolidated financial statements: |
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Noncontrolling Interests; and |
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Parent Companys and Operating Partnerships Equity |
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Liquidity and Capital Resources in the Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
This report also includes separate Item 4. (Controls and Procedures) disclosures and separate
Exhibit 31 and 32 certifications for each of the Parent Company and the Operating Partnership in
order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity
have made the requisite certifications and that the Parent Company and Operating Partnership are
compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended, and
18 U.S.C. § 1350.
In order to highlight the differences between the Parent Company and the Operating Partnership, the
separate sections in this report for the Parent Company and the Operating Partnership specifically
refer to the Parent Company and the Operating Partnership. In the
sections that combine disclosures of the Parent Company and the Operating Partnership, this report
refers to such disclosures as those of the Company. Although the Operating Partnership is generally
the entity that directly or indirectly enters into contracts and joint ventures and holds assets
and debt, reference to the Company is appropriate because the business is one enterprise and the
Parent Company operates the business through the Operating Partnership.
As general partner with control of the Operating Partnership, the Parent Company consolidates the
Operating Partnership for financial reporting purposes, and the Parent Company does not have
significant assets other than its investment in the Operating Partnership. Therefore, the assets
and liabilities of the Parent Company and the Operating Partnership are the same on their
respective financial statements. The separate discussions of the Parent Company and the Operating
Partnership in this report should be read in conjunction with each other to understand the results
of the Company operations on a consolidated basis and how management operates the Company.
3
TABLE OF CONTENTS
Filing Format
This combined Form 10-Q is being filed separately by Brandywine Realty Trust and Brandywine
Operating Partnership, L.P.
4
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share information)
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September 30, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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Real estate investments: |
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Rental properties |
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$ |
4,830,454 |
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$ |
4,512,618 |
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Accumulated depreciation |
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(764,455 |
) |
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(716,956 |
) |
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Operating real estate investments, net |
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4,065,999 |
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3,795,662 |
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Construction-in-progress |
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53,377 |
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271,962 |
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Land inventory |
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106,801 |
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97,368 |
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Total real
estate investments, net |
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4,226,177 |
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4,164,992 |
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Cash and cash equivalents |
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104,041 |
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1,567 |
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Accounts receivable, net |
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20,079 |
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10,934 |
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Accrued rent receivable, net |
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90,620 |
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87,173 |
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Asset held for sale, net |
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11,908 |
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Investment in real estate ventures, at equity |
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78,077 |
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75,458 |
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Deferred costs, net |
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100,894 |
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106,097 |
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Intangible assets, net |
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107,604 |
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105,163 |
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Notes receivable |
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20,127 |
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59,008 |
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Other assets |
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64,771 |
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53,358 |
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Total assets |
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$ |
4,824,298 |
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$ |
4,663,750 |
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LIABILITIES AND BENEFICIARIES EQUITY |
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Mortgage notes payable |
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$ |
757,584 |
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$ |
551,720 |
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Borrowing under credit facilities |
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22,000 |
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92,000 |
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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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1,562,238 |
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1,627,857 |
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Accounts payable and accrued expenses |
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92,092 |
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88,599 |
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Distributions payable |
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22,624 |
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21,799 |
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Tenant security deposits and deferred rents |
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52,878 |
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58,572 |
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Acquired below market leases, net |
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31,334 |
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37,087 |
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Deferred income |
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72,760 |
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47,379 |
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Other liabilities |
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29,256 |
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33,997 |
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Liabilities related to assets held for sale |
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261 |
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Total liabilities |
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2,826,027 |
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2,742,010 |
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Commitments and contingencies (Note 18) |
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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 2010 and 2009, respectively |
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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 2010 and 2009, respectively |
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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; 134,176,707 and 128,849,176 issued in 2010 and 2009, respectively
and 134,042,560 and 128,597,412 outstanding in 2010 and 2009, respectively |
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1,339 |
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1,286 |
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Additional paid-in capital |
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2,663,832 |
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2,610,421 |
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Deferred compensation payable in common stock |
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5,946 |
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5,549 |
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Common shares in treasury, at cost, 134,147 and 251,764 in 2010 and 2009,
respectively |
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(3,806 |
) |
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(7,205 |
) |
Common shares in grantor trust, 296,450 in 2010 and 255,700 in 2009 |
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(5,946 |
) |
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(5,549 |
) |
Cumulative earnings |
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488,553 |
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501,384 |
|
Accumulated other comprehensive loss |
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(2,817 |
) |
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(9,138 |
) |
Cumulative distributions |
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(1,279,231 |
) |
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(1,213,359 |
) |
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Total Brandywine Realty Trusts equity |
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1,867,913 |
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1,883,432 |
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Non-controlling interests |
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130,358 |
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38,308 |
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Total equity |
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1,998,271 |
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1,921,740 |
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Total liabilities and equity |
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$ |
4,824,298 |
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$ |
4,663,750 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share information)
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For the three-month |
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For the nine-month |
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periods ended September 30, |
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periods ended September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenue: |
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Rents |
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$ |
117,567 |
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$ |
119,141 |
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$ |
346,739 |
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$ |
357,929 |
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Tenant reimbursements |
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20,187 |
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18,964 |
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58,995 |
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56,253 |
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Termination fees |
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1,039 |
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1,764 |
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4,124 |
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2,840 |
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Third party management fees, labor reimbursement and leasing |
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2,922 |
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5,194 |
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9,293 |
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14,055 |
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Other |
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1,250 |
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871 |
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3,195 |
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2,318 |
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Total revenue |
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142,965 |
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|
145,934 |
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422,346 |
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433,395 |
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Operating Expenses: |
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Property operating expenses |
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42,448 |
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39,762 |
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|
125,992 |
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|
121,967 |
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Real estate taxes |
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14,328 |
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14,161 |
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40,909 |
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42,740 |
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Third party management expenses |
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1,528 |
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2,256 |
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4,433 |
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6,339 |
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Depreciation and amortization |
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52,019 |
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51,143 |
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|
156,198 |
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|
154,566 |
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General and administrative expenses |
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5,753 |
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|
5,018 |
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18,498 |
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15,490 |
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Total operating expenses |
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116,076 |
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112,340 |
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346,030 |
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341,102 |
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Operating income |
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26,889 |
|
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|
33,594 |
|
|
|
76,316 |
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|
92,293 |
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Other Income (Expense): |
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Interest income |
|
|
726 |
|
|
|
473 |
|
|
|
2,554 |
|
|
|
1,694 |
|
Interest expense |
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|
(34,488 |
) |
|
|
(31,455 |
) |
|
|
(97,222 |
) |
|
|
(102,045 |
) |
Interest expense amortization of deferred financing costs |
|
|
(827 |
) |
|
|
(1,579 |
) |
|
|
(2,700 |
) |
|
|
(4,725 |
) |
Recognized hedge activity |
|
|
|
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|
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(1,517 |
) |
|
|
|
|
|
|
(1,822 |
) |
Equity in income of real estate ventures |
|
|
1,035 |
|
|
|
1,331 |
|
|
|
3,356 |
|
|
|
3,450 |
|
(Loss) gain on early extinguishment of debt |
|
|
(64 |
) |
|
|
5,073 |
|
|
|
(1,701 |
) |
|
|
23,725 |
|
|
|
|
|
|
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|
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|
|
|
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|
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|
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|
|
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|
Income (loss) from continuing operations |
|
|
(6,729 |
) |
|
|
5,920 |
|
|
|
(19,397 |
) |
|
|
12,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Discontinued operations: |
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|
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Income from discontinued operations |
|
|
116 |
|
|
|
1,395 |
|
|
|
436 |
|
|
|
4,383 |
|
Net (loss) gain on disposition of discontinued operations |
|
|
(3 |
) |
|
|
(6 |
) |
|
|
6,346 |
|
|
|
(1,037 |
) |
Provision for impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,700 |
) |
|
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|
|
|
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|
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Total discontinued operations |
|
|
113 |
|
|
|
1,389 |
|
|
|
6,782 |
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|
|
(354 |
) |
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|
|
|
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Net income (loss) |
|
|
(6,616 |
) |
|
|
7,309 |
|
|
|
(12,615 |
) |
|
|
12,216 |
|
|
|
|
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|
|
|
|
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|
|
|
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Net (income) loss from discontinued operations attributable to non-
controlling interests LP units |
|
|
(3 |
) |
|
|
(30 |
) |
|
|
(147 |
) |
|
|
24 |
|
Net income attributable to non-controlling interests partners share
of consolidated real estate ventures |
|
|
|
|
|
|
(47 |
) |
|
|
|
|
|
|
(69 |
) |
Net (income) loss attributable to non-controlling interests LP units |
|
|
182 |
|
|
|
(84 |
) |
|
|
536 |
|
|
|
(189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to non-controlling interests |
|
|
179 |
|
|
|
(161 |
) |
|
|
389 |
|
|
|
(234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Brandywine Realty Trust |
|
|
(6,437 |
) |
|
|
7,148 |
|
|
|
(12,226 |
) |
|
|
11,982 |
|
Distribution to Preferred Shares |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
Amount allocated to unvested restricted shareholders |
|
|
(128 |
) |
|
|
(73 |
) |
|
|
(384 |
) |
|
|
(183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Common Shareholders of
Brandywine Realty Trust |
|
$ |
(8,563 |
) |
|
$ |
5,077 |
|
|
$ |
(18,604 |
) |
|
$ |
5,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.06 |
) |
|
$ |
0.03 |
|
|
$ |
(0.19 |
) |
|
$ |
0.05 |
|
Discontinued operations |
|
|
0.00 |
|
|
|
0.01 |
|
|
|
0.05 |
|
|
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.06 |
) |
|
$ |
0.04 |
|
|
$ |
(0.14 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
(0.06 |
) |
|
$ |
0.03 |
|
|
$ |
(0.19 |
) |
|
$ |
0.05 |
|
Discontinued operations |
|
|
0.00 |
|
|
|
0.01 |
|
|
|
0.05 |
|
|
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.06 |
) |
|
$ |
0.04 |
|
|
$ |
(0.14 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
132,208,245 |
|
|
|
128,582,498 |
|
|
|
130,841,534 |
|
|
|
106,273,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
132,208,245 |
|
|
|
129,926,111 |
|
|
|
130,841,534 |
|
|
|
107,206,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Brandywine Realty Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(6,547 |
) |
|
$ |
5,789 |
|
|
$ |
(18,861 |
) |
|
$ |
12,312 |
|
Income (loss) from discontinued operations |
|
|
110 |
|
|
|
1,359 |
|
|
|
6,635 |
|
|
|
(330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(6,437 |
) |
|
$ |
7,148 |
|
|
$ |
(12,226 |
) |
|
$ |
11,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month |
|
|
For the nine-month |
|
|
|
periods ended September 30, |
|
|
periods ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
(6,616 |
) |
|
$ |
7,309 |
|
|
$ |
(12,615 |
) |
|
$ |
12,216 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on derivative financial instruments |
|
|
2,274 |
|
|
|
328 |
|
|
|
6,445 |
|
|
|
6,399 |
|
Reclassification of realized (gains)/losses on derivative financial
instruments to operations, net |
|
|
13 |
|
|
|
(20 |
) |
|
|
12 |
|
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
2,287 |
|
|
|
308 |
|
|
|
6,457 |
|
|
|
6,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
(4,329 |
) |
|
|
7,617 |
|
|
|
(6,158 |
) |
|
|
18,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (income) loss attributable to non-controlling interest |
|
|
131 |
|
|
|
(161 |
) |
|
|
253 |
|
|
|
(234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Brandywine Realty Trust |
|
$ |
(4,198 |
) |
|
$ |
7,456 |
|
|
$ |
(5,905 |
) |
|
$ |
18,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF BENEFICIARIES EQUITY
For the Nine-Month Periods Ended September 30, 2010 and 2009
(unaudited, in thousands, except number of shares)
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Shares of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rabbi |
|
|
Brandywine |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
Common |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Par Value of |
|
|
Number of |
|
|
Par Value of |
|
|
Number of |
|
|
Number of |
|
|
Trust/Deferred |
|
|
Realty Trusts |
|
|
Additional |
|
|
Common |
|
|
Compensation |
|
|
Shares in |
|
|
|
|
|
|
Other |
|
|
|
|
|
Non- |
|
|
|
|
|
|
Preferred C |
|
|
Preferred C |
|
|
Preferred D |
|
|
Preferred D |
|
|
Common |
|
|
Treasury |
|
|
Compensation |
|
|
beneficial |
|
|
Paid-in |
|
|
Shares |
|
|
Payable in |
|
|
Grantor |
|
|
Cumulative |
|
|
Comprehensive |
|
|
Cumulative |
|
|
Controlling |
|
|
|
|
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
interest |
|
|
Capital |
|
|
in Treasury |
|
|
Common Stock |
|
|
Trust |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Distributions |
|
|
Interests |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2009 |
|
|
2,000,000 |
|
|
$ |
20 |
|
|
|
2,300,000 |
|
|
$ |
23 |
|
|
|
128,849,176 |
|
|
|
251,764 |
|
|
|
255,700 |
|
|
$ |
1,286 |
|
|
$ |
2,610,421 |
|
|
$ |
(7,205 |
) |
|
$ |
5,549 |
|
|
$ |
(5,549 |
) |
|
$ |
501,384 |
|
|
$ |
(9,138 |
) |
|
$ |
(1,213,359 |
) |
|
$ |
38,308 |
|
|
$ |
1,921,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,226 |
) |
|
|
|
|
|
|
|
|
|
|
(389 |
) |
|
|
(12,615 |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,321 |
|
|
|
|
|
|
|
136 |
|
|
|
6,457 |
|
Issuance of Common Shares of Beneficial Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,327,845 |
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
66,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,927 |
|
Equity issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,036 |
) |
Issuance of LP units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,732 |
|
|
|
77,732 |
|
Bonus Share Issuance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,607 |
) |
|
|
32,607 |
|
|
|
|
|
|
|
|
|
|
|
871 |
|
|
|
369 |
|
|
|
(369 |
) |
|
|
(502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369 |
|
Vesting of Restricted Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,598 |
) |
|
|
8,989 |
|
|
|
|
|
|
|
(1,114 |
) |
|
|
2,304 |
|
|
|
103 |
|
|
|
(103 |
) |
|
|
(1,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227 |
) |
Restricted Stock Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,723 |
|
Restricted Performance Units Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
695 |
|
Share Issuance from/to Deferred Compensation Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(314 |
) |
|
|
|
|
|
|
(3,866 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110 |
) |
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804 |
|
Outperformance Plan Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339 |
|
Trustee Fees Paid in Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,412 |
) |
|
|
3,020 |
|
|
|
|
|
|
|
|
|
|
|
224 |
|
|
|
35 |
|
|
|
(35 |
) |
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
Adjustment to Non-controlling Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,874 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,874 |
|
|
|
|
|
Cumulative Effect of Accounting Change for Variable Interest Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,439 |
|
|
|
|
|
|
|
|
|
|
|
(38 |
) |
|
|
1,401 |
|
Preferred Share distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,993 |
) |
|
|
|
|
|
|
(5,993 |
) |
Distributions declared ($0.45 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,880 |
) |
|
|
(1,264 |
) |
|
|
(61,144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, September 30, 2010 |
|
|
2,000,000 |
|
|
$ |
20 |
|
|
|
2,300,000 |
|
|
$ |
23 |
|
|
|
134,176,707 |
|
|
|
134,147 |
|
|
|
296,450 |
|
|
$ |
1,339 |
|
|
$ |
2,663,832 |
|
|
$ |
(3,806 |
) |
|
$ |
5,946 |
|
|
$ |
(5,946 |
) |
|
$ |
488,553 |
|
|
$ |
(2,817 |
) |
|
$ |
(1,279,231 |
) |
|
$ |
130,358 |
|
|
$ |
1,998,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Shares of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rabbi |
|
|
Brandywine |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
Common |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Par Value of |
|
|
Number of |
|
|
Par Value of |
|
|
Number of |
|
|
Number of |
|
|
Trust/Deferred |
|
|
Realty Trusts |
|
|
Additional |
|
|
Common |
|
|
Compensation |
|
|
Shares in |
|
|
|
|
|
|
Other |
|
|
|
|
|
Non- |
|
|
|
|
|
|
Preferred C |
|
|
Preferred C |
|
|
Preferred D |
|
|
Preferred D |
|
|
Common |
|
|
Treasury |
|
|
Compensation |
|
|
beneficial |
|
|
Paid-in |
|
|
Shares |
|
|
Payable in |
|
|
Grantor |
|
|
Cumulative |
|
|
Comprehensive |
|
|
Cumulative |
|
|
Controlling |
|
|
|
|
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
interest |
|
|
Capital |
|
|
in Treasury |
|
|
Common Stock |
|
|
Trust |
|
|
Earnings |
|
|
Income (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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,982 |
|
|
|
|
|
|
|
|
|
|
|
234 |
|
|
|
12,216 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,656 |
|
|
|
|
|
|
|
(317 |
) |
|
|
6,339 |
|
Issuance of Common Shares of Beneficial Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,250,000 |
|
|
|
|
|
|
|
|
|
|
|
402 |
|
|
|
241,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,322 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,482 |
|
Restricted Performance Units Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 |
|
Share Issuance from/to Deferred Compensation Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,796 |
) |
|
|
(54,854 |
) |
|
|
26,092 |
|
|
|
|
|
|
|
(29 |
) |
|
|
1,830 |
|
|
|
(816 |
) |
|
|
816 |
|
|
|
(1,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131 |
|
Share Choice Plan Issuance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46 |
) |
Stock Option Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340 |
|
Outperformance Plan Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
803 |
|
Trustee Fees Paid in Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,987 |
) |
|
|
4,895 |
|
|
|
|
|
|
|
|
|
|
|
466 |
|
|
|
35 |
|
|
|
(35 |
) |
|
|
(313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153 |
|
Adjustment to Non-controlling Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,709 |
) |
|
|
|
|
Other consolidated real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
73 |
|
Other activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183 |
|
Preferred Share distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,994 |
) |
|
|
|
|
|
|
(5,994 |
) |
Distributions declared ($0.30 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,952 |
) |
|
|
(845 |
) |
|
|
(35,797 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, September 30, 2009 |
|
|
2,000,000 |
|
|
$ |
20 |
|
|
|
2,300,000 |
|
|
$ |
23 |
|
|
|
128,849,176 |
|
|
|
266,842 |
|
|
|
255,700 |
|
|
$ |
1,286 |
|
|
$ |
2,609,212 |
|
|
$ |
(7,893 |
) |
|
$ |
5,549 |
|
|
$ |
(5,549 |
) |
|
$ |
505,468 |
|
|
$ |
(10,349 |
) |
|
$ |
(1,191,352 |
) |
|
$ |
39,397 |
|
|
$ |
1,945,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an intergral part of these consolidated financial statements.
8
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine-month periods |
|
|
|
ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(12,615 |
) |
|
$ |
12,216 |
|
Adjustments to reconcile net income (loss) to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
119,729 |
|
|
|
119,432 |
|
Amortization: |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
2,700 |
|
|
|
4,725 |
|
Amortization of debt discount/(premium), net |
|
|
590 |
|
|
|
3,015 |
|
Deferred leasing costs |
|
|
15,567 |
|
|
|
13,472 |
|
Acquired above (below) market leases, net |
|
|
(4,535 |
) |
|
|
(4,827 |
) |
Acquired lease intangibles |
|
|
21,657 |
|
|
|
24,926 |
|
Stock-based compensation costs |
|
|
3,744 |
|
|
|
3,880 |
|
Recognized hedge activity |
|
|
|
|
|
|
1,822 |
|
Straight-line rent |
|
|
(9,179 |
) |
|
|
(6,778 |
) |
Provision for doubtful accounts |
|
|
2,276 |
|
|
|
4,643 |
|
Provision for impairment in real estate |
|
|
|
|
|
|
3,700 |
|
Real estate venture income in excess of distributions |
|
|
(2,779 |
) |
|
|
(1,450 |
) |
Net loss (gain) on sale of interests in real estate |
|
|
(6,346 |
) |
|
|
1,038 |
|
Loss (gain) on early extinguishment of debt |
|
|
1,701 |
|
|
|
(23,725 |
) |
Contributions from historic tax credit transaction, net of deferred costs |
|
|
27,396 |
|
|
|
|
|
Cumulative interest accretion of repayments of unsecured notes |
|
|
(2,716 |
) |
|
|
(3,730 |
) |
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,540 |
) |
|
|
3,827 |
|
Other assets |
|
|
(16,051 |
) |
|
|
(8,243 |
) |
Accounts payable and accrued expenses |
|
|
11,238 |
|
|
|
18,102 |
|
Tenant security deposits and deferred rents |
|
|
(4,412 |
) |
|
|
(4,594 |
) |
Other liabilities |
|
|
3,197 |
|
|
|
1,648 |
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
149,622 |
|
|
|
163,099 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of properties |
|
|
(50,342 |
) |
|
|
|
|
Sales of properties, net |
|
|
17,352 |
|
|
|
33,354 |
|
Proceeds from repayment of mortgage notes receivable |
|
|
40,000 |
|
|
|
|
|
Capital expenditures |
|
|
(144,884 |
) |
|
|
(162,013 |
) |
Advances for purchase of tenant assets, net of repayments |
|
|
(4,514 |
) |
|
|
|
|
Investment in unconsolidated Real Estate Ventures |
|
|
|
|
|
|
(14,980 |
) |
Escrowed cash |
|
|
|
|
|
|
31,385 |
|
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income |
|
|
1,453 |
|
|
|
11,528 |
|
Decrease in cash due to the deconsolidation of variable interest entities |
|
|
(1,382 |
) |
|
|
|
|
Leasing costs |
|
|
(16,720 |
) |
|
|
(18,022 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(159,037 |
) |
|
|
(118,748 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
344,000 |
|
|
|
806,000 |
|
Repayments of Credit Facility borrowings |
|
|
(414,000 |
) |
|
|
(959,000 |
) |
Proceeds from mortgage notes payable |
|
|
253,981 |
|
|
|
149,800 |
|
Repayments of mortgage notes payable |
|
|
(6,533 |
) |
|
|
(81,558 |
) |
Proceeds from unsecured notes |
|
|
|
|
|
|
247,030 |
|
Repayments of unsecured notes |
|
|
(66,408 |
) |
|
|
(369,862 |
) |
Debt financing costs |
|
|
(492 |
) |
|
|
(24,354 |
) |
Refund of deferred financing costs related to forward commitment |
|
|
1,659 |
|
|
|
|
|
Net proceeds from issuance of shares |
|
|
65,990 |
|
|
|
242,332 |
|
Distributions paid to shareholders |
|
|
(65,045 |
) |
|
|
(53,958 |
) |
Distributions to noncontrolling interest |
|
|
(1,263 |
) |
|
|
(1,409 |
) |
|
|
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
111,889 |
|
|
|
(44,979 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
102,474 |
|
|
|
(628 |
) |
Cash and cash equivalents at beginning of period |
|
|
1,567 |
|
|
|
3,924 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
104,041 |
|
|
$ |
3,296 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest during the nine months ended September 30, 2010
and 2009 of $9,468 and $5,980, respectively |
|
$ |
85,824 |
|
|
$ |
92,309 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
|
|
|
|
Proceeds from mortgage notes payable retained by lender and included in other assets (see Note 7) |
|
|
2,519 |
|
|
|
|
|
Change in capital expenditures financed through accounts payable at period end |
|
|
(7,805 |
) |
|
|
8,290 |
|
Change in capital expenditures financed through retention payable at period end |
|
|
1,362 |
|
|
|
(3,945 |
) |
Change in unfunded tenant allowance |
|
|
(2,926 |
) |
|
|
|
|
Change in real estate investments due to the deconsolidation of variable interest entities |
|
|
(37,126 |
) |
|
|
|
|
Change in mortgage notes payable due to the deconsolidation of variable interest entities |
|
|
(42,877 |
) |
|
|
|
|
Change in non-controlling interest from issuance of limited partnership units (see Note 3) |
|
|
77,733 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
9
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit and per unit information)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Real estate investments: |
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
4,830,454 |
|
|
$ |
4,512,618 |
|
Accumulated depreciation |
|
|
(764,455 |
) |
|
|
(716,956 |
) |
|
|
|
|
|
|
|
Operating real estate investments, net |
|
|
4,065,999 |
|
|
|
3,795,662 |
|
Construction-in-progress |
|
|
53,377 |
|
|
|
271,962 |
|
Land inventory |
|
|
106,801 |
|
|
|
97,368 |
|
|
|
|
|
|
|
|
Total real
estate investments, net |
|
|
4,226,177 |
|
|
|
4,164,992 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
104,041 |
|
|
|
1,567 |
|
Accounts receivable, net |
|
|
20,079 |
|
|
|
10,934 |
|
Accrued rent receivable, net |
|
|
90,620 |
|
|
|
87,173 |
|
Asset held for sale, net |
|
|
11,908 |
|
|
|
|
|
Investment in real estate ventures, at equity |
|
|
78,077 |
|
|
|
75,458 |
|
Deferred costs, net |
|
|
100,894 |
|
|
|
106,097 |
|
Intangible assets, net |
|
|
107,604 |
|
|
|
105,163 |
|
Notes receivable |
|
|
20,127 |
|
|
|
59,008 |
|
Other assets |
|
|
64,771 |
|
|
|
53,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,824,298 |
|
|
$ |
4,663,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
757,584 |
|
|
$ |
551,720 |
|
Borrowing under credit facilities |
|
|
22,000 |
|
|
|
92,000 |
|
Unsecured term loan |
|
|
183,000 |
|
|
|
183,000 |
|
Unsecured senior notes, net of discounts |
|
|
1,562,238 |
|
|
|
1,627,857 |
|
Accounts payable and accrued expenses |
|
|
92,092 |
|
|
|
88,599 |
|
Distributions payable |
|
|
22,624 |
|
|
|
21,799 |
|
Tenant security deposits and deferred rents |
|
|
52,878 |
|
|
|
58,572 |
|
Acquired below market leases, net |
|
|
31,334 |
|
|
|
37,087 |
|
Deferred income |
|
|
72,760 |
|
|
|
47,379 |
|
Other liabilities |
|
|
29,256 |
|
|
|
33,997 |
|
Liabilities related to assets held for sale |
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,826,027 |
|
|
|
2,742,010 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 18) |
|
|
|
|
|
|
|
|
Redeemable limited partnership units at redemption value;
9,920,220 and 2,809,108 issued and outstanding in 2010 and 2009, respectively |
|
|
135,519 |
|
|
|
44,620 |
|
|
|
|
|
|
|
|
|
|
Brandywine Operating Partnerships equity: |
|
|
|
|
|
|
|
|
7.50% Series D Preferred Mirror Units; issued and outstanding-
2,000,000 in 2010 and 2009, respectively |
|
|
47,912 |
|
|
|
47,912 |
|
7.375% Series E Preferred Mirror Units; issued and outstanding-
2,300,000 in 2010 and 2009, respectively |
|
|
55,538 |
|
|
|
55,538 |
|
General Partnership Capital, 134,176,707 and 128,849,176 units issued in 2010
and 2009, respectively and 134,042,560 and
128,597,412 units outstanding
in 2010 and 2009, respectively |
|
|
1,761,871 |
|
|
|
1,783,033 |
|
Accumulated other comprehensive loss |
|
|
(2,569 |
) |
|
|
(9,428 |
) |
|
|
|
|
|
|
|
Total Brandywine Operating Partnerships equity |
|
|
1,862,752 |
|
|
|
1,877,055 |
|
|
|
|
|
|
|
|
|
|
Non-controlling interest consolidated real estate ventures |
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
|
Total Equity |
|
|
1,862,752 |
|
|
|
1,877,120 |
|
|
|
|
|
|
|
|
Total liabilities and partners equity |
|
$ |
4,824,298 |
|
|
$ |
4,663,750 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
10
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month |
|
|
For the nine-month |
|
|
|
periods ended September 30, |
|
|
periods ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rents |
|
$ |
117,567 |
|
|
$ |
119,141 |
|
|
$ |
346,739 |
|
|
$ |
357,929 |
|
Tenant reimbursements |
|
|
20,187 |
|
|
|
18,964 |
|
|
|
58,995 |
|
|
|
56,253 |
|
Termination fees |
|
|
1,039 |
|
|
|
1,764 |
|
|
|
4,124 |
|
|
|
2,840 |
|
Third party management fees, labor reimbursement and leasing |
|
|
2,922 |
|
|
|
5,194 |
|
|
|
9,293 |
|
|
|
14,055 |
|
Other |
|
|
1,250 |
|
|
|
871 |
|
|
|
3,195 |
|
|
|
2,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
142,965 |
|
|
|
145,934 |
|
|
|
422,346 |
|
|
|
433,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
42,448 |
|
|
|
39,762 |
|
|
|
125,992 |
|
|
|
121,967 |
|
Real estate taxes |
|
|
14,328 |
|
|
|
14,161 |
|
|
|
40,909 |
|
|
|
42,740 |
|
Third party management expenses |
|
|
1,528 |
|
|
|
2,256 |
|
|
|
4,433 |
|
|
|
6,339 |
|
Depreciation and amortization |
|
|
52,019 |
|
|
|
51,143 |
|
|
|
156,198 |
|
|
|
154,566 |
|
General & administrative expenses |
|
|
5,753 |
|
|
|
5,018 |
|
|
|
18,498 |
|
|
|
15,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
116,076 |
|
|
|
112,340 |
|
|
|
346,030 |
|
|
|
341,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
26,889 |
|
|
|
33,594 |
|
|
|
76,316 |
|
|
|
92,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
726 |
|
|
|
473 |
|
|
|
2,554 |
|
|
|
1,694 |
|
Interest expense |
|
|
(34,488 |
) |
|
|
(31,455 |
) |
|
|
(97,222 |
) |
|
|
(102,045 |
) |
Interest expense Deferred financing costs |
|
|
(827 |
) |
|
|
(1,579 |
) |
|
|
(2,700 |
) |
|
|
(4,725 |
) |
Recognized hedge activity |
|
|
|
|
|
|
(1,517 |
) |
|
|
|
|
|
|
(1,822 |
) |
Equity in income of real estate ventures |
|
|
1,035 |
|
|
|
1,331 |
|
|
|
3,356 |
|
|
|
3,450 |
|
(Loss) Gain on early extinguishment of debt |
|
|
(64 |
) |
|
|
5,073 |
|
|
|
(1,701 |
) |
|
|
23,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(6,729 |
) |
|
|
5,920 |
|
|
|
(19,397 |
) |
|
|
12,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
116 |
|
|
|
1,395 |
|
|
|
436 |
|
|
|
4,383 |
|
Net (loss) gain on disposition of discontinued operations |
|
|
(3 |
) |
|
|
(6 |
) |
|
|
6,346 |
|
|
|
(1,037 |
) |
Provision for impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113 |
|
|
|
1,389 |
|
|
|
6,782 |
|
|
|
(354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(6,616 |
) |
|
|
7,309 |
|
|
|
(12,615 |
) |
|
|
12,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to non-controlling interests |
|
|
|
|
|
|
(47 |
) |
|
|
|
|
|
|
(69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Brandywine Operating Partnership |
|
|
(6,616 |
) |
|
|
7,262 |
|
|
|
(12,615 |
) |
|
|
12,147 |
|
Distribution to Preferred share dividends |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
Amount allocated to unvested restricted unitholders |
|
|
(128 |
) |
|
|
(73 |
) |
|
|
(384 |
) |
|
|
(183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Common Partnership Unitholders
Brandywine Operating Partnership |
|
$ |
(8,742 |
) |
|
$ |
5,191 |
|
|
$ |
(18,993 |
) |
|
$ |
5,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.06 |
) |
|
$ |
0.03 |
|
|
$ |
(0.19 |
) |
|
$ |
0.05 |
|
Discontinued operations |
|
|
0.00 |
|
|
|
0.01 |
|
|
|
0.05 |
|
|
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.06 |
) |
|
$ |
0.04 |
|
|
$ |
(0.14 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.06 |
) |
|
$ |
0.03 |
|
|
$ |
(0.19 |
) |
|
$ |
0.05 |
|
Discontinued operations |
|
|
0.00 |
|
|
|
0.01 |
|
|
|
0.05 |
|
|
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.06 |
) |
|
$ |
0.04 |
|
|
$ |
(0.14 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common partnership units outstanding |
|
|
139,423,151 |
|
|
|
131,399,119 |
|
|
|
135,135,380 |
|
|
|
109,090,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common partnership units outstanding |
|
|
139,423,151 |
|
|
|
132,742,732 |
|
|
|
135,135,380 |
|
|
|
110,023,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Brandywine Operating Partnership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(6,729 |
) |
|
$ |
5,873 |
|
|
$ |
(19,397 |
) |
|
$ |
12,501 |
|
Income (loss) from discontinued operations |
|
|
113 |
|
|
|
1,389 |
|
|
|
6,782 |
|
|
|
(354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(6,616 |
) |
|
$ |
7,262 |
|
|
$ |
(12,615 |
) |
|
$ |
12,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
11
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month |
|
|
For the nine-month |
|
|
|
periods ended September 30, |
|
|
periods ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
(6,616 |
) |
|
$ |
7,309 |
|
|
$ |
(12,615 |
) |
|
$ |
12,216 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on derivative financial instruments |
|
|
2,274 |
|
|
|
328 |
|
|
|
6,445 |
|
|
|
6,399 |
|
Reclassification of realized (gains)/losses on derivative financial
instruments to operations, net |
|
|
13 |
|
|
|
(20 |
) |
|
|
12 |
|
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
2,287 |
|
|
|
308 |
|
|
|
6,457 |
|
|
|
6,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
(4,329 |
) |
|
|
7,617 |
|
|
|
(6,158 |
) |
|
|
18,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (income) loss attributable to non-controlling interest |
|
|
|
|
|
|
(47 |
) |
|
|
|
|
|
|
(69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Brandywine
Operating Partnership |
|
$ |
(4,329 |
) |
|
$ |
7,570 |
|
|
$ |
(6,158 |
) |
|
$ |
18,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
12
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine-month periods |
|
|
|
ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(12,615 |
) |
|
$ |
12,216 |
|
Adjustments to reconcile net income (loss) to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
119,729 |
|
|
|
119,432 |
|
Amortization: |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
2,700 |
|
|
|
4,725 |
|
Amortization of debt discount/(premium), net |
|
|
590 |
|
|
|
3,015 |
|
Deferred leasing costs |
|
|
15,567 |
|
|
|
13,472 |
|
Acquired above (below) market leases, net |
|
|
(4,535 |
) |
|
|
(4,827 |
) |
Acquired lease intangibles |
|
|
21,657 |
|
|
|
24,926 |
|
Stock-based compensation costs |
|
|
3,744 |
|
|
|
3,880 |
|
Recognized hedge activity |
|
|
|
|
|
|
1,822 |
|
Straight-line rent |
|
|
(9,179 |
) |
|
|
(6,778 |
) |
Provision for doubtful accounts |
|
|
2,276 |
|
|
|
4,643 |
|
Provision for impairment in real estate |
|
|
|
|
|
|
3,700 |
|
Real estate venture income in excess of distributions |
|
|
(2,779 |
) |
|
|
(1,450 |
) |
Net loss (gain) on sale of interests in real estate |
|
|
(6,346 |
) |
|
|
1,038 |
|
Loss (gain) on early extinguishment of debt |
|
|
1,701 |
|
|
|
(23,725 |
) |
Contributions from historic tax credit, net of deferred costs |
|
|
27,396 |
|
|
|
|
|
Cumulative interest accretion of repayments of unsecured notes |
|
|
(2,716 |
) |
|
|
(3,730 |
) |
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,540 |
) |
|
|
3,827 |
|
Other assets |
|
|
(16,051 |
) |
|
|
(8,243 |
) |
Accounts payable and accrued expenses |
|
|
11,238 |
|
|
|
18,102 |
|
Tenant security deposits and deferred rents |
|
|
(4,412 |
) |
|
|
(4,594 |
) |
Other liabilities |
|
|
3,197 |
|
|
|
1,648 |
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
149,622 |
|
|
|
163,099 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of properties |
|
|
(50,342 |
) |
|
|
|
|
Sales of properties, net |
|
|
17,352 |
|
|
|
33,354 |
|
Proceeds from repayment of mortgage notes receivable |
|
|
40,000 |
|
|
|
|
|
Capital expenditures |
|
|
(144,884 |
) |
|
|
(162,013 |
) |
Advances for purchase of tenant assets, net of repayments |
|
|
(4,514 |
) |
|
|
|
|
Investment in unconsolidated Real Estate Ventures |
|
|
|
|
|
|
(14,980 |
) |
Escrowed cash |
|
|
|
|
|
|
31,385 |
|
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income |
|
|
1,453 |
|
|
|
11,528 |
|
Decrease in cash due to the deconsolidation of variable interest entities |
|
|
(1,382 |
) |
|
|
|
|
Leasing costs |
|
|
(16,720 |
) |
|
|
(18,022 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(159,037 |
) |
|
|
(118,748 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
344,000 |
|
|
|
806,000 |
|
Repayments of Credit Facility borrowings |
|
|
(414,000 |
) |
|
|
(959,000 |
) |
Proceeds from mortgage notes payable |
|
|
253,981 |
|
|
|
149,800 |
|
Repayments of mortgage notes payable |
|
|
(6,533 |
) |
|
|
(81,558 |
) |
Proceeds from unsecured notes |
|
|
|
|
|
|
247,030 |
|
Repayments of unsecured notes |
|
|
(66,408 |
) |
|
|
(369,862 |
) |
Debt financing costs |
|
|
(492 |
) |
|
|
(24,354 |
) |
Refund of deferred financing costs related to forward commitment |
|
|
1,659 |
|
|
|
|
|
Net proceeds from issuance of operating units |
|
|
65,990 |
|
|
|
242,332 |
|
Distributions paid to preferred and common partnership unitholders |
|
|
(66,308 |
) |
|
|
(55,367 |
) |
|
|
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
111,889 |
|
|
|
(44,979 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
102,474 |
|
|
|
(628 |
) |
Cash and cash equivalents at beginning of period |
|
|
1,567 |
|
|
|
3,924 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
104,041 |
|
|
$ |
3,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest during the nine months ended September 30, 2010
and 2009 of $9,468 and $5,980, respectively |
|
$ |
85,824 |
|
|
$ |
92,309 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
|
|
|
|
Proceeds from mortgage notes payable retained by lender and included in other assets (see Note 7) |
|
|
2,519 |
|
|
|
|
|
Change in capital expenditures financed through accounts payable at period end |
|
|
(7,805 |
) |
|
|
8,290 |
|
Change in capital expenditures financed through retention payable at period end |
|
|
1,362 |
|
|
|
(3,945 |
) |
Change in unfunded tenant allowance |
|
|
(2,926 |
) |
|
|
|
|
Change in real estate investments due to the deconsolidation of variable interest entities |
|
|
(37,126 |
) |
|
|
|
|
Change in mortgage notes payable due to the deconsolidation of variable interest entities |
|
|
(42,877 |
) |
|
|
|
|
Issuance of redeemable limited partnership units related to the acquisition of Three Logan Square (see Note 3) |
|
|
77,733 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
13
BRANDYWINE REALTY TRUST AND BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
1. ORGANIZATION OF THE PARENT COMPANY AND THE OPERATING PARTNERSHIP
The Parent Company is a self-administered and self-managed real estate investment trust (REIT)
that provides leasing, property management, development, redevelopment, acquisition and other
tenant-related services for a portfolio of office and industrial properties. The Parent Company
owns its assets and conducts its operations through the Operating Partnership and subsidiaries of
the Operating Partnership. The Parent Company is the sole general partner of the Operating
Partnership and, as of September 30, 2010, owned a 93.1% interest in the Operating Partnership. The
Parent Companys common shares of beneficial interest are publicly traded on the New York Stock
Exchange under the ticker symbol BDN.
As of September 30, 2010, the Company owned 214 office properties, 20 industrial facilities and
three mixed-use properties (collectively, the Properties) containing an aggregate of
approximately 25.9 million net rentable square feet. The Company also has a garage property under
redevelopment. Therefore, as of September 30, 2010, the Company owned 238 properties containing an
aggregate of 25.9 million net rentable square feet. In addition, as of September 30, 2010, the
Company owned economic interests in 15 unconsolidated real estate ventures that contain
approximately 4.6 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, Concord, Carlsbad and Rancho
Bernardo, California.
The Company conducts its third-party real estate management services business primarily through
wholly-owned management company subsidiaries. As of September 30, 2010, the management company
subsidiaries were managing properties containing an aggregate of approximately 33.8 million net
rentable square feet, of which approximately 25.9 million net rentable square feet related to
Properties owned by the Company and approximately 7.9 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) for interim financial statements
information. 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 September 30, 2010, the results of its
operations for the three and nine-month periods ended September 30, 2010 and 2009 and its cash
flows for the nine-month periods ended September 30, 2010 and 2009 have been included. The results
of operations for such interim periods are not necessarily indicative of the results for a full
year. These consolidated financial statements should be read in conjunction with the Parent
Companys and the Operating Partnerships consolidated financial statements and footnotes included
in their respective 2009 Annual Reports on Form 10-K filed with the SEC on March 1, 2010.
Reclassifications and Revisions
Certain amounts have been reclassified in prior years to conform to the current year presentation.
The reclassifications are primarily due to the treatment of sold or held for sale properties as
discontinued operations on the statement of operations for all
periods presented. In addition, the Company changed $4.7 million from leasing
costs to capital expenditures in the investing section of the
statement of cash flows for the nine months ended September 30, 2009.
14
Principles of Consolidation
When the Company obtains an economic interest in an entity, the Company evaluates the entity to
determine if the entity is deemed a variable interest entity (VIE), and if the Company is deemed
to be the primary beneficiary, in accordance with the accounting standard for the consolidation of
variable interest entities. When an entity is not deemed to be a VIE, the Company considers the
provisions of the same accounting standard to determine 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. The Company consolidates (i) entities that are VIEs and of which the Company
is deemed to be the primary beneficiary and (ii) entities that are non-VIEs which the Company
controls and the limited partners neither have the ability to dissolve the entity or remove the
Company without cause nor any substantive participating rights. Entities that the Company accounts
for under the equity method (i.e., at cost, increased or decreased by the Companys share of
earnings or losses, plus contributions, less distributions) include (i) entities that are VIEs and
of which the Company is not deemed to be the primary beneficiary (ii) entities that are non-VIEs
which the Company does not control, but over which the Company has the ability to exercise
significant influence and (iii) entities that are non-VIEs that the Company controls through its
general partner status, but the limited partners in the entity have the substantive ability to
dissolve the entity or remove the Company without cause or have substantive participating
rights. The Company continuously assesses 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, more particularly if certain events occur that are likely to cause a change in the original
determinations. The portion of the entities that are consolidated but not owned by the Company is
presented as non-controlling interest as of and during the periods consolidated. All intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Management makes significant
estimates regarding revenue, 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.
Acquisition related costs are expensed as incurred. Costs incurred for the renovation and
betterment of an operating property are capitalized to the Companys investment in that property.
Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments,
which improve or extend the life of the asset, are capitalized and depreciated over their estimated
useful lives. Fully-depreciated assets are removed from the accounts.
Purchase Price Allocation
The Company allocates the purchase price of properties to net tangible and identified intangible
assets acquired based on fair values. Above-market and below-market in-place lease values for
acquired properties are recorded based on the present value (using an interest rate which reflects
the risks associated with the leases acquired) of the difference between (i) the contractual
amounts to be paid pursuant to the in-place leases and (ii) the Companys estimate of the fair
market lease rates for the corresponding in-place leases, measured over a period equal to the
remaining non-cancelable term of the lease (includes the below market fixed renewal period, if
applicable). 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 and any fixed-rate
bargain renewal periods. 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 the
accounting standard governing asset retirement obligations and when necessary, will record a
conditional asset retirement obligation as part of its purchase price.
15
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
The accounting standard for property, plant and equipment 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 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.
During the Companys impairment review for the nine month period ended September 30, 2010, the
Company determined that no impairment charges were necessary. For the nine month period ended
September 30, 2009, the Company determined that one of its properties, during testing for
impairment under the held and used model, had a historical cost greater than the probability
weighted undiscounted cash flows. Accordingly, the recorded amount was reduced to an amount based
on managements estimate of the current fair value. This property was sold in the second quarter of
the prior year. The Company also entered into development agreements related to two parcels of land
under option for ground lease that require the Company to commence development by December 31,
2012. If the Company determines that it will not be able to start the construction by the date
specified, or if the Company determines development is not in its best economic interest and an
extension of the development period cannot be negotiated, the Company will have to write off all
costs that it has incurred in preparing these parcels of land for development amounting to $7.7
million as of September 30, 2010.
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 $3.1 million and $7.0 million for the three and nine-month
periods ended September 30, 2010 and approximately $2.1 million and $4.7 million for the three and
nine-month periods ended September 30, 2009, respectively. 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 $2.2 million for
the three and nine-month periods ended September 30, 2010 and by $0.6 million and $2.1 million for
the three and nine-month periods ended September 30, 2009, respectively. 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 the
lease. Lease incentives decreased revenue by $0.2 million and $1.2 million for the three and
nine-month periods ended September 30, 2010 and by $0.4 million and $0.8 million for the three and
nine-month periods ended September 30 2009, respectively.
16
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. For
certain leases, significant assumptions and judgments are made by the Company in determining the
lease term such as when termination options are provided to the tenant. The lease term impacts the
period over which minimum rents are determined and recorded and also considers the period over
which lease related costs are amortized. 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 Parent 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 Parent 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. On
June 2, 2010, the Parent Companys shareholders approved amendments to the 1997 Plan that, among
other things, increased the number of common shares available for future awards under the 1997 Plan
by 6,000,000 (of which 3,600,000 shares are available solely for options and share appreciation
rights). As of September 30, 2010, 6,762,027 common shares remained available for future awards
under the 1997 Plan (including those shares available solely for options and share appreciation
rights). Through September 30, 2010, 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 $3.8 million during the
three and nine-month periods ended September 30, 2010, of which, $0.4 million and $1.0 million,
respectively, were capitalized as part of the Companys review of employee salaries eligible for
capitalization. The Company recognized stock-based compensation expense of $1.0 million and $3.3
million during the three and nine-month periods ended September 30, 2009, of which $0.2 million and
$0.7 million, respectively, had been capitalized. 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 in accordance with the
accounting standard for derivative and hedging activities. The accounting standard 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 the accounting standard for
fair value measurements and disclosures.
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 while the ineffective portions are recognized in earnings.
During the three months ended September 30, 2009, the Company recorded a $1.1 million fair value
adjustment in its consolidated statements of operations related to two of its interest swaps in
which the hedging relationship ceased due to the issuance of its unsecured notes on September 25,
2009. The ineffective portions of the hedges are recognized in earnings during the three and nine
month periods ended September 30, 2009, the Company recognized $0.4 million and $0.7 million,
respectively, for the ineffective portion of its forward starting swaps prior to the termination of
the hedging relationship.
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 estimates the fair value of its outstanding derivatives and
available-for-sale-securities in accordance with the accounting standard for fair value
measurements and disclosures. The accounting standard 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. It 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 Company has the ability to access; |
17
|
|
|
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; and |
|
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|
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.
The following table sets forth the Companys financial assets and liabilities that were accounted
for at fair value on a recurring basis as of September 30, 2010:
|
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|
|
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|
Fair Value Measurements at Reporting |
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Date Using: |
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Quoted Prices in |
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|
|
|
|
|
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|
|
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Active Markets for |
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Significant Other |
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Unobservable |
|
|
|
September 30, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2010 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
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|
|
|
|
|
|
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|
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Recurring |
|
|
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|
|
|
|
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|
|
|
|
|
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Assets: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
219 |
|
|
$ |
219 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
875 |
|
|
$ |
|
|
|
$ |
875 |
|
|
$ |
|
|
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, 2009:
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|
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|
|
|
|
|
|
|
|
|
|
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|
Fair Value Measurements at Reporting |
|
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|
Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
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|
Significant Other |
|
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Unobservable |
|
|
|
December 31, |
|
|
Identical Assets |
|
|
Observable Inputs |
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|
Inputs |
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Description |
|
2009 |
|
|
(Level 1) |
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|
(Level 2) |
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|
(Level 3) |
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|
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|
|
|
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|
|
|
|
|
|
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Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
431 |
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|
$ |
431 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Liabilities: |
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
7,320 |
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$ |
|
|
|
$ |
7,320 |
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$ |
|
|
Non-financial assets and liabilities recorded at fair value on a non-recurring basis to which the
Company would apply the accounting standard where a measurement was required under fair value would
include:
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Non-financial assets and liabilities initially measured at fair value in an acquisition
or business combination that are not remeasured at least quarterly at fair value, |
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Long-lived assets measured at fair value due to an impairment in accordance with the
accounting standard for the impairment or disposal of long-lived assets, |
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Equity and cost method investments measured at fair value due to an impairment in
accordance with the accounting standard for investments, |
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Notes receivable adjusted for any impairment in its value in accordance with the
accounting standard for loan receivables, and, |
|
|
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|
Asset retirement obligations initially measured at fair value under the accounting
standard for asset retirement obligations. |
There were no items that were accounted for at fair value on a non-recurring basis as of September
30, 2010.
18
Income Taxes
Parent Company
The Parent Company 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,
the Parent Company is required to, among other things, distribute at least 90% of its annual REIT
taxable income to its shareholders and meet certain tests regarding the nature of its income and
assets. As a REIT, the Parent Company 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
shareholders. Accordingly, no provision for federal and state income taxes is included in the
accompanying consolidated financial statements with respect to the operations of the Parent
Company. The Parent Company intends
to continue to operate in a manner that allows it to meet the requirements for taxation as a
REIT. If the Parent Company fails to qualify as a REIT in any taxable year, it 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. The Parent Company is subject to certain local income taxes. Provision for such taxes has
been included in general and administrative expenses in the Parent Companys Consolidated
Statements of Operations and Comprehensive Income.
The Parent Company 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 non-qualification can adversely
impact the Parent Companys ability to qualify as a REIT. Also, each subsidiary REIT may be subject
to local income taxes.
The Parent Company 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 non-customary services for tenants, hold assets that the Parent Company, as a REIT, cannot
hold directly and generally may engage in any real estate or non-real estate related business.
Operating Partnership
In general, the Operating 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 Operating Partnership are required to include their respective
share of the Operating Partnerships profits or losses in their respective tax returns. The
Operating 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 the Operating Partnership profits or losses, then the tax liability of the partners
would be changed accordingly.
The Operating Partnership has elected to treat several of its subsidiaries as REITs under
Sections 856 through 860 of the Code. Each subsidiary REIT has met the requirements for treatment
as a REIT under Sections 856 through 860 of the Code, 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 Operating Partnership has elected to treat several of its subsidiaries as taxable TRSs, which
are subject to federal, state and local income tax.
Accounting Pronouncements Adopted During 2010
In January 2010, the FASB issued a new accounting standard for distributions to stockholders with
components of stock and cash. The guidance clarifies that in calculating earnings per share, an
entity should account for the stock portion of the distribution as a stock issuance and not as a
stock dividend. The new standard is effective for fiscal years and interim periods ending after
December 15, 2009, and should be applied on a retrospective basis. The Companys adoption of the
new standard did not have a material impact on its consolidated financial position or results of
operations, as no distributions were paid with stock.
In January 2010, the FASB issued an amendment to the accounting standard for fair value
measurements and disclosures. The amendment clarifies and provides additional disclosure
requirements related to recurring and non-recurring fair value measurements. Specifically, the
guidance revises two disclosure requirements concerning fair value measurements and clarifies two
others. It requires separate presentation of significant transfers into and out of Levels 1 and 2
of the fair value hierarchy and disclosure of the reasons for such transfers. Also, it requires the
presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather
than on a net basis. The amendments clarify that disclosures should be disaggregated by class of
asset or liability and that disclosures about inputs and valuation techniques should be provided
for both recurring and non-recurring fair value measurements. This
amendment is effective for fiscal years and interim periods ending after December 15, 2009. The
Companys adoption of the new standard did not have a material impact on its consolidated financial
position or results of operations.
19
In December 2009, the FASB issued a new accounting standard governing transfer of financial assets.
This new standard is a revision to the existing accounting standard for the transfer and servicing
of financial assets and amends the guidance on accounting for transfers of financial assets,
including securitization transactions, where entities have continued exposure to risks related to
transferred financial assets. The new accounting standard also expands the disclosure requirements
for such transactions. This amendment is effective for fiscal years beginning after November 15,
2009. The Companys adoption of the new standard did not have a material impact on its consolidated
financial position or results of operations.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the
consolidation of VIEs. The elimination of the concept of a qualifying special-purpose entity (QSPE)
removes the exception from applying the consolidation
guidance within this amendment. This amendment requires an enterprise to perform a qualitative
analysis when determining whether or not it must consolidate a VIE. The amendment also requires an
enterprise to continuously reassess whether it must consolidate a VIE. Additionally, the amendment
requires enhanced disclosures about an enterprises involvement with VIEs and any significant
change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts
the enterprises financial statements. Finally, an enterprise will be required to disclose
significant judgments and assumptions used to determine whether or not to consolidate a VIE. This
amendment was adopted on January 1, 2010 and applied prospectively.
As a result of the adoption of the amendment to the accounting and disclosure requirements for the
consolidation of VIEs, the Company has determined that it will no longer consolidate three of the
VIEs that it has previously consolidated. In reaching its conclusion, the Company considered the
requirements provided by the accounting standard to qualitatively assess if the Company was the
primary beneficiary of the VIEs based on whether the Company had (i) the power to direct those
matters that most significantly impacted the activities of the VIE and (ii) the obligation to
absorb losses or the right to receive benefits of the VIE that could potentially be significant to
the VIE. The Companys consideration included an assessment of each of the entities with which it
has involvement and review of applicable documents such as, but not limited to applicable
partnership agreements, real estate venture agreements, LLC agreements, management and leasing
agreements. As of January 1, 2010, the Company held interests in 17 real estate ventures, 15 of
which are unconsolidated and two of which the Company continues to consolidate. The Companys basis
in reaching its conclusion for these entities is provided below:
Previously Consolidated:
Four Tower Bridge and Six Tower Bridge Ventures
Each of the Four Tower Bridge and Six Tower Bridge Real Estate Ventures was formed as a limited
partnership to own and manage an office property located in Conshohocken, Pennsylvania. The
Company entered into these ventures with two other partners during 1997 and 1998, respectively.
The other partner in Four Tower Bridge owns a 35% interest in the partnership entity and the other
partner in Six Tower Bridge owns a 37% interest in the partnership entities. These Real Estate
Ventures were determined to be VIEs and were previously consolidated in the Companys financial
statements in accordance with the amended accounting standard for the consolidation of VIEs. The
Real Estate Ventures were determined to be VIEs due to insufficient equity at the latest
reconsideration event. However, upon the Companys adoption of the new accounting standard on
January 1, 2010, the Company has determined that it will no longer consolidate these Real Estate
Ventures after it was determined that the partners have shared power in the ventures and no related
party considerations were identified. All significant decisions are approved by both partners in
the venture. Based on the facts and circumstances provided, the Company deconsolidated these two
Real Estate Ventures in accordance with the new accounting standard.
Coppell Associates
Coppell Associates is a Real Estate Venture that owns one property in Austin, Texas. The Company
entered into this venture with another partner which owns a 50% interest in the partnership. This
Real Estate Venture is a VIE and was previously consolidated in the Companys financial statements
in accordance with the amended accounting standard for the consolidation of VIEs. The venture was
determined to be a VIE due to insufficient equity at the latest reconsideration event. However,
upon the Companys adoption of the new accounting standard on January 1, 2010, the Company has
determined that it will no longer consolidate this Real Estate Venture after it concluded that the
partners have shared power in the venture. All significant decisions are approved by both partners
in the venture. Based on the facts and circumstances provided, the Company deconsolidated this
Real Estate Venture in accordance with the new accounting standard.
20
VIEs that Continue to be Consolidated:
Projects Related to the Companys Tax Credit Transactions
During 2008, the Company closed two transactions with US Bancorp (USB) related to the historic
rehabilitation of the 30th Street Post Office now known as the Internal Revenue Service (IRS)
Philadelphia Campus and the Cira South Garage both located in Philadelphia, Pennsylvania. The real
estate ventures created to facilitate the tax credit transactions were considered as VIEs because
the equity investment at risk is not sufficient to permit the entities to receive the tax credits
without the financial support from USB or because the rights to determine the significant decisions
are not vested in the equity. The Company has also concluded that it is the primary beneficiary of
the IRS Philadelphia Campus and the Cira South Garage 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 said
entities and, accordingly, by design has substantially all the risks of the entities. Please refer
to Note 16 for a detailed discussion of these transactions as well as the amount of deferred income
related to these VIEs that the Company has included in its consolidated balance sheets. There were
no other significant amounts included in the Companys consolidated balance sheet related to these
entities as the related amounts were eliminated during consolidation.
Other VIEs:
PJP VII
The Company holds a 25% interest in a Real Estate Venture that it entered into with two other
partners. One of the other partners holds a 50% interest in the venture while the other partner
holds a 25% interest. This venture is considered a VIE due to the fact that at the last
reconsideration event, it entered into a construction loan to fund the building construction of the
property and it was determined that there was insufficient equity in the joint venture. In
addition, this loan has not been refinanced as of September 30, 2010 and the Company guarantees
$0.7 million or 8.75% of the total construction note. It is expected that this entity will remain
a VIE until the venture refinances the construction loan into a permanent financing. It was
determined that the Company does not have the power to direct the significant economic activities
of the Real Estate Venture in accordance with the standard and as a result is not the primary
beneficiary of this real estate venture.
Residence Inn Hotel
The Company holds a 50% interest in a Real Estate Venture that owns a Residence Inn Hotel located
in Conshohocken, Pennsylvania. This Real Estate Venture has two other partners, one of which holds
a 46.4% interest and the other holds a 3.6% interest. The Real Estate Venture was considered as a
VIE in accordance with the amended accounting standard for the consolidation of VIEs due to the
participating rights of the non-equity holder hotel manager. However, the Company has determined
that the partners have shared power in the venture. All significant decisions are approved by all
partners in the venture. Accordingly this Real Estate Venture was not consolidated in the financial
statements of the Company. Upon the adoption of the new accounting standard, the Company still has
the same determination that it does not have the power to control the business of the Real Estate
Venture and that it is still appropriate to account for this venture under the equity method of
accounting.
G&I VI Interchange Office LLC
The Company holds a 20% interest in a Real Estate Venture that owns a portfolio of 29 office
properties located in Montgomery, Bucks, and Lehigh counties in Pennsylvania. The other partner in
this venture holds an 80% ownership interest. The Real Estate Venture was considered as a VIE in
accordance with the amended accounting standard for the consolidation of VIEs. The venture
continues to be determined a VIE due to the disproportionate voting rights. The Company has
determined that it is not the primary beneficiary of the venture. Accordingly, this Real Estate
Venture was not consolidated in the financial statements of the Company. Upon the adoption of the
new accounting standard, the Company still has the same determination that it does not have the
power to control the business of the Real Estate Venture and that it is still appropriate to
account for this venture under the equity method of accounting.
Seven Tower Bridge
The Company has a 10% total ownership interest in a Real Estate Venture that anticipates developing
a suburban office building in Conshohocken, Pennsylvania. There are three other partners in this
venture holding ownership interests of 50%, 20%, and 20%, respectively. This venture is considered
a VIE as the property is under development and there is insufficient equity to fund the
construction. The Company has determined that it is not the primary beneficiary of the venture.
Accordingly, this Real Estate Venture was not consolidated in the financial statements of the
Company. Upon the adoption of the new accounting standard, the Company still has the same
determination that it does not have the power to control the business of the Real Estate Venture
and that it is still appropriate to account for this venture under the equity method of accounting.
21
Other Unconsolidated Real Estate Ventures
In accordance with the Companys adoption of the accounting standard for the consolidation of VIEs,
it was determined that the Company would not consolidate the Real Estate Ventures below based on
the evaluation of the substantive participating rights of the partners in each venture under the
voting interest model:
|
|
|
Two Tower Bridge (Company as co-General Partner with 35% Ownership Interest) |
|
|
|
|
Eight Tower Bridge (Company as Limited Partner with 3% Preferred Equity Interest) |
|
|
|
|
PJP Real Estate Ventures (Company as Operating Member with 25% to 30% Ownership
Interest) |
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|
|
Macquarie BDN Office LLC (Company as Operating Member with 20% Ownership Interest) |
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|
|
Broadmoor Joint Venture (Company as co-Managing Venturer with 50% Ownership Interest) |
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|
|
|
1000 Chesterbrook (Company as co-General Partner with 50% Ownership Interest) |
The other unconsolidated real estate ventures described above are not VIEs as the other partners
in the ventures have either the substantive participating rights in the entities normal business
operations or the power to direct the activities is shared amongst the partners. As a result of
the Companys review, it has concluded that it is appropriate to account for these entities as
unconsolidated Real Estate Ventures under the equity method of accounting.
Additional Considerations
The supporting real estate venture agreements of the entities listed above provided a
straightforward determination of whether the Company has control to direct the business activities
of the entities. Where the Company has concluded that control is shared, it is generally because
of at least one other partner and the Company must agree on decisions that are considered
significant. The Company has also determined that it is not the primary beneficiary in these
entities as it does not have the power to direct the activities that most significantly impact the
economic performance of these entities. Also, if shared control was determined and the Company was
considered to be a related party, the Company is not the party deemed to be the most closely
associated with the business. For entities that the Company has determined to be VIEs but for
which it is not the primary beneficiary, its maximum exposure to loss is the carrying amount of its
investments, as the Company has not provided any guarantees other than the guarantee described for
PJP VII which was approximately $0.7 million at September 30, 2010. Also, for all entities
determined to be VIEs, the Company does not provide financial support to the real estate ventures
through liquidity arrangements, guarantees or other similar commitments, other than perhaps through
its general partner standing.
In accordance with the Companys adoption of the accounting standard as discussed in detail above,
the Companys consolidated balance sheet as of January 1, 2010 have been reduced by the following
amounts as a result of deconsolidating the three VIEs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Balance Sheets |
|
|
After Deconsolidation |
|
Balance Sheet: |
|
As Reported |
|
|
of Deconsolidated VIEs |
|
|
of VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, net |
|
$ |
4,164,992 |
|
|
$ |
37,288 |
|
|
$ |
4,127,704 |
|
Cash and cash equivalents |
|
|
1,567 |
|
|
|
1,438 |
|
|
|
129 |
|
Receivables, net |
|
|
98,107 |
|
|
|
1,627 |
|
|
|
96,480 |
|
Deferred costs, net |
|
|
106,097 |
|
|
|
1,662 |
|
|
|
104,435 |
|
Other assets |
|
|
292,987 |
|
|
|
2,644 |
|
|
|
290,343 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,663,750 |
|
|
$ |
44,659 |
|
|
$ |
4,619,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
2,454,577 |
|
|
$ |
43,027 |
|
|
$ |
2,411,550 |
|
Accounts payable and accrued expenses |
|
|
88,599 |
|
|
|
367 |
|
|
|
88,232 |
|
Other liabilities |
|
|
198,834 |
|
|
|
682 |
|
|
|
198,152 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,742,010 |
|
|
|
44,076 |
|
|
|
2,697,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Companys equity |
|
|
1,883,432 |
|
|
|
583 |
|
|
|
1,882,849 |
|
Noncontrolling interests |
|
|
38,308 |
|
|
|
|
|
|
|
38,308 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity |
|
$ |
4,663,750 |
|
|
$ |
44,659 |
|
|
$ |
4,619,091 |
|
|
|
|
|
|
|
|
|
|
|
The difference between the net amount removed from the Companys consolidated balance sheet and the
amount of the Companys retained interest in the deconsolidated VIEs, amounting to $1.4 million,
was recognized as a cumulative effect of accounting change to cumulative earnings in the Companys
consolidated balance sheets.
22
3. REAL ESTATE INVESTMENTS
As of September 30, 2010 and December 31, 2009 the gross carrying value of the Companys rental
properties was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2010 |
|
|
December 31,
2009 |
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
700,819 |
|
|
$ |
690,441 |
|
Building and improvements |
|
|
3,697,038 |
|
|
|
3,393,498 |
|
Tenant improvements |
|
|
432,597 |
|
|
|
428,679 |
|
|
|
|
|
|
|
|
|
|
$ |
4,830,454 |
|
|
$ |
4,512,618 |
|
|
|
|
|
|
|
|
Acquisitions and Dispositions
On August 5, 2010, the Company acquired a 53 story Class A office tower at 1717 Arch Street (Three
Logan Square) in Philadelphia, Pennsylvania, together with related ground tenancy rights under a
long-term ground lease, from BAT Partners, L.P. Three Logan Square contains approximately 1.0
million of net rentable square feet and is currently 66.5% leased. The Company acquired Three
Logan Square for approximately $129.0 million funded through a combination of $51.2 million in cash
and the issuance 7,111,112 units of a newly-established class of its limited partnership interest
in the Operating Partnership designated as Class F (2010) Units. The Class F (2010) Units do
not accrue a dividend and are not entitled to income or loss allocations prior to the first
anniversary of the closing. Total cash paid after the assumption of security deposit obligations
of existing tenants in the property of $0.9 million amounted to $50.3 million. The assumed security
deposit obligation is included in the tenant security deposits and deferred rents in the Companys
consolidated balance sheets. The Company funded the cash portion of the acquisition price through
an advance under its $600.0 million Credit Facility (the Credit Facility) and with available
corporate funds.
For purposes of computing the total purchase price, the Class F (2010) Units were valued based on
the closing market price of the Parent Companys common shares on the acquisition date of $11.54
less the annual dividend rate per share of $0.60 since these units do not accrue a dividend prior
to the first anniversary. The Class F (2010) Units issued are subject to redemption at the option
of the holder after the first anniversary of the acquisition. The Operating Partnership may, at its
option, satisfy the redemption either for an amount, per unit, of cash equal to the market price of
one of the Parent Companys common shares (based on the five-day trading average ending on the date
of the exchange) or for one of the Parent Companys common shares.
The Company accounted for the acquisition using the acquisition method of accounting. As discussed
in Note 2, the Company utilized a number of sources in making estimates of fair values for purposes
of allocating the purchase price to tangible and intangibles assets acquired and intangible
liabilities assumed. The purchase price is allocated as follows:
|
|
|
|
|
|
|
August 5, |
|
|
|
2010 |
|
|
|
|
|
|
Building and tenant improvements |
|
$ |
98,188 |
|
Intangible assets acquired |
|
|
28,856 |
|
Below market lease liabilities assumed |
|
|
(683 |
) |
|
|
|
|
Total |
|
$ |
126,361 |
|
|
|
|
|
Intangible assets acquired and intangible liabilities assumed consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
August 5, |
|
|
Amortization Period |
|
|
|
2010 |
|
|
(in years) |
|
Intangible assets: |
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
13,584 |
|
|
|
3 |
|
Tenant relationship value |
|
|
8,870 |
|
|
|
5 |
|
Above market tenant leases acquired |
|
|
895 |
|
|
|
1 |
|
Below market ground lease acquired |
|
|
5,507 |
|
|
|
82 |
|
|
|
|
|
|
|
|
Total |
|
$ |
28,856 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible liabilities: |
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
683 |
|
|
|
1 |
|
|
|
|
|
|
|
|
23
The Company also recognized tenant and other receivables of $1.1 million and prepaid real estate
taxes of $1.5 million from the acquisition and both are included as part of the accounts receivable
and the other asset sections, respectively, of the Companys consolidated balance sheets.
The Company recognized $0.4 million of acquisition related costs which are included as part of
general and administrative expenses of the Companys consolidated statements of operations.
The operating results of the acquired property are included in the Companys results of operations
from the acquisition date and are presented below (in thousands):
|
|
|
|
|
|
|
For the period from August 5 |
|
|
|
to September 30, 2010 |
|
Revenue: |
|
|
|
|
Rents |
|
$ |
2,203 |
|
Tenant Reimbursements |
|
|
668 |
|
Other |
|
|
208 |
|
|
|
|
|
Total revenue |
|
$ |
3,079 |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations (includes depreciation
and intangible asset amortization) |
|
$ |
(1,222 |
) |
|
|
|
|
The unaudited pro forma information below summarizes the Companys combined results of operations
for the nine month periods ended September 30, 2010 and 2009 as though the acquisition of Three
Logan Square was completed on January 1, 2009. The supplemental pro forma operating data is not
necessarily indicative of what the actual results of operations would have been assuming the
transaction had been completed as set forth above, nor do they purport to represent the Companys
results of operations for future periods (in thousands except for per share amounts).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(unaudited) |
|
Pro forma revenues |
|
$ |
438,091 |
|
|
$ |
455,090 |
|
Pro forma income (loss) from continuing operations |
|
|
(18,655 |
) |
|
|
14,248 |
|
Pro forma net income (loss) available to common shareholders |
|
|
(17,838 |
) |
|
|
7,484 |
|
|
|
|
|
|
|
|
|
|
Earnings per common share from continuing operations: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
(0.15 |
) |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
Basic as pro forma |
|
$ |
(0.14 |
) |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diulted as reported |
|
$ |
(0.15 |
) |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
Diulted as pro forma |
|
$ |
(0.14 |
) |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
(0.14 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
Basic as pro forma |
|
$ |
(0.14 |
) |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diulted as reported |
|
$ |
(0.14 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
Diulted as pro forma |
|
$ |
(0.14 |
) |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
As of September 30, 2010, two of the Companys building properties located in King of Prussia,
Pennsylvania are currently undergoing demolition and the remaining land balances are now presented
as land inventory in the Companys consolidated balance sheets. The Company has determined that
there was a change in the estimated useful lives of the properties resulting from the ongoing
demolition causing an acceleration of depreciation expense. During nine months ended September 30,
2010, the Company recognized the remaining depreciation of both properties amounting to $2.7
million, with the land values of $1.1 million being reclassified to land inventory for potential
future development. All related demolition costs are charged to earnings.
On September 14, 2010, the Company sold 630 Clark Avenue, a 50,000 net rentable square feet office
property located in King of Prussia, Pennsylvania for a sales price of $3.6 million.
On August 18, 2010, the Company sold 479 Thomas Jones Way, a 49,264 net rentable square feet office
property located in Exton, Pennsylvania, for a sales price of $3.8 million.
24
On January 14, 2010, the Company sold Westmoreland Plaza, a 121,815 net rentable square feet office
property located in Richmond, Virginia, for a sales price of $10.8 million.
All sales presented above and one held for sale property are included within discontinued
operations (see Note 10).
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of September 30, 2010, the Company had an aggregate investment of approximately $78.1 million in
15 unconsolidated Real Estate Ventures. The Company formed these ventures with unaffiliated third
parties, or acquired interest in them, to develop office properties or to acquire land in
anticipation of possible development of office properties. Thirteen of the Real Estate Ventures own
48 office buildings that contain an aggregate of approximately 4.6 million net rentable square
feet, one Real Estate Venture owns three acres of undeveloped parcel of land 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. The Companys unconsolidated interests range from 3% to 65%, subject to specified
priority allocations of distributable cash 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.
25
The following is a summary of the financial position of the Real Estate Ventures as of September
30, 2010 and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 (a) |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net property |
|
$ |
523,100 |
|
|
$ |
503,932 |
|
Other assets |
|
|
110,677 |
|
|
|
96,643 |
|
Other Liabilities |
|
|
32,115 |
|
|
|
37,774 |
|
Debt |
|
|
512,512 |
|
|
|
470,232 |
|
Equity |
|
|
89,150 |
|
|
|
92,569 |
|
Companys share of equity (Companys basis) |
|
|
78,077 |
|
|
|
75,458 |
|
|
|
|
(a) - |
|
Includes the three real estate ventures that were deconsolidated upon the adoption of the new
accounting standard for the consolidation of VIEs. |
The following is a summary of results of operations of the Real Estate Ventures for the three and
nine-month periods ended September 30, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Nine-month period |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2010 (a) |
|
|
2009 |
|
|
2010 (a) |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
27,713 |
|
|
$ |
24,228 |
|
|
$ |
82,310 |
|
|
$ |
77,917 |
|
Operating expenses |
|
|
9,766 |
|
|
|
7,725 |
|
|
|
28,767 |
|
|
|
26,401 |
|
Interest expense, net |
|
|
8,928 |
|
|
|
8,186 |
|
|
|
25,936 |
|
|
|
22,183 |
|
Depreciation and amortization |
|
|
8,336 |
|
|
|
7,698 |
|
|
|
22,860 |
|
|
|
25,379 |
|
Net income |
|
|
683 |
|
|
|
619 |
|
|
|
4,747 |
|
|
|
3,954 |
|
Companys share of income (Companys basis) |
|
|
1,035 |
|
|
|
1,331 |
|
|
|
3,356 |
|
|
|
3,450 |
|
|
|
|
(a) - |
|
Includes the three real estate ventures that were deconsolidated upon the adoption of the new
accounting standard for the consolidation of VIEs. |
As of September 30, 2010, the Company had guaranteed repayment of approximately $0.7 million of
loans on behalf of a certain Real Estate Venture. 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 September 30, 2010 and December 31, 2009, the Companys deferred costs were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing Costs |
|
$ |
131,180 |
|
|
$ |
(57,577 |
) |
|
$ |
73,603 |
|
Financing Costs |
|
|
39,225 |
|
|
|
(11,934 |
) |
|
|
27,291 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
170,405 |
|
|
$ |
(69,511 |
) |
|
$ |
100,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing Costs |
|
$ |
124,391 |
|
|
$ |
(50,643 |
) |
|
$ |
73,748 |
|
Financing Costs |
|
|
42,965 |
|
|
|
(10,616 |
) |
|
|
32,349 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
167,356 |
|
|
$ |
(61,259 |
) |
|
$ |
106,097 |
|
|
|
|
|
|
|
|
|
|
|
During the three and nine-months ended September 30, 2010, the Company capitalized internal
direct leasing costs of $1.3 million and $4.3 million, respectively, and during the three and
nine-months ended September 30, 2009, the Company capitalized internal direct leasing costs of $1.2
million and $4.2 million, respectively, in accordance with the accounting standard for the
capitalization of leasing costs.
26
6. INTANGIBLE ASSETS
As of September 30, 2010 and December 31, 2009, the Companys intangible assets were comprised of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
117,718 |
|
|
$ |
(66,567 |
) |
|
$ |
51,151 |
|
Tenant relationship value |
|
|
97,760 |
|
|
|
(50,725 |
) |
|
|
47,035 |
|
Above market leases acquired |
|
|
19,908 |
|
|
|
(10,490 |
) |
|
|
9,418 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
235,386 |
|
|
$ |
(127,782 |
) |
|
$ |
107,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
70,135 |
|
|
$ |
(38,801 |
) |
|
$ |
31,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
123,456 |
|
|
$ |
(71,402 |
) |
|
$ |
52,054 |
|
Tenant relationship value |
|
|
97,566 |
|
|
|
(49,374 |
) |
|
|
48,192 |
|
Above market leases acquired |
|
|
15,674 |
|
|
|
(10,757 |
) |
|
|
4,917 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
236,696 |
|
|
$ |
(131,533 |
) |
|
$ |
105,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
75,325 |
|
|
$ |
(38,238 |
) |
|
$ |
37,087 |
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, the Companys annual amortization for its intangible
assets/liabilities is as follows (in thousands, and assuming no early lease terminations):
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
Liabilities |
|
2010 |
|
$ |
8,890 |
|
|
$ |
1,911 |
|
2011 |
|
|
31,993 |
|
|
|
7,061 |
|
2012 |
|
|
23,028 |
|
|
|
6,384 |
|
2013 |
|
|
13,022 |
|
|
|
5,944 |
|
2014 |
|
|
9,532 |
|
|
|
4,457 |
|
Thereafter |
|
|
21,139 |
|
|
|
5,577 |
|
|
|
|
|
|
|
|
Total |
|
$ |
107,604 |
|
|
$ |
31,334 |
|
|
|
|
|
|
|
|
27
7. DEBT OBLIGATIONS
The Parent Company guarantees the debt obligations of the Operating Partnership but does not, by
itself hold any indebtedness except only for the mortgage debt on Libertyview which is included in
the table below. All other debt is held directly or indirectly by the Operating Partnership.
The following table sets forth information regarding the Companys consolidated debt obligations
outstanding at September 30, 2010 and December 31, 2009 (in thousands):
MORTGAGE DEBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
Interest |
|
|
Maturity |
|
Property / Location |
|
2010 |
|
|
2009 |
|
|
Rate |
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plymouth Meeting Exec. |
|
$ |
41,457 |
|
|
$ |
42,042 |
|
|
|
7.00 |
%(a) |
|
|
Dec-10 |
|
Four Tower Bridge |
|
|
|
|
|
|
10,158 |
|
|
|
6.62 |
%(b) |
|
|
Feb-11 |
|
Arboretum I, II, III & V |
|
|
20,555 |
|
|
|
21,046 |
|
|
|
7.59 |
% |
|
|
Jul-11 |
|
Midlantic Drive/Lenox Drive/DCC I |
|
|
56,952 |
|
|
|
58,215 |
|
|
|
8.05 |
% |
|
|
Oct-11 |
|
Research Office Center |
|
|
39,366 |
|
|
|
39,999 |
|
|
|
5.30 |
%(a) |
|
|
Oct-11 |
|
Concord Airport Plaza |
|
|
34,783 |
|
|
|
35,594 |
|
|
|
5.55 |
%(a) |
|
|
Jan-12 |
|
Six Tower Bridge |
|
|
|
|
|
|
13,557 |
|
|
|
7.79 |
%(b) |
|
|
Aug-12 |
|
Newtown Square/Berwyn Park/Libertyview |
|
|
58,475 |
|
|
|
59,557 |
|
|
|
7.25 |
% |
|
|
May-13 |
|
Coppell Associates II |
|
|
|
|
|
|
2,711 |
|
|
|
6.89 |
%(b) |
|
|
Dec-13 |
|
Southpoint III |
|
|
2,766 |
|
|
|
3,255 |
|
|
|
7.75 |
% |
|
|
Apr-14 |
|
Tysons Corner |
|
|
97,027 |
|
|
|
98,056 |
|
|
|
5.36 |
%(a) |
|
|
Aug-15 |
|
Coppell Associates I |
|
|
|
|
|
|
16,600 |
|
|
|
5.75 |
%(b) |
|
|
Feb-16 |
|
Two Logan Square |
|
|
89,800 |
|
|
|
89,800 |
|
|
|
7.57 |
% |
|
|
Apr-16 |
|
One Logan Square |
|
|
60,000 |
|
|
|
60,000 |
|
|
|
LIBOR + 3.50 |
%(c) |
|
|
Jul-16 |
|
IRS Philadelphia Campus |
|
|
209,700 |
|
|
|
|
|
|
|
6.95 |
%(d) |
|
|
Sep-30 |
|
Cira South Garage |
|
|
46,800 |
|
|
|
|
|
|
|
7.11 |
%(d) |
|
|
Sep-30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
757,680 |
|
|
|
550,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: unamortized fixed-rate debt premiums (discounts), net |
|
|
(96 |
) |
|
|
1,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
757,584 |
|
|
$ |
551,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNSECURED DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$300.0M 5.625% Guaranteed Notes due 2010 |
|
|
196,604 |
|
|
|
198,545 |
|
|
|
5.61 |
% |
|
|
Dec-10 |
|
Bank Term Loan |
|
|
183,000 |
|
|
|
183,000 |
|
|
|
LIBOR + 0.80 |
% |
|
|
Jun-11 |
(e) |
Credit Facility |
|
|
22,000 |
|
|
|
92,000 |
|
|
|
LIBOR + 0.725 |
% |
|
|
Jun-11 |
(e) |
$345.0M 3.875% Guaranteed Exchangeable Notes due 2026 |
|
|
73,535 |
|
|
|
127,960 |
|
|
|
5.50 |
% |
|
|
Oct-11 |
(f) |
$300.0M 5.750% Guaranteed Notes due 2012 |
|
|
175,200 |
|
|
|
187,825 |
|
|
|
5.73 |
% |
|
|
Apr-12 |
|
$250.0M 5.400% Guaranteed Notes due 2014 |
|
|
242,681 |
|
|
|
242,681 |
|
|
|
5.53 |
% |
|
|
Nov-14 |
|
$250.0M 7.500% Guaranteed Notes due 2015 |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
7.68 |
% |
|
|
May-15 |
|
$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 |
|
|
|
5.68 |
% |
|
|
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 |
|
|
1,771,630 |
|
|
|
1,910,621 |
|
|
|
|
|
|
|
|
|
Less: unamortized exchangeable debt discount |
|
|
(1,469 |
) |
|
|
(4,327 |
) |
|
|
|
|
|
|
|
|
unamortized fixed-rate debt discounts, net |
|
|
(2,922 |
) |
|
|
(3,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unsecured indebtedness |
|
$ |
1,767,238 |
|
|
$ |
1,902,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Obligations |
|
$ |
2,524,822 |
|
|
$ |
2,454,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These loans were assumed upon acquisition of the related properties. The interest rates
presented above reflects the market rate at the time of acquisition. |
|
(b) |
|
These loans were removed from the Companys balance sheet due to the deconsolidation of the
related VIEs as discussed in Note 2. |
|
(c) |
|
This mortgage is subject to an interest rate floor of 4.50% on a monthly basis. |
|
(d) |
|
On August 26, 2010, the Company received $254.0 million of gross proceeds from the $256.5
million forward financing commitment it entered into on June 29, 2009 related to the IRS
Philadelphia Campus and the Cira South Garage (see related discussion below). The financing
encompasses two separate loans: $209.7 million on the IRS Philadelphia Campus and $46.8
million on the Cira South Garage. |
|
(e) |
|
On July 20, 2010, the maturity date of the Bank Term Loan was extended from October 18, 2010
to June 29, 2011. The Bank Term Loan and the Credit Facility may be extended to June 29, 2012
at the Companys discretion. |
|
(f) |
|
On October 20, 2011, the holders of the Guaranteed Exchangeable Notes have the right to
request the redemption of all or a portion of the Guaranteed Exchangeable Notes they hold at a
price equal to 100% of the principal amount plus accrued and unpaid interest. Accordingly, the
Guaranteed Exchangeable Notes have been presented with an October 20, 2011 maturity date. |
28
During the nine-month periods ended September 30, 2010 and 2009, the Companys
weighted-average effective interest rate on its mortgage notes payable was 6.62% and 6.45%,
respectively.
During the nine-months ended September 30, 2010, the Company repurchased $69.0 million of its
outstanding unsecured Notes in a series of transactions which are summarized in the table below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase |
|
|
|
|
|
|
|
|
|
|
Deferred Financing |
|
Notes |
|
Amount |
|
|
Principal |
|
|
Loss |
|
|
Amortization |
|
2010 5.625% Notes |
|
$ |
2,002 |
|
|
$ |
1,942 |
|
|
$ |
37 |
|
|
$ |
2 |
|
2012 5.750% Notes |
|
|
13,333 |
|
|
|
12,625 |
|
|
|
431 |
|
|
|
32 |
|
3.875% Notes |
|
|
54,662 |
|
|
|
54,425 |
|
|
|
1,233 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69,997 |
|
|
$ |
68,992 |
|
|
$ |
1,701 |
|
|
$ |
284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 the 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 provided
that the Company has not committed any defaults under the Credit Facility and is able to acquire
additional commitments from its existing lenders or new lenders. As of September 30, 2010, the
Company had $22.0 million of borrowings, and $14.0 million in letters of credit outstanding,
leaving $564.0 million of unused availability under the Credit Facility. During the nine-month
periods ended September 30, 2010 and 2009, the weighted-average interest rate on Credit Facility
borrowings was 1.14% and 1.97%, respectively. As of September 30, 2010 the weighted average
interest rate on the Credit Facility was 0.98%.
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 September 30, 2010.
On August 26, 2010, the Company received $254.0 million of gross proceeds from the $256.5 million
forward financing commitment it entered into on June 29, 2009. The Company paid a $17.7 million
commitment fee in connection with this commitment. The total loan amount together with the
commitment fee had been escrowed pending the completion of the development of the IRS Philadelphia
Campus and the Cira South Garage as well as the commencement of the leases at these facilities.
The escrow account was administered by The Bank of New York Mellon (the trustee). The financing
encompasses two separate loans of $209.7 million on the IRS Philadelphia Campus and $46.8 million
on the Cira South Garage. The lender held back $2.5 million of the total financing until the
completion of certain conditions related to the IRS Philadelphia Campus and Cira South Garage. The
loans are non-recourse and are secured by the IRS Philadelphia Campus and Cira South Garage,
respectively. The loans bear interest of 5.93% with interest only through September 10, 2010 and
thereafter require principal and interest monthly payments based on a 20 year amortization
schedule. As of September 30, 2010, total financing costs related to this transaction amounted to
$19.8 million which is included as part of the deferred costs in the Companys consolidated balance
sheet and will be amortized over the 20 year term of the loans using the effective interest rate
method. The total financing costs included the commitment fee which was reduced to $16.0 million
after the receipt of a refund resulting from the overpayment made on the commitment fee of $1.7
million. Other related transaction costs included as part of total financing costs amounted to
$3.8 million. The Company used the loan proceeds to reduce borrowings under its Credit Facility
and for general corporate purposes.
The Company accounts for its outstanding 3.875% Guaranteed Exchangeable Notes in accordance with
the accounting standard for convertible debt instruments. The accounting 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 accounting standard requires the initial proceeds
from the Companys issuance of the 3.875% Guaranteed Exchangeable Notes to be allocated between a
liability component and an equity component in a manner that reflects interest expense at the
interest rate of a similar nonconvertible debt that could have been issued by the Company at such
time. 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).
29
The principal amount outstanding of the 3.875% Guaranteed Exchangeable Notes was $73.5 million at
September 30, 2010 and $128.0 million at December 31, 2009, respectively. 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 is $24.4 million and is reflected within additional paid-in capital in the Companys
consolidated balance sheets. The unamortized debt discount is $1.5 million at September 30, 2010
and $4.3 million at December 31, 2009, respectively, and will be amortized through October 15,
2011. The effective interest rate at September 30, 2010 and December 31, 2009 was 5.5%. The Company
recognized contractual coupon interest of $0.7 million and $2.6 million for the three and
nine-month periods ended September 30, 2010 and $1.9 million and $7.3 million for the three and
nine-month periods ended September 30, 2009, respectively. In addition, the Company recognized
interest on amortization of debt discount of $0.3 million and $1.3 million during the three and
nine-month periods ended September 30, 2010, and $0.9 million and $2.6 million during the three and
nine-month periods ended September 30, 2009, respectively. Debt discount write-offs resulting from
debt repurchases amounted to $1.6 million for the nine-month period ended September 30, 2010 and
$1.0 million and $3.3 million for the three and nine month periods ended September 30, 2009,
respectively.
As of September 30, 2010, the Companys aggregate scheduled principal payments of debt obligations,
excluding amortization of discounts and premiums, are as follows (in thousands):
|
|
|
|
|
2010 |
|
$ |
241,951 |
|
2011 |
|
|
407,078 |
|
2012 |
|
|
221,136 |
|
2013 |
|
|
67,037 |
|
2014 |
|
|
255,016 |
|
Thereafter |
|
|
1,337,092 |
|
|
|
|
|
Total principal payments |
|
|
2,529,310 |
|
Net unamortized premiums/(discounts) |
|
|
(4,488 |
) |
|
|
|
|
Outstanding indebtedness |
|
$ |
2,524,822 |
|
|
|
|
|
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 September 30, 2010 and December 31, 2009,
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 September 30, 2010 and December 31, 2009
approximate the fair values for cash and cash equivalents, accounts receivable, other assets,
accounts payable and accrued expenses.
30
The following are financial instruments for which the Companys estimates of fair value differ from
the carrying amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage payable, net of premiums |
|
$ |
757,680 |
|
|
$ |
744,632 |
|
|
$ |
551,873 |
|
|
$ |
523,745 |
|
Unsecured notes payable, net of discounts |
|
$ |
1,488,020 |
|
|
$ |
1,551,184 |
|
|
$ |
1,557,011 |
|
|
$ |
1,497,356 |
|
Variable Rate Debt Instruments |
|
$ |
283,610 |
|
|
$ |
273,251 |
|
|
$ |
353,610 |
|
|
$ |
341,210 |
|
Notes Receivable |
|
$ |
33,138 |
(a) |
|
$ |
25,689 |
|
|
$ |
71,989 |
(a) |
|
$ |
62,776 |
|
|
|
|
(a) |
|
For purposes of this disclosure, one of the notes is presented gross of the deferred gain of
$12.9 million arising from the sale of two properties in the prior year accounted for under the
accounting standard for installment sales. |
9. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
Risk Management
In the course of its on-going business operations, the Company encounters economic risk. There are
three main components of economic risk: interest rate risk, credit risk and market risk. The
Company is subject to interest rate risk on its interest-bearing liabilities. Credit risk is
primarily the risk of inability or unwillingness of tenants to make contractually required
payments. Market risk is the risk of declines in the value of properties due to changes in rental
rates, interest rates or other market factors affecting the valuation of properties held by the
Company.
Risks and Uncertainties
Deteriorating economic conditions have generally resulted in a reduction of the availability of
financing and higher borrowing costs. These factors, coupled with a sluggish 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 2010 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 high
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.
The Companys Credit Facility, its 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 if any, 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.
The Company was in compliance with all financial covenants under the Credit Facility as of
September 30, 2010. 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 volatility 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.
31
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 accounting standard for fair value measurements and disclosures,
the Company incorporates credit valuation adjustments to appropriately reflect both its own
nonperformance risk and the respective counterpartys nonperformance risk in the fair value
measurements. In adjusting the fair value of its derivative contracts for the effect of
nonperformance risk, the Company has considered the impact of netting and any applicable credit
enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives
fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with
its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the
likelihood of default by itself and its counterparties. However, as of September 30, 2010 and
December 31, 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 fair value of the hedges at September 30, 2010 and December 31, 2009 is included in other
liabilities and accumulated other comprehensive income in the accompanying balance sheet, except
for the $1.1 million fair value adjustment of the hedges charged to the consolidated statements of
operations during the three months ended September 30, 2009 related to two of its interest swaps
for which the hedging relationship ceased due to the issuance of its unsecured notes on September
25, 2009. The ineffective portions of the hedges are recognized in earnings in the current period
and during the three and nine months period ended September 30, 2009, the Company recognized $0.4
million and $0.7 million, respectively, for the ineffective portion of its forward starting swaps
prior to the termination of the hedging relationship.
32
The following table summarizes the terms and fair values of the Companys derivative financial
instruments at September 30, 2010 and December 31, 2009 (in thousands). The notional amounts
present the Companys use of these instruments, but do not represent exposure to credit, interest
rate or market risks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge |
|
Hedge |
|
|
|
|
|
Notional Amount |
|
|
|
|
|
|
Trade |
|
|
Maturity |
|
|
Fair Value |
|
Product |
|
Type |
|
Designation |
|
|
|
9/30/2010 |
|
|
12/31/2009 |
|
|
Strike |
|
|
Date |
|
|
Date |
|
|
9/30/2010 |
|
|
12/31/2009 |
|
Swap |
|
Interest Rate |
|
Cash Flow |
(b) |
|
|
$ |
155,000 |
|
|
$ |
123,000 |
(a) |
|
|
4.709 |
% |
|
|
9/20/07 |
|
|
|
10/18/10 |
|
|
$ |
548 |
|
|
$ |
5,162 |
|
Swap |
|
Interest Rate |
|
Cash Flow |
(b) |
|
|
|
25,000 |
|
|
|
25,000 |
|
|
|
4.415 |
% |
|
|
10/19/07 |
|
|
|
10/18/10 |
|
|
|
89 |
|
|
|
827 |
|
Swap |
|
Interest Rate |
|
Cash Flow |
(b) |
|
|
|
25,000 |
|
|
|
25,000 |
|
|
|
3.747 |
% |
|
|
11/26/07 |
|
|
|
10/18/10 |
|
|
|
75 |
|
|
|
688 |
|
Swap |
|
Interest Rate |
|
Cash Flow |
(b) |
|
|
|
25,774 |
|
|
|
25,774 |
|
|
|
2.975 |
% |
|
|
10/16/08 |
|
|
|
10/30/10 |
|
|
|
163 |
|
|
|
643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
230,774 |
|
|
$ |
198,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
875 |
|
|
$ |
7,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) - |
|
Notional amount accretes up to $155,000 through October 8, 2010. |
|
(b) - |
|
Hedging unsecured variable rate debt. |
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
6.5% or more of the Companys rents during the three and nine-month periods ended September 30,
2010 and 2009. 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 nine-month periods ended September 30, 2010, income from discontinued operations
relates to the three properties that the Company sold during 2010 and one property designated as
held for sale as of September 30, 2010. The Company determined that one of its office buildings
located in Austin, Texas met the criteria for an asset held for sale pursuant to the related
requirements provided for the classification as held for sale under the accounting standard for
long lived assets. Accordingly, at September 30, 2010, this property is required to be measured at
the lower of its carrying value or the estimated fair value less costs to sell. No provision for
impairment was recognized at September 30, 2010 as the estimated fair value of the property less
costs to sell is higher than its carrying value.
The following table summarizes the revenue and expense information for the property classified as
discontinued operations for the three and nine-month periods ended September 30, 2010 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Nine-month period |
|
|
|
ended September 30, 2010 |
|
|
ended September 30, 2010 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
376 |
|
|
$ |
1,245 |
|
Tenant reimbursements |
|
|
115 |
|
|
|
714 |
|
Other |
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
505 |
|
|
|
1,973 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
154 |
|
|
|
552 |
|
Real estate taxes |
|
|
61 |
|
|
|
232 |
|
Depreciation and amortization |
|
|
174 |
|
|
|
753 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
389 |
|
|
|
1,537 |
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before gain on
sale of interests in real estate |
|
|
116 |
|
|
|
436 |
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on disposition of discontinued operations |
|
|
(3 |
) |
|
|
6,346 |
|
Provision for impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
113 |
|
|
$ |
6,782 |
|
|
|
|
|
|
|
|
33
For the three and nine-month periods ended September 30, 2009, income from discontinued operations
relates to properties that the Company sold through September 30, 2010. The following table
summarizes the revenue and expense information for properties classified as discontinued operations
for the three and nine-month periods ended September 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Nine-month period |
|
|
|
ended September 30, 2009 |
|
|
ended September 30, 2009 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
2,629 |
|
|
$ |
9,560 |
|
Tenant reimbursements |
|
|
1,802 |
|
|
|
5,625 |
|
Other |
|
|
2 |
|
|
|
127 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
4,433 |
|
|
|
15,312 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
1,629 |
|
|
|
5,430 |
|
Real estate taxes |
|
|
618 |
|
|
|
2,053 |
|
Depreciation and amortization |
|
|
791 |
|
|
|
3,446 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,038 |
|
|
|
10,929 |
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before gain on
sale of interests in real estate |
|
|
1,395 |
|
|
|
4,383 |
|
|
|
|
|
|
|
|
|
|
Net loss on disposition of discontinued operations |
|
|
(6 |
) |
|
|
(1,037 |
) |
Provision for impairment |
|
|
|
|
|
|
(3,700 |
) |
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
1,389 |
|
|
$ |
(354 |
) |
|
|
|
|
|
|
|
The following table summarizes the balance sheet information for the three properties identified as
held for sale at September 30, 2009 (in thousands):
|
|
|
|
|
Real Estate Investments: |
|
|
|
|
Operating property |
|
$ |
12,655 |
|
Accumulated depreciation |
|
|
(1,363 |
) |
|
|
|
|
|
|
|
11,292 |
|
|
|
|
|
|
Receivables |
|
|
115 |
|
Other assets |
|
|
501 |
|
|
|
|
|
Total Assets Held for Sale |
|
$ |
11,908 |
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale |
|
$ |
261 |
|
|
|
|
|
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 THE PARENT COMPANY
Non-controlling interests in the Parent Companys financial statements relate to redeemable common
limited partnership interests in the Operating Partnership held by parties other than the Parent
Company and interests held by third party partners in the previously consolidated real estate
ventures.
Operating Partnership
As of September 30, 2010 and December 31, 2009, the aggregate book value of the non-controlling
interests associated with the redeemable common limited partnership interests in the accompanying
consolidated balance sheet was $130.4 million and $38.3 million, respectively. The Parent Company
believes that the aggregate settlement value of these interests (based on the number of units
outstanding and the closing price of the common shares on the balance sheet date) was approximately
$121.5 million and $32.0 million, respectively.
Non-controlling Interest Partners Share of Previously Consolidated Real Estate Ventures
As discussed in Note 2, as of December 31, 2009, the Company owned interests in three consolidated
Real Estate Ventures (Four Tower Bridge, Six Tower Bridge and Coppell Associates) that the Company
determined to be VIEs and were consolidated until January 1, 2010. As of December 31, 2009, the
aggregate amount related to these non-controlling interests classified within equity was $0.1
million. The Parent Company believes that the aggregate settlement value of these interests was
approximately $7.9 million as of December 31, 2009. This amount is based on the estimated
liquidation values of the assets and liabilities and the resulting proceeds that the Parent Company
would distribute to its real estate venture partners upon dissolution based on book value, as
required under the terms of the respective partnership agreements. Subsequent changes to the
estimated fair values of the assets and liabilities of the consolidated Real Estate Ventures will
affect the Parent Companys estimate of the aggregate settlement value. The partnership
agreements of the Real Estate Ventures 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.
34
As discussed in Note 2, the Parent Company, upon its adoption of the amendment to the accounting
and disclosure requirements for the consolidation of VIEs on January 1, 2010, determined that it
will no longer consolidate these VIEs.
12. NON-CONTROLLING INTERESTS IN THE OPERATING PARTNERSHIP
As of December 31, 2009, the Operating Partnership owned interests in three consolidated Real
Estate Ventures (see Note 11 above) that own three office properties containing approximately 0.4
million net rentable square feet. These Real Estate Ventures were considered as VIEs under the
accounting standard for consolidation. As of December 31, 2009, the aggregate amount related to
these non-controlling interests classified within equity was $0.1 million. The Operating
Partnership believes that the aggregate settlement value of these interests was approximately $7.9
million as of December 31, 2009. This amount is based on the estimated liquidation values of the
assets and liabilities and the resulting proceeds that the Parent 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 fair values of the assets and
liabilities of the consolidated Real Estate Ventures will affect the Operating Partnerships
estimate of the aggregate settlement value. The partnership agreements of the Real Estate Ventures
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.
As discussed in Note 2, the Operating Partnership, upon its adoption of the amendment to the
accounting and disclosure requirements for the consolidation of VIEs on January 1, 2010, has
determined that it will no longer consolidate these VIEs.
13. BENEFICIARIES EQUITY OF THE PARENT COMPANY
Earnings per Share (EPS)
The following table details the number of shares and net income used to calculate basic and diluted
earnings per share (in thousands, except share and per share amounts; results may not add due to
rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(6,729 |
) |
|
$ |
(6,729 |
) |
|
$ |
5,920 |
|
|
$ |
5,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations attributable to non-controlling interests |
|
|
182 |
|
|
|
182 |
|
|
|
(131 |
) |
|
|
(131 |
) |
Amount allocable to unvested restricted shareholders |
|
|
(128 |
) |
|
|
(128 |
) |
|
|
(73 |
) |
|
|
(73 |
) |
Preferred share dividends |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations available to common shareholders |
|
|
(8,673 |
) |
|
|
(8,673 |
) |
|
|
3,718 |
|
|
|
3,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
113 |
|
|
|
113 |
|
|
|
1,389 |
|
|
|
1,389 |
|
Discontinued operations attributable to non-controlling interests |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(30 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common shareholders |
|
|
110 |
|
|
|
110 |
|
|
|
1,359 |
|
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
(8,563 |
) |
|
$ |
(8,563 |
) |
|
$ |
5,077 |
|
|
$ |
5,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
132,208,245 |
|
|
|
132,208,245 |
|
|
|
128,582,498 |
|
|
|
128,582,498 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,343,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
132,208,245 |
|
|
|
132,208,245 |
|
|
|
128,582,498 |
|
|
|
129,926,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common shareholders |
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
Discontinued operations attributable to common shareholders |
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month periods ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(19,397 |
) |
|
$ |
(19,397 |
) |
|
$ |
12,570 |
|
|
$ |
12,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations attributable to non-controlling
interests |
|
|
536 |
|
|
|
536 |
|
|
|
(258 |
) |
|
|
(258 |
) |
Amount allocable to unvested restricted shareholders |
|
|
(384 |
) |
|
|
(384 |
) |
|
|
(183 |
) |
|
|
(183 |
) |
Preferred share dividends |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations available to common shareholders |
|
|
(25,239 |
) |
|
|
(25,239 |
) |
|
|
6,135 |
|
|
|
6,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
6,782 |
|
|
|
6,782 |
|
|
|
(354 |
) |
|
|
(354 |
) |
(Income) loss from discontinued operations attributable to non-controlling
interests |
|
|
(147 |
) |
|
|
(147 |
) |
|
|
24 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common shareholders |
|
|
6,635 |
|
|
|
6,635 |
|
|
|
(330 |
) |
|
|
(330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders |
|
$ |
(18,604 |
) |
|
$ |
(18,604 |
) |
|
$ |
5,805 |
|
|
$ |
5,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
130,841,534 |
|
|
|
130,841,534 |
|
|
|
106,273,509 |
|
|
|
106,273,509 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
933,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
130,841,534 |
|
|
|
130,841,534 |
|
|
|
106,273,509 |
|
|
|
107,206,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to common shareholders |
|
$ |
(0.19 |
) |
|
$ |
(0.19 |
) |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
Discontinued operations attributable to common shareholders |
|
|
0.05 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders |
|
$ |
(0.14 |
) |
|
$ |
(0.14 |
) |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable limited partnership units totaling 9,920,220 and 2,816,621 as of September 30, 2010 and
2009, respectively, were excluded from the diluted earnings per share computations because their
effect would have been anti-dilutive.
The contingent securities/share based compensation impact is calculated using the treasury stock
method and relates to employee awards settled in shares of the Parent Company. The effect of these
securities is anti-dilutive for periods that the Parent 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 nine months
ended September 30, 2010 and 2009, earnings representing nonforfeitable dividends as noted in the
table above were allocated to the unvested restricted shares.
Common and Preferred Shares
On September 15, 2010, the Parent Company declared a distribution of $0.15 per common share,
totaling $20.3 million, which was paid on October 18, 2010 to shareholders of record as of October
5, 2010. On September 15, 2010, the Parent Company declared distributions on its Series C Preferred
Shares and Series D Preferred Shares to holders of record as of September 30, 2010. These shares
are entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions paid on
October 15, 2010 to holders of Series C Preferred Shares and Series D Preferred Shares totaled $0.9
million and $1.1 million, respectively.
In March 2010, the Parent Company commenced a continuous equity offering program (the Offering
Program), under which the Parent Company may sell up to an aggregate amount of 15,000,000 common
shares until March 10, 2013. The Company may sell common shares in amounts and at times to be
determined by the Parent Company. Actual sales will depend on a variety of factors as determined
by the Company, including market conditions, the trading price of its common shares and
determinations by the Parent Company of the appropriate sources of funding. In conjunction with
the Offering Program, the Parent Company engaged sales agents who received compensation, in
aggregate, of up to 2% of the gross sales price per share sold during the nine months ended
September 30, 2010. During the three -month period ended September 30, 2010, the Parent Company
sold 2,042,500 shares, under this program at an average sales price of $12.36 per share resulting
in net proceeds of $25.0 million. From its inception in March 2010 through September 30, 2010, the
Parent Company has sold 5,327,845 under this program at an average sales price of $12.56 per share
resulting in net proceeds of $65.9 million. The Parent Company contributed the net proceeds from
the sale of its shares to the Operating Partnership in exchange for the issuance of 5,327,845
common partnership units to the Parent Company. The Operating Partnership used the net proceeds
from the sales contributed by the Parent Company to repay balances on its Credit Facility and for
general corporate purposes.
36
Common Share Repurchases
The Parent Company maintains a share repurchase program pursuant to which the Parent Company is
authorized to repurchase its common shares from time to time. The Parent Companys Board of
Trustees initially authorized this program in 1998 and has periodically replenished capacity under
the program. On May 2, 2006 the Board of Trustees restored capacity to 3.5 million common shares.
The Parent Company did not repurchase any shares during the nine-month period ended September 30,
2010. As of September 30, 2010, the Parent Company may purchase an additional 0.5 million shares
under the program.
Repurchases may be made from time to time in the open market or in privately negotiated
transactions, subject to market conditions and compliance with legal requirements. The share
repurchase program does not contain any time limitation and does not obligate the Parent Company to
repurchase any shares. The Parent Company may discontinue the program at any time.
14. PARTNERS EQUITY OF THE OPERATING PARTNERSHIP
Earnings per Common Partnership Unit
The following table details the number of units and net income used to calculate basic and diluted
earnings per common partnership unit (in thousands, except unit and per unit amounts; results may
not add due to rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(6,729 |
) |
|
$ |
(6,729 |
) |
|
$ |
5,920 |
|
|
$ |
5,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations attributable to
non-controlling interests |
|
|
|
|
|
|
|
|
|
|
(47 |
) |
|
|
(47 |
) |
Amount allocable to unvested restricted unitholders |
|
|
(128 |
) |
|
|
(128 |
) |
|
|
(73 |
) |
|
|
(73 |
) |
Preferred share dividends |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations available to common unitholders |
|
|
(8,855 |
) |
|
|
(8,855 |
) |
|
|
3,802 |
|
|
|
3,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common unitholders |
|
|
113 |
|
|
|
113 |
|
|
|
1,389 |
|
|
|
1,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders |
|
$ |
(8,742 |
) |
|
$ |
(8,742 |
) |
|
$ |
5,191 |
|
|
$ |
5,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average units outstanding |
|
|
139,423,151 |
|
|
|
139,423,151 |
|
|
|
131,399,119 |
|
|
|
131,399,119 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,343,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average units outstanding |
|
|
139,423,151 |
|
|
|
139,423,151 |
|
|
|
131,399,119 |
|
|
|
132,742,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common unitholders |
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
Discontinued operations attributable to common unitholders |
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common unitholders |
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month periods ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(19,397 |
) |
|
$ |
(19,397 |
) |
|
$ |
12,570 |
|
|
$ |
12,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations attributable to
non-controlling interests |
|
|
|
|
|
|
|
|
|
|
(69 |
) |
|
|
(69 |
) |
Amount allocable to unvested restricted unitholders |
|
|
(384 |
) |
|
|
(384 |
) |
|
|
(183 |
) |
|
|
(183 |
) |
Preferred share dividends |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations available to common unitholders |
|
|
(25,775 |
) |
|
|
(25,775 |
) |
|
|
6,324 |
|
|
|
6,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common unitholders |
|
|
6,782 |
|
|
|
6,782 |
|
|
|
(354 |
) |
|
|
(354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders |
|
$ |
(18,993 |
) |
|
$ |
(18,993 |
) |
|
$ |
5,970 |
|
|
$ |
5,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average units outstanding |
|
|
135,135,380 |
|
|
|
135,135,380 |
|
|
|
109,090,130 |
|
|
|
109,090,130 |
|
Contingent securities/Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
933,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average units outstanding |
|
|
135,135,380 |
|
|
|
135,135,380 |
|
|
|
109,090,130 |
|
|
|
110,023,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common unitholders |
|
$ |
(0.19 |
) |
|
$ |
(0.19 |
) |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
Discontinued operations attributable to common unitholders |
|
|
0.05 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common unitholders |
|
$ |
(0.14 |
) |
|
$ |
(0.14 |
) |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine-months
ended September 30, 2010 and 2009, 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 September 15, 2010, the Operating Partnership declared a distribution of $0.15 per common
partnership unit, totaling
$20.3 million, which was paid on October 18, 2010 to unitholders of
record as of October 5, 2010.
On September 15, 2010, the Operating Partnership declared distributions on its Series D Preferred
Mirror Units and Series E Preferred Mirror Units to holders of record as of September 30, 2010.
These units are entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions
paid on October 15, 2010 to holders of Series D Preferred Mirror Units and Series E Preferred
Mirror Units totaled $0.9 million and $1.1 million, respectively.
During the three-month period ended September 30, 2010, the Parent Company contributed net proceeds
amounting to $25.0 million from the sale of 2,042,500 shares under its Offering Program to the
Operating Partnership in exchange for the issuance of 2,042,500 common partnership units to the
Parent Company. From the inception of the Offering Program in March 2010 through September 30,
2010, the Parent Company has contributed net proceeds of $65.9 million from the sale of its shares
to the Operating Partnership in exchange for the issuance of 5,327,845 common partnership units to
the Parent Company. The Operating Partnership used the net proceeds from the sales to repay
balances on its unsecured revolving credit facility and for general corporate purposes.
On August 5, 2010, the Operating Partnership issued 7,111,112 units of the newly established Class
F (2010) Units in connection with the Companys acquisition of the Three Logan Square. The Class F
(2010) Units were valued based on the closing market price of the Parent Companys common shares on
the acquisition date of $11.54 adjusted for the annual dividend rate per share of $0.60 since these
units do not accrue a dividend prior to the first anniversary of the closing. The Class F (2010)
Units are also not entitled to the Operating Partnerships income or loss allocations prior to the
first anniversary of the closing. After the first anniversary, the Class F (2010) Units will
receive the same dividend that the Parent Company pays on its common shares and will be allocated
their share of the Operating Partnerships income or loss. The Class F (2010) Units issued is
subject to redemption at the option of the holders after the first anniversary of the acquisition.
The Operating Partnership may, at its option, satisfy the redemption either for an amount, per
unit, of cash equal to the market price of one of the Parent Companys common share (based on the
five-day trading average ending on the date of the exchange) or for one of the Parent Companys
common share. The redemption value of these Class F (2010) Units and the other redeemable limited
partnership units are presented in the mezzanine section of the Operating Partnerships balance
sheet because they can be redeemed in cash or with the Parent Companys common shares.
Common Share Repurchases
The Parent Company did not purchase any shares during the three and nine months ended September 30,
2010 and accordingly, during the three and nine months ended September 30, 2010, the Operating
Partnership did not repurchase any units in connection with the Parent Companys share repurchase
program.
38
15. SHARE BASED AND DEFERRED COMPENSATION
Stock Options
At September 30, 2010, the Parent Company had 3,129,372 options outstanding under its shareholder
approved equity incentive plan. There were 1,731,884 options unvested as of September 30, 2010 and
$2.0 million of unrecognized compensation expense associated with these options to be recognized
over a weighted average of 1.6 years. During the three and nine months ended September 30, 2010,
the Company recognized $0.3 million and $0.7 million of compensation expense, respectively, related
to unvested options. During the three and nine months ended September 30, 2009, the Company
recognized $0.1 million and $0.3 million of compensation expense, respectively, related to the
unvested options. The recognized compensation expenses are included as part of general and
administrative expense in the Companys consolidated statements of operations. The Company has also
capitalized nominal amounts of compensation expense for the said periods as part of the Companys
review of employee salaries eligible for capitalization.
Option activity as of September 30, 2010 and changes during the nine months ended September 30,
2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining Contractual |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Value |
|
Outstanding at January 1, 2010 |
|
|
2,404,567 |
|
|
$ |
15.48 |
|
|
|
8.38 |
|
|
$ |
(9,816,670 |
) |
Granted |
|
|
724,805 |
|
|
|
11.31 |
|
|
|
9.43 |
|
|
|
681,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010 |
|
|
3,129,372 |
|
|
$ |
14.52 |
|
|
|
8.06 |
|
|
$ |
(7,091,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested/Exercisable at September
30, 2010 |
|
|
1,397,487 |
|
|
$ |
17.50 |
|
|
|
7.35 |
|
|
$ |
(4,749,238 |
) |
Restricted Share Awards
As of September 30, 2010, 852,196 restricted shares were outstanding and vest over three to seven
years from the initial grant date. The remaining compensation expense to be recognized at September
30, 2010 was approximately $5.1 million. That expense is expected to be recognized over a weighted
average remaining vesting period of 1.8 years. The Company recognized compensation expense related
to outstanding restricted shares of $0.9 million and $2.7 million during the three and nine months
ended September 30, 2010, of which $0.2 million and $0.7 million, respectively, were capitalized as
part of the Companys review of employee salaries eligible for capitalization. The Company
recognized compensation expense related to outstanding restricted shares of $0.9 million and $2.5
million during the three and nine months ended September 30, 2009, of which $0.2 million and $0.7
million, respectively, were also capitalized. The expensed amounts are included in general and
administrative expense on the Companys consolidated statement of operations in the respective
periods.
The following table summarizes the Companys restricted share activity for the nine-months ended
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair value |
|
Non-vested at January 1, 2010 |
|
|
708,580 |
|
|
$ |
9.69 |
|
Granted |
|
|
240,302 |
|
|
|
11.56 |
|
Vested |
|
|
(95,798 |
) |
|
|
20.47 |
|
Forfeited |
|
|
(888 |
) |
|
|
12.51 |
|
|
|
|
|
|
|
|
Non-vested at September 30, 2010 |
|
|
852,196 |
|
|
$ |
10.76 |
|
|
|
|
|
|
|
|
Restricted Performance Share Units Plan
On March 4, 2010 and April 1, 2009, the Compensation Committee of the Parent Companys Board of
Trustees awarded an aggregate of 120,955 and 488,292 share-based awards, respectively, to its
executives. These awards are referred to as Restricted Performance Share Units, or RPSUs. The
RPSUs represent the right to earn common shares. The number of common shares, if any, deliverable
to award recipients depends on the Companys performance based on its total return to shareholders
during the three year measurement period that commenced on January 1, 2010 (in the case of the
March 4, 2010 awards) and January 1, 2009 (in the case of the April 1, 2009 awards) and that ends
on the earlier of December 31, 2012 or December 31, 2011 (as applicable) or the date of a change of
control, compared to the total shareholder return of REITs within an index over such respective
periods. The awards are also contingent upon the continued employment of the participants through
the performance periods (with exceptions for death, disability and qualifying retirement).
Dividends are deemed credited to the performance units accounts and are applied to acquire more
performance units for the account of the unit holder at the price per common share ending on the
dividend payment date. If earned, awards will be settled in common shares in an amount that
reflects both the number of performance units in the holders account at the end of the applicable
measurement period and the Companys total return to shareholders during the applicable three year
measurement period relative to the total shareholder return of the REIT within the index.
39
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 (not to exceed 200%) of the participants base units.
The fair values of the 2010 and 2009 awards on the grant dates were $2.0 million and $1.1 million,
respectively, and are being amortized over the said cliff vesting period. On the date of each
grant, the awards were valued using a Monte Carlo simulation. For the three and nine-month periods
ended September 30, 2010, the Company recognized total compensation expense for both the 2010 and
2009 awards of $0.3 million and $0.7 million, respectively, related to this plan of which nominal
amounts were capitalized for each period as part of the Companys review of employee salaries
eligible for capitalization. For the three and nine months ended September 30, 2009, the Company
recognized total compensation expense for the 2009 award of $0.1 million and $0.2 million,
respectively, related to this plan of which nominal amounts were also capitalized.
Outperformance Program
On August 28, 2006, the Compensation Committee of the Parent Companys Board of Trustees adopted a
long-term incentive compensation program (the outperformance program) under the 1997 Plan. The
outperformance program provided for share-based awards, with share issuances (if any), to take the
form of both vested and restricted common shares and with any share issuances contingent upon the
Companys total shareholder return during a three year measurement period exceeding specified
performance hurdles. These hurdles were not met and, accordingly, no shares were delivered under
the outperformance program and the outperformance program, has terminated in accordance with its
terms. The awards under the outperformance program were accounted for in accordance with the
accounting standard for stock-based compensation. The aggregate grant date fair value of the awards
under the outperformance program, as adjusted for estimated forfeitures, was approximately
$5.9 million (with the values determined through a Monte Carlo simulation) and are being amortized
into expense over the five-year vesting period beginning on the grant dates using a graded vesting
attribution model. For the three and nine-month periods ended September 30, 2010, the Company
recognized $0.1 million and $0.3 million, respectively, of compensation expenses related to the
outperformance program. For the three and nine-month periods ended September 30, 2009, the Company
recognized $0.2 million and $0.8 million, respectively, of compensation expenses related to the
outperformance program.
Employee Share Purchase Plan
On May 9, 2007, the Parent 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 Parent 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 2010 plan year is limited to
the lesser of 20% of compensation or $50,000. The number of shares reserved for issuance under the
ESPP is 1.25 million. During the three and nine-month periods ended September 30, 2010, employees
made purchases under the ESPP of $0.1 million and $0.4 million, respectively. The Company
recognized $0.1 million of compensation expense related to the ESPP during the nine months ended
September 30, 2010. During the three and nine-month periods ended September 30, 2009, employees
made purchases of $0.1 million and $0.3 million, respectively, under the ESPP. The Company
recognized $0.1 million of compensation expense related to the ESPP during the nine months ended
September 30, 2009. The Board of Trustees of the Parent Company may terminate the ESPP at its sole
discretion at any time.
Deferred Compensation
In January 2005, the Parent Company adopted a Deferred Compensation Plan (the Plan) that allows
trustees 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 notional 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. For the nine month periods ended September 30, 2010 and 2009, the Company
recorded a net increase in compensation costs of $0.4 million and $1.2 million, respectively, in
connection with the Plan due to the change in the 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 and mutual funds, which can be utilized as a funding source for the
Companys obligations under the Plan. Participants in the Plan have no interest in any assets set
aside by the Company to meet its obligations under the Plan. For the nine month periods ended
September 30, 2010 and 2009, the Company recorded a net decrease in compensation cost of $0.4
million and $1.5 million, respectively, in connection with the investments in the company-owned
policies and mutual funds.
40
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 the accounting standard for deferred compensation arrangements
where amounts earned are held in a rabbi trust and invested, the deferred compensation obligation
associated with the Companys 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 September 30, 2010 and 2009, 0.3 million of such shares were 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.
16. 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 IRS Philadelphia Campus, a 862,692 square foot office building that
is 100% leased to the IRS. On August 27, 2010, the Company completed the development of the IRS
Philadelphia Campus and the IRS lease commenced. USB agreed to contribute approximately $64.8
million of project costs and advanced $10.2 million of that amount contemporaneously with the
closing of the transaction. USB subsequently advanced an additional $27.4 million and $23.8 million
in June 2010 and December 2009, respectively. The remaining $3.4 million will be advanced upon the
Companys completion of certain items and compliance with the federal rehabilitation regulations.
In exchange for its contributions into the development of IRS Philadelphia Campus, USB is entitled
to substantially all of the benefits derived from the tax rehabilitation credits available under
section 47 of the Internal Revenue Code. USB does not have a material interest in the underlying
economics of the property. This transaction includes a put/call provision whereby the Company may
be obligated or entitled to repurchase USBs interest in the IRS Philadelphia Campus. The Company
believes the put will be exercised and the amount attributed to that puttable non-controlling
interest obligation is included in other liabilities and is being accreted to the expected fixed
put price.
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 IRS Philadelphia Campus, the Company concluded that
the IRS Philadelphia Campus should be consolidated. 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
other than the amounts allocated to the put obligation will be recognized as revenue in the
consolidated financial statements beginning when the obligation to USB is relieved which occurs
upon delivery of the expected tax benefits net of any associated costs. The tax credit is subject
to 20% recapture per year beginning one year after the completion of the IRS Philadelphia Campus.
The total USB contributions made amounting to $61.4 million as of September 30, 2010 and $34.0
million as of December 31, 2010 are presented within deferred income in the Companys consolidated
balance sheet. The contributions were recorded net of the amount allocated to non-controlling
interest as described above of $1.7 million and $0.7 million at September 30, 2010 and December 31,
2009, respectively. The Company anticipates that beginning in September 2011 it will recognize the
cash received as revenue net of allocated expenses over the five year tax credit recapture period
as defined in the Internal Revenue Code with other income (expense) in its consolidated statements
of operations. The Company also expects that the put/call provision will be exercised in December
2015 when the recapture period ends.
Direct and incremental costs incurred in structuring the transaction are deferred and will be
recognized as expense in the consolidated financial statements upon the recognition of the related
revenue as discussed above. The deferred cost at September 30, 2010 is $4.3 million and is included
in other assets on the Companys consolidated balance sheet. Amounts included in interest expense
related to the accretion of the non-controlling interest liability and the 2% return expected to be
paid to USB on its non-controlling interest aggregate to $0.3 million and $0.7 million for the
three and nine-months ended September 30, 2010, respectively.
New Markets Tax Credit Transaction
On December 30, 2008, the Company entered into a transaction with USB related to the Cira South
Garage 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.
41
USB contributed $13.3 million into the development of the Cira South Garage and as such it is
entitled to substantially all of the benefits derived from the tax credit, but it does not have a
material interest in the underlying economics of the Cira South Garage. 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 and is being accreted to the expected fixed put price.
The said put price is insignificant.
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 investment entities established to
facilitate the NMTC transaction should be consolidated. The USB contribution of $13.3 million is
included in deferred income on the Companys consolidated balance sheet at September 30, 2010 and
December 31, 2009. The USB contribution other than the amount allocated to the put obligation will
be recognized as income in the consolidated financial statements when the tax benefits are
delivered without risk of recapture to the tax credit investors and the Companys obligation is
relieved. The Company anticipates that it will recognize the net cash received as revenue within
other income/expense in the year ended December 31, 2015. The NMTC is subject to 100% recapture
for a period of seven years as provided in the Internal Revenue Code. The Company expects that the
put/call provision will be exercised in December 2015 when the recapture period ends.
Direct and incremental costs incurred in structuring the transaction are deferred and will be
recognized as expense in the consolidated financial statements upon the recognition of the related
revenue as discussed above. The deferred cost at September 30, 2010 is $5.3 million and is included
in other assets on the Companys consolidated balance sheet.
17. SEGMENT INFORMATION
As of September 30, 2010, the Company manages its portfolio within seven segments:
(1) Pennsylvania, (2) Philadelphia Central Business District (CBD), (3) Metropolitan Washington
D.C, (4) New Jersey/Delaware, (5) Richmond, Virginia, (6) Austin, Texas and (7) California. The
Pennsylvania segment includes properties in Chester, Delaware, and Montgomery counties in the
Philadelphia suburbs. The Philadelphia CBD segment includes properties located in 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
Burlington, Camden and Mercer counties and in New Castle county in the state of Delaware. The
Richmond, Virginia segment includes properties primarily in Albemarle, Chesterfield, Goochland and
Henrico counties and Durham, North Carolina. The Austin, Texas segment includes properties in
Austin. The California segment includes properties in Oakland, Concord, Carlsbad and Rancho
Bernardo. 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.
As a result of the acquisition of Three Logan Square and the placement in service of the IRS
Philadelphia Campus and the Cira South Garage, the Company added the Philadelphia CBD segment
during the quarter ended September 30, 2010. The Philadelphia CBD includes Three Logan Square, the
IRS Philadelphia Campus, the Cira South Garage and certain other properties in Philadelphia, PA
that were previously included in the Pennsylvania segment. The results of prior periods have been
restated to conform to the current period presentation.
42
Segment information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philadelphia |
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
CBD |
|
|
Metropolitan, D.C. |
|
|
/Delaware |
|
|
Virginia |
|
|
Austin, Texas |
|
|
California |
|
|
Corporate |
|
|
Total |
|
As of September 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,182,809 |
|
|
$ |
911,267 |
|
|
$ |
1,353,706 |
|
|
$ |
591,146 |
|
|
$ |
293,602 |
|
|
$ |
254,487 |
|
|
$ |
243,437 |
|
|
$ |
|
|
|
$ |
4,830,454 |
|
Construction-in-progress |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
53,377 |
|
|
$ |
53,377 |
|
Land inventory |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
106,801 |
|
|
$ |
106,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,230,768 |
|
|
$ |
495,499 |
|
|
$ |
1,356,206 |
|
|
$ |
598,122 |
|
|
$ |
297,958 |
|
|
$ |
282,093 |
|
|
$ |
251,972 |
|
|
$ |
|
|
|
$ |
4,512,618 |
|
Construction-in-progress |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
271,962 |
|
|
$ |
271,962 |
|
Land inventory |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
97,368 |
|
|
$ |
97,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended
September 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
36,810 |
|
|
$ |
24,617 |
|
|
$ |
33,881 |
|
|
$ |
25,417 |
|
|
$ |
8,919 |
|
|
$ |
8,014 |
|
|
$ |
5,503 |
|
|
$ |
(196 |
) |
|
$ |
142,965 |
|
Property operating expenses, real
estate taxes and
third party management expenses |
|
|
14,591 |
|
|
|
9,859 |
|
|
|
11,665 |
|
|
|
12,759 |
|
|
|
3,287 |
|
|
|
3,205 |
|
|
|
3,170 |
|
|
|
(232 |
) |
|
|
58,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
22,219 |
|
|
$ |
14,758 |
|
|
$ |
22,216 |
|
|
$ |
12,658 |
|
|
$ |
5,632 |
|
|
$ |
4,809 |
|
|
$ |
2,333 |
|
|
$ |
36 |
|
|
$ |
84,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended
September 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
39,199 |
|
|
$ |
18,309 |
|
|
$ |
35,411 |
|
|
$ |
26,241 |
|
|
$ |
9,031 |
|
|
$ |
7,534 |
|
|
$ |
8,572 |
|
|
$ |
1,637 |
|
|
$ |
145,934 |
|
Property operating expenses, real
estate taxes and
third party management expenses |
|
|
13,169 |
|
|
|
7,611 |
|
|
|
12,652 |
|
|
|
12,293 |
|
|
|
3,342 |
|
|
|
3,359 |
|
|
|
3,765 |
|
|
|
(12 |
) |
|
|
56,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
26,030 |
|
|
$ |
10,698 |
|
|
$ |
22,759 |
|
|
$ |
13,948 |
|
|
$ |
5,689 |
|
|
$ |
4,175 |
|
|
$ |
4,807 |
|
|
$ |
1,649 |
|
|
$ |
89,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine-months ended
September 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
113,622 |
|
|
$ |
61,579 |
|
|
$ |
103,285 |
|
|
$ |
76,240 |
|
|
$ |
27,087 |
|
|
$ |
23,979 |
|
|
$ |
17,374 |
|
|
$ |
(820 |
) |
|
$ |
422,346 |
|
Property operating expenses, real
estate taxes and
third party management expenses |
|
|
44,232 |
|
|
|
25,632 |
|
|
|
36,043 |
|
|
|
37,204 |
|
|
|
10,112 |
|
|
|
9,969 |
|
|
|
8,853 |
|
|
|
(711 |
) |
|
|
171,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
69,390 |
|
|
$ |
35,947 |
|
|
$ |
67,242 |
|
|
$ |
39,036 |
|
|
$ |
16,975 |
|
|
$ |
14,010 |
|
|
$ |
8,521 |
|
|
$ |
(109 |
) |
|
$ |
251,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine-months ended
September 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
117,817 |
|
|
$ |
55,461 |
|
|
$ |
105,221 |
|
|
$ |
77,156 |
|
|
$ |
27,296 |
|
|
$ |
23,549 |
|
|
$ |
22,104 |
|
|
$ |
4,791 |
|
|
$ |
433,395 |
|
Property operating expenses, real
estate taxes and
third party management expenses |
|
|
40,036 |
|
|
|
24,067 |
|
|
|
39,310 |
|
|
|
35,441 |
|
|
|
10,308 |
|
|
|
10,741 |
|
|
|
10,514 |
|
|
|
629 |
|
|
|
171,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
77,781 |
|
|
$ |
31,394 |
|
|
$ |
65,911 |
|
|
$ |
41,715 |
|
|
$ |
16,988 |
|
|
$ |
12,808 |
|
|
$ |
11,590 |
|
|
$ |
4,162 |
|
|
$ |
262,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
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 |
|
|
Nine-month periods |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(amounts in thousands) |
|
|
(amounts in thousands) |
|
Consolidated net operating income |
|
$ |
84,661 |
|
|
$ |
89,755 |
|
|
$ |
251,012 |
|
|
$ |
262,349 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(34,488 |
) |
|
|
(31,455 |
) |
|
|
(97,222 |
) |
|
|
(102,045 |
) |
Deferred financing costs |
|
|
(827 |
) |
|
|
(1,579 |
) |
|
|
(2,700 |
) |
|
|
(4,725 |
) |
Recognized Hedge Activity |
|
|
|
|
|
|
(1,517 |
) |
|
|
|
|
|
|
(1,822 |
) |
Depreciation and amortization |
|
|
(52,019 |
) |
|
|
(51,143 |
) |
|
|
(156,198 |
) |
|
|
(154,566 |
) |
Administrative expenses |
|
|
(5,753 |
) |
|
|
(5,018 |
) |
|
|
(18,498 |
) |
|
|
(15,490 |
) |
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
726 |
|
|
|
473 |
|
|
|
2,554 |
|
|
|
1,694 |
|
Equity in income of real estate ventures |
|
|
1,035 |
|
|
|
1,331 |
|
|
|
3,356 |
|
|
|
3,450 |
|
Gain (loss) on early extinguishment of
debt |
|
|
(64 |
) |
|
|
5,073 |
|
|
|
(1,701 |
) |
|
|
23,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(6,729 |
) |
|
|
5,920 |
|
|
|
(19,397 |
) |
|
|
12,570 |
|
Income (loss) from discontinued operations |
|
|
113 |
|
|
|
1,389 |
|
|
|
6,782 |
|
|
|
(354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(6,616 |
) |
|
$ |
7,309 |
|
|
$ |
(12,615 |
) |
|
$ |
12,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18. 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-cancellable ground leases under which the
Company is the lessee are expensed on a straight-line basis regardless of when payments are due.
Minimum future rental payments on non-cancelable leases at September 30, 2010 are as follows (in
thousands):
|
|
|
|
|
2010 |
|
$ |
1,739 |
|
2011 |
|
|
2,318 |
|
2012 |
|
|
2,318 |
|
2013 |
|
|
2,318 |
|
2014 |
|
|
2,409 |
|
Thereafter |
|
|
284,979 |
|
One of the land leases for a property 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.
44
The Company also has ground tenancy rights under a long term ground lease agreement when it
acquired Three Logan Square on August 5, 2010. The annual rental payment under this ground lease
is ten dollars through August 2022 which is when the initial term of the ground lease will end.
After the initial term, the Company has the option to renew the lease until 2091. The Company also
has the option to purchase the land at fair market value after providing a written notice to the
owner. The annual rental payment after 2022 will be adjusted at the lower of $3.0 million or the
prevailing market rent at that time until 2030. Subsequent to 2030, the annual rental payment will
be adjusted at the lower of $4.0 million or the prevailing market rent at the time until 2042 and
at fair market value until 2091. The Company believes that based on conditions as of the date the
lease was assigned (August 5, 2010), the lease will reset to market after the initial term. Using
the estimated fair market rent as of the date of the acquisition over the extended term of the
ground lease (assuming the purchase option is not exercised), the future payments will aggregate
$27.4 million. The Company has not included the amounts in the table above since such amounts are
not fixed and determinable.
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 706,288 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 the Company must pay a state and local transfer upon taking title)
and $2.9 million (if no transfer tax is payable upon the transfer).
The Company is currently being audited by the Internal Revenue Service for its 2004 tax year. The
audit concerns the tax treatment of the TRC acquisition 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, if any, 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 Prentiss
acquisition), 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
September 30, 2010: 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 the applicable
property on account of tax liabilities attributed to them.
As part of the Companys acquisition of properties from time to time in tax-deferred transactions,
the Company has agreed to provide certain of the prior owners of the acquired properties with the
right to guarantee the Companys indebtedness. If the Company were to seek to repay the
indebtedness guaranteed by the prior owner before the expiration of the applicable agreement, the
Company will be required to provide the prior owner an opportunity to guaranty a qualifying
replacement debt. These debt maintenance agreements may limit the Companys ability to refinance
indebtedness on terms that will be favorable to the Company.
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 its
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.
45
During 2008, in connection with the development of the IRS Philadelphia Campus and the Cira South
Garage, the Company entered into a historic tax credit and a new market tax credit arrangement,
respectively. The Company is required to be 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.
19. SUBSEQUENT EVENTS
On October 1, 2010, the Company prepaid its Plymouth Meeting Executive Center mortgage debt
amounting to $41.5 million without penalty.
The Company has evaluated subsequent events through the date the financial statements were issued.
46
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. This Quarterly Report on Form 10-Q and other materials filed by us with the SEC (as
well as information included in oral or other written statements made by us) contain statements
that are forward-looking, including statements relating to business and real estate development
activities, acquisitions, dispositions, future capital expenditures, financing sources,
governmental regulation (including environmental regulation) and competition. We intend such
forward-looking statements to be covered by the safe-harbor provisions of the 1995 Act. The words
anticipate, believe, estimate, expect, intend, will, should and similar expressions,
as they relate to us, are intended to identify forward-looking statements. Although we believe that
the expectations reflected in such forward-looking statements are based on reasonable assumptions,
we can give no assurance that our expectations will be achieved. As forward-looking statements,
these statements involve important risks, uncertainties and other factors that could cause actual
results to differ materially from the expected results and, accordingly, such results may differ
from those expressed in any forward-looking statements made by us or on our behalf. Factors that
could cause actual results to differ materially from our expectations include, but are not limited
to:
|
|
|
the continuing impact of the recent credit crisis and global economic slowdown,
which is having and may continue to have a negative effect on the following, among other
things: |
|
|
|
the fundamentals of our business, including overall market occupancy
and rental rates; |
|
|
|
the financial condition of our tenants, many of which are financial,
legal and other professional firms, our lenders, counterparties to our derivative
financial instruments and institutions that hold our cash balances and short-term
investments, which may expose us to increased risks of default by these parties; |
|
|
|
availability of financing on attractive terms or at all, which may
adversely impact our future interest expense and our ability to pursue acquisition
and development opportunities and refinance existing debt; and |
|
|
|
a decline in real estate asset valuations, which may limit our ability
to dispose of assets at attractive prices or obtain or maintain debt financing
secured by our properties or on an unsecured basis. |
|
|
|
changes in local real estate conditions (including changes in rental rates and the
number of properties that compete with our properties); |
|
|
|
changes in the economic conditions affecting industries in which our principal
tenants compete; |
|
|
|
the unavailability of equity and debt financing for us or our tenants, particularly
in light of the current economic environment; |
|
|
|
our failure to lease unoccupied space in accordance with our projections; |
|
|
|
our failure to re-lease occupied space upon expiration of leases; |
|
|
|
tenant defaults and the bankruptcy of major tenants; |
|
|
|
changes in prevailing interest rates; |
|
|
|
risks associated with interest rate hedging contracts and the effectiveness of such
arrangements; |
|
|
|
failure of acquisitions to perform as expected; |
|
|
|
unanticipated costs associated with the acquisition, integration and operation of,
our acquisitions; |
|
|
|
unanticipated costs to complete, lease-up and operate our developments and
redevelopments; |
|
|
|
risks and costs associated with land development, including building moratoriums
and inability to obtain necessary zoning, land-use, building, occupancy and other
required governmental approvals, construction cost increases or overruns and
construction delays; |
|
|
|
increased costs for, or lack of availability of, adequate insurance, including for
terrorist acts; |
|
|
|
risks associated with actual or threatened terrorist attacks; |
|
|
|
demand for tenant services beyond those traditionally provided by landlords; |
|
|
|
potential liability under environmental or other laws; |
|
|
|
failure or bankruptcy of real estate venture partners; |
47
|
|
|
inability of real estate venture partners to fund venture obligations; |
|
|
|
failure of dispositions to close in a timely manner; |
|
|
|
failure of buyers of properties from us to comply with terms of their financing
agreements to us; |
|
|
|
earthquakes and other natural disasters; |
|
|
|
risks associated with the unforeseen impact of climate change including existing
and pending laws and regulations governing climate changes to our business operations and
tenants; |
|
|
|
risks associated with federal, state and local tax audits; |
|
|
|
complex regulations relating to our status as a REIT and the adverse consequences
of our failure to qualify as a REIT; and |
|
|
|
the impact of newly adopted accounting principles on our accounting policies and on
period-to-period comparisons of financial results. |
Given these uncertainties, and the other risks identified in the Risk Factors section of our 2009
Annual Report on Form 10-K, we caution readers not to place undue reliance on forward-looking
statements. We assume no obligation to update or supplement forward-looking statements that become
untrue because of subsequent events.
The discussion that follows is based primarily on our consolidated financial statements as of
September 30, 2010 and December 31, 2009 and for the three and nine-months ended September 30, 2010
and 2009 and should be read along with the consolidated financial statements and related notes
appearing elsewhere in this report. The ability to compare one period to another may be
significantly affected by acquisitions completed, development properties placed in service and
dispositions made during those periods.
OVERVIEW
As of September 30, 2010, our portfolio consisted of 214 office properties, 20 industrial
facilities and three mixed-use properties that contain an aggregate of approximately 25.9 million
net rentable square feet. These 237 properties make up our core portfolio. We also had, as of
September 30, 2010, a garage property under redevelopment. Therefore, as of September 30, 2010, we
own 238 properties with an aggregate of 25.9 million net rentable square feet. As of September 30,
2010, we also held economic interests in 15 unconsolidated real estate ventures (the Real Estate
Ventures) that we formed with third parties to develop or own commercial properties. The
properties owned by these Real Estate Ventures contain approximately 4.6 million net rentable
square feet.
As of September 30, 2010, we managed our portfolio within seven geographic segments:
(1) Pennsylvania, (2) Philadelphia CBD, (3) Metropolitan Washington D.C, (4) New Jersey/Delaware,
(5) Richmond, Virginia, (6) Austin, Texas and (7) California. The Pennsylvania segment includes
properties in Chester, Delaware, and Montgomery counties in the Philadelphia suburbs. The
Philadelphia CBD segment includes properties located in 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 Burlington, Camden and Mercer
counties and in New Castle county in the state of Delaware. The Richmond, Virginia segment includes
properties primarily in Albemarle, Chesterfield, Goochland and Henrico counties and Durham, North
Carolina. The Austin, Texas segment includes properties in Austin. The California segment includes
properties in Oakland, Concord, Carlsbad and Rancho Bernardo.
We generate cash and revenue from leases of space at our properties and, to a lesser extent, from
the management of properties owned by third parties and from investments in the Real Estate
Ventures. Factors that we evaluate when leasing space include rental rates, costs of tenant
improvements, tenant creditworthiness, current and expected operating costs, the length of the
lease, vacancy levels and demand for office and industrial space. We also generate cash through
sales of assets, including assets that we do not view as core to our portfolio, either because of
location or expected growth potential, and assets that are commanding premium prices from third
party investors.
Our financial and operating performance is dependent upon the demand for office, industrial and
other commercial space in our markets, our leasing results, our acquisition, disposition and
development activity, our financing activity, our cash requirements and economic and market
conditions, including prevailing interest rates.
Volatile economic conditions have resulted in a reduction of the availability of financing and
potentially in 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. We believe
that vacancy rates may increase through 2011 and possibly beyond as the current economic climate
negatively impacts tenants in our Properties.
48
We expect that the impact of the current state of the economy, including high unemployment and the
unprecedented volatility and illiquidity in the financial and credit markets, will continue to have
a dampening effect on the fundamentals of our business, including increases in past due accounts,
tenant defaults, lower occupancy and reduced effective rents. These conditions would negatively
affect our future net income and cash flows and could have a material adverse effect on our
financial condition. We believe that the quality of our assets and our strong balance sheet will
enable us to raise debt capital, if necessary, from sources such as traditional term or secured
loans from banks, pension funds and life insurance companies, however these sources are lending
fewer dollars, under stricter terms and at higher borrowing rates, and there can be no assurance
that we will be able to borrow funds on terms that are economically attractive or at all.
We seek revenue growth at our portfolio through an increase in occupancy and rental rates.
Occupancy at our core portfolio at September 30, 2010 was 84.9%.
In seeking to increase revenue through our operating, financing and investment activities, we also
seek to minimize operating risks, including (i) tenant rollover risk, (ii) tenant credit risk and
(iii) development risk.
Tenant Rollover Risk:
We are subject to the risk that tenant leases, upon expiration, will not be renewed, that space may
not be relet, or that the terms of renewal or reletting (including the cost of renovations) may be
less favorable to us than the current lease terms. Leases accounting for approximately 1.9% of our
aggregate final annualized base rents as of September 30, 2010 (representing approximately 1.8% of
the net rentable square feet of the Properties) expire without penalty in 2010. We maintain an
active dialogue with our tenants in an effort to maximize lease renewals. During the nine months
ended September 30, 2010, we achieved a 61.9% retention rate in our core portfolio. If we are
unable to renew leases or relet space under expiring leases, at anticipated rental rates, or if
tenants terminate their leases early, our cash flow would be adversely impacted.
Tenant Credit Risk:
In the event of a tenant default, we may experience delays in enforcing our rights as a landlord
and may incur substantial costs in protecting our investment. Our management regularly evaluates
our accounts receivable reserve policy in light of our tenant base and general and local economic
conditions. Our accounts receivable allowance was $15.7 million or 12.4% of total receivables
(including accrued rent receivable) as of September 30, 2010 compared to $16.4 million or 14.3% of
total receivables (including accrued rent receivable) as of December 31, 2009.
If economic conditions persist or deteriorate further, we may experience increases in past due
accounts, defaults, lower occupancy and reduced effective rents. This condition would negatively
affect our future net income and cash flows and could have a material adverse effect on our
financial condition.
Development Risk:
At September 30, 2010, we were proceeding on one garage redevelopment with total projected costs of
$14.4 million of which $0.8 million remained to be funded. In addition, we are completing the
lease-up of six recently completed developments, aggregating 0.9 million square feet, for which we
expect to spend an additional $17.3 million in 2010. We are actively marketing space at these
projects to prospective tenants but can provide no assurance as to the timing or terms of any
leases of space at these projects.
As of September 30, 2010, we owned approximately 497 acres of undeveloped land. As market
conditions warrant, we will look to dispose of those parcels that we do not anticipate developing.
For land parcels that we elect to develop, we will be subject to risks and costs associated with
land development, including building moratoriums and inability to obtain necessary zoning,
land-use, building, occupancy and other required governmental approvals, construction cost
increases or overruns and construction delays, and insufficient occupancy rates and rental rates.
We also entered into development agreements related to two of our land parcels under option for
ground lease that require us to commence development by December 31, 2012. If we determine that we
will not be able to start the construction by the date specified, or if we determine that
development is not in our best economic interest and an extension of the development period cannot
be negotiated, we will have to write off all costs that we have incurred in preparing these parcels
of land for development amounting to $7.7 million as of September 30, 2010.
49
RECENT PROPERTY TRANSACTIONS
On August 5, 2010, we acquired Three Logan Square in Philadelphia, together with related ground
tenancy rights under a long-term ground lease, from BAT Partners, L.P. Three Logan Square contains
approximately 1.0 million of net rentable square feet and is currently 66.5% leased. We acquired
Three Logan Square for approximately $129.0 million funded through a combination of $51.2 million
in cash and 7,111,112 units of its newly-established Class F (2010) Units. The Class F (2010)
Units do not accrue a dividend and are not entitled to income or loss allocations prior to the
first anniversary of the closing. We funded the cash portion of the acquisition price through an
advance under its revolving credit facility and with available corporate funds.
As of September 30, 2010, two of our buildings located in King of Prussia, Pennsylvania were
undergoing demolition and the remaining land balances have been presented as land inventory in our
consolidated balance sheets. We have determined that there was a change in the estimated useful
lives of the properties resulting from the ongoing demolition causing an acceleration of
depreciation expense. During the three months ended September 30, 2010, we recognized the remaining
depreciation for both properties amounting to $2.7 million with the land values of $1.1 million
being reclassified to land inventory for potential future development. All related demolition costs
are charged to earnings.
On September 14, 2010, we sold 630 Clark Avenue, a 50,000 net rentable square feet office property
located in King of Prussia, Pennsylvania for a sales price of $3.6 million.
On August 18, 2010, we sold Thomas Jones Way, a 49,264 net rentable square feet office property
located in Exton, Pennsylvania, for a sales price of $3.8 million.
On January 14, 2010, we sold Westmoreland Plaza, a 121,815 net rentable square feet property
located in Richmond, Virginia, for a sales price of $10.8 million.
We continually reassess our portfolio to determine properties that may be in our best interest to
sell depending on strategic or economic factors. From time to time, the decision to sell properties
in the short term could result in an impairment or other loss being taken by us and such losses
could be material to the statement of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements Discussion and Analysis of Financial Condition and Results of Operations discuss our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Certain
accounting policies are considered to be critical accounting policies, as they require management
to make assumptions about matters that are highly uncertain at the time the estimate is made and
changes in accounting policies are reasonably likely to occur from period to period. Management
bases its estimates and assumptions on historical experience and current economic conditions. On an
on-going basis, management evaluates its estimates and assumptions including those related to
revenue, impairment of long-lived assets and the allowance for doubtful accounts. Actual results
may differ from those estimates and assumptions.
Our Annual Report on Form 10-K for the year ended December 31, 2009 contains a discussion of our
critical accounting policies. There have been no significant changes in our critical accounting
policies since December 31, 2009. See also Note 2 in our unaudited consolidated financial
statements for the three and nine-months ended September 30, 2010 set forth herein. Management
discusses our critical accounting policies and managements judgments and estimates with our Audit
Committee.
RESULTS OF OPERATIONS
Comparison of the Three-Month Periods Ended September 30, 2010 and 2009
The table below shows selected operating information for the Same Store Property Portfolio and
the Total Portfolio. The Same Store Property Portfolio consists of 230 properties containing an
aggregate of approximately 22.9 million net rentable square feet that we owned for the entire
three-month periods ended September 30, 2010 and 2009. This table also includes a reconciliation
from the Same Store Property Portfolio to the Total Portfolio net income (i.e., all properties
owned by us during the three-month periods ended September 30, 2010 and 2009) by providing
information for the properties which were acquired, placed into service, under development or
redevelopment and administrative/elimination information for the three-month periods ended
September 30, 2010 and 2009 (in thousands).
The Total Portfolio net income presented in the table is equal to the net income of the Parent
Company. The only difference between the reported net income of the Parent Company and the
Operating Partnership is the allocation of the non-controlling interest attributable to continuing
and discontinued operations for limited partnership units that is on the statement of operations
for the Parent Company.
50
Comparison of three-months ended September 30, 2010 to the three-months ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently Completed |
|
|
Development/Redevelopment |
|
|
Other |
|
|
|
|
|
|
Same Store Property Portfolio |
|
|
Properties |
|
|
Properties (a) |
|
|
(Eliminations) |
|
|
Total Portfolio |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
(dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash rents |
|
$ |
107,833 |
|
|
$ |
112,161 |
|
|
$ |
(4,328 |
) |
|
$ |
5,266 |
|
|
$ |
1,910 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(672 |
) |
|
$ |
1,151 |
|
|
$ |
112,427 |
|
|
$ |
115,222 |
|
|
$ |
(2,795 |
) |
Straight-line rents |
|
|
3,311 |
|
|
|
2,586 |
|
|
|
725 |
|
|
|
476 |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
3,787 |
|
|
|
2,574 |
|
|
|
1,213 |
|
Above/below market rent amortization |
|
|
1,297 |
|
|
|
1,468 |
|
|
|
(171 |
) |
|
|
56 |
|
|
|
(123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,353 |
|
|
|
1,345 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rents |
|
|
112,441 |
|
|
|
116,215 |
|
|
|
(3,774 |
) |
|
|
5,798 |
|
|
|
1,767 |
|
|
|
|
|
|
|
|
|
|
|
(672 |
) |
|
|
1,159 |
|
|
|
117,567 |
|
|
|
119,141 |
|
|
|
(1,574 |
) |
Tenant reimbursements |
|
|
18,666 |
|
|
|
18,500 |
|
|
|
166 |
|
|
|
1,549 |
|
|
|
344 |
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
120 |
|
|
|
20,187 |
|
|
|
18,964 |
|
|
|
1,223 |
|
Termination fees |
|
|
1,039 |
|
|
|
548 |
|
|
|
491 |
|
|
|
|
|
|
|
1,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,039 |
|
|
|
1,764 |
|
|
|
(725 |
) |
Third party management fees, labor
reimbursement and leasing |
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,925 |
|
|
|
5,194 |
|
|
|
2,922 |
|
|
|
5,194 |
|
|
|
(2,272 |
) |
Other, excluding termination fees |
|
|
742 |
|
|
|
639 |
|
|
|
103 |
|
|
|
214 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
294 |
|
|
|
151 |
|
|
|
1,250 |
|
|
|
871 |
|
|
|
379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
132,885 |
|
|
|
135,902 |
|
|
|
(3,017 |
) |
|
|
7,561 |
|
|
|
3,408 |
|
|
|
|
|
|
|
|
|
|
|
2,519 |
|
|
|
6,624 |
|
|
|
142,965 |
|
|
|
145,934 |
|
|
|
(2,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
42,361 |
|
|
|
40,721 |
|
|
|
(1,640 |
) |
|
|
2,482 |
|
|
|
1,021 |
|
|
|
(8 |
) |
|
|
2 |
|
|
|
(2,387 |
) |
|
|
(1,982 |
) |
|
|
42,448 |
|
|
|
39,762 |
|
|
|
(2,686 |
) |
Real estate taxes |
|
|
13,131 |
|
|
|
13,592 |
|
|
|
461 |
|
|
|
908 |
|
|
|
260 |
|
|
|
11 |
|
|
|
11 |
|
|
|
278 |
|
|
|
298 |
|
|
|
14,328 |
|
|
|
14,161 |
|
|
|
(167 |
) |
Third party management expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,528 |
|
|
|
2,256 |
|
|
|
1,528 |
|
|
|
2,256 |
|
|
|
728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
77,393 |
|
|
|
81,589 |
|
|
|
(4,196 |
) |
|
|
4,171 |
|
|
|
2,127 |
|
|
|
(3 |
) |
|
|
(13 |
) |
|
|
3,100 |
|
|
|
6,052 |
|
|
|
84,661 |
|
|
|
89,755 |
|
|
|
(5,094 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,484 |
|
|
|
5,018 |
|
|
|
5,753 |
|
|
|
5,018 |
|
|
|
(735 |
) |
Depreciation and amortization |
|
|
46,568 |
|
|
|
47,658 |
|
|
|
1,090 |
|
|
|
3,941 |
|
|
|
2,251 |
|
|
|
|
|
|
|
|
|
|
|
1,510 |
|
|
|
1,234 |
|
|
|
52,019 |
|
|
|
51,143 |
|
|
|
(876 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss) |
|
$ |
30,825 |
|
|
$ |
33,931 |
|
|
$ |
(3,106 |
) |
|
$ |
(39 |
) |
|
$ |
(124 |
) |
|
$ |
(3 |
) |
|
$ |
(13 |
) |
|
$ |
(3,894 |
) |
|
$ |
(200 |
) |
|
$ |
26,889 |
|
|
$ |
33,594 |
|
|
$ |
(6,705 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
|
230 |
|
|
|
230 |
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
237 |
|
|
|
237 |
|
|
|
|
|
Square feet |
|
|
22,871 |
|
|
|
22,871 |
|
|
|
|
|
|
|
2,997 |
|
|
|
2,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,868 |
|
|
|
25,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
726 |
|
|
|
473 |
|
|
|
253 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,488 |
) |
|
|
(31,455 |
) |
|
|
(3,033 |
) |
Interest expense Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(827 |
) |
|
|
(1,579 |
) |
|
|
752 |
|
Recognized hedge activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,517 |
) |
|
|
1,517 |
|
Equity in income of real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,035 |
|
|
|
1,331 |
|
|
|
(296 |
) |
(Loss) gain on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64 |
) |
|
|
5,073 |
|
|
|
(5,137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,729 |
) |
|
|
5,920 |
|
|
|
(12,649 |
) |
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113 |
|
|
|
1,389 |
|
|
|
(1,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6,616 |
) |
|
$ |
7,309 |
|
|
$ |
(13,925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.06 |
) |
|
$ |
0.04 |
|
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPLANATORY NOTES |
|
(a)- |
|
Results include: one redevelopment property. |
51
Total Revenue
Cash rents from the Total Portfolio decreased by $2.8 million from the third quarter of 2009 to the
third quarter of 2010 primarily reflecting:
|
|
|
decrease of $4.3 million of rental income at the same store portfolio as a result
of the decrease in same store occupancy of 340 basis points; |
|
|
|
decrease of $1.8 million due to the deconsolidation of three of our Real Estate
Ventures as a result of the adoption of the new accounting standard for the
consolidation of variable interest entities beginning January 1, 2010. This
standard does not require retrospective adoption; and |
|
|
|
decrease of $1.0 million of rental income due to the decrease in occupancy at
three redevelopment properties that we recently placed in service. |
The decrease in cash rents from the Total Portfolio was offset by an increase of $4.3 million of
rental income due to our acquisition of Three Logan Square and the completion and placement in
service of the IRS Philadelphia Campus and the Cira South Garage during the third quarter of 2010.
Straight-line rents increased by $1.2 million due to $0.4 million of straight-line rents from the
acquisition of Three Logan Square during the third quarter of 2010. The remainder of the increase
is due to leases that commenced during the third quarter of 2010 with free rent periods at our same
store properties.
Tenant reimbursements increased by $1.2 million mainly due to the acquisition of Three Logan Square
and completion and placement in service of the IRS Philadelphia Campus and Cira South Garage during
the third quarter of 2010. This increase is consistent with the increase in property operating
expenses.
Third party management fees, labor reimbursement and leasing decreased by $2.3 million mainly due
to the termination of third party management contracts during the course of 2009 totaling 4.3
million square feet. This is consistent with the decrease in third party management expenses.
Property Operating Expenses
Property operating expenses increased by $2.7 million mainly due to $1.6 million of expenses from
acquisition of Three Logan and the IRS Philadelphia Campus and Cira South Garage
properties that we placed in service during the third quarter of 2010. The remainder of the
difference is due to the fact that in the third quarter of 2009 we incurred less repair and
maintenance expenses due to timing of various projects.
Interest Expense
The increase in interest expense of $3.0 million is primarily due to the following:
|
|
|
increase of $4.6 million from the sale of $250.0 million of unsecured notes in
the third quarter of 2009; |
|
|
|
increase of $0.3 million resulting from a higher weighted average interest rate
on our Credit Facility borrowings for the three-month period ended September 30,
2010 compared to the three-month period ended September 30, 2009; |
|
|
|
increase of $0.3 million interest expense relates to the accretion of estimated
equity payments and the expected put payment as a result of contributions received
as part of the historic tax credit transaction; |
|
|
|
net increase of $1.3 million resulting from a higher outstanding mortgage notes
payable balance as of September 30, 2010 compared to September 30, 2009; and |
|
|
|
increase of $0.6 million from higher weighted interest rates on our $183.0
million Bank Term Loan and our three Preferred Trust Borrowings for the three-month
period ended September 30, 2010 compared to the three-month period ended September
30, 2009. |
52
The above described increase of $7.1 million in interest expense was offset by a decrease of $1.5
million resulting from the pay-off of an unsecured note at maturity during the fourth quarter of
2009 and a decrease of $2.6 million resulting from our buybacks of various unsecured notes
subsequent to the third quarter of 2009. The details of the various purchases completed during the
three-month period ended September 30, 2010 are noted in the (Loss) gain on early extinguishment of
debt section below. Details for all purchases during 2009 are included in our Annual Report on
Form 10-K for the year ended December 31, 2009.
Deferred financing cost amortized decreased by $0.8 million mainly due to the acceleration of such
expenses incurred from greater debt repurchase activities during the third quarter of 2009 compared
to the third quarter of 2010 offset by one month of deferred financing costs incurred relating to
the forward financing on the IRS Philadelphia Campus and the Cira South Garage.
Recognized hedge activity
During the third quarter of 2009, we recorded a $1.1 million mark to market adjustment relating to
two of our swaps that were applied to our offering of $250.0 million 7.50% senior unsecured notes
due 2015 completed in September 2009. The swaps no longer qualified for hedge accounting upon
completion of that offering since the hedging relationship was terminated. Accordingly, the
changes in the fair value of the swaps were reflected in our statement of operations until they
were cash settled in December 2009. We also recognized $0.4 million for the ineffective portion of
the forward starting swaps during the third quarter of 2009 prior to the termination of the hedging
relationship.
(Loss) gain on early extinguishment of debt
During the three-month period ended September 30, 2010, we repurchased $0.2 million of our 5.625%
Guaranteed Notes due 2010 and $1.6 million of our 5.750% Guaranteed Notes due 2012 which resulted
in a nominal net loss on early extinguishment of debt.
During the three-month period ended September 30, 2009, we repurchased $46.2 million of our $345.0
million 3.875% Exchangeable Notes, $47.6 million of our $275.0 million 4.500% Guaranteed Notes due
2009, $102.2 million of our $300.0 million 5.750% Guaranteed Notes due 2012 and $7.3 million of our
$250.0 million 5.400% Guaranteed Notes due 2014 which resulted in a net gain on early
extinguishment of debt of $5.1 million. The gain on early extinguishment of debt is inclusive of
adjustments made to reflect our adoption of the new accounting standard for convertible debt
instruments.
Discontinued Operations
During the third quarter of 2010, we sold two properties and classified one property in Austin, TX
as held for sale. These properties had total revenue of $0.5 million, operating expenses of $0.2
million, depreciation and amortization expense of $0.2 million. We recognized a gain and loss of
$1.4 million, respectively, from the sale of these properties.
The September 30, 2009 amounts are reclassified to include the operations of the properties sold
and held for sale through the third quarter of 2010, as well as all properties that were sold
through the year ended December 31, 2008. Therefore, the discontinued operations amount for the
third quarter of 2009 includes total revenue of $4.4 million, operating expenses of $2.2 million
and depreciation and amortization expense of $0.8 million.
Net income (loss)
Net loss was $6.6 million for the third quarter of 2010 as compared to net income of $7.3 million
for the third quarter of 2009 as a result of the factors described above. Net loss is
significantly impacted by depreciation of operating properties and amortization of acquired
intangibles. These non-cash charges do not directly affect our ability to pay dividends.
Amortization of acquired intangibles will continue over the related lease terms or estimated
duration of the tenant relationship.
Loss (earnings) per Common Share
Loss per share was $0.06 for the third quarter of 2010 as compared to earnings per share of $0.04
for the third quarter of 2009 as a result of the factors described above and an increase in the
average number of common shares outstanding. The increase in the average number of common shares
outstanding is primarily due to the issuances pursuant to the Offering Program in 2010.
53
RESULTS OF OPERATIONS
Comparison of the Nine-Month Periods Ended September 30, 2010 and 2009
The table below shows selected operating information for the Same Store Property Portfolio and
the Total Portfolio. The Same Store Property Portfolio consists of 227 properties containing an
aggregate of approximately 22.5 million net rentable square feet that we owned for the entire
nine-month periods ended September 30, 2010 and 2009. This table also includes a reconciliation
from the Same Store Property Portfolio to the Total Portfolio net income (i.e., all properties
owned by us during the nine-month periods ended September 30, 2010 and 2009) by providing
information for the properties which were acquired, placed into service, under development or
redevelopment and administrative/elimination information for the nine-month periods ended September
30, 2010 and 2009 (in thousands).
The Total Portfolio net income presented in the table is equal to the net income of the Parent
Company. The only difference between the reported net income of the Parent Company and the
Operating Partnership is the allocation of the non-controlling interest attributable to continuing
and discontinued operations for limited partnership units that is on the statement of operations
for the Parent Company.
54
Comparison of nine-months ended September 30, 2010 to the nine-months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently Completed |
|
|
Development/Redevelopment |
|
|
Other |
|
|
|
|
|
|
Same Store Property Portfolio |
|
|
Properties |
|
|
Properties (a) |
|
|
(Eliminations) |
|
|
Total Portfolio |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
(dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash rents |
|
$ |
323,466 |
|
|
$ |
333,052 |
|
|
$ |
(9,586 |
) |
|
$ |
8,071 |
|
|
$ |
6,803 |
|
|
$ |
3,355 |
|
|
$ |
3,128 |
|
|
$ |
(1,898 |
) |
|
$ |
3,662 |
|
|
$ |
332,994 |
|
|
$ |
346,645 |
|
|
$ |
(13,651 |
) |
Straight-line rents |
|
|
8,196 |
|
|
|
5,980 |
|
|
|
2,216 |
|
|
|
1,032 |
|
|
|
583 |
|
|
|
(17 |
) |
|
|
(141 |
) |
|
|
|
|
|
|
25 |
|
|
|
9,211 |
|
|
|
6,447 |
|
|
|
2,764 |
|
Above/below market rent amortization |
|
|
4,218 |
|
|
|
4,838 |
|
|
|
(620 |
) |
|
|
316 |
|
|
|
378 |
|
|
|
|
|
|
|
(379 |
) |
|
|
|
|
|
|
|
|
|
|
4,534 |
|
|
|
4,837 |
|
|
|
(303 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rents |
|
|
335,880 |
|
|
|
343,870 |
|
|
|
(7,990 |
) |
|
|
9,419 |
|
|
|
7,764 |
|
|
|
3,338 |
|
|
|
2,608 |
|
|
|
(1,898 |
) |
|
|
3,687 |
|
|
|
346,739 |
|
|
|
357,929 |
|
|
|
(11,190 |
) |
Tenant reimbursements |
|
|
55,660 |
|
|
|
53,563 |
|
|
|
2,097 |
|
|
|
2,465 |
|
|
|
1,554 |
|
|
|
572 |
|
|
|
381 |
|
|
|
298 |
|
|
|
755 |
|
|
|
58,995 |
|
|
|
56,253 |
|
|
|
2,742 |
|
Termination fees |
|
|
3,893 |
|
|
|
1,626 |
|
|
|
2,267 |
|
|
|
107 |
|
|
|
|
|
|
|
124 |
|
|
|
1,214 |
|
|
|
|
|
|
|
|
|
|
|
4,124 |
|
|
|
2,840 |
|
|
|
1,284 |
|
Third party
management fees, labor reimbursement and leasing |
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,296 |
|
|
|
14,055 |
|
|
|
9,293 |
|
|
|
14,055 |
|
|
|
(4,762 |
) |
Other, excluding termination fees |
|
|
1,537 |
|
|
|
1,307 |
|
|
|
230 |
|
|
|
673 |
|
|
|
89 |
|
|
|
1 |
|
|
|
161 |
|
|
|
984 |
|
|
|
761 |
|
|
|
3,195 |
|
|
|
2,318 |
|
|
|
877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
396,967 |
|
|
|
400,366 |
|
|
|
(3,399 |
) |
|
|
12,664 |
|
|
|
9,407 |
|
|
|
4,035 |
|
|
|
4,364 |
|
|
|
8,680 |
|
|
|
19,258 |
|
|
|
422,346 |
|
|
|
433,395 |
|
|
|
(11,049 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
124,658 |
|
|
|
118,035 |
|
|
|
(6,623 |
) |
|
|
5,965 |
|
|
|
4,313 |
|
|
|
1,348 |
|
|
|
1,428 |
|
|
|
(5,979 |
) |
|
|
(1,809 |
) |
|
|
125,992 |
|
|
|
121,967 |
|
|
|
(4,025 |
) |
Real estate taxes |
|
|
38,216 |
|
|
|
40,579 |
|
|
|
2,363 |
|
|
|
1,584 |
|
|
|
934 |
|
|
|
411 |
|
|
|
392 |
|
|
|
698 |
|
|
|
835 |
|
|
|
40,909 |
|
|
|
42,740 |
|
|
|
1,831 |
|
Third party management expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,433 |
|
|
|
6,339 |
|
|
|
4,433 |
|
|
|
6,339 |
|
|
|
1,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
234,093 |
|
|
|
241,752 |
|
|
|
(7,659 |
) |
|
|
5,115 |
|
|
|
4,160 |
|
|
|
2,276 |
|
|
|
2,544 |
|
|
|
9,528 |
|
|
|
13,893 |
|
|
|
251,012 |
|
|
|
262,349 |
|
|
|
(11,337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
256 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
18,229 |
|
|
|
15,490 |
|
|
|
18,498 |
|
|
|
15,490 |
|
|
|
(3,008 |
) |
Depreciation and amortization |
|
|
141,782 |
|
|
|
142,539 |
|
|
|
757 |
|
|
|
6,308 |
|
|
|
4,048 |
|
|
|
2,513 |
|
|
|
3,177 |
|
|
|
5,595 |
|
|
|
4,802 |
|
|
|
156,198 |
|
|
|
154,566 |
|
|
|
(1,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss) |
|
$ |
92,311 |
|
|
$ |
99,213 |
|
|
$ |
(6,902 |
) |
|
$ |
(1,449 |
) |
|
$ |
112 |
|
|
$ |
(250 |
) |
|
$ |
(633 |
) |
|
$ |
(14,296 |
) |
|
$ |
(6,399 |
) |
|
$ |
76,316 |
|
|
$ |
92,293 |
|
|
$ |
(15,977 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
|
227 |
|
|
|
227 |
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
237 |
|
|
|
237 |
|
|
|
|
|
Square feet |
|
|
22,516 |
|
|
|
22,516 |
|
|
|
|
|
|
|
1,734 |
|
|
|
1,734 |
|
|
|
1,618 |
|
|
|
1,618 |
|
|
|
|
|
|
|
|
|
|
|
25,868 |
|
|
|
25,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,554 |
|
|
|
1,694 |
|
|
|
860 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97,222 |
) |
|
|
(102,045 |
) |
|
|
4,823 |
|
Interest expense Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,700 |
) |
|
|
(4,725 |
) |
|
|
2,025 |
|
Recognized hedge activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,822 |
) |
|
|
1,822 |
|
Equity in income of real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,356 |
|
|
|
3,450 |
|
|
|
(94 |
) |
(Loss) gain on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,701 |
) |
|
|
23,725 |
|
|
|
(25,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,397 |
) |
|
|
12,570 |
|
|
|
(31,967 |
) |
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,782 |
|
|
|
(354 |
) |
|
|
7,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(12,615 |
) |
|
$ |
12,216 |
|
|
$ |
(24,831 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.14 |
) |
|
$ |
0.05 |
|
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPLANATORY NOTES |
|
(a)- |
|
Results include: two developments and two redevelopment properties. |
55
Total Revenue
Cash rents from the Total Portfolio decreased by $13.7 million from the nine-month period ended
September 30, 2009 to the nine-month period ended September 30, 2010 primarily reflecting:
|
|
|
decrease of $9.6 million of rental income at the same store portfolio as a result
of the decrease in same store occupancy of 330 basis points; |
|
|
|
decrease of $5.5 million due to the deconsolidation of three of our real estate
ventures as a result of the adoption of the new accounting standard for the
consolidation of variable interest entities beginning January 1, 2010 during the
first quarter of 2010. This standard does not require retrospective adoption; |
|
|
|
decrease of $2.9 million of rental income due to the decrease in occupancy at
three redevelopment properties that we recently placed in service; and |
The decrease in cash rents from the Total Portfolio was offset by an increase of $4.3 million of
rental income due to our acquisition of Three Logan Square and the completion and placement in
service of the IRS Philadelphia Campus and the Cira South Garage during the third quarter of 2010.
Straight-line rents increased by $2.7 million due to $0.4 million of straight-line rents from the
acquisition of Three Logan during the third quarter of 2010. The remainder of the increase is due
to leases that commenced during the third quarter of 2010 with free rent periods at our same store
properties.
Tenant reimbursements increased by $2.7 million mainly due to the significant number of leases
which includes base year operating expense recovery calculations that reached their base year
amounts quicker in 2010 than in 2009. Lease structure, the significant northeast snowfall expenses
in the first quarter of 2010, as well as the deferral to later months and timing of the repairs and
maintenance expenses in the second quarter of 2009, resulted in the base year leases achieving
their base year amounts earlier in 2010 than in 2009. This is consistent with the increase in
property operating expenses.
Termination fees at the Total Portfolio increased by $1.3 million from the nine-month period ended
September 30, 2009 to the nine-month period ended September 30, 2010 primarily due to increased
tenant move-outs during 2010 which is consistent with the decrease in occupancy noted above.
Third party management fees, labor reimbursement and leasing decreased by $4.8 million mainly due
to the termination of third party management contracts during the course of 2009 totaling 4.3
million square feet. This is consistent with the decrease in third party management fees.
Property Operating Expenses
Property operating expenses increased by $4.0 million mainly as a result of higher snow removal and
repairs and maintenance expenses totaling $5.5 million during the nine-month period ended September
30, 2010 compared to the nine-month period ended September 30, 2009, offset by a decrease of $2.0
million in bad debt expense during the nine-month period ended September 30, 2010 as compared to
the nine-month period ended September 30, 2009.
Real Estate Taxes
Real estate taxes decreased by $1.8 million mainly due to lower taxes assessed on our properties
during the nine-month period ended September 30, 2010 compared
to the nine month period ended
September 30, 2009, offset by additional real estate taxes due to our acquisition of Three Logan
Square during the third quarter of 2010.
General and Administrative Expense
General and Administrative Expense increased by $3.0 million primarily due to:
|
|
|
increase of $0.4 million in amortization of stock-based compensation as a result
of stock option and restricted stock performance units granted in March 2010; |
|
|
|
increase of $1.3 million in salaries, bonus and recruiting fees due to new hires
during the nine-month period ended September 30, 2010; |
56
|
|
|
a $0.2 million one-time bonus payment made during the nine-month period ended
September 30, 2010; |
|
|
|
increase of $0.5 million as a result of various corporate level expenses during
the nine-month period ended September 30, 2010, none of which were individually
significant; |
|
|
|
increase of $0.5 million in professional fees and deal costs as result of
contemplated transactions taking place during 2010; and |
|
|
|
the receipt of corporate level tax refunds of $0.2 million during the nine-month
period ended September 30, 2009 that were recorded as a reduction in that period. |
Provision for Impairment on Real Estate
During our Q1 2009 impairment review, we 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. Accordingly, the recorded amount was reduced to an amount based
on managements estimate of the current 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.
Interest Expense
The decrease in interest expense of $4.8 million is primarily due to the following:
|
|
|
decrease of $12.4 million resulting from our buybacks of various unsecured notes
subsequent to the third quarter of 2009. The details of the various purchases
completed during the nine-month period ended September 30, 2010 are noted in the
(Loss) gain on early extinguishment of debt section below and details for all
purchases during 2009 are included in our Annual Report on Form 10-K for 2009; |
|
|
|
decrease of $5.3 million resulting from the pay-off of an unsecured note at
maturity during the fourth quarter of 2009; |
|
|
|
decrease of $0.2 million resulting from a lower weighted average interest rate on
our Credit Facility borrowings for the nine-month period ended September 30, 2010
compared to the nine-month period ended September 30, 2009; |
|
|
|
decrease of $0.9 million resulting from lower weighted average interest rates on
our $183.0 million Bank Term Loan and our three Preferred Trust borrowings. Such
borrowings have variable interest rates and a portion of such borrowings are swapped
to fixed rate debt through our hedging program. This decrease is offset by an
increase of $1.4 million paid under theses hedges since the variable interest rates
on such debt is lower than the swapped fixed rate on the hedges assigned to these
borrowings; and |
|
|
|
an increase of $3.5 million in capitalized interest as a result of the increase
in cumulative spending on development projects in 2010 |
The above described decrease of $20.9 million was offset by an increase of $14.3 million from the
sale of $250.0 million of unsecured notes in the third quarter of 2009 and a net increase of $1.1
million resulting from a higher outstanding mortgage notes payable balance as of September 30, 2010
compared to September 30, 2009. In addition, there was an increase of $0.6 million in interest
expense related to the estimated equity interest payments as a result of our partnership in the IRS
Philadelphia Campus.
Deferred financing costs decreased by $2.0 million mainly due to the acceleration of such expenses
incurred from greater debt repurchase activities during the third quarter of 2009 compared to the
third quarter of 2010 offset by one month of deferred financing costs incurred relating to the
forward financing on the IRS Philadelphia Campus and Cira South Garage.
57
Recognized hedge activity
During the nine-month period ended September 30, 2009, we recorded a $1.1 million mark to market
adjustment relating to two of our swaps that were applied to our offering of $250.0 million 7.50%
senior unsecured notes due 2015 completed in September 2009. The swaps no longer qualified for
hedge accounting upon completion of that offering since the hedging relationship was terminated.
Accordingly, the changes in the fair value of the swaps were reflected in our statement of
operations until they were cash settled in December 2009. During the nine-month period ended
September 30, 2009, we also recorded $0.7 million related to the ineffective portion of our hedges.
(Loss) gain on early extinguishment of debt
During the nine-month period ended September 30, 2010, we repurchased (i) $54.4 million of our
3.875% Guaranteed Exchangeable Notes, (ii) $1.9 million of our 5.625% Guaranteed Notes due 2010 and
(iii) $12.6 million of our 5.750% Guaranteed Notes due 2012 which resulted in a net loss on early
extinguishment of debt of $1.7 million.
During the nine-month period ended September 30, 2009, we repurchased (i) $122.5 million of our
$345.0 million 3.875% Guaranteed Exchangeable Notes, (ii) $94.1 million of our $275.0 million
4.500% Guaranteed Notes due 2009, (iii) $65.0 million of our $300.0 million 5.625% Guaranteed Notes
due 2010, (iv) $112.2 million of our $300.0 million 5.750% Guaranteed Notes due 2012 and (v) $7.3
million of our $250.0 million 5.400% Guaranteed Notes due 2014, which resulted in a net gain on
early extinguishment of debt of $23.7 million. The loss on early extinguishment of debt is
inclusive of adjustments made to reflect our prior adoption of the new accounting standard for
convertible debt instruments.
Discontinued Operations
During the nine-month period ended September 30, 2010, we sold three properties and classified one
property in Austin, TX as held for sale as of September 30, 2010. These properties had total
revenue of $2.0 million, operating expenses of $0.8 million, depreciation and amortization expense
of $0.8 million. We recognized a gain and loss on sale of $7.7 million and $1.4 million,
respectively, for the three properties sold.
The nine-month period ended September 30, 2009 amounts are reclassified to include the operations
of the properties sold and held for sale through the third quarter of 2010, as well as all
properties that were sold through the year ended December 31, 2009. Therefore, the discontinued
operations amount for the nine-month period ended September 30, 2009 includes total revenue of
$15.3 million, operating expenses of $7.5 million and depreciation and amortization expense of $3.4
million. During the nine-month period ended September 30, 2009, we also recognized a provision for
impairment of $3.7 million on a property that was sold during the second quarter of 2009.
Net income (loss)
Net loss was $12.6 million for the nine-month period ended September 30, 2010 as compared to net
income of $12.2 million for the nine-month period ended September 30, 2009 as a result of the
factors described above. Net loss is significantly impacted by depreciation of operating
properties and amortization of acquired intangibles. These non-cash charges do not directly affect
our ability to pay dividends. Amortization of acquired intangibles will continue over the related
lease terms or estimated duration of the tenant relationship.
Loss (earnings) per Common Share
Loss per share was $0.14 for the nine-month period ended September 30, 2010 as compared to earnings
per share of $0.05 for the nine-month period ended September 30, 2009 as a result of the factors
described above and an increase in the average number of common shares outstanding. The increase
in the average number of common shares outstanding is primarily due to the continuing equity
offering program in 2010.
58
LIQUIDITY AND CAPITAL RESOURCES OF THE PARENT COMPANY
The Parent Company conducts its business through the Operating Partnership and its only material
asset is its ownership of the partnership interests of the Operating Partnership. The Parent
Company, other than acting as the sole general partner of the Operating Partnership, issues public
equity from time to time and guarantees the debt obligations of the Operating Partnership. The
Parent Companys principal funding requirement is the payment of dividends on its common stock and
preferred stock. The Parent Companys principal source of funding for its dividend payments is the
distributions it receives from the Operating Partnership.
As of September 30, 2010, the Parent Company owned a 93.0% interest in the Operating Partnership.
The remaining interest of approximately 7.0% pertains to common limited partnership interests owned
by non-affiliated investors of the Parent Company. As the sole general partner of the Operating
Partnership, the Parent Company has full and complete responsibility for the Operating
Partnerships day-to-day operations and management.
The Parent Companys principal source of capital is from the distributions it receives from the
Operating Partnership. The Parent Company believes that the Operating Partnerships sources of
working capital, particularly its cash flows from operations and borrowings available under its
Credit Facility, are adequate for it to make its distribution payments to the Parent Company, which
in turn will enable the Parent Company to make dividend payments to its stockholders.
The Parent Company receives proceeds from equity issuances from time to time, but is required by
the Operating Partnerships partnership agreement to contribute the proceeds from its equity
issuances to the Operating Partnership in exchange for partnership units of the Operating
Partnership. The Parent Companys ability to sell common shares and preferred shares is dependent
on, among other things, general market conditions for REITs, market perceptions about the Company
as a whole and the current trading price of its shares. The Parent Company regularly analyzes which
source of capital is most advantageous to it at any particular point in time. In March 2010, the
Parent Company commenced a continuous equity offering program (the Offering Program), under which
it may sell up to an aggregate amount of 15,000,000 common shares until March 10, 2013. The Parent
Company may sell common shares in amounts and at times to be determined by the Parent Company.
Actual sales will depend on a variety of factors to be determined by the Parent Company, including
market conditions, the trading price of its common shares and determinations by the Parent Company
of the appropriate sources of funding. In conjunction with the Offering Program, the Parent
Company engaged sales agents who received compensation, in aggregate, of up to 2% of the gross
sales price per share sold during the nine months ended September 30, 2010. During the three
months ended September 30, 2010, the Parent Company sold 2,042,500 shares under this program at an
average sales price of $12.36 per share resulting in net proceeds of $25.0 million. From its
inception in March 2010 through September 30, 2010, the Parent Company has sold 5,327,845 shares
under this program at an average sales price of $12.56 per share resulting in net proceeds of $65.9
million. The Parent Company contributed the net proceeds from the sales to the Operating
Partnership.
On September 15, 2010, the Parent Company declared a distribution of $0.15 per common share,
totaling $20.3 million, which it paid on October 18, 2010 to its shareholders of record as of
October 5, 2010. In addition, the Parent Company declared distributions on its Series C Preferred
Shares and Series D Preferred Shares to holders of record as of September 30, 2010. These shares
are entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions paid on
October 15, 2010 to holders of Series C Preferred Shares and Series D Preferred Shares totaled $0.9
million and $1.1 million, respectively.
The Parent Company also maintains a share repurchase program under which its Board of Trustees has
authorized the Parent Company to repurchase its common shares from time to time. As of September
30, 2010, there are approximately 0.5 million shares remaining to be repurchased under this
program. The Parent Companys Board of Trustees has not limited the duration of the program;
however, it may be terminated at any time.
Together with the Operating Partnership, the Parent Company maintains a shelf registration
statement that registered common shares, preferred shares, depositary shares and warrants and
unsecured debt securities. Subject to the Companys ongoing compliance with securities laws, and
if warranted by market conditions, the Company may offer and sell equity and debt securities from
time to time under the shelf registration statement.
The Parent Company also guarantees the Operating Partnerships secured and unsecured obligations
which as of September 30, 2010 amounted to $757.7 million and $1,771.6 million, respectively. If
the Operating Partnership fails to comply with its debt requirements, the Parent Company will be
required to fulfill the Operating Partnerships commitments under such guarantees. As of September
30, 2010, the Operating Partnership is in compliance with all of its debt covenant and requirement
obligations.
In order to maintain its qualification as a REIT, the Parent Company is required to,among other
things, pay dividends to its stockholders of at least 90% of its REIT taxable income. The Parent
Company has historically satisfied this requirement.
Overall, the liquidity of the Parent Company is dependent on the Operating Partnerships ability to
make distributions to the Parent Company. However, there can be no assurance that the Operating
Partnerships sources of capital will continue to be available to meet its working capital needs
including its ability to make distribution payments to the Parent Company. In cases where the
Operating Partnership is faced with working capital problems or would need to raise capital to fund
acquisitions and developments, the Parent Company will have to consider alternative sources to
increase liquidity, including, among other things, equity issuances through its existing Offering
Program, use of its available line of credit and potential sale of properties.
59
LIQUIDITY AND CAPITAL RESOURCES OF THE OPERATING PARTNERSHIP
General
The Operating Partnerships principal liquidity needs for the next twelve months are as follows:
|
|
|
fund normal recurring expenses, |
|
|
|
fund capital expenditures, including capital and tenant improvements and leasing
costs, |
|
|
|
fund repayment of certain debt instruments when they mature, |
|
|
|
fund current development and redevelopment costs, and |
|
|
|
fund distributions to the Parent Company |
The Operating Partnership believes that with the uncertain economic conditions, it is likely that
vacancy rates may continue to increase, effective rental rates on new and renewed leases may
continue to decrease and tenant installation costs, including concessions, may continue to increase
in most or all of its markets in 2010 and possibly beyond. As a result, the Operating Partnerships
revenue from the overall reduced demand for office space, and its cash flow could be insufficient
to cover increased tenant installation costs over the short-term. If this situation were to occur,
the Operating Partnership expects that it would finance cash deficits through borrowings under our
Credit Facility and other debt and equity financings.
The Operating Partnership believes that its liquidity needs will be satisfied through cash flows
generated by operations, financing activities and selective property sales. Rental revenue, expense
recoveries from tenants, and other income from operations are its principal sources of cash that it
uses to pay operating expenses, debt service, recurring capital expenditures and the minimum
distributions required to maintain its REIT qualification. The Operating Partnership seeks to
increase cash flows from its properties by maintaining quality standards for its properties that
promote high occupancy rates and permit increases in rental rates while reducing tenant turnover
and controlling operating expenses. The Operating Partnerships revenue also includes third-party
fees generated by its property management, leasing, development and construction businesses. The
Operating Partnership believes that its revenue, together with proceeds from property sales and
debt financings, will continue to provide funds for its short-term liquidity needs. However,
material changes in its operating or financing activities may adversely affect its net cash flows.
Such changes, in turn, would adversely affect its ability to fund distributions to the Parent
Company, debt service payments and tenant improvements. In addition, a material adverse change in
its cash provided by operations would affect the financial performance covenants under its Credit
Facility, unsecured term loan and unsecured notes.
Financial markets have experienced unusual volatility and uncertainty. The Operating Partnerships
ability to fund development projects, as well as its ability to repay or refinance debt maturities
could be adversely affected by its inability to secure financing at reasonable terms beyond those
already completed. It is possible, in these unusual and uncertain times that one or more lenders in
its Credit Facility could fail to fund a borrowing request. Such an event could adversely affect
its ability to access funds from its Credit Facility when needed.
The Operating Partnerships liquidity management remains a priority. The Operating Partnership is
proactively pursuing new financing opportunities to ensure an appropriate balance sheet position.
As a result of these dedicated efforts, the Operating Partnership is comfortable with its ability
to meet future debt maturities and development funding needs. The Operating Partnership believes
that its current balance sheet is in an adequate position at the date of this filing, despite the
ongoing disruption in the credit markets.
The Operating Partnership uses multiple financing sources to fund its long-term capital needs. It
uses its credit facility for general business purposes, including the acquisition, development and
redevelopment of properties and the repayment of other debt. It will also consider other
properties within its portfolio as necessary, where it may be in its best interest to obtain a
secured mortgage.
The Operating Partnerships ability to incur additional debt is dependent upon a number of factors,
including its credit ratings, the value of its unencumbered assets, its degree of leverage and
borrowing restrictions imposed by its current lenders. If more than one rating agency were to
downgrade its credit rating, its access to capital in the unsecured debt market would be more
limited and the interest rate under its existing Credit Facility and the Bank Term Loan would
increase.
The Operating Partnerships ability to sell its limited partnership and preferred units is
dependent on, among other things, general market conditions for REITs, market perceptions about the
Company and the current trading price of the Parent Companys shares. The Parent Company
contributes the proceeds it receives from its equity issuances to the Operating Partnership in
exchange for partnership units of the Operating Partnership in accordance with the Operating
Partnerships partnership agreement. The Operating Partnership uses the net proceeds from the
sales contributed by the Parent Company to repay balances on its Credit Facility and for general
corporate purposes. The Operating Partnership, from time to time, also issues its own partnership
units to as consideration for property acquisitions and developments. On August 5, 2010, the
Operating Partnership issued 7,111,112 units of its newly-established Class F (2010) Units in
connection with the acquisition of Three Logan Square. The Class F (2010) Units do not accrue a
dividend and are not entitled to income or loss allocations prior to the first anniversary of the
closing. They are also not convertible into the Parent Companys common shares for that period.
60
The Operating Partnership will also consider sales of selected Properties as another source of
managing its liquidity. Asset sales during 2009 and through 2010 have been a source of cash. During
2010, it sold three properties containing 0.2 million in net rentable square feet for net cash
proceeds of $17.4 million. Since mid-2007, the Operating Partnership has used proceeds from asset
sales to repay existing indebtedness, provide capital for its development activities and strengthen
its financial condition. There is no guarantee that it will be able to raise similar or even lesser
amounts of capital from future asset sales.
Cash Flows
The following discussion of the Operating Partnerships cash flows is based on the consolidated
statement of cash flows and is not meant to be a comprehensive
discussion of the changes in our
cash flows for the periods presented.
As of September 30, 2010 and December 31, 2009, the
Operating Partnership maintained cash and cash
equivalents of $104.0 million and $1.6 million,
respectively. The following are the changes in cash
flow from its activities for the nine-month periods ended September 30 (in thousands):
|
|
|
|
|
|
|
|
|
Activity |
|
2010 |
|
|
2009 |
|
Operating |
|
$ |
149,622 |
|
|
$ |
163,099 |
|
Investing |
|
|
(159,037 |
) |
|
|
(118,748 |
) |
Financing |
|
|
111,889 |
|
|
|
(44,979 |
) |
|
|
|
|
|
|
|
Net cash flows |
|
$ |
102,474 |
|
|
$ |
(628 |
) |
|
|
|
|
|
|
|
The Operating Partnerships principal source of cash flows is from the operation of its properties.
The Operating Partnership does not restate its cash flow for discontinued operations.
The net decrease of $13.5 million in cash flows from operating activities of the Operating
Partnership during the nine months ended September 30, 2010 compared to the nine months ended
September 30, 2009 is primarily the result of the following:
|
|
|
decrease in average occupancy from 89.2% during the nine months ended September 30, 2009
to 88.0% during the nine months ended September 30, 2010; |
|
|
|
decrease in the number of operating properties due to dispositions. The Operating
Partnership sold a total of six properties subsequent to September 30, 2009; |
|
|
|
timing of cash receipts from our tenants and cash expenditures in the normal course of
operations. |
The described decrease in cash flows from operating activities was partially offset by the
contribution received from the historic tax credit transaction of $27.4 million in June 2010.
The net increase of $40.3 in cash flows used in investing activities of the Operating Partnership
during the nine months ended September 30, 2010 compared to the nine months ended September 30,
2009 is primarily attributable to the following:
|
|
|
$50.3 million of net cash paid related to the acquisition of Three Logan Square; |
|
|
|
decrease in cash of $1.4 million due to the deconsolidation of variable interest
entities; |
|
|
|
receipt of funds placed in escrow during the last quarter of 2008 related to the Cira
South Garage amounting to $31.4 million which was also used to finance the development of
the Cira South Garage during the first quarter of last year; |
|
|
|
advances made for purchase of tenant assets, net of repayments amounting $4.5 million; |
|
|
|
decrease in net proceeds from sales of properties from $33.4 million during the nine
months ended September 30, 2009 to $17.4 million during the nine months ended September 30,
2010; and |
|
|
|
decrease in cash distributions from unconsolidated Real Estate Ventures of $10.1 million
during the nine months ended September 30, 2010 compared to the nine months ended September
30, 2009. |
61
The net increase in cash used in investing activities was partially o